Partnership Act.pptx

THE INDIAN PARTNERSHIP ACT,
1932
APPLICABLE TO : WHOLE OF INDIA EXCEPT
JAMMU & KASHMIR
APPLICABLE W.E.F. – 1ST OCTOBER, 1932.
Indian Partnership Act, 1932
Prepared By: CA Nikunj R. Amlani

PARTNERSHIP :
“ It is a relation between two or more persons who have agreed to
share the profits of a business carried on by all or any of them acting
for all”
From the above definitions the following analysis can be made:
There must be AT LEAST TWO PERSONS
There must be a relation created by an AGREEMENT.
There must be PROFIT SHARING from a BUSINESS.
There must be a MUTUAL AGENCY among partners.

PARTNERS :
THE PERSONS WHO HAVE ENTERED INTO A PARTNERSHIP
ARE INDIVIDUALLY CALLED “PARTNERS”
FIRM :
THE PERSONS WHO HAVE ENTERED INTO A
PARTNERSHIP ARE COLLECTIVELY CALLED “FIRM”
It is a convenient phrase for describing the partners, without any separate legal
existence apart from its partners.
FIRM NAME :
It is the name by which a firm is represented. The name by which all the
partners are liable to each other and to outsiders.

NAME:-
"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.
ACT OF A FIRM :
MEANS 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“
BUSINESS :
THE ACT GIVES INCLUSIVE DEFINITION. IT INCLUDES EVERY TRADE,
OCCUPATION AND PROFESSION.
THIRD PARTY :
MEANS A PERSON WHO IS NOT A PARTNER IN A FIRM.

Essential Elements of a Partnership:
At Least Two Persons :
 The Persons must be Competent to contract and have a Separate
Legal Identity.
 A Partnership Firm or HUF cannot become partner.
Agreement :
 Partnership Must be Created by an Agreement.
 Partnership can not be created by Status.
 E.g. if A and B are Partner in a firm AB and Associates, Son of A and
B can not be the partner in firm by birth.

Business :
 There must be a Legal business carried by partners
 It may be Permanent or Temporary.
 The Firm can not be in the form of Non-Profit Organization. i.e.
Charitable, Religious or Social Purpose firms cannot be formed.
Profit sharing :
 There must be a profit sharing among all the partners
 PSR may be equal or in any other ratio as per Agreement.
 However, Loss sharing by All P’ners is not compulsory.
 If the agreement is silent regarding loss sharing, then profit sharing
includes loss sharing also in the same ratio.
Mutual Agency :
 Each Partner is an agent as well as principal of each other.
 All the partners are liable for any act of a partner carried on in
relation to business of a firm within his authority.

True Test of Partnership (Mutual Agency):
It is a test conducted to check whether there is a partnership between
two or more persons.
“ Profit Sharing is a PRIMA FACIE Evidence of a
partnership
While
Mutual Agency is CONCLUSIVE evidence of a partnership”
Examples of No Partnership :
( Two or more persons share profits but not having Mutual Agency
relation )
1) Joint owners ( Co-owners ):
E.g. Anil and Mukesh became Joint Owner of “Ambani House” after
Death of Dhirubhai.

2) Money lenders :
E.g. ICICI bank given loan to Mr. X for business and asked for 10%
profit sharing untill loan is repaid in addition to interest @10%p.a.
3) Servent or agent :
E.g. Profit share offered to sales executive as incentive in addition to
monthly salary
4) Widow / Child of deceased partner :
E.g. Priya, ( Widow of Ram ), got profit sharing in firm until settlement
of Ram’s due by firm.
5) Seller of Goodwill :
E.g. Hutch demanded 10% profit sharing from Vodafone Ltd till next 20
years for sale of Goodwill.

