The Indian Partnership Act, 1932

Kinds of Partnership

1] Partnership at Will ( Duration of Partnership )

Section 7 of the Indian Partnership Act 1932, there are two conditons be fulfilled for a partnership to be a partnership at will. These are

· There is no agreement about a fixed period for the existence of a partnership.

· No provision with regards to the determination of a partnership

2] Partnership for a Fixed Term ( Duration of Partnership )

partnership was created for a fixed duration of time.After the expiration of such a duration, the partnership shall also end or may continue their business even after the expiration of the duration.

[3] Particular Partnership

partnership is formed only to carry out one business venture or to complete one undertaking after that partnership will be dissolved.

4] General Partnership

When the purpose for the formation of the partnership is to carry out the business, in general, it is said to be a general partnership.

Right to Determine Relationship

Partners can determine their mutual rights and duties by a contract called partnership deed, which determines aspects of general administration, such as which partner will do what work, what will be their share in profits, etc. It may be varied by express or implied consent of all the partners.

Such deed can be expressly made or implied by a course of dealing.

For example, if one partner checks accounts of the firm daily and others do not object, his conduct will be presumed to be a right of all partners in the absence of a written partnership deed between them. So they can themselves determine the rights of partners.

Relation of Partners: Rights of Partners, Duties of Partners

Agreement in Restraint of Trade is Valid

Section 27 of the Indian Contracts Act, 1872 declares contracts in restraint of trade as void. All agreements restraining exercise of a lawful profession, trade or business are invalid.

Section 11 of Partnership Act, however, states that partners can validly levy such a restraint on each other, but such restraint must be provided for under the partnership deed. Partners can use this agreement to prohibit each other from carrying on any business other than that of the firm.

Rights of Partners Inter Se

1. Right to participate in business

2. Right to express opinions

3. Right to access books and accounts:

4. Right to share profits

5. Right to be indemnified

6. Right to interest on capital and advances

Duties of Partners inter se

1. General duties

2. Duty to indemnify for fraud

3. Duty to act diligently

4. Duty to use the firm’s property properly

5. Duty to not earn personal profits or to compete

Partnership Property (Section 14)

The property of a firm is also known as partnership property, partnership assets, joint stock, common stock, or joint estate. A partnership property includes all property and rights, and interest in property that the partnership firm purchases.

These purchases can also be made for the purpose and in course of the business of the firm, including the goodwill of the firm. All partners collectively own such properties.

Hence, a partnership property comprises of the following items if there is no agreement between the partners showing any contrary intention:

· All property and rights and interest in property that the partners purchase in the common stock as their contribution to the common business.

· All property and rights and interest in property that the firm purchases either for the firm or for the purpose and in course of the business of the firm.

· Goodwill of the business.

Goodwill

Section 14 specifies that the goodwill of a business is the property of the firm and is subject to a contract between the partners. However, it does not define the term goodwill.

Goodwill is the value of the reputation of a business in respect of the expected future profits over and above the profits that a firm earns in the same class of business. It is a part of partnership property. The firm can sell the goodwill separately or along with other properties.

Application of Partnership Property (Section 15)

According to section 15, the partnership property should be held and used exclusively for the purpose of the firm. While all partners have a community of interest in the property, during the subsistence of the partnership no partner has a proprietary interest in the assets of the firm.

Each partner has a right to his share in the profits of the firm until the firm subsists. He also has a right to see that the application and use of the assets of the firm are for the purpose of the business of the partnership.

Rights of Outgoing Partner

A partner who leaves the partnership firm in which the remaining partners continue the business is an outgoing partner. Such a partner has certain liabilities and rights as prescribed by the Partnership Law. In this article, we will focus on the rights of an outgoing partner.

Consequences of Non Registration of Firm

Section 69 of the Indian Partnership Act, 1932 offers a detailed explanation of the consequences of not opting for firm registration. These are:

1] No suit in a civil court by the firm or other co-partners against any third party

2] No relief to partners for set-off of claim

3] An aggrieved partner cannot bring legal action against other partner or the firm

4] A third party can sue the firm

Consequences of Dissolution of a Firm

Liability for Acts done by Partners after the Dissolution of Firm (Section 45)

According to this section, the partners of a firm are liable to a third party for any act done by any of them unless they give a public notice of the dissolution. This notice can be given by any partner. It also specifies that the estate of a partner who dies, retires from the firm, becomes insolvent, or that of a person who the third party is not aware of being a partner of the firm, is not liable under this section (from the date he ceases to be a partner).

