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GENERAL NATURE OF A PARTNERSHIP

01

DEFINITION OF ‘PARTNERSHIP’, ‘PARTNER’, ‘FIRM’ AND ‘FIRM NAME’ (SECTION 4)

‘Partnership’ is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.

Persons who have entered into partnership with one another are called individually ‘partners’ and collectively ‘a firm’, and the name under which their business is carried on is called the ‘firm name’.

ELEMENTS OF PARTNERSHIP

1. ASSOCIATION OF TWO OR MORE PERSONS:

Only persons recognized by law can enter into an agreement of partnership.

Therefore, a firm, since it is not a person recognized in the eyes of law cannot be a partner.

A minor cannot be a partner in a firm, but with the consent of all the partners, may be admitted to the benefits of partnership.

The partnership Act is silent about the maximum number of partners but section 464 of the Companies Act, 2013 has put a limit of 50 partners in any association/partnership firm.

2. AGREEMENT:

There must be an agreement entered into by all the persons concerned.

This element relates to voluntary contractual nature of partnership. An agreement from which relationship of Partnership arises may be expressed or implied from the act done by partners and from a consistent course of conduct being followed, showing mutual understanding between them. It may be oral or in writing.

Note:- The ‘Partnership Agreement’ is also known as ‘Partnership Deed’.

3. BUSINESS:

1) There must exist a business (includes every trade, occupation & profession)-

2) The motive of the business is the “acquisition of gains” which leads to the formation of partnership.

Therefore, there can be no partnership where there is no intention to carry on the business & to share the profit thereof.

Example: 1) Co-owners who share amongst themselves the rent derived from a piece of land are not partners, because there does not exist any business.

2) No charitable institution or club may be floated in partnership

[A joint stock company may, however, be floated for non-economic purposes].

4. AGREEMENT TO SHARE PROFITS:

There can be no partnership where only one of the partners is entitled to the whole of the profits of the business.

Partners must agree to share the profits in any manner they choose.

But an agreement to share losses is not an essential element.

It is open to one or more partners to agree to share all the losses.

However, in the event of losses, unless agreed otherwise, these must be borne in the profit-sharing ratio.

Example: X and Y buy certain bales of cotton which they agree to sell on their joint account and to share the profits equally. X and Y are partners in respect of such cotton business.

5. BUSINESS CARRIED ON BY ALL OR ANY OF THEM ACTING FOR ALL:

This is the cardinal principle of the partnership Law.

There should be a binding contract of mutual agency between the partners.

An act of one partner in the course of the business of the firm is in fact an act of all partners. Each partner carrying on the business is the principal as well as the agent for all the other partners. He is an agent in so far as he can bind the other partners by his acts & he is a principal to the extent that he is bound by the act of other partners. It is the true test of partnership rather than sharing of profits.

If the element of mutual agency is absent, then there will be no partnership.

KD Kamath & Co.

The Supreme Court has held that the 2 essential conditions to be satisfied are that:

(1) there should be an agreement to share the profits as well as the losses of business; &

(2) the business must be carried on by all or any of them acting for all, within the meaning of the definition of ‘partnership’ u/s 4.

The fact that the exclusive power & control, by agreement of the parties, is vested in one partner or the further circumstance that only one partner can operate the bank accounts or borrow on behalf of the firm are not destructive of the theory of partnership provided the two essential conditions, mentioned earlier, are satisfied.

TRUE TEST OF PARTNERSHIP

For determining the existence of partnership, it must be proved.

1. There was an agreement between all the persons concerned

2. The agreement was to share the profits of a business and

3. the business was carried on by all or any of them acting for all.

If all the above are present there will be no difficulty in determining the existence of partnership. But the task becomes difficult when either there is no specific agreement.

In such a case for testing the existence Section 6 has to be referred.

Section 6-regard must be had to the real relation between the parties as shown by all relevant facts taken together. Cumulative effect of all relevant facts such as written or verbal agreement, real intention and conduct of the parties, other surrounding circumstances etc., are to be considered while deciding the relationship between the parties and ascertaining the existence of partnership.

1. Agreement:

Partnership is created by agreement & not by status (Section 5).

In particular, the members of a HUF carrying on a family business as such, or a Burmese Buddhist husband & wife carrying on business as such are not partners.

2. Sharing of Profit:

The sharing of profits or of gross returns arising from property by persons holding a joint or common interest in that property does not of itself make such persons partners.

The receipt by a person of a share of the profits of a business, or of a payment contingent upon the earning of profits or varying with the profits earned by a business, does not of itself make him a partner with the persons carrying on the business; and in particular, the receipt of such share or payment-

(a) by a lender of money to persons engaged or about to engage in any business,

(b) by a servant or agent as remuneration,

(c) by a widow or child of a deceased partner, as annuity, or

(d) by a previous owner or part owner of the business, as consideration for the sale of the goodwill or share thereof, does not of itself make the receiver a partner with the persons carrying on the business.

Sharing of profit is an essential element to constitute a partnership.

But, it is only a prima facie evidence and not conclusive evidence.

Although the right to participate in profits is a strong test of partnership, & there may be cases where, upon a simple participation in profits, there is a partnership, yet whether the relation does or does not exist must depend upon the whole contract between the parties.

3. Agency:

Existence of Mutual Agency which is the cardinal principle of partnership law, is very much helpful in reaching a conclusion in this regard.

Each partner carrying on the business is the principal as well as an agent of other partners. So, the act of one partner done on behalf of firm, binds all the partners.

If the elements of mutual agency relationship exist between the parties constituting a group formed with a view to earn profits by running a business, a partnership may be deemed to exist.

Santiranjan Das Gupta Vs. Dasyran Murzamull (Supreme Court)

Following factors weighed upon the Supreme Court to reach the conclusion that there is no partnership between the parties:

(a) Parties have not retained any record of terms and conditions of partnership.

(b) Partnership business has maintained no accounts of its own, which would be open to inspection by both parties

(c) No account of the partnership was opened with any bank

(d) No written intimation was conveyed to the Deputy Director of Procurement with respect to the newly created partnership.

PARTNERSHIP DISTINGUISHED FROM OTHER FORMS OF ORGANISATION

Partnership

Vs.

Joint Stock Company

Partnership Vs. Club

Partnership

vs.

