Indian Partnership Act 1932

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### Introduction to Partnership - **Definition (Sec 4):** A 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. - **Partners:** Persons who have entered into partnership with one another. - **Firm:** The collective name under which such persons carry on business. - **Firm Name:** The name under which their business is carried on. - **Nature of Partnership:** Not a separate legal entity from its partners. #### Essential Elements of Partnership 1. **Agreement:** Must be a contractual agreement (express or implied). 2. **Two or More Persons:** Minimum 2, maximum 50 (for non-banking business) and 10 (for banking business) as per Companies Act 2013, Sec 464. 3. **Business:** Must be a lawful business. 4. **Sharing of Profits:** Agreement to share profits is essential (sharing of losses is implied, but not mandatory to be expressly agreed upon). 5. **Mutual Agency:** Business carried on by all or any of them acting for all. This is the true test of partnership. #### Partnership vs. Other Forms - **Joint Stock Company:** Separate legal entity, perpetual succession, limited liability, transferability of shares. - **Hindu Undivided Family (HUF):** Governed by Hindu law, not contract. Karta's liability is unlimited, others limited. No mutual agency. - **Co-ownership:** No business, no profit sharing, no mutual agency. Co-owners can transfer interest without consent. - **Club:** Non-profit motive, no mutual agency. #### True Test of Partnership (Sec 6) - The real relation between the parties, as shown by all relevant facts taken together, should be considered. - **Key Factor:** Mutual Agency (every partner is an agent and principal for others). - **Prima Facie Evidence:** Sharing of profits is strong evidence, but not conclusive. - **Exceptions (not partnerships):** - Lenders of money receiving a share of profits. - Servants or agents receiving a share of profits. - Widows or children of a deceased partner receiving annuities. - Minors receiving a share of profits. - Previous owners of a business receiving a share of profits on sale of goodwill. ### Types of Partners - **Actual/Active Partner:** Actively participates in business, known to the public, unlimited liability. - **Sleeping/Dormant Partner:** Invests capital, shares profits/losses, but doesn't participate in management. Unlimited liability. - **Nominal Partner:** Lends name to the firm, no capital, no profit share, but liable to third parties. - **Partner by Estoppel/Holding Out (Sec 28):** One who, by words or conduct, represents himself as a partner, or knowingly permits himself to be represented as one, is liable to anyone who has on the faith of any such representation given credit to the firm. - **Sub-Partner:** A person who shares profits with one of the partners. Not a partner of the firm. - **Partner in Profits Only:** Shares profits but not losses. Still liable to third parties. - **Minor as Partner (Sec 30):** - Cannot be a full-fledged partner, but can be admitted to the benefits of partnership with the consent of all partners. - Liability is limited to his share in the profits and property of the firm. - No personal liability. - Cannot sue the partners for accounts or payment of his share, except when severing connection with the firm. - On attaining majority, he has 6 months to elect to become a partner or not. - If he elects to be a partner, his liability becomes unlimited from the date he was admitted to benefits. - If he elects not to be a partner, his share is not liable for firm's debts after public notice. ### Relations of Partners #### Mutual Rights and Duties (Sec 9-17) - **General Duties (Sec 9):** To carry on business to the greatest common advantage, be just and faithful to each other, render true accounts, and full information. - **Duty to Indemnify (Sec 10):** Partner must indemnify firm for loss caused by his fraud in the conduct of business. - **Determination of Rights & Duties:** By contract between partners, which can be express or implied. - **Conduct of Business (Sec 12):** - Every partner has a right to take part in the conduct of the business. - Every partner is bound to attend diligently to his duties. - Differences (ordinary matters) settled by majority. Fundamental changes require consent of all. - No partner entitled to remuneration for taking part in business. - **Profit and Loss Sharing (Sec 13):** - Partners share profits equally unless otherwise agreed. - Must contribute equally to losses. - No interest on capital unless agreed. - Interest on advances by partner @ 6% p.a. (if no agreement). - Firm must indemnify partner for payments made and liabilities incurred in ordinary and proper conduct of business. - **Property of the Firm (Sec 14):** - All property, rights, and interests originally brought into the firm. - Property acquired with firm's money. - Goodwill of the business. - **Personal Profits (Sec 16):** Partner must account for and pay to the firm any personal profit derived from any transaction of the firm, or from the use of the firm's property, name, or business connection. - **Rights & Duties after Change (Sec 17):** - Continue as before unless contrary agreement. #### Relation of Partners to