CS Foundation Indian Partnership Act, 1932 Notes
Partnerships are a form of business association between two or more persons who join to carry on a trade or business. Each person contributes money, property, labour or skill and expects to share in the profits and losses of the business.
As per Section 4 of The Indian Partnership Act, 1932 “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”.
→ Salient features of partnership:
- For partnership there must be two or more people who are eligible to contract, partners may be natural person or artificial person.
- In a partnership, the partners are agents for the partnership. As such, one partner may legally bind the partnership to a contract or agreement that appears to be in line with the partnership’s operations. As most partnerships create unlimited liability for its partners, it is important to know something about potential partners before beginning a partnership.
- In a partnership the liability of partners is unlimited. Partners may be called on to use their personal assets to satisfy partnership debts when the partnership cannot meet its obligations. If one partner does not have sufficient assets to meet his/her share of the partnership’s debt, the other partners can be held individually liable by the creditor requiring payment.
- The relation of partnership arises from contract and not from status; and, in particular, the members of a Hindu undivided family carrying on a family business as such are not partners in such business.
- As general rule, a person who receives a share of the profits is prima facie deemed to be a partner of the firm but the receipt of such share, or of a payment contingent on or varying in the profit of a business, does not of itself make him a partner in the business. Thus if a person is being repaid the money that it has advanced to the partnership firm from the profits of the firm then it does not become a partner.
- Sharing of profit means sharing of losses too.
- Partnership should be there to carry on some business.
→ Formation of partnership:
As per the partnership Act there should be a contract between the partners of a partnership firm. This contract is called partnership agreement. Partnership must have all the characteristic features of contract except that a minor may be given the benefits of a partner when all the partners agree to it.
→ Partnership agreement:
Partnership agreement may be written or oral but it is always advisable to have it written and detailing all the rights and liabilities of each partner.
→ Contents of partnership deed:
- Name of firm: includes the name of the business entity.
- The names and addresses of partners who compose it.
- Business to be done: includes exactly what will be done in this partnership. This section should be very particular to avoid confusion and loopholes
- Commencement of partnership: includes when the partnership should begin. The date of the contract is assumed as this date, if none is given.
→ The duration of partnership:
The amount of capital to be contributed by each partner and the methods of raising finance in future if so required. Division of profits and losses – includes what percentages of profits and losses each partner will receive. If it is not a limited partnership, then there is unlimited liability (each partner is responsible for all partners’ debts, including their own).
The ratio of sharing profits and losses:
- Salaries, commissions etc., if any, payable to partners.
- Division of task and responsibility, i.e., the duties, powers and obligations of all the partners.
- Ending of the business – includes what happens when the business winds down.
- The mutual rights and duties of the partners of a firm may be determined by contract between the partners and such contract may be express or may be implied by a course of dealing. Such contract may be varied
- by consent of all the partners and such consent may be express or may be implied by a course of dealing.
- Expulsion of partners in case of gross breach of duty or fraud.
- Accounting period and the date on which the accounts are to be prepared.
→ Classification of partnership Partner ship-at- WILL:
As per section 7 of the Act where no provision is made by contract between the partners for the duration of their partnership, or for the determination of their partnership, the partnership is “partnership-at-will”. This partnership can be dissolved by any partner by giving notice. Partnership is dissolved from the date which is mentioned on the notice but in case no date is mentioned then it is dissolved at the date when communication regarding the notice is given.
As per section 8 of the Act A person may become a partner with another person in particular adventures or undertakings. Such partnership is between two or more persons for some adventure or undertaking and it may be for one undertaking only.
→ Difference between co-ownership and partnership:
In the co-ownership property is owned jointly without any intention to carry on business while it is the relation between persons who have agreed to share the profit and losses of a business.
Below mentioned are the differences between co-ownership and partnership under the following headings
1. Profit Sharing:
- Partnership: In the partnership profit sharing the basic object of the partnership formation.
- Co-Ownership: In the Co-ownership there is no concept of profit and loss sharing
- Partnership: Agreement or contract is essential for partnership.
- Co-Ownership: Agreement is not essential for co-ownership.
- Partnership: Every partner is an agent of other partner in the partnership.
- Co-Ownership: One co-owner is not the agent of other co-owner.
4. Limit for Members:
- Partnership: In the partnership there is restriction for the maximum number of partners.
- Co-Ownership: In the co-ownership there is no restriction for the maximum number of co-owners.
5. Transfer of Rights:
- Partnership: In the partnership a partner cannot transfer his rights to another person without consulting the other partners.
- Co-Ownership: In a co-ownership a co-owner can transfer his rights to any one without consultation.
6. Legal Claim:
- Partnership: In a partnership a partner has legal claim on the property of partnership.