Hindu Undivided Family

Partnership Vs. Co-Ownership or joint ownership i.e. the relation which subsists between persons who own property jointly or in common.

Partnership vs. Association

KINDS OF PARTNERSHIPS

On the basis of duration :

1. Partnership at will (Sec 7) : It is a partnership when:

a) no fixed period has been agreed upon for the duration of the partnership; and

b) there is no provision made as to the determination of the partnership.

A partnership at will may be dissolved by any partner by giving notice in writing to all the other partners of his intention to dissolve the same.

2. Partnership for a fixed period: Where a provision is made by a contract for the duration of the partnership, the partnership is called ‘partnership for a fixed period’. It is a partnership created for a particular period of time. Such a partnership comes to an end on the expiry of the fixed period.

Note:

Where a partnership entered into for a fixed term is continued after the expiry of such term, it is to be treated as having become a partnership at will.

On the basis of extent of business:

1. Particular partnership: Where a person becomes a partner with another person in any particular adventure or undertaking the partnership is called ‘particular partnership’. A partnership, constituted for a single adventure or undertaking is, subject to any agreement, dissolved by the completion of the adventure or undertaking.

2. General partnership: Where a partnership is constituted with respect to the business in general, it is called a general partnership.

Note:

In the case of a particular partnership the liability of the partners extends only to that particular adventure or undertaking, but it is not so in the case of general partnership.

Partnership Deed

Partnership is the result of an agreement.

It may be in writing or formed verbally.

But it is desirable to have it in writing to avoid future disputes. The document in writing containing the various terms and conditions as to the relationship of the partners to each other is called the ‘partnership deed’. It should be drafted with care & be stamped according to the provisions of the Stamp Act, 1899. Where the partnership comprises immovable property, the instrument of partnership must be in writing, stamped & registered under the Registration Act.

Partnership deed may contain the following information:-

1. Name of the partnership form.

2. Names of all the partners.

3. Nature and place of the business of the firm.

4. Date of commencement of partnership.

5. Duration of the partnership firm.

6. Capital contribution of each partner.

7. Profit Sharing ratio of the partners.

8. Admission and Retirement of a partner.

9. Rates of interest on Capital, Drawings and loans.

10. Provisions for settlement of accounts in the case of dissolution of the firm.

11. Provisions for Salaries or commissions, payable to the partners, if any.

12. Provisions for expulsion of a partner in case of gross breach of duty or fraud.

A partnership firm may add or delete any provision according to the needs of the firm.

TYPES OF PARTNERS

Active or Actual or Ostensible partner:

He acts as an agent of other partners for all acts done in the ordinary course of business. In the event of his retirement, he must give a public notice in order to absolve himself of liabilities for acts of other partners done after his retirement.

Nominal Partner

A person who lends his name to the firm, without having any real interest in it, is called a nominal partner.

He is not entitled to share the profits of the firm. Neither he invest in the firm nor takes part in the conduct of the business. He is, however liable to third parties for all acts of the firm.

Sleeping or Dormant Partner

They are called as ‘sleeping’or ‘dormant’ partners. They share profits and losses and are liable to the third parties for all acts of the firm. They are, however not required to give public notice of their retirement from the firm.

Partner in profits only

A partner who is entitled to share the profits only without being liable for the losses is known as the partner for profits only and also liable to the third parties for all acts of the profits only.

Incoming partners

A person who is admitted as a partners into an already existing firm with the consent of all the existing partners is called as “incoming partner”. Such a partner is not liable for any act of the firm done before his admission as a partner.

Outgoing partner

A partner who leaves a firm in which the rest of the partners continue to carry on business is called a retiring or outgoing partner. Such a partner remains liable to third parties for all acts of the firm until public notice is given of his retirement.

Partner by holding out (Sec 28)

Partnership by holding out is also known as partnership by estoppel.

Where a man holds himself out as a partner, or allows others to do it, he is then stopped from denying the character he has assumed and upon the faith of which creditors may be presumed to have acted.A person may himself, by his words or conduct have induced others to believe that he is a partner or he may have allowed others to represent him as a partner. The result in both the cases is identical.

It is only the person to whom the representation has been made and who has acted thereon that has right to enforce liability arising out of ‘holding out’.

For the purpose of fixing liability on a person who has, by representation, led another to act, it is not necessary to show that he was actuated by a fraudulent intention.

This is also applicable to a former partner who has retired from the firm without giving proper public notice of his retirement. In such cases a person who, even subsequent to the retirement, give credit to the firm on the belief that he was a partner, will be entitled to hold him liable.

Example: X and Y are partners in a partnership firm. X introduced A, a manager, as his partner to Z. A remained silent. Z, a trader believing A as partner supplied 100 T.V sets to the firm on credit. After expiry of credit period, Z did not get amount of T.V sets sold to the partnership firm. Z filed a suit against X and A for the recovery of price. Here, in the given case, A, the Manager is also liable for the price because he becomes a partner by holding out (Section 28, Indian Partnership Act, 1932).

Example: A partnership firm consisting of P, Q, R and S. S retires from the firm without giving public notice and his name continues to be used on letterheads. Here, S is liable as a partner by holding out to creditors who have lent on the faith of his being a partner.

UNIT– 2: RELATIONS OF PARTNERS

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RELATION OF PARTNERS:-

RELATION OF PARTNERS TO ONE ANOTHER

1) GENERAL DUTIES

2) DUTY TO INDEMNIFY FOR LOSS CAUSED BY FRAUD

3) RIGHTS & DUTIES DETERMINED BY CONTRACT

4) CONDUCT OF BUSINESS

5) MUTUAL RIGHTS & LIABILITIES

GENERAL DUTIES OF PARTNERS (SEC 9):

Partners are bound to-

1)carry on the business of the firm to the greatest common advantage,

2)to be just and faithful to each other, and

3)to render true accounts and full information of all things affecting the firm to any partner or his legal representative where some of the accounts are kept by one of them.

DUTY TO INDEMNIFY FOR LOSS CAUSED BY FRAUD (SEC 10):

Every partner shall indemnify the firm for any loss caused to it by his fraud in the conduct of the business of the firm. This entitles the co-partners to throw the whole of the consequences upon him.

