partnership act 1932-26

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Indian Partnership Act, 1932:

Indian Partnership Act, 1932


Introduction The Law Of Partnership is contained in the Indian Partnership Act, 1932, which came into effect on 1 st October, 1932. Prior to the enactment of this Act, it was embodied in Chapter XI of the Indian Contract Act, 1872. It was found that the provisions pertaining to partnership, as contained in the ICA, 1872, were not exhaustive. Hence the present Partnership Act. The most important change brought about by the Act is the provision for the registration of firms.


Contd… A contract of partnership is a special contract. Where the Partnership Act is silent on any point, the general principles of the law of contract apply.

Meaning & Definition of ‘Partnership:


Meaning of ‘Partner’ ‘Firm’ and ‘Firm Name’:

Meaning of ‘Partner’ ‘Firm’ and ‘Firm Name’ Partner:- Persons who have entered into partnership with one another are called individually "partners" and collectively ‘a firm’. Firm name:- The name under which their business is carried on by them.

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Essential elements of Partnership Lawful Business An agreement Two or more persons Sharing of profit Mutual agency Essential Characteristics

Essential Characteristics:

Essential C haracteristics Association of two or more persons: There should be at least two competent persons to form a partnership. As regards the maximum number of partners in a firm, Sec.11 of the Companies Act, 1956 provides that the number of persons in a firm carrying on banking business should not exceed 10 and in any other business 20. If the number of partners exceeds this limit, the partnership becomes an illegal association. It ceases to be a partnership if the number gets reduced to one by any reason.


Contd.. The term ‘person’ as used in Sec.4 does not include a firm. This is because a firm is not a separate legal entity. As such two partnership firms cannot enter into partnership, though all the partners of the two firms may form a partnership out of their separate firms provided their number does not exceed the statutory limit. A company is a ‘person’ and being an entity distinct from its members, enter into a contract of partnership if it is authorized by its Memorandum of Association.


Contd.. 2. Agreement: The partnership relation is one of contractual nature. It arises from contract and not from status, as agreement between the parties is the basis of this contract. The agreement may be express (i.e., oral or written) or implied. Implied agreement may be inferred from the course of dealing or the conduct of the parties. The agreement may be for a fixed period or for the execution of a particular adventure, or it may give option to the partners to withdraw from the partnership at any time. Partnership is thus created by contract; it does not arise by operation of law or from status or from inheritance. It must have all the essential elements of a valid contract.


Contd.. 3. Business: A partnership can be formed only for the purpose of carrying on some business, Business includes every trade, occupation and profession. The word ‘business’ generally conveys the idea of a running business involving numerous transactions.


Contd… 4. Sharing of Profits: The object of partnership must be to make profit. Profit means net profit, i.e., excess of returns over outlays, the excess of what is obtained over the cost of obtaining it. Profits must be distributed among the partners in an agreed ratio. The sharing of profits also involves sharing of loss which in fact is negative profit. But as between the partners, it may be agreed that one or more of the partners shall not be liable for losses.


Contd… 5. Mutual Agency The business of partnership may be carried on by all the partners or by any of them acting for all . A partner is both an agent and the principal. If one partner is acting on behalf of the Firm and other partners then he is called as… Agent of the FIRM, and Agent of the Partners.


TYPES OF PARTNERS Actual or ostensible partner: A person who becomes a partner by an agreement and is actively engaged in the conduct of the business of the partnership is known as an actual partner. He is the agent of the other partners in the ordinary course of the business of the firm. He binds himself and the other partners, so far as third parties are concerned, for all the acts which he does in the ordinary course of the business and in the name of the firm.

2. Sleeping or Dormant Partner :

2. Sleeping or Dormant Partner A sleeping partner is one who contributes capital, shares profits and losses of the firm but takes no active part in the day to day management of the affairs of the firm. A person, who has money to invest but cannot spare time for the business, may become sleeping partner. A sleeping partner is liable for the liabilities of the business like other partners. The position of a sleeping partner is similar to that of an undisclosed principal. But a sleeping partner need not give a public notice of his retirement from the firm. He is not liable for any act of the firm done after his retirement.

3.Nominal Partner :

3.Nominal Partner A partner who lends his name to the firm, without having any real interest in it, is called a nominal partner. He does not invest in the business of the firm, nor does he share in the profits or take part in the management of the business of the firm. But he, along with other partners, is liable to the outsiders for all the debts of the firm. A nominal partner must be distinguished from a sleeping partner. A nominal partner is known to the world as a partner in the firm, but he does not share in the profits of the firm. A sleeping partner, on the other hand, is one whose name does not appear to the world, but he shares in the profits of the business. Both are, however, liable for all the acts of the firm.