- Co-Ownership: In a co-ownership a co-owner has a legal claim on the joint property.
7. Division of Property:
- Partnership: In a partnership a partner has no right to demand the partition of property. He can only demand the share of profit. ‘
- Co-Ownership: In a co-ownership a co-owner can demand the division of property .
8. Dissolution Risk:
- Partnership: Partnership is affected by the death, insolvency or retirement of any partner.
- Co-Ownership: Co-ownership can not be dissolved due to above reasons.
→ Difference between HUF and Partnership:
- Partnership is the result of an agreement or act of parties. HUF is created by operation of law,
- Each partner is personally liable for the debts and liabilities of the firm to an unlimited extent. In HUF only Karta or manager is liable for its debts and liabilities.
- Death of a partner automatically dissolves the partnership whereas death of a member does not affect HUF.
- A minor can not be a partner in a partnership firm but a minor acquires membership in HUF by his birth.
→ Difference between company and Partnership:
- A limited company is a legal entity, run by directors and owned by shareholders, while partnerships are owned and run by individual partners.
- Each company must publish its annual accounts, although small organisations need only provide a basic financial summary. Partnerships do not have to publish or audit their accounts, however large they get.
- In a company the liability of members is limited while in partnership the liability of partners is unlimited.
- In company disclosure of information compulsory as per various Acts. In partnership it is not required.
- In company it is not dissolved with the death of a member while in partnership a death of partner leads to the dissolution of Partnership.
→ Constitution of the firm:
Circumstances which lead to change in constitution of firm are
- As per Section 31 introduction of a new partner.
- As per section 32 retirement of partner.
- As per section 33 expulsion of a partner.
- As per section 34 insolvency of a partner.
- As per section 35 liability of estate of deceased partner
→ Partnership property:
Property originally brought into the partnership stock, or acquired on account of the firm, are to be held as partnership assets and the same applies to property bought with partnership money. It should be clearly mentioned in the agreement whether the property belongs to firm or to individual partners.
Section 14 of the Indian Partnership Act, 1932 deals with properties which are deemed to be the properties of the firm.
They are as follows:
- Properties directly purchased by the firm in its own name become the properties of the firm.
- Properties which are brought into a partnership firm by the partners as their respective capital contributions become properties of the firm. Such properties may include immovable properties also.
- If a partner brings in property at the time of formation of the partnership firm, it does not require registration. It is to be noted that the property should have been brought into the firm only at the time of the formation and not any time later when the firm has already come into existence.
→ Types of partners:
Various types of partners are
Active Partner or Actual or Ostensible Partner:
A person who provides his share in capital and also takes active part in the management. The development of business depends upon the active partners.
Sleeping Partner or Dormant partner:
A sleeping partner is a partner in a partnership business who does not play an active role, especially one who supplies capital and whose association with the enterprise is not public knowledge. He has share in profit and loss of business
These partners do not share the profit and loss the firm. These do not participate in the management of a firm. A firm only uses the name and goods reputation of the partners. So these are called nominal partners.
Partner in profit only: If a partner is entitled to receive certain share of profit and is not held liable for the losses, he is known as partner in profit only. He is not allowed to take part in the management of the business.
If a partner agrees to share his profit with a third person then he becomes a Sub Partner
Partner by Estoppel or bolding out:
If person styles the character of a partner in a business before a third party (outsiders) by words or in writing or by his act, he is called a partner by estoppel. The third party mistaking him as a partner in the business advances loans on his creditability, that person would be personally responsible for the liability attaching to the position of a partner The partner by estoppel would, however, not be entitled to any right like other partners in the business.
Similarly, if a person is declared to be a partner by a partner of a firm and such person remained silent without denying it, he also considered a partner by holding out. Thus, such persons are liable to outsiders partners on the principle of estoppel or holding out because on faith of their representation action outsiders have granted credit to the firm.
A partner by estoppel though has the personal liability for the debts of the firm but he can recover the amount from the partners only if they are solvent.
Exceptions to the doctrine of holding out are
- In case of Torts committed by partners
- In case the holding out partner is declared insolvent
- It does not bind the estate of the deceased partner in case when the business is being carried after the death of partner in the old firm name.
Partnership arises from contract and a minor is not competent to enter into contract. Therefore, strictly speaking, a minor cannot be a full-fledged partners. But with the consent of all the partners he can be admitted into partnership for benefits only. He is not personally liable to third parties for the debts of the firm, on attaining majority, if he continues as a partner, his liability will become unlimited with effect from the date of hi original admission into the firm. When a minor becomes major then within 6 months of his attaining the majority he has to elect whether he wants to be a partner or not he may give a public notice regarding his wish to be a partner or not but if he fails to give any notice then he is deemed to be a partner.
