Partnership Act 1932

Outline
• Partnership Definition
• Essentials of Partnership
• Types of partnership
• Registration of Partnership
• Effect of Non-Registration
• Method of Registration
• When does partnership become illegal?

Outline (Continue…..)
• Partnership Agreement
• Rules regarding rights and liabilities of
partners.
• Personal profits earned by the partners
• The property of the firm
• Implied authority of the partners
• Reconstitution of a firm
• Dissolution of partnership

Partnership
• Partnership has been defined by the
Partnership Act as the relation between
persons who have agreed to share the profits
of a business carried on by all or any one of
them acting for all. Persons who have entered
into partnership with one another are called
individually as partners, and collectively as
firm and the name under which their business
is carried on is called the firm name.

Essentials
• There must be a business
• Two to twenty members
• Contract between persons
• Object is to earn profit
• Carried on by all or any of them on behalf of
all.

Types of Partnership
• Partnership at will
• Particular partnership

Registration of Partnership
• The law does not require that every firm must
be registered.

Effects of non-registration
• No partner can bring a suit in any court
against the firm or his co-partner in the firm.
• The firm cannot file a suit against any third
party.
• Third party : Any person who is not a partner in the
firm.

When partnership becomes illegal?
The following circumstances make partnership illegal:
• If all or all but one partner become insolvent.
• If the business transacted by a firm becomes illegal
• Partnership is for limited time period, and time has
expired
• If a firm continues after a partner has given a notice
that partnership should be dissolved provided that is
partnership at will.
• If a partnership continues after its dissolution by the
court
• If there are more than 20 partners

Mode of determining existence of
partnership (Test of partnership)
In order to determine the existence of partnership, the
following must be proved:
• There must be an agreement among the persons to be
held as partners
• The agreement must be for doing some business
• The agreement must be to share the profits of a
business
• There must be a relationship of principal and agent
among the partners
• There must be an agreement to carry on the business
by all or any of them acting for all

Kinds of Partners
• Active partner / working partner
• Sleeping partner
• Nominal partner
• Senior partner
• Junior partner
• Partner in profits only
• Secret partner
• Minor partner

Method of registration

Partnership Agreement
• Partnership agreement is also known as “deed
of partnership” or “Articles of Partnership”
• The partnership agreement may be written on
paper or entered into orally. But it is always
advisable to have it in black and white.
• The Partnership agreement must state:
The name of the firm
The nature of the business to be carried on.

Partnership Agreement (Cont…)
The term or duration of partnership
The amount of capital each partner is to
contribute
The drawings
The interest to be allowed on capital and
drawings
Powers and authorities of partners
Remuneration of partners
Method of division of profits and losses

Partnership Agreement (Cont…)
Method to be followed in the event of death
of a partner, dissolution, etc.
Treatment of goodwill at the time of winding
up
Keeping of books of accounts, and audit
Arbitration clause, laying down the procedure
to be followed in case of disputes

RULES REGARDING RIGHTS AND
LIABILITIES OF PARTNERS

Rules Regarding Rights/Liabilities
• As Partnership is the creation of contract
between the partners, the mutual rights and
liabilities of the partners may be determined
by contract between the partners, such a
contract may be expressed or implied.
• But in all cases, following two principles will
govern the rights and liabilities of partners:

Rules Regarding Rights/Liabilities (Cont..)
1. Partners are bound to carry on the business
of the firm to the great common advantage
to be just and faithful to each other, and to
share true accounts and full information of
all things affecting the firm to any partner
and his legal representative.
2. Every partner must indemnify the firm for
any loss caused to it by his fraud in the
conduct of the business of the firm.

Rules Regarding Rights/Liabilities (Cont..)
• Every partner has a right to take part in the
conduct of the business.
• Every partner is bound to perform his duties
diligently in the conduct of the business.
• Any difference arising as to ordinary matters may
be decided by a majority of the partners, and
every partner has a 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 the partners.

Rules Regarding Rights/Liabilities (Cont..)
• Every partner has a right to have access to and to
inspect and copy any of the books of the firm
• A partner is not entitled to receive any
remuneration for taking part in the conduct of
the business.
• The partners are entitled to share profits earned,
and shall contribute losses according to
predetermined ratio.
• In the absence of agreement, no partner is
entitled to receive interest on the capital
contributed by him.

Rules Regarding Rights/Liabilities (Cont..)
• A partner making, for the purposes of the
business, any payment or advance beyond the
amount of capital he agreed to subscribe, is
entitled to interest thereon at 6 percent per
annum from the date of the advance.
• A partner shall indemnify the firm for any loss
caused to it by his willful neglect in the
conduct of the business of the firm.

