partnership act

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INDIAN PARTNERSHIP ACT, 1932 The Indian Partnership Act, 1932 lays down the important provisions relating to partnership contracts. However, the general principles of the Indian Contracts Act, 1872 which formally contained the provisions of the law of partnership shall apply so far as they are not inconsistent with this Act. (Section 3)


Partnership According to Section 4 “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”. Therefore, in order that persons may become partners, it is essential that the following four elements co-exist: There must be at least two persons; There must be a relationship arising out of an agreement between two or more persons to do a business; The agreement must be to share the profits of a business; The business must be carried on by all or any of them acting for all.

Essentials of a Partnership and True Test of Partnership:

Essentials of a Partnership and True Test of Partnership Association of two or more persons Agreement Business Sharing of Profits Mutual Agency-The True Test

Formation of Partnership:

Formation of Partnership The partnership agreement must comply with all the essentials of a valid contract. Two exceptions, however, may be noted: A minor may be admitted to the benefits of a partnership with the consent of all other partners. As relations of partners inter se are that of agency, no consideration is required to create the partnership.

Kinds of Partners:

Kinds of Partners Actual, Active or Ostensible Partner Sleeping or Dormant Partner Nominal Partner Partner in Profits Only Sub-Partner Partner by Estoppel or Holding Out Effects of Holding out Exceptions to Holding Out The doctrine of Holding Out is not applicable in the following cases: It does not apply to cases of torts committed by partners. It does not extend to bind the estate of a deceased partner, where after a partner’s death the business of the firm is continued in the old firm name. It also does not apply where the Holding Out partner has been adjudicated insolvent.


Dissolution The Partnership Act makes a distinction between the “dissolution of partnership” and “dissolution of firm”. Where there is dissolution of partnership between all the partners of a firm, it is a dissolution of the firm (Section 39). Where there is an extinction of relationship between some of the partners only, it is a dissolution of partnership. The dissolution of partnership takes place (even when there is no dissolution of the firm) in the following circumstances: By the expiry of the fixed term for which the partnership was formed. [Section 42(a)] By the completion of the adventure. [Section 42(b)] By the death of a partner. [Section 42(c)] By the insolvency of a partner. [Section 42(d)] By the retirement of a partner. [Section 42(e)]

Modes of Dissolution of the Firm:

Modes of Dissolution of the Firm By mutual agreement (Section 40) By the insolvency of all the partners but one. [Section 41(a)] By business becoming illegal [Section 41(b)] By notice of dissolution. (Section 43) Dissolution by the Court: When a partner becomes of unsound mind Permanent incapacity of a partner Misconduct of a partner affecting the business Persistent disregard of partnership agreement by a partner Transfer of interest or share by a partner Business working at a loss Where just and equitable

Effect of Dissolution:

Effect of Dissolution Continuing authority of partners Continuing liability of partners Right to Return of Premium unless dissolution was caused by (i) agreement, or (ii) misconduct of the party seeking return of the premium, or (iii) death of a partner. (Section 51) Rights of a partner in case of dissolution on account of fraud or misrepresentation.(i) lien on surplus assets for any sum paid by him for purchase of his share in the firm or for any capital contributed by him;(ii) to rank as a creditor in respect of any payments made by him towards firm’s debts; (iii) to be indemnified by the partner(s) guilty of fraud or misrepresentation against all the debts of the firm.(Section 52)

Settlement of Accounts on Dissolution:

Settlement of Accounts on Dissolution Treatment of losses: Losses including deficiencies of capital are to be paid in the following manner: First out of profits; Then out of capital; Lastly by partners individually in their profit sharing ratio. Application of Assets: The assets of the firm, including the sums, contributed by the partners to make up losses or deficiencies of capital shall be applied in the following manner and order: in paying outside creditors; in repaying advances made by partners rateably (distinct from investment of capital); in repaying capital to partners rateably; and the ultimate residue, if any, shall be divided among the partners in the proportions in which profits are divisible.

Registration of the Firm:

Registration of the Firm The Partnership Act, 1932, does not make registration of a firm compulsory but it introduces certain disabilities, which makes registration necessary at one time or other. An unregistered firm is not an illegal association. The registration of a firm may be effected at any time by sending by post or delivering to the Registrar of the area in which any place of business of the firm is situated or proposed to be situated, a statement in the prescribed form and accompanied by the prescribed fee, stating: the name of the firm, the place or principal place of business of the firm, the names of any other places where the firm carried on business, the date when each partner joined the firm, the names in full and permanent addresses of the partners and the duration of the firm. The statement shall be signed and verified by all the partners or by their agents specially authorised in this behalf. (Section 58)

Effects of Non-registration:

Effects of Non-registration Following are restrictions if the firm is not registered and the person suing is or has not been shown in the Register of Firms as a partner in the firm. Sub-section (1) of Section 69 places a bar on the right of the partners of a firm to sue each other or the firm for enforcing any right arising from a contract or conferred by the Partnership Act, Sub-section (2) of Section 69 places a bar on the institution of a suit by or on behalf of a firm against a third-party There is no bar on the right of third-parties to sue the firm or any partner.

Suits by Unregistered Firms :

Suits by Unregistered Firms A suit for the dissolution of a firm. A suit for rendering of accounts of a dissolved firm. A suit for realisation of the property of a dissolved firm. A suit or claim of set-off, the value of which does not exceed one hundred rupees, A proceeding in execution or other proceeding incidental to or arising from a suit or claim for not exceeding one hundred rupees in value. A suit by a firm which has no place of business in the territories to which the Indian Partnership Act extends. A suit for the realisation of the property of an insolvent partner. A suit by a firm whose places of business are situated in areas which are exempted from the application of Chapter VII of the Indian Partnership Act, 1932.