DETERMINATION OF RIGHTS & DUTIES OF PARTNERS BY CONTRACT BETWEEN THE PARTNERS (SEC 11):

(1)the mutual rights & duties of the partners of a firm may be determined by contract between the partners, & such contract may be express or implied by a course of dealing. It may be varied by expressed or implied consent of all the partners.

(2) Agreements in restraint of trade- such contracts may provide that a partner shall not carry on any business other than that of the firm while he is a partner.

THE CONDUCT OF THE BUSINESS (SEC 12):

Subject to contract between the partners-

(a) every partner has a right to take part in the conduct of the business- precluded from participating- Court can restrain- other remedies, e.g., a suit for dissolution, a suit for accounts without seeking dissolution- only if there is no contract to the contrary- In such a case, the Court will normally be unwilling to interpose with the management with such partner or partners, unless it is clearly made out that something was done illegally.

(b) every partner is bound to attend diligently to his duties in the conduct of the business;

(c) any difference arising as to ordinary matters connected with the business may be decided by majority of the partners, and every partner shall have the right to express his opinion before the matter is decided, but no change may be made in the nature of the business without the consent of all partners; and

(d) every partner(active or sleeping) has a right to have access to & to inspect & copy any of the books of the firm(bona fide)

MUTUAL RIGHTS & LIABILITIES (SEC 13):

Subject to contract between the partners-

(a) a partner is not entitled to receive remuneration for taking part in the conduct of the business;-can always be varied by an express agreement or by a course of dealings (customary)

(b) the partners are entitled to share equally in the profits earned, & contribute equally to the losses sustained by the firm;-burden of proving that the shares are unequal, will lie on the party alleging the same.

Note: There is no connection between the proportion in which the partners shall share the profits and the proportion in which they have contributed towards the capital of the firm.

(c) where a partner is entitled to interest on the capital it shall be payable only out of profits;- if there is-

(i) an express agreement to that effect, or

(ii) any trade custom to that effect; or

(iii) a statutory provision which entitles him to such interest.

(d) a partner making an advance beyond the amount of capital, is entitled to interest thereon at the rate of 6% p.a.;

(e) the firm shall indemnify a partner in respect of payments made & liabilities incurred by him-

(i) in the ordinary & proper conduct of the business, and

(ii) in doing such act, in an emergency, for the purposes of protecting the firm from loss, as would be done by a person of ordinary prudence, in his own case, under similar circumstances; and

(f) a partner shall indemnify the firm for any loss caused to it by his willful neglect in the conduct of business of the firm.

PARTNERSHIP PROPERTY (SEC 14)

1. THE PROPERTY OF THE FIRM (SEC 14): Subject to contract between the partners, the property of the firm includes-

a) all property & rights and interest in property originally brought into the stock of the firm, or

b) acquired, by purchase or otherwise, by or for the firm, or for the purposes and in the course of the business of the firm, and c)goodwill of the business.

Unless the contrary intention appears, property acquired with money of the firm are deemed to have been acquired for the firm.

The mere fact that the property of a partner is being used for the purposes of the firm shall not by itself make it partnership property, unless it is intended to be treated as such. Partners may, by an agreement at any time, convert the property of any partner or partners into a partnership property.

Goodwill may be defined as the value of the reputation of a business house in respect of profits expected in future over & above the normal level of profits earned by undertaking belonging to the same class of business.

When a partnership firm is dissolved every partner has a right, in the absence of any agreement to the contrary, to have the goodwill of business sold for the benefit of all the partners. Any partner may upon the sale of the goodwill of a firm, make an agreement with the buyer that such partner will not carry on any business similar to that of the firm within a specified period or within specified local limits. Such agreement shall be valid if the restrictions imposed are reasonable.

Property of a partner: Where the property is exclusively belonging to a person, it does not become a property of the partnership merely because it is used for the business of the partnership, such property will become property of the partnership if there is an agreement.

2. APPLICATION OF THE PROPERTY OF THE FIRM (SECTION 15): Subject to contract between the partners, the property of the firm shall be held and used by the partners exclusively for the purposes of the business.

PERSONAL PROFIT EARNED BY PARTNERS (SEC 16)

Subject to contract between the partners,-

(a) If a partner derives any profit for himself from any transaction of the firm, or from the use of the property or business connection of the firm or the firm name, he shall account for that profit and pay it to the firm;

Example: A, B, C & D established partnership business for refining sugar. A, who was himself a wholesale grocer, was entrusted with the work of selection and purchase of sugar. As a wholesale grocer, A was well aware of the variations in the sugar market and had the suitable sense of propriety as regards purchases of sugar. He had already in stock sugar purchased at a low price which he sold to the firm when it was in need of some, without informing the partners that the sugar sold had belonged to him. It was held that A was bound to account to the firm for the profit so made by him.

(b) If a partner carries on any business of the same nature as and competing with that of the firm, he shall account for and pay to the firm all profits made by him in that business.

Example: A, B, C and D started a business in partnership for importing salt from foreign ports and selling it at Chittagong. A struck certain transactions in salt on his own account, which were found to be of the same nature as the business carried on by the partnership. It was held that A was liable to account to the firm for profits of the business so made by him.

RIGHTS & DUTIES OF PARTNERS AFTER A CHANGE IN THE FIRM (SEC 17)

Subject to contract between the partners-

(a) after a change in the firm: Where a change occurs in the constitution of a firm, the mutual rights & duties of the partners in the reconstituted firm remain the same as they were immediately before the change;

(b) after the expiry of the term of the firm: Where a firm constituted for a fixed term continues to carry on business after expiry of that term, the mutual rights & duties of the partners remain the same as they were before the expiry, &

(c) where additional undertakings are carried out: where a firm constituted to carry out one or more adventures or undertakings carries out other adventures or undertakings are the same as those in respect of the original adventures or undertakings.

RELATION OF PARTNERS TO THIRD PARTIES

1. PARTNER TO BE AGENT OF THE FIRM (SEC 18)

2. IMPLIED AUTHORITY OF PARTNER AS AGENT OF THE FIRM (SEC 19)

3. EXTENSION AND RESTRICTION OF PARTNERS’ IMPLIED AUTHORITY (SEC 20)

4. PARTNER’S AUTHORITY IN AN EMERGENCY (SEC 21)

1. PARTNER TO BE AGENT OF THE FIRM (SEC 18):

Subject to the provisions of this Act,

a partner is the agent of the firm for the purposes of the business of the firm.