Third Parties (Sec 18-30) - **Partner as Agent of the Firm (Sec 18):** Every partner is an agent of the firm for the purpose of the business of the firm. - **Implied Authority of Partner (Sec 19):** - Can bind the firm by acts done in the usual way of business. - Examples: buying/selling goods, receiving payments, incurring debts. - **Acts Beyond Implied Authority (Sec 19(2)):** - Cannot submit dispute to arbitration. - Cannot open a bank account in his own name for the firm. - Cannot compromise or relinquish any claim or portion of a claim by the firm. - Cannot withdraw a suit or proceeding filed on behalf of the firm. - Cannot admit any liability in a suit or proceeding against the firm. - Cannot acquire immovable property on behalf of the firm. - Cannot transfer immovable property belonging to the firm. - Cannot enter into partnership on behalf of the firm. - **Extension & Restriction of Partner's Authority (Sec 20):** Can be extended or restricted by contract between partners. - **Partner's Authority in Emergency (Sec 21):** Act to protect the firm from loss, as a person of ordinary prudence would do. - **Effect of Admissions by a Partner (Sec 23):** Admissions or representations concerning the firm's affairs, if made in the ordinary course of business, are evidence against the firm. - **Effect of Notice to Acting Partner (Sec 24):** Notice to a partner who habitually acts in the business of the firm operates as notice to the firm, except in case of fraud on the firm committed by or with the consent of that partner. - **Liability of Partners (Sec 25):** Every partner is jointly and severally liable for all acts of the firm done while he is a partner. - **Liability of the Firm for Wrongful Acts of a Partner (Sec 26):** If a partner's wrongful act or omission in the ordinary course of business causes loss or injury to a third party, or penalty, the firm is liable to the same extent as the partner. - **Liability of the Firm for Misapplication by Partners (Sec 27):** - If a partner, acting within his apparent authority, receives money/property from a third party and misapplies it. - If the firm receives money/property from a third party in the course of its business, and it is misapplied by any of the partners while it is in the custody of the firm. - **Partner by Estoppel/Holding Out (Sec 28):** Explained above. - **Rights of Transferee of Partner's Interest (Sec 29):** - Cannot become a partner. - Cannot interfere in management. - Cannot inspect books. - Entitled only to the share of profits of the transferring partner. - On dissolution, entitled to the share of the assets of the transferring partner. ### Incoming and Outgoing Partners - **Introduction of a Partner (Sec 31):** - Requires consent of all existing partners, unless otherwise agreed. - New partner is not liable for acts of the firm done before he became a partner, unless he agrees to undertake it. - **Retirement of a Partner (Sec 32):** - By agreement with other partners. - In accordance with an express agreement. - By giving notice of intention to retire (in case of partnership at will). - Retiring partner remains liable for firm's acts done before retirement, unless public notice is given and released by agreement. - Liable to third parties for acts done by firm after retirement unless public notice is given. - **Expulsion of a Partner (Sec 33):** - Only if power is conferred by contract. - Must be exercised in good faith (for the benefit of the firm). - Partner must be given an opportunity to be heard. - **Insolvency of a Partner (Sec 34):** - Adjudged insolvent, ceases to be a partner from the date of order. - Firm is dissolved unless otherwise agreed. - Estate of insolvent partner is not liable for acts of firm after insolvency. - Firm is not liable for acts of insolvent partner after insolvency. - **Death of a Partner (Sec 35):** - If no contract to the contrary, the firm is dissolved. - Estate of deceased partner is not liable for acts of firm after his death. - **Rights of Outgoing Partner to Carry on Competing Business (Sec 36):** - Can carry on competing business. - Cannot use the firm name, represent himself as carrying on the firm's business, or solicit customers of the old firm. - **Right of Outgoing Partner in Certain Cases to Share Subsequent Profits (Sec 37):** - If capital is not paid out, he or his estate is entitled to either: - Share of profits attributable to the use of his share of the property, OR - Interest at 6% p.a. on the amount of his share. - **Revocation of Continuing Guarantee by Change in Firm (Sec 38):** - A continuing guarantee given to a firm, or to a third party in respect of the transactions of a firm, is, in the absence of agreement to the contrary, revoked as to future transactions by any change in the constitution of the firm. ### Dissolution of a Firm - **Dissolution of Firm vs. Dissolution of Partnership:** - **Dissolution of Partnership:** Change in relation of partners, firm continues. E.g., admission, retirement. - **Dissolution of Firm:** Termination of all relations between all partners, business ceases. - **Modes of Dissolution:** #### 1. Dissolution by Agreement (Sec 40) - By mutual agreement of all partners. - In accordance with a contract between partners. #### 