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ACKNOWLEDGEMENT
I would like to thank my faculty Mr. Vijay Kumar Vimal, whose assignment of such a pertinent
topic made me work towards knowing the subject with a greater interest and enthusiasm and
moreover he guided me throughout the project.

I owe the present accomplishments of my project to my friends and seniors, who helped me
immensely with sources of research materials throughout the project and without whom I
couldn’t have completed it in the present way.

I would also like to extend my gratitude to my parents and all those unseen hands who helped me
out at every stage of my project.

THANK YOU!

NAME – KUMAR SANJEEV

ROLL NO. – 2122

3rd Semester (BA LL.B)

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 DECLARATION
I hereby declare that the work reported in the B.A. LL.B (Hons.) project report entitled
“PAYMENT BY FIRM DEBT & PRIVATE DEBT” submitted at Chanakya National Law
University Patna, is an authentic record of my work carried under the supervision of Dr. Vijay
Kumar Vimal. I have not submitted this work elsewhere for any other degree or diploma. I am
fully responsible for the contents of my project report.

KUMAR SANJEEV

Chanakya National Law University

20/10/2020

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Contents
ACKNOWLEDGEMENT...........................................................................................................................2
DECLARATION.........................................................................................................................................3
INTRODUCTION.......................................................................................................................................6
Mutual Relations of Partners.......................................................................................................................7
Right of Partners......................................................................................................................................7
Duties of Partners....................................................................................................................................8
GENERAL DUTIES OF A PARTNER...................................................................................................9
RIGHTS AND DUTIES OF THE PARTNERS....................................................................................10
SPECIAL RIGHTS AND DUTIES OF THE PARTNERS...................................................................11
MUTUAL RIGHTS AND LIBILITIES................................................................................................12
REGISTRATION OF FIRMS...................................................................................................................13
Procedure for Registration:...................................................................................................................13
Effects of Non-Registration...................................................................................................................15
DISSOLUTION OF FIRMS......................................................................................................................16
Modes of Dissolution.............................................................................................................................16
PAYMENT BY FIRM DEBT AND PRIVATE DEBT.............................................................................20
Firm Debts:............................................................................................................................................21
Private Debts:........................................................................................................................................21
1. On the basis of meaning:......................................................................................................................21
(a) Firm's debts are debts owed by the firm to outsiders.............................................................................21
(b) Private debts are debts owed by the partners to the outsiders.................................................................21
2. On the basis of liability:.......................................................................................................................21
(a) All the partners of the firm are liable jointly to pay off the Firm's debts.................................................21
(b) Only the concerned partner, who owes the debt, is liable to pay off the Private debts.............................21
3. On the basis of application of property:.................................................................................................21
(a) Firm's debts will be paid off first using the firm's property. However, they will be given the last priority
when using private property of the partners...............................................................................................21
(b) Private debts will be paid off last using the firm's property but will be given first priority when using the
private property of the partners.................................................................................................................21

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 INTRODUCTION
Section 4 of the Indian Partnership Act, 1932 defines ‘Partnership’ as: 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.

Agreement between the partners and firm is the basis of formation of partnership. This
agreement may be written or oral. But written agreement is always preferred. The agreement
must satisfy all the necessary elements of a valid contract.

The duration of a partnership depends upon the nature of agreement between or among the
parties.

1. Partnership at Will

2. Partnership for a fixed term

3. Particular Partnership.

1. Partnership at Will

There is no provision in the contract between the partners for the duration of the partnership.
Any partner can dissolve the firm by giving notice to the other partners. If the partnership deed is
silent regarding the term of the partnership then such partnership is said to be partnership at will.

There exist some important features of a partnership at will

a. No provision regarding duration of membership.

b. No provision for determination and termination of membership.

c. Is supposed to be a partnership for an indefinite period.

Section 7 of the IPA 1932 states that, “Where no provision is made by contract between the
partners for the duration of their partnership or for the determination of their partnership, this
partnership is partnership at will.”