Rules Regarding Rights/Liabilities (Cont..)
• The firm shall indemnify a partner in respect
of payments made and liabilities incurred by
him.
i. In the ordinary and proper conduct of the
business
ii. In doing such act, in any emergency for the
purpose of protecting the firm from loss, as
would be done by a person of ordinary
prudence, in his own case under similar
circumstances.

Personal Profits Earned By
Partners

Personal Profits Earned By Partners
If a partner derives any profit for himself from
any transaction of the firm or from the use of
property or business connection of the firm or
the firm name, he shall account for that profit
and pay it to the firm and share it with his co-
partners.
If a partner carries on any business of the same
nature and competing with that of the firm, he
shall account for and pay to the firm all profits
made by him in that business and share the same
with his co-partners.

The Property Of The Firm

The Property Of The Firm
• The property of the firm shall be held and
used by the partners exclusively for the
purposes of the business.

Implied Authority of Partners

Implied Authority of Partners
• A partner is the agent of the firm, therefore, a
transaction entered into by one partner on behalf of
the firm is binding on the firm and makes every partner
liable, provided the following conditions laid down in
Section 19 (1).
 The transaction must be related to the normal business
of the firm,
 The transaction must be an act for carrying on business
in the usual way
 The transaction must be executed in the firm name, or
in any other manner expressing or implying an
intention to bind the firm

Implied Authority of Partners (Cont.)
The Implied authority does not empower him to:
1. Open a banking account on behalf of the firm
2. Compromise any claim or portion of a claim by
the firm
3. Withdraw a suit or proceeding filed on behalf of
the firm
4. Admit any liability in a suit or proceeding against
the firm
5. Acquire immoveable property on behalf of the
firm

Reconstitution of a firm
A firm is said to be reconstituted when
A new partner is introduced
Any of the partners retires
Any of the partners is lawfully expelled
Any of the partners becomes insolvent
Any of the partners dies

1-Introduction of New Partner
• In the absence of any contract, between the
partners, no person shall be introduced as a
partner into a firm without the consent of all
the existing partners. If an existing partner
sells his share in the partnership, the
purchaser of the share does not become a
partner unless all the other partners agree to
such transfer.

2-Retirement of the partner
A partner may retire
 With the consent of all other partners
 In accordance with an express agreement by the
partners
 Where the partnership is at will, by giving notice in
writing to all other partners of his intention to retire.
The mode of retirement of partners in any firm may,
however, be specified by a special agreement between
the partners.
A retiring partner has to give a public notice of retirement
in order to obtain freedom from liability for the debts of
the firm from the date of such notice.

3-Expulsion of a partner
A partner cannot be expelled except in the
manner specified by the contract between the
partners and unless the expulsion has been
made in good faith.
An expelled partner cannot claim damages. His
only right is to seek reinstatement. A legal
expelled partner stands on the same footing as a
retire partner as regards his liabilities for the
debts of the firm.

4-Insolvency of a partner
A partner ceases to be a partner as soon as he is
adjudged an insolvent. But the firm is not
dissolved unless all the partners or all but one
are adjudged insolvent.

5-Death of a partner.
Unless otherwise provided by the contract of
partnership. The death of a partner has the
effect of dissolving the partnership. Where
under a contract between the partners, the firm
is not dissolved by the death of a partner, the
estate of a deceased partner is not liable for any
act of the firm done after the death.

Dissolution of Partnership

Dissolution of Partnership
A firm may be dissolved with the consent of all
the partners, or according to the terms of the
partnership agreement. It may be dissolved in
the following cases:
1-Compulsory Dissolution.
2-Dissolution on the happening of certain
contingencies
3-Dissolution by notice of partnership at will
4-Dissolution by the court

Compulsory Dissolution
A firm is compulsory dissolved if all the partners,
or all of the partners but one, become insolvent,
or if the business of the firm becomes unlawful.

Dissolution on the happening of
certain contingencies
Subject to an agreement between the partners,
a firm is dissolved:
If constituted for a fixed term, by the expiry of
the term
If constituted to carry out one or more
projects, by the completion thereof
By the death of a partner
By the adjudication of a partner as an
insolvent

Dissolution by notice of partnership at
will
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

Dissolution by the court
At the suit of a partner, the court may dissolve a firm on any of the
following grounds:
 That a partner has become of an unsound mind
 That a partner has become in any way permanently incapable of
performing his duties as a partner
 That a partner is guilty of misconduct
 That a partner willfully or persistently commits breach of
partnership agreement
 That a partner has in any way transferred his interest in the firm to
a third party
 That the business of a firm cannot be carried on except at a loss
 Any other ground that renders it just and equitable that the firm
should be dissolved.

Further topics
• Kinds of partners
• Test determining the existence of partnership
• Difference between partnership and co-
ownership