The principal distinction between him and a mere agent is that he has a community of interest with other partners in the whole property & business & liabilities of partnership, whereas an agent as such has no interest in either.

This rule cannot be applied to all transactions and dealings between the partners themselves. It is applicable only to the act done by partners for the purpose of the business of the firm.

2. IMPLIED AUTHORITY OF PARTNER AS AGENT OF THE FIRM (SEC 19):

Subject to the provisions of section 22,

the act of a partner which is done to carry on, in the usual way, business of the kind carried on by the firm, binds the firm.

The authority of a partner to bind the firm is called “implied authority”.

In the absence of any usage or custom of trade to the contrary, the implied authority of a partner does not empower him to-

(a) Submit a dispute relating to the business of the firm to arbitration;

(b) open a banking account on behalf of the firm in his own name;

(c) compromise or relinquish any claim or portion of a claim by the firm;

(d) withdraw a suit or proceedings filed on behalf of the firm;

(e) admit any liability in a suit or proceedings against the firm;

(f) acquire immovable property on behalf of the firm;

(g) transfer immovable property belonging to the firm; and

(h) enter into partnership on behalf of the firm.

MODE OF DOING ACT TO BIND FIRM (SEC 22):

In order to bind a firm, an act /instrument done /executed by a partner/other person on behalf of the firm shall be done in firm name, or in any other manner expressing or implying an intention to bind the firm.

It is however subject to the following restrictions:

1. The act done must relate to the usual business of the firm, & scope of partner's authority.

2. The act is such as is done for normal conduct of business of the firm.

The usual way of carrying on the business will depend on the nature and circumstances of each particular case [Sec 19(1)].

3. The act to be done in the name of the firm or in any other manner expressing or implying an intention to bind the firm (Sec 22).

Example:X, a partner in a firm of solicitors, borrows money and executes a promissory note in the name of firm without authority. The other partners are not liable on the note, as it is not part of the ordinary business of a solicitor to draw, accept, or endorse negotiable instruments, however it may be usual for one partner of firm of bankers to draw, accept or endorse a bill of exchange on behalf of the firm.

If partnership be of a general commercial nature,

(i) he may pledge or sell the partnership property;

(ii) he may buy goods on account of the partnership;

(iii) he may borrow money, contract debts and pay debts on account of the partnership;

(iv) he may draw, make, sign, endorse, transfer, negotiate and procure to be discounted, Promissory notes, bills of exchange, cheques and other negotiable papers in the name and on account of the partnership.

3. EXTENSION AND RESTRICTION OF PARTNERS’ IMPLIED AUTHORITY (SEC 20):

The partners in a firm may, by contract between themselves, extend/restrict implied authority of any partners.

Notwithstanding any such restriction, any act done by a partner on behalf of the firm which falls within his implied authority binds the firm.

Exception:

Under the following conditions, the restrictions imposed on the implied authority of a partner by agreement shall be effective against a third party:

1. The third party knows about the restrictions, and

2. The third party does not know that he is dealing with a partner in a firm.

Example: A, a partner, borrows from B Rs.1,000 in the name of the firm but in excess of his authority, & utilizes the same in paying off the debts of firm. Here, the fact that the firm has contracted debts suggests that it is a trading firm, & as such it is within the implied authority of A to borrow money for the business of the firm. This implied authority may be restricted by an agreement between him & other partners.

Now if B, the lender, is unaware of this restriction imposed on A, the firm will be liable to repay the money to B. On the contrary B’s awareness as to this restriction will absolve the firm of its liability to repay the amount to B.

Note: extension or restriction is only possible with the consent of all the partners.

Any one partner, or even a majority of the partners, cannot restrict or extend the implied authority.

4. PARTNER’S AUTHORITY IN AN EMERGENCY (SECTION 21)

A partner has authority, in an emergency, to do all such acts for the purpose of protecting the firm from loss as would be done by a person of ordinary prudence, in his own case, acting under similar circumstances, and such acts bind the firm

EFFECT OF ADMISSIONS BY A PARTNER (SEC 23)

An admission or representation made by a partner concerning the affairs of the firm is evidence against the firm, if it is made in the ordinary course of business.

An admission or representation by a partner will not however, bind the firm if his authority on the point is limited & the other party knows of the restriction.

Representations made do not have any effect in case of disputes between partners themselves.

Example: X & Y are partners in a firm dealing in spare parts of different brands of motorcycle bikes. Z purchases a spare part for his Yamaha motorcycle after being told by X that the spare part is suitable for his motorcycle. Y is ignorant about this transaction. The spare part proves to be unsuitable for the motorcycle & it is damaged. X & Y both are responsible to Z for his loss.

EFFECT OF NOTICE TO ACTING PARTNER (SEC 24)

Notice to a partner who habitually acts in the business of the firm of any matter relating to the affairs of the firm operates as notice to the firm, except in the case of a fraud on the firm committed by or with the consent of that partner. The notice to one is equivalent to the notice to the rest of the partners of the firm, just as a notice to an agent is notice to his principal. It must be received by a working partner & not by a sleeping partner. It must relate to the firm’s business.

Example: P, Q, and R are partners in a business for purchase & sale of second hand goods. R purchases a second hand car on behalf of the firm from S. In the course of dealings with S, he comes to know that the car is a stolen one and it actually belongs to X. P and Q are ignorant about it. All the partners are liable to X, the real owner.

The only exception would lie in the case of fraud, whether active or tacit.

Example: A, a partner who actively participates in the management of the business of the firm, bought for his firm, certain goods, while he knew of a particular defect in the goods. His knowledge as regards the defect, ordinarily, would be construed as the knowledge of the firm, though the other partners in fact were not aware of the defect. But because A had, in league with his seller, conspired to conceal the defect from the other partners, the rule would be inoperative and the other partners would be entitled to reject the goods, upon detection by them of the defect.