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2. Partnership for a fixed term

In this case, the partnership is entered into for a fixed period of time, the completion of which
entails the end of the partnership. The partners can however continue even after the completion
of the term, upon which the partnership ceases to be partnership for a fixed term and becomes
partnership at will.

3. Particular Partnership.

When two or more persons agree to carry on business in particular adventure of understanding,
such a partnership is called a particular partnership. Such partnerships are formed to carry on
certain ventures. If the partners agree to continue even after the completion of the venture, then
the particular partnership ceases to exist and is replaced by partnership at will.

Mutual Relations of Partners

Right of Partners
1. Right to take part in the conduct of business.

2. Right to access of books

3. Right to interest on capital

4. Right to share profit

5. Right to interest on advances.

6. Right to be consulted

7. Right to indemnity

8. Right to use property

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9. Right to prevent new admission

10. Right to retire

11. Right to protect the firm

12. Right to retain in the firm

13. Right to carry on competing business.

14. An incoming partner will not be liable for any debts or liabilities of the firm before he
becomes a partner.

Duties of Partners
1. Absolute duties

a. Duty to carry on business to the greatest common advantage

b. Duty to render true accounts

c. Duty to provide full information

d. Duty to be just and faithful to others

e. Duty to be liable jointly and severally

f. Duty to indemnity for loss caused by fraud

g. Duty not to assign his interests

2. Qualified duties

a. Duty to attend diligently to his duties

b. Duty to account for personal profit derived

c. Duty to contribute to losses

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d. Duty to indemnify for willful neglect

e. Duty to work without remuneration

f. Duty not to complete with the business of the firm

g. Duty to use firm’s property exclusively for the firm

h. Duty to work within the authority

3. Authority

a. Implied authority of partner as agent of the firm

b. Extension and restriction of partner’s implied authority

c. Partner’s authority in an emergency

GENERAL DUTIES OF A PARTNER

Subject to a contract to the contrary between the partners the following are the duties of a partner
according to section 9 of The Indian Partnership Act, 1932-

1- To carry on the business of the firm to the greatest common advantage. Good faith requires
that a partner shall not obtain a private advantage at the expense of the firm. Where a partner
carries on a rival business in competition with the partnership, the other partners are entitled to
restrain him.

2- To be just and faithful. Partnership as a rule is presumed to be based on mutual trust and
confidence of each partner, not only in the skill and knowledge, but also in the integrity, of each
other partner.

3- To render true accounts and full information of all things done by them to their co-partners.

4- According to sec. 10 of the said act every partner shall indemnify for loss caused by fraud.
Every partner shall indemnify the firm for loss caused to it by his fraud in the conduct of the
business of the firm.
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5- Not to carry on business competing with the firm. 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.

6- To carry out the duties created by the contract. The partners are bound to perform all the
duties created by the agreement between the partners.

RIGHTS AND DUTIES OF THE PARTNERS

Determination of rights and duties of partners by contract between the partners:

Subject to the provisions of the Indian Partnership Act, 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. [Section
11(1)].  Thus, partners are free to determine the mutual rights and duties by contract. Such
contract may be in writing or it may be implied by their actions.

According to section 17 of the said act, rights and duties of partners is subject to a contract
between the partners:

1- After a change in a firm- where a change occurs in the constitution of a firm, the mutual rights
and duties of the partners in the reconstituted firm remain the same as they were immediately
before the change.

2- After the expiry of the term of the firm- where a firm constituted for a fixed term continues to
carry on business after the expiry of that term, the mutual rights and duties of the partners remain
the same as they were before the expiry, so far as they may be consistent with the incidents of
partnership at will.

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3- Where additional undertakings are carried out- where a firm constituted to carry out one or
more adventures or undertakings carries out other adventures or undertakings are the same as
those in respect of the original adventures or undertakings.

Subject to a contract to the contrary a partner has the following rights.

1. To take part in the conduct and management of the business

2. To express opinion in matters connected with the business. He has a right to be consulted and
heard in all matters affecting the business of the firm

3. To have free access to all the records, books of account of the firm and take copy from them.

4. To share in the profits of the business. Every partner is entitled to share in the profits in
proportion agreed to between the parties.