Partnership V/s Company :
 Separate Legal Identity :
 P’ship : Not Available.
 Company : Yes
 Mutual Agency Relationship:
 P’ship : Yes
 Company : No
 Sharing of Profit :
 P’ship : Compulsory to all p’ners.
 Company : Not Compulsory. ( Reserve or Dividend )
 Liability of Members :
 P’ship : Unlimited
 Company : Limited ( by guarantee or shares)
 Property :
 P’ship : Firm’s property = Partner’s property.
 Company : Companies property is not member’s property

 Transfer of share by Members:
 P’ship : Restricted ( only by consent of all partners )
 Company : Freely Allowed
 Management :
 P’ship : By all or any partners
 Company : By BOD.
 Max No. of Members :
 P’ship : 100
 Company : 200 ( Pvt C0.), Unlimited ( Public co.)
 Min No. of Members :
 P’ship : 2
 Company : Pvt Co : 2( there may be OPC), Public Co : 7
 Perpetual Succession :
 P’ship : Not Available
 Company : Available.
 Min. Capital :
 P’ship : Not Specified.
 Company : Pvt. Co.- Rs. 1lacs, Pub co- Rs.5lacs

Partnership V/s HUF
 Creation :
 P’ship : By agreement.
 HUF : By Operation of Law ( Status )
 Death of member :
 P’ship : Dissolved.
 HUF: Continues.
 Management :
 P’ship : By all or any of the partners.
 HUF : By Karta only.
 Mutual Agency Relation:
 P’ship : Exists between all p’ners.
 HUF : Doesn’t exist between members.

 Liability of Members :
 P’ship : Unlimited.
 HUF : Only unlimited for Karta. For Others, Limited.
 Checking Accounts by Members :
 P’ship : By any of the partners.
 HUF : By Karta only
 Law applicable :
 P’ship : IPA, 1932.
 HUF : Mitakshara School of Hindu Law.
 Position of a Minor :
 P’ship : May be admitted for benefit.
 HUF : May be Member from birth.

Partnership V/s Co-owners ( Joint Owners )
 Max. no. of members :
 P’ship : 100
 Co-ow: Unlimited.
 Creation :
 P’ship : Always by an Agreement
 Co-ow: Either by Agreement or by operation of law.
 Mutual Agency Relation :
 P’ship : Exists between Partners
 Co-ow : Doesn’t exist
 Transfer of Share :
 P’ship : A P’ner can only trf his share with consent of all other
p’ners.
 Co-ow : A Co-ow. Can trf. His share without consent.

 Lien over Property :
 P’ship : Each p’ner has right of lien.
 Co-ow : doesn’t have such right.
 Division of property :
 P’ship : A p’ner can not ask for such division.
 Co-ow: A co-ow can ask for division of prop.
 Dissolution:
 P’ship : On retirement, death, insolvency of p’ner.
 Co-ow : Only on death of co-ow.

Types of Partners :
E.g. MC & Associates is a firm between Munna, Circuit, Mamu, Ambani
and Shock – circuit ( Son of circuit – 17 years )
Active, actual or ostensible Partner :
 Ordinary P’ner taking part in functioning of business.
 By his act, whole firm is bound, as they are known to TP.
 Having all rights of a p’ner.
 E.g. Munna and Circuit
Dormant or Sleeping partner : (hidden partner)
 Invest money, share profit/loss.
 Do not take active part in business of firm.
 No identity disclosed to T.P.
 Unlimited Liable for act of firm.
 E.g. Mamu

Nominal Partner :
 A P’ner who Lends his name to Firm.
 Unlimited liable to third party for act of firm.
 E.g. Ambani.
Partner in Profit Only :
 Invest money, Entitled for profit sharing but not for losses.
 Unlimited liable to TP for act of firm if he is Competent person.
 E.g. Shock-circuit
Sub-partner:
 He is Transferee of Share by a p’ner.
 No rights to take part in business of firm, only having profit sharing.
 Not liable for act of firm, even can not bind firm by his act.
 E.g. Chinki

Partner by Estoppel or Holding out :
 A person who is represented as a partner to third parties who is not a
partner actually.
 He is liable to third parties same as actual partner.
 E.g. Swami.
Exception to Holding out / Estoppel:
1) Fraud committed by any partner.
2) Estate of Deceased Partner
3) Adjudicated Insolvent Partner.