LIABILITY TO THIRD PARTIES (SECTION 25 TO 27)

1. LIABILITY OF A PARTNER FOR ACTS OF THE FIRM (SEC 25)

2. LIABILITY OF THE FIRM FOR WRONGFUL ACTS OF A PARTNER (SEC 26):

3. LIABILITY OF FIRM FOR MISAPPLICATION BY PARTNERS (SEC 27)

1. LIABILITY OF A PARTNER FOR ACTS OF THE FIRM (SEC 25):

Every partner is liable, jointly with all the other partners and also severally, for all acts of the firm done while he is a partner.

This is because that all the acts done within the scope of authority are the acts done towards the business of the firm.

The expression ‘act of firm’ connotes any act or omission by all the partners or by any partner or agent of the firm, which gives rise to a right enforceable by or against the firm.

Example:

Certain persons were found to have been partners in a firm when the acts constituting an infringement of a trademark by the firm took place, it was held that they were liable for damages arising out of the alleged infringement, it being immaterial that the damages arose after the dissolution of the firm

2. LIABILITY OF THE FIRM FOR WRONGFUL ACTS OF A PARTNER (SEC 26):

The firm is liable to the same extent as the partner for any loss or injury caused to a third party by the wrongful acts of a partner, if they are done by the partner while acting.

(a) in the ordinary course of the business of the firm

(b) with the authority of the partners.

The fact that the method employed by the partner in doing it was unauthorized or wrongful would not affect the question. All the partners in a firm are liable to a third party for loss or injury caused to him by the negligent act of a partner acting in the ordinary course of the business.

Example:One of the two partners in coal mine acted as a manager was guilty of personal negligence in omitting to have the shaft of the mine properly fenced. As a result thereof, an injury was caused to a workman. The other partner was also held responsible for the same.

3. LIABILITY OF FIRM FOR MISAPPLICATION BY PARTNERS (SEC 27):

Where-(a) a partner acting within his apparent authority receives money or property from a third party and misapplies it, or

(b) a firm in the course of its business receives money or property from a third party, and the money or property is misapplied by any of the partners while it is in the custody of the firm, the firm is liable to make good the loss.

Clause (a) covers the case where a partner acts within his authority & due to his authority as partner, he receives money or property belonging to a third party & misapplies that money or property. It is not necessary that the money should have actually come into the custody of the firm.

Clause (b) would be attracted when such money or property has come into the custody of the firm & it is misapplied by any of the partners.

The firm would be liable in both the cases.

If receipt of money by one partner is not within the scope of his apparent authority, his receipt cannot be regarded as a receipt by the firm & the other partners will not be liable, unless the money received comes into their possession or under their control.

Example: A, B, and C are partners of a place for car parking. P stands his car in the parking place but A sold out the car to a stranger. For this liability, the firm is liable for the acts of A.

RIGHTS OF TRANSFEREE OF A PARTNER’S INTEREST (SEC 29)

A transfer by a partner of his interest in the firm, either absolute or by mortgage, or by the creation by him of a charge on such interest-

gives following rights of such a transferee:

(1) During the continuance of partnership, such transferee is not entitled

(a) to interfere with the conduct of the business,

(b) to require accounts, or

(c) to inspect books of the firm.

He is only entitled to receive the share of the profits of the transferring partner & he is bound to accept the profits as agreed to by the partners, i.e., he cannot challenge the accounts.

(2) On the dissolution of the firm or on the retirement of the transferring partner, the transferee will be entitled, against the remaining partners:

(a) to receive the share of the assets of the firm to which the transferring partner was entitled, &

(b) for the purpose of ascertaining the share, he is entitled to an account as from the date of the dissolution.

No person can be introduced as a partner in a firm without the consent of all the partners. A partner cannot by transferring his own interest, make anybody else a partner in his place, unless the other partners agree to accept that person as a partner. However, a partner is not debarred from transferring his interest. A partner’s interest in the partnership can be regarded as an existing interest & tangible property which can be assigned.

MINORS ADMITTED TO THE BENEFITS OF PARTNERSHIP (SEC 30)

(1) with the consent of all the partners , he may be admitted to the benefits of partnership.

(2) has right to such share of property & of the profits of the firm as may be agreed upon & he may have access to & inspect & copy any accounts of the firm.

(3) minor’s share is liable for the acts of the firm, but he is not personally liable for any such act.

(4) minor may not sue the partners for an account or payment of his share of property or profits of the firm, except when severing his connection with the firm, (in such case the amount of his share shall be determined by a valuation as per Sec 48)

All/any partner entitled to dissolve the firm upon notice to other partners may elect in such suit to dissolve the firm, & thereupon the Court shall proceed with the suit as one for dissolution and for settling accounts between the partners, & the amount of share of the minor shall be determined along with shares of other partners.

(5) At any time within 6 months of his attaining majority, or

of his obtaining knowledge that he had been admitted to the benefits of partnership,

whichever date is later,

such person may give public notice that he has elected to become or not to become a partner in the firm, & such notice shall determine his position as regards the firm

If he fails to give such notice, he shall become a partner in the firm on the expiry of 6 months.

Such minor shall give notice to the Registrar that he has or has not become a partner.

(6) Where any person has been admitted as a minor to the benefits of partnership in a firm, the burden of proving the fact that such person had no knowledge of such admission until a particular date after the expiry of 6 months of his attaining majority shall lie on the persons asserting that fact.

(7) Where such person becomes a partner-

(a) his right & liabilities as a minor continue up to the date on which he becomes a partner, but he also becomes personally liable to third parties for all acts of the firm done since he was admitted to the benefits of partnership, &

(b) his share in the property & profits of firm shall be the share to which he was entitled as a minor.

(8) Where such person elects not to become a partner-

(a) his rights and liabilities shall continue to be those of a minor up to the date on which he gives public notice

(b) his share shall not be liable for any acts of the firm done after the date of the notice, &

(c) he shall be entitled to sue the partners for his share of the property & profits.

Minor cannot be declared insolvent, but if the firm is declared insolvent his share in the firm vests in the Official Assignee.

LEGAL CONSEQUENCES OF PARTNER COMING IN & GOING OUT (SEC 31 – 35)

Any change in the relation of partners will result in reconstitution of the partnership firm. Thus, on

-admission of a new partner or

-retirement of a partner or

-expulsion of the partner, or

-on insolvency of a partner etc.

a firm will be reconstituted.

INTRODUCTION OF A PARTNER (SECTION 31)

(1) no person shall be introduced as a partner into a firm without the consent of all the existing partners.