2. Compulsory Dissolution (Sec 41) - By insolvency of all but one partner. - By the business becoming unlawful. #### 3. Dissolution on the Happening of Certain Contingencies (Sec 42) - If entered for a fixed term, by the expiry of that term. - If entered for a single adventure, by the completion of that adventure. - By the death of a partner. - By the insolvency of a partner. - (Subject to contract between partners) #### 4. Dissolution by Notice (Sec 43) - In case of partnership at will, by any partner giving notice in writing to all other partners of his intention to dissolve the firm. - Date of dissolution: date mentioned in notice, or date of communication if no date mentioned. #### 5. Dissolution by the Court (Sec 44) - On application by a partner, the court may order dissolution on grounds like: - **Insanity:** Partner becomes of unsound mind. - **Permanent Incapacity:** Partner becomes permanently incapable of performing duties. - **Misconduct:** Partner guilty of conduct affecting the business. - **Breach of Agreement:** Willful or persistent breach of agreements by a partner. - **Transfer of Interest:** Partner transfers whole of his interest to third party. - **Continuous Losses:** Business cannot be carried on except at a loss. - **Just and Equitable:** Any other ground which the court deems just and equitable. #### Consequences of Dissolution - **Liability for Acts Done After Dissolution (Sec 45):** Partners continue to be liable to third parties for any act done by any of them which would have been an act of the firm if done before dissolution, until public notice of dissolution is given. - **Right of Partners to Have Business Wound Up (Sec 46):** Every partner, or his representative, has a right to have the property of the firm applied in payment of the debts and liabilities of the firm, and to have the surplus distributed among partners. - **Settlement of Accounts (Sec 48):** - Losses paid first out of profits, then capital, then by partners individually in their profit-sharing ratios. - Assets applied in order: 1. To third-party debts. 2. To advances by partners. 3. To capital of partners. 4. Residue divided among partners in profit-sharing ratios. - **Payment of Firm Debts and Separate Debts (Sec 49):** - Firm property applied first to firm debts. - Separate property of a partner applied first to his separate debts. - Surplus of firm property, if any, used for separate debts. - Surplus of separate property, if any, used for firm debts. - **Personal Profits After Dissolution (Sec 50):** Partner must account for personal profits derived from firm's transactions undertaken after dissolution but before completion of winding up. - **Return of Premium (Sec 51):** If a partner has paid a premium and the firm is dissolved prematurely, he is entitled to repayment of a proportion of the premium (unless dissolution due to his misconduct or agreement otherwise). - **Rights Where Partnership Contract is Rescinded for Fraud or Misrepresentation (Sec 52):** - Lien on surplus assets for capital contributed. - Right to rank as a creditor for any sum paid for firm's debts. - Right to be indemnified against firm's debts. - **Settlement of Goodwill (Sec 55):** - Goodwill of the firm is part of the property of the firm. - Can be sold separately or with other property. - Partner may agree not to carry on similar business within specified limits. ### Registration of Firms (Sec 58-71) - **Registration is NOT Compulsory:** But highly advisable due to consequences of non-registration. - **Procedure for Registration (Sec 58):** - Application to Registrar of Firms in prescribed form. - Statement containing: firm name, place of business, names of other places of business, date of joining of each partner, names and addresses of partners, duration of firm. - Signed by all partners or their agents. - Verification and payment of fee. - **Effect of Non-Registration (Sec 69):** - **No suit by partner against firm or co-partners:** For enforcement of any right arising from a contract or right conferred by the Act. - **No suit by firm against third parties:** To enforce rights arising from contract. - **No right to claim set-off** (exceeding Rs. 100) or other proceedings in respect of a contract. - **Third parties can sue unregistered firm/partners.** - **Unregistered firm can sue third parties for torts.** - **Unregistered firm can sue to enforce a statutory right or a right not arising from contract.** - **Power of Court to order winding up** of an unregistered firm is not affected. - **Rights of partners to sue for dissolution or accounts of a dissolved firm** or to enforce rights against third parties for recovery of property are not affected. - **Rectification of Mistakes (Sec 59):** Registrar can rectify mistakes in statements. - **Amendment of Statement (Sec 60):** Changes in firm name, principal place of business, opening/closing branches. - **Recording of Changes in Constitution (Sec 61):** Admission, retirement, death, expulsion, insolvency of partner. - **Notice of Change of Name and Address of Partner (Sec 62):** Must be given to Registrar. - **Notice of Dissolution (Sec 63):** Must be given by any partner to Registrar. - **Penalty for False Particulars (Sec 70):** Imprisonment or fine or both.