4. Partner in Profits Only: :

4. Partner in Profits Only: Sometimes partners may agree that a partner shall get a share of the profits only and that he shall not be liable to contribute towards the losses. Such a partner is known as a partner in profits only. But vis-à-vis third parties, he is liable for all the debts of the firm. If the firm incurs any losses and the other partners have meager private resources, he shall have to bear the brunt of the losses as the liability of the partners is join and several and at the same time unlimited.

5.Sub Partner:

5.Sub Partner When a partner agrees to share his profits derived from the firm with a third person, that third person is known as a sub-partner. A sub-partner is in no way connected with the firm and cannot represent himself as a partner of the firm. He has no right against the firm nor is he liable for the acts of the firm.

6. Minor Partner :

6. Minor Partner According to Sec.11 of the Indian Contract Act, an agreement by or with a minor is void. As such, he is incapable of entering into a contract of partnership. But with the consent of all the partners for the time being, a minor may be admitted to the benefits of partnership. This provision is based on the rule that a minor cannot be a promisor, but he can be a promisee or a beneficiary. But a new partnership cannot be formed with a minor partner. Also, there cannot be partnership of minors among themselves as they are incapable of entering into a contract.

7. Partner by Estoppel or Holding Out:

7. Partner by Estoppel or Holding Out Sometimes a person who is not a partner in a firm may, under certain circumstances, be liable for its debts as if he were a partner. Such a partner is called a partner by estoppel or holding out. Ex: A retired businessman of some repute assumed the honorary presidentship of the business of certain persons who requested him for the same. Held he was liable for the debts of the firm to those who gave credit to the firm in the bonafide belief that he was a partner.


FORMATION OF PARTNERSHIP Partnership is based on an agreement. Agreement may be made orally or in writing or may be implied from the course of dealing among partners. All the essential elements of a valid contract must be present But the following 2 points are to be noted in this connection 1)Minor partner- A minor partner may be admitted to the benefits of partnership in consent of all the other partners. 2)Consideration –As no consideration is required to create an agency (Sec 185 of the Indian contract act,1872), no consideration is required to create a partnership which is an extension of law of agency.

Partnership deed:

Partnership deed The agreement creating partnership may be express or implied and the latter may be inferred from the conduct or the course of dealing of the parties or from the circumstances of the case. However, it is in the interest of partners that the agreement must be in writing. The document which contains agreement is called partnership deed. It usually contains provisions relating to the nature and place of business, the name of the firm, the names and addresses of the partners, the duration of the firm, profit sharing ratio, interest on capital and drawings, valuation of goodwill on the death or retirement of a partner, management, accounts, arbitration, etc.. The deed must be duly stamped as required by the Indian Stamp Act, 1889.

Registration Of Firms:

Registration Of Firms Registration not compulsory Left to the option of the firms to get themselves registered. An unregistered firm suffers certain disabilities, hence it is good to register . A registration is only a reliable evidence of the existence of partnership. It also affords protection to outsiders dealing with the firm.

Procedure for Registration (Section 58-59):

Procedure for Registration (Section 58-59) The registration of a firm may be effected at any time by filing an application in the form of a statement, giving the necessary information, with the Registrar of Firms of the area. Sec.57 empowers a State Government to appoint Registrars of Firms for the purposes of the Partnership Act and define the areas within which they shall exercise their powers and perform their duties.


Contd… The application for registration of a firm shall be accompanied by the prescribed fee. It shall state:

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Name of the firm, The place or principal place of business of the firm, The names of other places where the firm carries on business. The date when each partner joined the firm The names in full and permanent addresses of the partners; the duration of the firm.


Contd.. The statement shall be signed by all the partners or by their agents specially authorized in this behalf. It shall also be verified by them in the prescribed manner. When the Registrar is satisfied that the above provisions have been duly complied with, he shall record an entry of the statement in the Register of Firms and file the statement. He shall then issue under his hand a certificate of registration. Registration is effective from the date when the Registrar files the statement and makes entries in the Register of firms and not from the date of presentation of the statement to him. Registration to a firm under Sec.59 cannot be declined for the reason of a company being a partner of the firm.


RIGHTS OF A PARTNER 1. Right to take part in business Every partner has a right to take a part in the conduct of the business. This is based on the common principle that partnership business is common for all the partners. But where a partner neglects or refuses to perform his duties, and the burden of performing such duties for the conduct of the business falls on other partners, the other partners have a right to compensation. 2. Right to express his opinion on any matter. Every partner has an inherent right to be consulted in all matters affecting the business of the partnership and express his views before any decision is taken by the partners. No change can be made in the nature of the business , nor can the place of business be changed nor the sale of business get effected, unless all the partners agree to it.


Contd…. 3. Right of access to accounts: Subject to contract between the partners, every partner has a right to have access to and inspect and copy any of the books of the firm. A minor partner may have access to and inspect any of the accounts of the firm but not ‘books’. 4. Right to share to profits In the absence of any agreement, the partners are entitled to share profits of the firm equally and are liable to contribute equally to the losses sustained by the firm.