Types / Classification of Partnership :
Particular Partnership :
 A Partnership for a particular adventure or a contract or an act.
 Dissolved when venture is completed.
 E.g. L&T and Ultratech entered into a partnership to construct
Reliance Township.
Partnership for fix period :
 The period of p’ship is mentioned in a contract between partners.
 Dissolved when Time expired.
 E.g. partnership between Hero and Honda for 25 years.
Partnership at Will :
 Duration is not fixed for partnership
 It can be dissolved at any time by any partner by giving notice to all
other partner or he can retire by notice

Change in a Firm :
A. Change in Constitution of a firm :
a. Introduction of a new partner ( Unanimous consent required)
b. Retirement or Expulsion of a partner
c. death of a partner
d. Insolvency of a partner.
B. Change in nature of business of firm (Only possible by
unanimous consent of all partners).
C. Change in duration of firm.
Rights and Duties of partner due to change in firm:
Rights and Duties of Partners remains SAME AS BEFORE
in case of any Change in Firm.
However, in case of change in Duration of Firm, the
Partnership becomes at Will.

Minor as a Partner :
General Rule :
Minor can not become a Full-fledged partner in firm as he is not capable
to enter into agreement.
Exception :
Minor can be admitted to a benefit (only for profit) in a firm with the
consent of all partners. (Unanimous consent)
Rights of a minor :
 Profit sharing in firm
 Access, inspection, copy of accounts of firm
 Sue the partners for his share of payment at the time of severing
from firm
 Option to decide whether to become a partner in a firm or not, within
6 months of attaining majority or on becoming aware that he has
been admitted as minor, whichever is LATER.

Liabilities of a Minor :
 His share is liable for loss of firm, but he is not personally liable. (
i.e. Limited Liability )
 If he fails to give notice of becoming partner or not within 6 months,
then he is assumed to be a partner in a firm and he is liable for all the
acts of a firm done since he was admitted as a partner in firm as
minor.
 On attaining majority, if he decide not to become a partner, then his
rights and liabilities end on the day he gives public notice in that
regard.

Rights of a partner :
All Rights given as per IPA, 1932, these are subject to agreement. i.e.
the rights can be changed by specific provision in agreement.
 Take part in conduct ( any transactions ) of business of firm
 To be consulted for any decision of firm. For Ordinary decision-
Majority consent. And Fundamental Decision- Unanimous Consent.
 To access the books of firm at any time
 Remuneration : i) As per Law, Remuneration is not payable to any
partner, ii) It is paid only if a) decided in agreement, or b) payable
as per continued usage of trade or customs.
 To share the profits of a firm.
 Interest on capital: Rules same as Remuneration. However, It is only
paid out of profits of firm and not out of capital of firm.
 To obtain interest on advance made by partner to firm @6% p.a.
 To be indemnified ( to be reimbursed) for any cost, loss or expense
incurred by him on behalf of firm.

 To stop admission of any new partner.
 To retire from firm at any time, i) with consent of all partners, ii) by
giving notice to all partners ( P’ship at Will), iii) as per agreement.
 Not to be expelled from firm by any majority of partners without any
valid reason.
 Retiring P’ner can i) cary on any business and ii) may advertise such
business, but he cannot i) use firm name , ii) represent himself as
carying on firm business, iii) solicit customers of firm.
 To share subsequent profits in stead of interest on sum due @6% p.a.
payable on his retirement.
 To dissolve the firm by giving notice to all partners when the
partnership is at Will.

Duties of a partner :
 To carry on business of firm to greatest common advantage,
 To be just and faithfull to others
 To render to other partners with full details.
 To indemnify the firm for any loss or damage to firm due to fraud of
a partner.
 To attend dilligently to the act of firm and apply his entire
knowledge for the firm without any remuneration.
 To refund the profit earned by partner from any Competitive
business act done by him, however, no need to refund profit earned
from non-competitive business act done by him.

.
Partnership Property :
The property of a firm is the property of partners But Property of
partner is not considered as property of firm.
The partnership property includes;
 All the properties, rights and interests which partners have
contributed to the common business.
 All the properties, rights and interests which are purchased by firm
in course of business of firm
 Goodwill of firm

Implied Authority of a Partner :
IA means, The Act done by a P’ner ;
i) Relates to business of the firm,
ii) Done in the firm name,
iii) Done in the usual way.
Examples of IA for a Trading Firm :
A partner may pledge, or sell partnership property, buy or sell
goods, borrow money, contract debts, pay debts, draw, endorse
cheques etc.
Express Authority of a Partner:
Restriction or Extension of Implied Authority by agreement
between partners is called Express Authority.
Relation of Partners to Third Parties:
REFER THE CHART

Acts Outside Implied Authority :
The Following Acts can only be done by any partner with consent of all
partners:
 To submit a dispute relating to the business of the firm to arbitration
 Open a bank account on behalf of the firm in his own name
 Compromise or relinquish any claim or portion of a claim by the firm
against a third party
 Withdraw a suit or proceedings filed on behalf of a firm
 Admit any liability in a suit or proceeding against the firm
 Acquire immovable property on behalf of the firm
 Transfer immovable property belonging to the firm
 Enter into partnership on behalf of firm.