In simple words, Section 45 endeavors to protect third parties who have no clue about the dissolution of firm and also the partners of a dissolved firm from liabilities towards third parties post-dissolution.

Wind up the Business Post-Dissolution (Section 46)

Once a firm is dissolved, every partner or his representative has a right to apply the property of the firm in payments of debts and liabilities of the firm. The surplus, if any, can be distributed among the partners according to their rights.

Also according to section 47 post-dissolution, the authority of each partner to bind the firm, along with other mutual rights and obligations, continue till such time that they can wind up the affairs of the firm.

This gives them a chance to complete the unfinished transactions at the time of dissolution. This does not include the acts of a partner who has been adjudicated insolvent.

Elements of a Partnership

The Indian Partnership Act 1932 defines a partnership as a relation between two or more persons who agree to share the profits of a business run by them all or by one or more persons acting for them all. As we go through the Act we will come across five essential elements that every partnership must contain. Let us take a look at them.

1] Contract for Partnership

2] Association of Two or More Persons

3] Carrying on of Business

4] Profit Sharing

5] Mutual Agency

Types of Partners

Six types of partners we come across on a regular basis. This list is not exhaustive, the Partnership Act does not restrict any unique kind of partnership that the partners want to define for themselves. Let us take a look at some of the important types of partners.

1] Active Partner/Managing Partner - he takes active participation in the firm

2] Dormant/Sleeping Partner - does not participate in the daily function

3] Nominal Partner - does not have any real or significant interest in the partnership

4] Partner by Estoppel - person is not a partner he has represented himself as partner by holding out

5] Partner in Profits Only - partner will only share the profits of the firm, he will not be liable for any liabilities

6] Minor Partner

A minor cannot be a partner of a firm according to the Contract Act. However, a partner can be admitted to the benefits of a partnership if all partner gives their consent for the same. He will share profits of the firm but his liability for the losses will be limited to his share in the firm.

Such a minor partner on attaining majority (becoming 18 years of age) has six months to decide if he wishes to become a partner of the firm. He must then declare his decision via a public notice. So whether he continues as a partner or decides to retire, in both cases he will have to issue a public notice.

A Partner is an Agent of the Firm (Section 18)

Section 18 specifies that a partner is an agent of the firm for the purpose of business of the firm. This is actually one of the essential elements of a partnership.

Acts for and in the interest of his partners, then he is acting as an agent.

Partner is an agent only or the purpose of business of the firm. He is not an agent for all transactions and dealings between the partners themselves.

Minors Admitted to Benefits of Partnership

Section 30 of the Indian Partnership Act 1932 contains legal provisions about a minor in a partnership.

Indian Contract Act 1857 clearly states minor cannot be a partner in a partnership firm.

However, according to the Partnership Act, a minor may be admitted to the benefits of a partnership. So while the minor will not be a partner he will enjoy all the benefits of a partnership. To admit all the minor to the benefits of the partnership all of the partners of the firm must be in agreement.

Rights of a Minor Partner

i. A minor partner will obviously have the right to his share of the profits of the firm. But the minor partner is not liable for any losses beyond his interests in the firm. So a minor partner’s personal assets cannot be liquidated to pay the firms liabilities.

ii. He can also like any other partner inspect the books of accounts of the firm. He can demand a copy of the books as well.

iii. If necessary he can sue any or all of the other partners for his share of the profits or benefits.

iv. A minor partner on attaining majority has the right to become a partner of the firm. He has six months from attaining majority to decide if he will execute this right. Whether he decides to become a partner or not he must give public notice about the same.

Liabilities of a Minor Partner

i. A minor cannot be held personally liable for the losses of the firm. And if the firm declares insolvency the minor’s share is kept with the Official Receiver

ii. After turning 18 the minor partner can choose to become a partner of the firm. But he may choose to not become a partner. In this case, the minor partner has to give a public notice about this decision. And the notice has to be given within 6 months of gaining a majority. If such a notice is not given even after 6 months then the minor partner will become liable for all acts done by the other partners till the date of such notice.

iii. Should the minor partner choose to become a partner he will be liable to all the third parties for the acts done by any and all partners since he was admitted to the benefits of the partnership.

iv. If he becomes a full-time partner he will be treated as a normal partner and have all the liabilities of one. His share in the profits and property of the firm will remain the same as it was when he was a minor partner.

Legal Consequences of Admission or Retirement of a Partner

Admission or Introduction of a Partner (Section 31)

According to this section, the consent of all the existing partners is necessary before introducing a new partner into a partnership firm. This is subject to the provisions of Section 30 regarding minors in the firm. Further, the new partner has no liability for any actions of the firm done before his admission.