(2) a person who is introduced as a partner into a firm does not become liable for any acts of the firm done before he became a partner- unless he agrees to be liable for obligations incurred by the firm prior to the date- creditor’s consent is necessary to accept the new firm as their debtor & discharge the old partners.

Thus, an agreement between the partners & the incoming partner that he shall be liable for existing debts will not ipso facto give creditors of the firm any right against him.

RETIREMENT OF A PARTNER

(SEC 32)

(1) A partner may retire:

(a) with the consent of all the other partners;

(b) in accordance with an express agreement by the partners; or

(c) where the partnership is at will, by giving notice in writing to all the other partners of his intention to retire.

(2) A retiring partner may be discharged from any liability to any third party for acts of the firm done before his retirement by an agreement made by him with such third party & the partners of the reconstituted firm, & such agreement may be implied by a course of dealing between third party & the reconstituted firm after he had knowledge of the retirement.

(3) Notwithstanding the retirement of a partner from a firm, he & the partners continue to be liable as partners to third parties for any act done by any of them which would have been an act of the firm if done before the retirement, until public notice is given of the retirement: Provided that a retired partner is not liable to any third party who deals with the firm without knowing that he was a partner.

(4) Notices may be given by the retired partner or by any partner of reconstituted firm.

Retirement of a partner does not dissolve it unless there are only 2 partners.

EXPULSION OF A PARTNER (SEC 33)

(i) the power of expulsion must have existed in a contract between the partners;

(ii) the power has been exercised by a majority of the partners; and

(iii) it has been exercised in good faith.

If all these conditions are not present, the expulsion is not deemed to be in bona fide interest of the business of the firm.

The test of good faith includes:

• The expulsion must be in the interest of the partnership.
• The partner to be expelled is served with a notice.
• He is given an OBH.

If a partner is otherwise expelled, the expulsion is null and void.

Expulsion of partners does not necessarily result in dissolution of the firm.

Example: A, B and C are partners in a Partnership firm. They were carrying their business successfully for the past several years. Spouses of A and B fought in ladies club on their personal issue and A’s wife was hurt badly. A got angry on the incident and he convinced C to expel B from their partnership firm. B was expelled from partnership without any notice from A and C.

INSOLVENCY OF A PARTNER (SECTION 34)

LIABILITY OF ESTATE OF DECEASED PARTNER (SEC 35)

Where under a contract between partners, the firm is not dissolved by the death of a partner, estate of a deceased partner is not liable for any act of the firm done after his death. It is not necessary to give any notice either to public or the persons having dealings with the firm.

Ordinarily, the effect of the death of a partner is the dissolution of the partnership, but the rule in regard to the dissolution of the partnership, by death of partner is subject to a contract between the parties & the partners are competent to agree that the death of one will not have the effect of dissolving the partnership as regards the surviving partners unless the firm consists of only 2 partners.

Example: X was a partner in a firm. The firm ordered goods in X’s lifetime; but the delivery of the goods was made after X’s death. In such a case, X’s estate would not be liable for the debt; a creditor can have only a personal decree against the surviving partners and a decree against the partnership assets in the hands of those partners. A suit for goods sold and delivered would not lie against the representatives of the deceased partner. This is because there was no debt due in respect of the goods in X’s lifetime

RIGHTS OF OUTGOING PARTNER TO CARRY ON COMPETING BUSINESS (SECTION 36)

(1) An outgoing partner may carry on business competing with that of the firm and he may advertise such business, but subject to contract to the contrary, he may not,

(a) use the firm name,

(b) represent himself as carrying on the business of the firm or

(c) solicit the custom of persons who were dealing with the firm before he ceased to be a partner.

Agreement in restraint of trade-

(2) A partner may make an agreement with his partners that on ceasing to be a partner he will not carry on any business similar to that of the firm within a specified period or within specified local limits and, notwithstanding anything contained in sec 27 of the Indian Contract Act, 1872, such agreement shall be valid if the restrictions imposed are reasonable.

A similar rule applies to such an agreement of sale of the firm’s goodwill [Sec 53].

RIGHT OF OUTGOING PARTNER IN CERTAIN CASES TO SHARE SUBSEQUENT PROFITS (SECTION 37)

Where any member of a firm has died or otherwise ceased to be partner, & the surviving or continuing partners carry on the business of the firm with the property of the firm without any final settlement of accounts as between them & the outgoing partner or his estate, then, in the absence of a contract to the contrary, -

the outgoing partner or his estate is entitled at the option of himself or his representatives to such share of the profits made since he ceased to be a partner as may be attributable to the use of his share of the property of the firm or to interest at the rate of 6 % p.a. on the amount of his share in the property of the firm

Whereby contract between the partners, an option is given to surviving or continuing partners to purchase the interest of a deceased or outgoing partner, & that option is duly exercised, the estate of the deceased partner, or the outgoing partner or his estate, is not entitled to any further or other share of profits;

Example 1: A, B and C are partners in a manufacture of machinery. A is entitled to three-eighths of the partnership property and profits. A becomes bankrupt whereas B and C continue the business without paying out A’s share of the partnership assets or settling accounts with his estate. A’s estate is entitled to three-eighths of the profits made in the business, from the date of his bankruptcy until the final liquidation of the partnership affairs.

Example 2: A, B and C are partners. C retires after selling his share in the partnership firm. A and B fail to pay the value of the share to C as agreed to. The value of the share of C on the date of his retirement from the firm would be pure debt from the date on which he ceased to be a partner as per the agreement entered between the parties. C is entitled to recover the same with interest.

REVOCATION OF CONTINUING GUARANTEE BY CHANGE IN FIRM (SEC 38)

A continuing guarantee given to a firm or to third party in respect of the transaction of a firm is, in the absence of an agreement to the contrary, revoked as to future transactions from the date of any change in the constitution of the firm. Such change may occur by the death, or retirement of a partner, or by introduction of a new partner.