Act in emergency by a partner :
The Firm is Liable to Third Party even if the Act is outside Authority
of Partner.
Notice to Acting Partner :
Information to Active Partner is assumed to be information to Firm. i.e.
Other partners cannot reject the transaction.
However, if Active partner and Third party has incurred fraud with
other partners, the act can be rejected by other partners.
Liability to Third Parties :
All the partners are liable to third parties for any act of the firm done
within his implied authority, Even if;
•it was done by a fraud by a partner or
•misappropriation of property by partner

Right of a Transferee of a partner’s Share :
The Transferee of the partner’s share is called sub partner.
Such transferee is not a partner of firm, he is only partner of a partner.
During continuance of partnership, transferee can not;i) interfere
with conduct of business,ii) require or inspect books of accounts.
On dissolution, he may sue the partners for recovering his share in
profit and property as well as Check the Accounts of Firm to Ascertain
True Position of Firm.

Consequences of Partners coming in and going out:
Introduction of a partner :
Admission by Unanimous Consent of all p’ners.
New Partner is liable from Date of his Admission.
If new partner wants to be liable for old obligations, mutual consent
of all the parties required. i.e. New/Old partners and Third Party.
Retirement of a partner :
To Carry on any Business after retirement.
He may be Restrained to carry on Competing Business for
reasonable period and local limit by agreement.
To receive the share of profit and property.
To get Int. @6% p.a. on O/s Due or Subsequent Profit Sharing, at
his option.
The liability of Retiring P’ner continues untill Public Notice is
Given, Except Sleeping P’ner.

Death or Insolvency of a partner :
The liability of the partner ceases on the day of death or insolvency.
No Public notice is required to be given.
The Firm is Dissolved on Death or Insolvency unless agreed in
agreement to carry on business by remaining partners in agreement.
Expulsion(removal) of a partner :
Valid only if all the following conditions satisfied, otherwise Void.
a. The power is exercised in majority
b. The power is obtained by a contract between partners and
c. The power has been exercised in Good faith, i.e.
i. The expulsion is in interest of the firm
ii. The partner is served with notice for expulsion
iii. The partner is given opportunity of being heard.
The Liability of Expelled P’ner continues for the act of firm, untill
PN is given by Expelled p’ner or Firm.

EFFECT ON CONTINUING GUARANTEE DUE TO
CHANGE IN FIRM
The continuing guarantee given by Surety on behalf of Firm, will be
Ceased from the day of change in firm, Unless the agreement provides
otherwise.

Registration of a firm:
The registration of the firm is not compulsory,
However, it may be done at any time during continuance of firm.
Process of Registration:
To Fill up the Registration Form.
Form to be Signed by All the P’ners or their Agent.
The form to be sent to Registrar of Firm along with DD of
Prescribed Fees.
The Registration Form to include following details:
 Firm name,
Principal Place of Business,
Name of other place of business,
Date of joining of each partner,
Name and address of partners,
Duration of firm.

On receipt of Form, The Registrar will register the name of firm
from above details in Register of Firms if satisfied.
RoF to issue a Certificate of Registration to partners.
Regn is Complete when Registrar enters details of firm in Register Of
firms.
Conclusive evidence of Regn is Certificate of Registration.
Effect of Change:
Any Change in firm must be informed to RoF.
For change in Firm Name or Change in Principal place of Business,
the form informing change will be sent to RoF signed by all p’ners.
For any other change, any one p’ner may intimate to RoF.
If any change is not intimated to RoF, the Firm can not file a Suit
against TP.

Rectification of Reg. details:
The Errors or Mistakes in Register of Firms may be rectified or
amended by registrar;
Either on application by any partner, or
By the order of court.
Inspection of Register of Firms:
The register of firms remains open for inspection by any public on
payment of such fees as may be prescribed.
Any person may also obtain the copy of any portion of register on
payment of fees.