Contd……. 5 . Right to interest on capital. The partnership agreement may contain a clause as to the right of partners to claim interest on capital at a certain rate . Such interest subject to contract between the partners , is payable only out of profits, if any, earned by the firm. 6. Right to interest on advances . Where a partner makes, for the purposes of the business of the firm, any advance beyond the amount of capital, he is entitled to interest on such advance @ 6% per annum. Such interest is not only payable out of the profits of the business but also out of the assets of the firm.

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7.Right to be indemnified A partner has authority, in an emergency, to do all such acts for the purpose of protecting the firm from loss as would be done by a person of ordinary prudence , in his own case, acting under similar circumstances. Such acts of the partner bind the firm. If as a consequence of any such act, the partner incurs any liability or makes any payment, he has a right to be indemnified. 8. Right to the use of partnership property None of the partner can use partnership property as their personal property if any one does like that then he must account to the firm whatever profit he earned by the use of that property.


Contd.. 9. Rights of partner as agent of the firm Every partner for the purposes of the business of the firm is the agent of the firm. 10. No new partner to be introduced Every partner has a right to prevent the introduction of a new partner unless he consents to that or, unless there is an express term in the contract permitting such introduction. This is because partnership is founded on mutual trust and confidence.

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11.No liability before joining A person who is introduced as a partner into a firm is not liable for any act of the firm done, before he became partner. 12.Right to retire A partner has right to retire a)With the consent of all the other partners, b)In accordance with an express agreement between the partners, c)Where the partnership is at will, by giving notice to ‘all the other partners of his intention to retire.


Contd… 13.Right not to be expelled A partner has a right not to be expelled from the firm by any majority of the partners , save in the exercise in good faith of powers conferred by the contract between the partners. 14.Right of outgoing partner to share in the subsequent profits Legal representatives of the deceased partner or the outgoing partner, in the absence of a contract to the contrary, is entitled, at his option, to- (a) such share of the profits as is proportionate to his share in the property of the firm, or (b) interest at the rate of 6 percent per annum on the amount of his share in the property of the firm.

Duties of a partner:

Duties of a partner 1.To carry on business to the greatest common advantage. Every partner is bound to carry on the business of the firm to the greatest common advantage. He is bound, in all transactions affecting the partnership, to do his best in the common interest of the firm. He must share with other partners any benefit which he may have been able to obtain from other people and in which the firm is in honour and conscience entitled to participate. Ex-B & C were partners in a business as sugar refiners, C was authorized to buy sugar for the firm. He without B’s knowledge supplied to the firm his own sugar at the market price. He had brought the sugar at a lower price and thus made a considerable profit . Held he must account to the firm, for the profit made.


Contd…. 2.To observe faith. Every partner must be just and faithful, and observe utmost good faith towards every other partner of the firm. Good faith requires that he shall not obtain a private advantage at the expenses of the firm.


Contd… 3.To indemnify for fraud Every partner is bound to indemnify the firm for any loss caused to it by his fraud in the conduct of the business of the firm. This is an absolute duty of a partner and no partner can contract himself out of it. 4.To attend diligently Subject to contract between the partners it is the duty of every partner to attend diligently to his duties in the conduct of the business firm and to use his knowledge and skill to the common advantage of all the partners. 5.Not to claim remuneration A partner is not entitled to receive any remuneration in any form for taking part in the conduct of the business of the firm. It is, however, usual to allow some remuneration to the working partners provided there is a specific agreement to that effect.

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6. To share losses It is the duty of every partner to contribute to the losses of the firm . In the absence of an agreement to the contrary, the partners are bound to contribute equally to the losses sustained by the firm. 7. To indemnify for wilful effect Every partner is, subject to contract between the partners, bound to i ndemnify the firm for any loss caused to it by his wilful neglect in the conduct of the business of the firm. 8. To hold and use property of the firm exclusively for the firm. It is the duty of every partner of the firm to hold and use the property of the firm exclusively for the purposes of the business of the firm. 9. To act within authority Every partner is bound to act within the scope of his actual or implied authority. Where he exceeds the authority conferred on him and the firm suffers a loss then he has to compensate that loss.

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10. To account for personal profit If a partner derives any benefit ,without the consent of other partners, from partnership transactions, he must account for it and pay it to the firm. Ex-A,B and C carry on business of partnership as merchants. D, to whom they send goods for sale on commission, secretly allows C a share in the commission which he receives in consideration of C using his influence to send consignments to him , A&B come to know of the secret share of C .They can compel C to render account to the firm for the money so received by him. 11. To account for profits in competing business, A partner must not carry on any business of the same nature as competing with that of the firm. Ex-A&B are partners in a business which consists of supplying meat to the government .Subsequently it is found that A is engaged with C in supplying meat to the same government. A is bound to account to the firm for the profits so made by him.