UNIT 3: REGISTRATION & DISSOLUTION OF A FIRM

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REGISTRATION OF FIRMS-APPLICATION(SEC 58):

(1) The registration of a firm may be effected at any time by sending by post or delivering to the Registrar of the area in which any place of business of the firm is situated or proposed to be situated, a statement in the prescribed form & accompanied by the prescribed fee, stating-

(a) The firm’s name

(b) The place or principal place of business of the firm,

(c) The names of any other places where the firm carries on business,

(d) the date when each partner joined the firm,

(e) the names in full & permanent addresses of partners, and

(f) the duration of the firm.

The statement shall be signed by all the partners, or by their agents specially authorised in this behalf.

(2) Each person signing the statement shall also verify it in the manner prescribed.

(3) A firm name shall not contain any of the following words, namely:-

‘Crown’, Emperor’, ‘Empress’, ‘Empire’, ‘Imperial’, ‘King’, ‘Queen’, ‘Royal’, or words expressing or implying the sanction, approval or patronage of Government except when the State Government signifies its consent to the use of such words as part of the firm-name by order in writing.

The registration of a partnership is optional & one partner cannot compel another partner to join in the registration of the firm. It is not essential that the firm should be registered from the very beginning. When the partners decide to get the firm registered they have to file the statement in the prescribed form. Subsequent alterations in the name, place, constitution, etc., of the firm that may occur during its continuance should also be registered.

REGISTRATION (SEC 59):

When the Registrar is satisfied that the provisions of section 58 have been duly complied with, he shall record an entry of the statement in a register called the Register of Firms, and shall file the statement. Then he shall issue a certificate of Registration.

Note: registration is deemed to be completed as soon as an application in prescribed form with prescribed fee & necessary details concerning the particulars of partnership is delivered to the Registrar. The recording of an entry in the register of firms is a routine duty of Registrar.

CONSEQUENCES OF NON-REGISTRATION (SEC 69)

Under the English Law, the registration of firms is compulsory.

Therefore, there is a penalty for non- registration of firms.

But the Indian Partnership Act does not make the registration of firms compulsory nor does it impose any penalty for non-registration.

However, non-registration of partnership gives rise to a number of disabilities.

Although registration of firms is not compulsory, yet the consequences or disabilities of non-registration have a persuasive pressure for their registration.

(i) No suit in a civil court by firm or other co-partners against third party: The firm or any other person on its behalf cannot bring an action against the third party for breach of contract entered into by the firm, unless the firm is registered and the persons suing are or have been shown in the register of firms as partners in the firm.

(ii) No relief to partners for set-off of claim: If an action is brought against the firm by a third party, then neither the firm nor the partner can claim any set-off, if the suit be valued for more than Rs. 100 or pursue other proceedings to enforce the rights arising from any contract.

(iii) Aggrieved partner cannot bring legal action against other partner or the firm: A partner of an unregistered firm (or any other person on his behalf) is precluded from bringing legal action against the firm or any person alleged to be or to have been a partner in the firm. But, such a person may sue for dissolution of the firm or for accounts & realization of his share in the firm’s property where the firm is dissolved.

(iv) Third party can sue the firm: In case of an unregistered firm, an action can be brought against the firm by a third party.

Exceptions: Non-registration of a firm does not, however effect the following rights:

1. The right of third parties to sue the firm or any partner.

2. The right of partners to sue for the dissolution of the firm or for the settlement of the accounts of a dissolved firm, or for realization of the property of a dissolved firm.

3. The power of an Official Assignees, Receiver of Court to release the property of the insolvent partner & to bring an action.

4. The right to sue or claim a set-off if the value of suit does not exceed Rs. 100 in value.

Registration may also be effected even after a suit has been filed by the firm but in that case it is necessary to withdraw the suit first & get the firm registered & then file a fresh suit.

A & Co. is registered as a partnership firm in 2015 with A, B & C partners. In 2016, A dies. In 2017, B & C sue X in the name & on behalf of A & Co., without fresh registration. Whether the suit is maintainable.

Answer

In the case of a registered firm (whose business was carried on after its dissolution by death of one of the partners), a suit can be filed by the remaining partners in respect of any subsequent dealings or transactions without notifying to the Registrar of Firms, the changes in the constitution of the firm, it was decided that the remaining partners should sue in respect of such subsequent dealings or transactions even though the firm was not registered again after such dissolution & no notice of the partner was given to the Registrar.

The test applied in these cases was whether the plaintiff satisfied the only two requirements of Sec 69 namely,

(i) the suit must be instituted by or on behalf of the firm which had been registered;

(ii) the person suing had been shown as partner in the register of firms. In view of this position of law, the suit is in the case by B and C against X in the name and on behalf of A & Co. is maintainable.

what difference would it make, if in 2017 B & C had taken a new partner, D, & then filed suit against X without fresh registration?

Where a new partner is introduced, the fact is to be notified to Registrar who shall make a record of the notice in the entry relating to the firm in the Register of firms. Therefore, the firm cannot sue as D’s (new partner’s) name has not been entered in the register of firms. It was pointed out that in the second requirement, the phrase “person suing” means persons in the sense of individuals whose names appear in the register as partners & who must be all partners in the firm at the date of the suit.

DISSOLUTION OF FIRM (SEC 39 - 47)

The dissolution of partnership between all partners of firm is called ‘dissolution of firm’.

When only one or more partners retires or becomes incapacitated from acting as a partner due to death, insolvency or insanity, the partnership between such a partner & others is dissolved, but the rest may decide to continue. In such cases, there is no dissolution of firm but it is instead called dissolution of partnership. In the case of dissolution of the firm the whole firm is dissolved.

Dissolution of Firm Vs. Dissolution of Partnership

Modes of Dissolution of a firm (Sections 40-44)

1. DISSOLUTION WITHOUT THE ORDER OF THE COURT OR VOLUNTARY DISSOLUTION:

(i) Dissolution by agreement (Sec 40):

A firm may be dissolved with the consent of all partners or in accordance with a contract between the partners.

(ii) Compulsory dissolution (Sec 41):

A firm is compulsorily dissolved by the happening of any event which makes it unlawful for the business of the firm to be carried on or for the partners to carry it on in partnership.

When more than one separate adventure or undertaking is carried on by the firm, the illegality of one or more shall not of itself cause the dissolution of the firm in respect of its lawful adventures & undertakings.

Example: A firm is carrying on the business of trading a particular chemical and a law is passed which bans on the trading of such a particular chemical. The business of the firm becomes unlawful and so the firm will have to be compulsorily dissolved.