Consequences of non-registration of a firm :
 As we know, the Regn. Of firm is not compulsory.
 Howerver, There are Certain Disabilities of Unregistered Firms,
which creates a Persuasive pressure to register the firms.
DISABILITIES OF NON-REGISTERED FIRM:
 The firm or partners cannot file suit on third party for any breach of
contract.
 TP may file suit against firm, But the firm or any partner cannot ask
for set off if the suit amount is more than Rs.100
 A partner cannot file suit on firm as well as on any other partner.
Only the p’ners may sue for Dissolution and realisation of assets.
 However, the firm may file a suit if;
 The firm is Registered later on. and
 All the present p’ners are registered with ROF.

Dissolution :
Dissolution of firm means, end of Jural relation between all the
partners.
Dissolution of partnership means, end of relation between some
partners but still firm continues. E.g. retirement, death, insolvency of a
partner etc.
The dissolution may take place in any of the following ways ;
 Dissolution by an agreement between all the partners.
 By all partners becoming insolvent or all but one becoming
insolvent.
 On happening of contingencies such as;
 a) expiry of time,
 b) completion of venture,
 c) death or insolvency of a partner.

 Notice by Any P’ner to other p’ners in case of P’ship at Will.
 Dissolution will be effective from the date as mentioned in
Notice, or
 If no date mentioned, from date of communication of such
notice to other p’ners.
 Business of the firm becomes Illegal.
 Dissolution declared by Court order due to application by any
p’ner. It happens in following cases;
 a) partner becomes unsound or permanent incapacity,
 b) misconduct of partner,
 c) consistent breach of agreement by partner,
 d) transfer of whole share by a partner,
 e) business carried only at loss,
 f) any other equitable ground found satisfactory by court.

Consequences of dissolution :
 All the partners are liable to third parties for any act done by a
partner until a public notice is given regarding dissolution.
 However, following p’ners are not liable:
 Dormant partner,
 Insolvent partner or
 Deceased partner.
 There is a Continuing liability of all p’ners even after dissolution for
following:
 Transactions relating to wind up firm, and
 Complete the unfinished transactions at the time of dissolution.
 Settlement of accounts of the firm is done as follows :
 Settle the debts to third parties
 Settle the partner’s advances
 Settle the partner’s capital
 Distribute the surplus to partners in the Profit sharin ratio.

 If there is Deficiency, it will be adjusted;
 First against Profit of Firm
 Then against Capital of p’ners.
 The remaining deficiency is borne by all p’ners in PSR.
 The Firm’s Properties are first applied against debt of firm and then
against debts of partners and
 Properties of Partners are first applied against personal debts of
partners and then against debts of firm.
 The profit earned, after dissolution but till firm is wound up, is to be
distributed among all the partners in the profit sharing ratio.

Return of Goodwill / Premium:
If firm is dissolved before maturity;
 The premium ( Goodwill ) has to be returned if the firm has been
dissolved due to;
 without fault of either party, or
 due to fault of both, or
 due to fault of partner receiving premium ( old partners ) or
 due to insolvency of partner receiving premium. ( old partners )
 However, Goodwill will not be returned if the partnership is
dissolved due to;
 by death of any partner,
 due to misconduct of partner paying premium ( new partner )
 as per the agreement not to pay premium back.

MODE OF GIVING PUBLIC NOTICE :
 Public notice is given in following manner:
 By notification in official Gazette
 In at least one vernacular news paper which is circulated in cities
where the firm continues business and
Notice to ROF if Firm is Registered.
P.N. is compulsory in case of;
 Retirement or expulsion of a partner,
Dissolution of firm,
Decision of minor on attaining majority.
Effect of Fraud by a Partner:
If the Dissolution takes place due to Fraud by a partner;
 The Aggrieved partner gets the preferential right to obtain all the
dues to be recovered by him over the defaulting partner.
Aggrieved partner can recover all dues from defaulting partner.

Decision of Garner vs Murray:
On Dissolution of Firm;
the Defficiency arising due to Insolvency of a partner; is borne by
Solvent Partners in their Capital Ratio.
Interest on Capital vs Advance by partner:
Interest on Capital of partner is payable only upto the date of
Dissolution of firm, irrespective of repayment of capital.
But interest on Advance by partner is paid upto the date of repayment
of such advance.

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