Contd…… 12. To be liable jointly severally Every partner is liable , jointly with all the other partners and also severally , for all the acts of the firm done while he is a partner. An ‘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. 13. Not to assign his rights A partner cannot assign his rights and interest in the firm to an outsider so as to make him the partner of the firm. He can, however, assign his share of the profit and his share in the assets of the firm.


DISSOLUTION OF PARNERSHIP The term dissolution means coming to an end or discontinuation. Dissolution of the partnership (owing to retirement, death or insolvency of a partner), merely involves change in the relation of the partners but it does not end the firm; the partnership would certainly come to an end but the firm, the reconstituted one might continue under the same name.


DISSOLUTION OF FIRM The dissolution of the firm implies a complete breakdown of the partnership relation among all the partners.

Distinction between dissolution of partnership and firm:

Distinction between dissolution of partnership and firm Dissolution of a firm means that the firm closes its business and comes to an end. While dissolution of a partnership means termination of old partnership agreement and a reconstitution of firm due to admission, retirement and death of a partner. In dissolution of a partnership the remaining partners may agree to carry on the business under a new agreement

Modes of Dissolution:- A firm may be dissolved in any of the following ways::

Modes of Dissolution:- A firm may be dissolved in any of the following ways: 1 . By Consent:- A partnership firm can be dissolved any time with the consent of all the partners whether the partnership is at will or for a fixed duration 2 . By Agreement:- A partnership can be dissolved in accordance with the terms of the Partnership Deed or of the separate agreement.


Cont….. 3 . Compulsory Dissolution:- In case, any of the following events take place then it becomes compulsory for the firm to dissolute: - ( i ) Insolvency of Partners:- In case all the partners or all the partners except one become insolvent. (ii) Unlawful Business:- In case the firm’s business become unlawful on the happening of a subsequent event. e.g. trading with alien country.


Cont…. 4 . Dissolution on the happening of contingent event:- A firm may be dissolved on the happening of any of the following contingent event:- ( i ) Expiry of Fixed Period:- If the firm is constituted for fixed period, then the firm is dissolves automatically. (ii) On achievement of specific task:- If the firm has been constituted for the achievement of specific task, on achievement of that task, firm ceases to exist . (iii) Death of Partner:- Death of any of the partner dissolves the partnership. (iv) Insolvency of Partner:- The insolvency of any of the partner may dissolve the firm. (v) Resignation of Partner:- Resignation by any of the partners dissolves the partnership


Cont…. 5 . Dissolution By Notice:- In case of partnership at will, a partner can dissolve it by giving written notice of dissolution to other partners duly signed by him. 6 . Dissolution by Court:- The court may order for the dissolution of the firm on the following grounds:- ( i ) Insanity of Partner:- On the application of any of the partner, court may order for the dissolution of the firm if a partner has become of an unsound mind. (ii) Incapacity of Partner:- If a partner has become permanent in capable of discharging his duties and obligations then court may order for the dissolution of firm on the application of any of the partner. (iii) Misconduct of Partner:- If any partner other than partner suing is responsible for any loss to the firm, then the court may order for the dissolution of the firm.


cont…. (iv) Constant breach of agreement by partner:- The court may order for the dissolution of the firm if the partner other than the suing partner is found guilty for constant breach of agreement and it becomes impossible to continue the business with such partner. (v) Transfer of Interest :- When any of the partner other than the suing partner transfers whole of its share to the third party for permanently. (vi) Continuous Losses:- The court may order for dissolution if the firm is continuously suffering losses and there is no more capital available for the future growth of the firm. (vii) Just and Equitable:- The court may order for dissolution on any other ground which court think is just, fair and equitable. e.g. loss of total confidence between the partner .

A) By the order of the court: :

A) By the order of the court: A partner may apply to the court for getting the firm dissolved. On getting such application by any of the partner the  court may proceed to order the dissolution of the firm in the following circumstances: 1) If any of the partner becomes of unsound mind. 2) If a partner, other than the partner filing the suit is guilty of intentionally and persistently committing a breach of  the partnership agreement. 3) If a partner, other than the partner filing the suit has transferred whole of his interest in the firm to a third party without the consent of the other partners. 4) If a partner, other than the partner filing the suit is guilty is of misconduct. 5) If a partner, other than the partner filing the suit has become disabled to perform his duties as a partner. 6) If the court is satisfied that the business of the firm cannot be carried on except a loss. 7) If the court considers it just and equitable to dissolve the firm due to some other reason.

B) Without the intervention of the court. :

B) Without the intervention of the court. 1) If all the partners are willing and hereby agree to dissolve the firm. 2) In the following circumstances: a) On the death of any partner. b) If any partner becomes insolvent. c) On the expiry of the duration of the firm. d) On the completion of the venture.

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