→ Rights and Duties of partners:
Every partner has right to take part in planning, implementation and control activities of the firm
- Section 12 (b) -every partner is bound to attend diligently to his duties in the conduct of the business
- Section 12(c) any difference arising as to ordinary matters connected with the business may be decided by a 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 the partners.
- Section 12(d) every partner has a right to have access to and to inspect and copy any of the books of the firm.
- Section 12(e) in the event of the death of a partner, his heirs or legal representatives or their duly authorised agents shall have a right of access to and to inspect and copy any of the books of the firm.
- Section 13(a) a partner is not entitled to receive remuneration for taking part in the conduct of the business.
- Section 13(b) the partners are entitled to share equally in the profits earned and shall contribute equally to the losses sustained by the firm.
- Section 13(c) where a partner is entitled to interest on the capital subscribed by him, such interest shall be payable only out of profits.
- Section 13(d) a partner making, for the purposes of the business, any payment or advance beyond the amount of capital he has agreed to subscribe, is entitled to interest thereon at the rate of six percent, per annum.
- Section 13(e) the firm shall indemnify a partner in respect of payments made and liabilities incurred by him
- in the ordinary and proper conduct of the business; and
- in doing such act, in an 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; and
- Section 13(1) 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
- It is the duty of every partners to share the loss occurred in a firm
- It is the duty of every partners to work honestly and faithfully and work for common benefit of all partners and firm
- It is the duty of every partners to work and make decisions within the authority
- Section 15 Subject to the contract between the partners, the property of the firm shall be held and used by the partners exclusively for the purposes of the business.
- It is the duty of every partners to maintain the financial status of the firm. –
- It is the duty of every partners to stop the leakage in firm. There should not make any secret profit,
- Section 16(a) if a partner derives any profits 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.
- Section 16(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. It is the duty of every partners to compensate on the loss and damage of firm.
→ Relation of Partners:
Partners as agents:
Every partner is an agent of the firm and his other partners for the purposes of the business of the partnership; and the acts of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm of which he is a member bind the firm and his partners unless the partner so acting has in fact no authority to act for the firm in the particular matter and the person with whom he is dealing either knows that he has no authority or does not know or believe him to be a partner.
→ Partners authority:
Partner can have two types of authority
- Express authority: Authority which is given by words spoken or written. The acts of the partner done under his express authority bind the firm with him. Thus even if the acts of the partner are beyond the scope of partnership business but have been given to partner by express authority then the firm is bound by all such acts.
- Implied Authority: 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 conferred by this section is called his 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-submit a dispute relating to the business of the firm to arbitration
- open a banking account on behalf of the firm in his own name
- compromise or relinquish any claim or portion of a claim by the firm
- withdraw a suit or proceeding filed on behalf of the 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 the firm.
Liability of a Partner for Acts of the Firm. – 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.
Liability of the Firm for Wrongful Acts of a Partner. – Where, by the wrongful act or omission of a partner acting in the ordinary course of the business of a firm or with the authority of his partners, loss or injury is caused to any third party, or any penalty is incurred, the firm is liable therefore to the same extent as the partner.
Retirement of a Partner. – A retiring partner is liable for the debts that contracted when he was partner. A retiring partnep 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 and the partners of the reconstituted firm and such agreement may be implied by a course of dealing between such third party and the reconstituted firm after he had knowledge of the retirement. A partner is no longer liable for any debts if a public notice is given of the retirement as per the manner laid down in section 72 of the Act.
Insolvency of a Partner. – Where a partner in a firm is adjudicated an insolvent, he ceases to be a partner on the date on which the order of adjudication is made, whether or not the firm is thereby dissolved.
The dissolution of a partnership is the process during which the affairs of the partnership are wound up (where the ongoing nature of the partnership relation terminates).
An existing partnership dissolves whenever the reconstitution of the existing firm is caused by
- if entered into for a fixed term by the expiration of that term
- if entered into for an undefined time, by any partner giving notice to the other or others of his intention to dissolve the partnership
- Death of a partner
- if entered into for a single adventure or undertaking, by the termination of that adventure or undertaking;
However, the dissolution of partnership does not lead to the dissolution of the firm since the two situations are
different. In case of dissolution of partnership, the firm continues, only the partnership relation is reconstituted, but in case of dissolution of firm, not only partnership is dissolved but the firm also loses its existence, implying thereby that the firm ceases to operate as a partnership firm (Section 39 of the Partnership Act, 1932). After dissolution of firm, the firm does not remain in business.