Rights and Liabilities of a New Partner

All liabilities of a new partner commence from the date of his admission as a partner in the firm. This is unless he accepts liability for the obligations incurred by the firm before his admission.

So, after the admission of a new partner, the new firm may agree to assume liability for the debts of the old firm and the creditors may accept the new firm as their debtor, discharging the old firm. It is important to note that the creditor’s consent is important to make the transaction operative.

In a contract, the technical term for substituted liability is Novation. Hence, a mere agreement amongst the partners cannot operate as Novation unless the creditors provide their consent.

The retirement of a Partner (Section 32)

· With the consent of all the partners,

· In accordance with an express agreement by the partners, or

· The partnership is at will, by giving notice in writing to all the other partners of his intention to retire

Liabilities of an Outgoing Partner

A retired partner continues to be liable to the third party for acts of the firm till such time that he or other members of the firm give a public notice of his retirement. However, if the third party deals with the firm without knowing that he was a partner in the firm, then he will not be liable to the third party.

Expulsion of a Partner (Section 33)

A partnership firm can expel a partner provided:

· The power of expulsion exists in the contract between the partners

· Majority of the partners exercise the power

· The power is used in good faith

If these conditions are not met, then the expulsion is not bona fide in the interest of the business. The test of good faith includes three aspects:

1. The expulsion should be in the interest of the partnership.

2. Before expelling a partner the firm serves a notice to him.

3. The partner being expelled is given an opportunity to state his version of events leading up to the expulsion.

If these aspects are not met, then the expulsion is not considered to be made in good faith and is null and void. It is important to note that the expulsion of partners does not necessarily result in the dissolution of the firm.

Insolvency of a Partner (Section 34)

When a partner of a firm is adjudicated as insolvent –

· He ceases to be a partner of the firm from the date of the adjudication

· Whether or not the firm subsequently dissolves

· His estate, which vests in the official assignee, ceases to be liable for any act of the firm from the said date

· The firm ceases to be liable for any act of such a partner.

Liability of Estate of a Deceased Partner (Section 35)

Usually, the death of a partner results in the dissolution of the partnership. However, if the partner’s contract to not dissolve the partnership post the death of any partner, then the surviving partner continue the business of the firm after absolving the deceased partner’s estate from any liability of the future obligations of the firm.

Further, it is not necessary for the firm to give a public notice or inform the persons dealing with the firm about the death of the partner.

An exception is a partnership consisting of only two partners. In such cases, the death of a partner results in the dissolution of the partnership.

Dissolution of a Firm

When the partnership between all the partners of a firm is dissolved, then it is called dissolution of a firm. It is important to note that the relationship between all partners should be dissolved for the firm to be dissolved. Let us look at the legal provisions for the dissolution of a firm.

Modes of Dissolution of a Firm

A firm can be dissolved either voluntarily or by an order from the Court.

Voluntary Dissolution of a Firm (without the order of the Court)

Voluntary dissolution can be of four types.

1] By Agreement (Section 40)

2] Compulsory Dissolution (Section 41)

3] On the happening of certain contingencies (Section 42)

4] By notice of partnership at will (Section 43)

Dissolution of a Firm by the Court

According to Section 44 of the Indian Partnership Act, 1932, the Court may dissolve a firm on the suit of a partner on any of the following grounds:

1] Insanity/Unsound mind

2] Permanent Incapacity

3] Misconduct

4] Persistent Breach of the Agreement

5] Transfer of Interest

6] Continuous/Perpetual losses

7] Just and equitable grounds

The court may find other just and equitable grounds for the dissolution of the firm. Some such grounds are:

· Deadlock in management

· Partners not being in talking terms with each other

· Loss of substratum (the foundation of the business)

· Gambling by a partner on the stock exchange.

Implied Authority of a Partner (Section 19)

Authority of a partner to bind the firm is Implied Authority. Unless a contrary agreement exists, implied authority does not empower a partner to (Section 19 – subsection 2 of the Indian Partnership Act, 1932):

· Submit a dispute, relating to the business of the firm, to arbitration

· Open a bank account in his name, on behalf of the firm

· Compromise or relinquish, full or part of a claim by the firm

· Withdraw a suit or proceedings filed on behalf of the firm

· Admit any liability in a suit or proceedings against the firm

· Acquire an immovable property on behalf of the firm

· Transfer an immovable property belonging to the firm

· Enter into a partnership on behalf of the firm

Section 22 of the Indian Partnership Act, 1932, adds that the act which was done by the partner to bind the firm must be done in the name of the firm or in any other manner which implies an intention to bind the firm.