(iii) Dissolution on the happening of certain contingencies (Sec 42):

Subject to contract between the partners, a firm can be dissolved on the happening of any of the following contingencies-

(iv) Dissolution by notice of partnership at will (Sec 43):

(1) Where the partnership is at will, the firm may be dissolved by any partner giving notice in writing to all the other partners of his intention to dissolve the firm.

(2) If the date is mentioned, the firm is dissolved as from the date mentioned in the notice as the date of dissolution, or if no date is so mentioned, as from the date of the communication of the notice.

(2) DISSOLUTION BY THE COURT (SECTION 44):

(a) Insanity/unsound mind: Where a partner (not a sleeping partner) has become of unsound mind, the court may dissolve the firm on a suit of the other partners or by the next friend of the insane partner. Temporary sickness is no ground for dissolution of firm.

(b) Permanent incapacity: When a partner, other than the partner suing, has become in any way permanently incapable(physical disability or illness )of performing his duties as partner, then the court may dissolve the firm.

(c) Misconduct: Where a partner, other than the partner suing, is guilty of conduct which is likely to affect prejudicially the carrying on of business, the court may order for dissolution of the firm, by giving regard to the nature of business. It is not necessary that misconduct must relate to the conduct of the business.

(d) Persistent breach of agreement: Where a partner other than the partner suing, wilfully or persistently commits breach of agreements relating to the management of the affairs of the firm or the conduct of its business, or otherwise so conduct himself in matters relating to the business that it is not reasonably practicable for other partners to carry on the business in partnership with him, then the court may dissolve the firm at the instance of any of the partners.

• Embezzlement,
• Keeping erroneous accounts
• Holding more cash than allowed
• Refusal to show accounts despite repeated request etc.

Example: If one of the partners keeps erroneous accounts and omits to enter receipts or if there is continued quarrels between the partners or there is such a state of things that destroys the mutual confidence of partners, the court may order for dissolution of the firm.

(e) Transfer of interest: Where a partner other than the partner suing, has transferred the whole of his interest in the firm to a third party or has allowed his share to be charged or sold by the court, in the recovery of arrears of land revenue, the court may dissolve the firm at the instance of any other partner.

(f) Continuous/Perpetual losses: Where the business of the firm cannot be carried on except at a loss in future also, the court may order for its dissolution.

(g) Just and equitable grounds: Where the court considers any other ground to be just and equitable for the dissolution of the firm, it may dissolve a firm.

(i) Deadlock in the management.

(ii) Where the partners are not in talking terms between them.

(iii) Loss of substratum.

(iv) Gambling by a partner on a stock exchange.

CONSEQUENCES OF DISSOLUTION (SEC 45 - 55)

(a) Liability for acts of partners done after dissolution (Sec 45):

(1) Notwithstanding the dissolution of a firm, the partners continue to be liable as such to third parties for any act done by any of them which would have been an act of the firm if done before the dissolution, until public notice is given of the dissolution.

The estate of a partner who dies, or who is adjudicated an insolvent, or of a partner who, not having been known to the person dealing with the firm to be a partner, retires from the firm, is not liable under this section for acts done after the date on which he ceases to be a partner.

Two fold objectives-

1. It seeks to protect third parties dealing with the firm who had no notice of prior dissolution and

2. It also seeks to protect partners of a dissolved firm from liability towards third parties.

Example: X and Y who carried on business in partnership for several years, executed on December 1, a deed dissolving the partnership from the date, but failed to give a public notice of the dissolution. On December 20, X borrowed in the firm’s name a certain sum of money from R, who was ignorant of the dissolution. In such a case, Y also would be liable for the amount because no public notice was given.

There are exceptions i.e even where notice of dissolution has not been given, there will be no liability for subsequent acts in the case of:

(a) the estate of a deceased partner,

(b) an insolvent partner, or

(c) a dormant partner, i.e., a partner, who was not known as a partner to the person dealing with the firm.

(b) Right of partners to have business wound up after dissolution (Sec 46):

On the dissolution of a firm every partner or his representative is entitled, as against all the other partners or their representative, to have the property of the firm applied in payment of the debts & liabilities of the firm, and to have the surplus distributed among the partners or their representatives according to their rights.

(c) Continuing authority of partners for purposes of winding up (Sec 47):

After the dissolution of a firm the authority of each partner to bind the firm, and the other mutual rights & obligations of the partners, continue notwithstanding the dissolution, so far as may be necessary to wind up the affairs of the firm & to complete transactions begun but unfinished at the time of the dissolution, but not otherwise

The firm is in no case bound by the acts of a partner who has been adjudicated insolvent; but this proviso does not affect the liability of any person who has after the adjudication represented himself or knowingly permitted himself to be represented as a partner of the insolvent.

(d) Settlement of partnership accounts (Sec 48): subject to agreement by the partners:-

(i) Losses, including deficiencies of capital, shall be paid first out of profits, next out of capital, &, lastly, if necessary, by the partners individually in the proportions in which they were entitled to share profits.

(ii) The assets of the firm, including any sums contributed by the partners to make up deficiencies of capital, must be applied in the following manner & order:

(a) in paying the debts of the firm to third parties;

(b) in paying to each partner rateably what is due to him from capital;

(c) in paying to each partner rateably what is due to him on account of capital; and

(d) the residue, if any, shall be divided among the partners in the proportions in which they were entitled to share profits.

Example: X & Y were partners sharing profits and losses equally & X died. On taking partnership accounts, it transpired that he contributed 6,60,000 to the capital of the firm & Y only 40,000. The assets amounted to 2,00,000. The deficiency (6,60,000 + 40,000 – 2,00,000 i.e. 5,00,000) would have to be shared equally by Y & X’s estate, then the assets would be divided between the partners in proportion to their capital with the result that X’s estate would be the main loser.

(e) Payment of firm debts and of separate debts (Sec 49):

Where there are joint debts due from the firm and also separate debts due from any partner:

(i) the property of the firm shall be applied in the first instance in payment of the debts of the firm, and if there is any surplus, then the share of each partner shall be applied to the payment of his separate debts or paid to him;

(ii) the separate property of any partner shall be applied first in the payment of his separate debts and surplus, if any, in the payment of debts of the firm.

Teamwork

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