→ Dissolution by the Court
At the suit of a partner, the Court may dissolve a firm on any of the following grounds, namely:—
(a) that a partner has become of unsound mind, in which case the suit may be brought as well by the next friend of the partner who has become of unsound mind as by any other partner.
(b) that a partner, other than the partner suing, has become in any way permanently incapable of performing his duties as partner.
(c) that a partner, other than the partner suing, is guilty of conduct which is likely to affect prejudicially the carrying on of the business regard being had to the nature of the business;
(d) that a partner, other than the partner suing, wilfully or persistently commits breach of agreements relating to the management of the affairs of the firm of the conduct of its business; or otherwise so conducts himself in matters relating to the business that it is not reasonably practicable for the other partners to carry on the business in partnership with him;
(e) that a partner, other than the partner suing, has in any way transferred the whole of his interest in the firm to a third party, or has allowed his share to be charged under the provisions of rule 49 of Order XXI of the First Schedule to the Code of Civil Procedure, 1908, or has allowed it to be sold in the recovery of arrears of land revenue or of any dues recoverable as arrears of land revenue due by the partner.
(f) that the business of the firm cannot be carried on save at a loss; or
(g) on any other ground which renders it just and equitable that the firm should be dissolved.
→ Effect of dissolution
Continuing authority of partners:
After the dissolution of a partnership the authority of each partner to bind the firm and the other rights and obligations of the partners, continue notwithstanding the dissolution so far as may be necessary to wind up the affairs of the partnership and to complete transactions begun but unfinished at the time of the dissolution.
Apportionment of premium:
Where one partner has paid a premium to another on entering into a partnership for a fixed term and the partnership is dissolved before the expiration of that term otherwise than by the death of a partner, the Court may order the repayment of the premium, or of such part thereof as it thinks just, having regard to the terms of the partnership contract and to the length of time during which the partnership has continued
→ Rule for distribution of assets on final settlement of accounts:
In settling accounts between the partners after a dissolution of partnership, the following rules shall, subject to any agreement, be observed:
(a) Losses, including losses and deficiencies of capital, shall be paid first out of profits, next out of capital and lastly, if necessary, by the partners individually in the proportion in which they were entitled to share profits:
(byThe assets of the firm including the sums, if any, contributed by the partners to make up losses or deficiencies of capital, shall be applied in the following manner and order:
- In paying the debts and liabilities of the firm to persons who are not partners therein:
- In paying to each partner rateably what is due from the firm to him for advances as distinguished from capital:
- In paying to each partner rateably what is due from the firm to him in respect of capital:
- The ultimate residue, if any, shall be divided among the partners in the proportion in which profits are divisible
→ Sale of Goodwill after Dissolution:
In settling the accounts of a firm after dissolution, the goodwill shall, subject to contract between the partners, be included in the assets and it may be sold either separately or along with other property of the firm.
Where the goodwill of a firm is sold after dissolution, a partner may carry on a business competing with that of the buyer and he may advertise such business, but, subject to agreement between him and the buyer, 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 its dissolution.
→ Registration of Firm:
Under Section 58 of the Act, a firm may be registered at any time (not merely at the time of its formation but subsequently also ) by filing an application with the Registrar of Firms of the area in which any place of business of the firm is situated or proposed to be situated.
The application shall contain:
- Name of the firm
- Place or principal place of business
- Names of any other places where the firm carries on business.
- Date on which each partner joined the firm
- Name in full and permanent address of partners.
- Duration of the firm
Application shall be signed and verified by all the partners or their duly authorized agents.
→ Effect of non registration of Firm
Partnership Act, 1932 does not provide for compulsory registration of firms. It is optional for partners to set the firm registered and there are no penalties for non-registration.
However, Section 69 of the Act which deals with the effects of non-registration denies certain rights to an unregistered firm.
→ Under the Act:
- A partner of an unregistered firm cannot file a suit in any court against the firm or other partners for the enforcement of any right arising from a contract or right conferred by the Partnership Act unless the firm is registered and the person suing is or has been shown in the Register of Firms as a partner in the firm.
- No suits to enforce a right arising from a contract shall be instituted in any Court by or on behalf of a firm against any third party unless the firm is registered and the persons suing are or have been shown in the Register of Firms as partners in the firm.
- An unregistered firm or any of its partners cannot claim a set off (i.e. mutual adjustment of debts owned by the disputant parties to one another) or other proceedings in a dispute with a third party.
Hence, every firm finds it advisable to get itself registered sooner or later.
→ Suit for Libel Slander:
A firm is a collection of partners so a firm cannot bring a suit for libel slander against any firm. Libel is any defamation that can be seen, such as a writing, printing, effigy, movie, or statue. Slander is any defamation that is spoken and heard. But a partner can bring a suit for libel slander against any firm.