While the implied authority depends on the nature of the business of the firm, a partnership of a general commercial nature may allow the partner to:

· Pledge or sell the partnership property

· Purchase goods on behalf of the partnership

· Borrow money, contract and pay debts on account of the partnership

· Draw, make, sign, endorse, transfer, negotiate and procure negotiable papers in the name and on account of the partnership.

According to Section 20 of the Indian Partnership Act, 1932, the partners of a firm can make a contract to extend or restrict the implied authority of a partner.

These restrictions or extensions apply to a third party only when the third party is aware of the restrictions or does not know that he is dealing with a partner of the firm.

Partner’s Authority in an Emergency (Section 21)

As per Section 21 of the Indian Partnership Act, 1932, if there is an emergency, then every partner has the authority to do all such acts that a person of ordinary prudence would do to protect the firm from a loss. Such acts bind the firm.

Settlement of Partnership Accounts (Section 48)

Section 48 lays down certain rules for settlement of partnership accounts after the dissolution of firm under the usual course of business. However, the partners can mutually agree for a different settlement mode. The rules are as follows:

1. Any losses or deficiencies of capital will be paid out of profits. If the profits are not sufficient, then they are paid out of the capital and finally, if necessary, by the partners. The partners contribute in the proportion in which they receive their share in profits.

2. The assets of the firm, which includes the sums contributed by the partners to make up for the deficiency in the capital, is applied in the following order:

1. Repaying the debts of the firm to third parties

2. Paying each partner rateably what is due to him from the capital

3. Paying each partner rateably what is due to him on account of capital

4. If any amount is left, then dividing it among the partners in proportions in which they receive their share in profits.

Paying Firm Debts and Separate Debts (Section 49)

If there are joint debts due from the firm and separate debts due from any partner, then:

· The payment of firm debts is given priority. If there is any surplus, then the share of each partner is applied to his separate debts. It can also be paid to him.

· The separate property of the partner is applied first in the payment of his separate debts. IF there is any surplus, then it is applied to the payment of firm debts.

Personal Profits Earned after Dissolution of Firm (Section 50 and 53)

A firm is dissolved by the death of a partner. If the surviving partners, either themselves or with the representative of the deceased partner carry on the business of the firm, then they have to account for any personal profits by them, before winding up the firm.

So, if a lease expires on the death of a partner and the surviving partners renew it before the firm winds up, then the profits belong to the firm.

Section 53 clearly states that in the absence of an agreement to the contrary, a partner can restrain other partners from carrying on a similar business in the name of the firm or from using the property of the firm for their own benefit, unless the winding up process is complete.

Return of Premium on the Premature Dissolution of Firm (Section 51)

If a firm dissolves earlier than the time fixed for it, then the partner paying the premium can receive a return of a reasonable part of the premium. This holds true except when the partnership is dissolved:

· Due to the death of a partner

· Due to the misconduct of the partner paying the premium

· Post an agreement which has no provisions for the return of premium

Also, the partner paying the premium gets a return of a proportionate part of the premium. This holds true when the partnership is dissolved:

· Without either partner being at fault

· Owing to the fault of both the partners

· Due to the fault of the partner receiving the premium

· Due to unawareness about the insolvency of the partner receiving the premium

Contract Rescinded for Fraud or Misrepresentation (Section 52)

If the contract creating a partnership is rescinded due to fraud or misrepresentation, then the party who can rescind the contract is entitled to:

· Lien on the assets of the firm remaining after the debts of the firm is paid. This lien is for any sum paid by him for the purchase of a share in the firm and capital contributed by him.

· Rank as a creditor of the firm for any payment made by him towards the debts of the firm

· An indemnity from the partners guilty of the fraud or misrepresentation against all debts of the firm.

Sale of Goodwill after the Dissolution of Firm (Section 55)

The goodwill is included in the assets during the settling of the accounts of a firm after dissolution. The goodwill can be sold separately or along with the other assets of the firm. This is subject to the contract between the partners.

Once the goodwill of the firm is sold after dissolution, a partner can carry on and advertise a business competing with that of the buyer of goodwill. However, subject to the agreement between him and the buyer, he may not:

· Use the name of the firm

· Represent himself as carrying on the business of the firm

· Solicit the customs of persons dealing with the firm before the dissolution

It is also important to note that a partner can make an agreement with the buyer of goodwill that he will not carry on any business similar to that of the firm or with certain local limits. Such an agreement, notwithstanding Section 27 of the Indian Contract Act is valid if the restrictions are reasonable.

Partnership Act