5. To get interest on the payment of advance. Where a partner makes for the purpose of the
business, any payment or advance beyond the amount of capital he has agreed to subscribe, he is
entitled to interest thereon at the rate of 6% per annum.

6. To be indemnified by the firm against losses or expenses incurred by him for the benefit of the
firm.

SPECIAL RIGHTS AND DUTIES OF THE PARTNERS

After the change of the firm-Where the change occurs in the constitution of a firm, the mutual
rights and duties of the partners in the reconstituted firm remain the same.

                                             

                                                          

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MUTUAL RIGHTS AND LIBILITIES
Subject to contract between the partners- 

(a) A partner is not entitled receive remuneration for taking part in the conduct of the business; 

(b)  The partners are entitled to share equally in the profits earned, and shall contribute equally to
the losses sustained by the firm,

(c)  Where a partner is entitled to interest on the capital subscribed by him such interest shall be
payable only out of profits-,

(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 per
cent. Per annum;

(e) 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, and

(ii) 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

(f)  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.

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 REGISTRATION OF FIRMS
Procedure for Registration:
The Partnership Act authorizes the State Governments to appoint Registrars of Firms for the
purpose of registering partnership firms1. Accordingly an office of the Registrar of Firms exists
in every state. Registration is obtained by filling an application with the Registrar. The
application must be on the prescribed form and accompanied by the prescription fee. The
application has to state the following particulars2:

a) The name of the firm

b) The place or principal place of business of the firm

c) The names of any other places where the firm carries on business

d) The date when each partner joined the firm

e) The names in full and the permanent address of the partners

f) The duration of the firm

The application must be signed and verified by each partner or his duly authorized agent3. If a
partner refuses to sign the application form, registration can only be achieved by dropping his
name from the form.

If the Registrar is satisfied that the requirements as to registration have been complied with, he
registers the firm and enters its name in the Register of Firms4. He then issues under his hand a
certificate of registration.

1
Section 57
2
Section 58
3
Section 58(2)
4
Section 59

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Change of Particulars [S.60]

Any change of name or location of the principal place of business requires almost a new
registration and, therefore, statement to that effect signed by all partners and accompanied by the
prescribed fee should be set to the Registrar.

When the business of the firm is discontinued at one place or extended to a new place5 or when a
partner changes his name or permanent address6 or when the firm is dissolved or a partner retires
or joins or a minor, having been admitted elects to become or not to become a partner7, the
Registrar should be informed.

Penalty for false particulars

The statements in the application form or amending forms and notices sent to the Registrar
should be true and complete. If any person knowingly, or without belief in its truth, furnishes
false or incomplete information, he is liable for penalty8.

Rules of Evidence [s.68]

Any statement, notice or intimation recorded with the Registrar by any person is a conclusive
proof against him of the fact stated9. Entries relating to a firm in the Register of Firms shall be
proved by producing certified copies of the entries10.

5
Section 61
6
Section 62
7
Section 63
8
Which may extend to 3 months of imprisonment or fine or both
9
Section 68(1)
10
Section 69(2)

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Effects of Non-Registration

Section 69 reads:

Effects of Non-Registration- (1) No suit to enforce the right arising from a contract or constituted
but this Act shall be instituted in any Court by or on behalf of any person suing as a partner in
the firm against the firm or any person alleged to be or to have been a partner in the firm 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.

(2) No suit to enforce a right arising from a contract shall be instituted in any Court by or on
behalf of a firm against a third party unless the firm is registered and the persons suing are or
have been shown in the Register of Firms as partners on the firm.

(3) The provisions of sub-section (1) and (2) shall apply to also a claim of set off or other
proceedings to enforce a right arising from a contract, but shall not affect-

a) The enforcement of any right to sue for the dissolution of the firm or for the accounts of a
dissolved firm, or any right or power to realize the property of a dissolved firm; or

b) The powers of an official assignee or Court under the Presidency- towns Insolvency Act 1920
(5 of 1920) to realize the property of an insolvent partner.

(4) This section shall not apply-

a) to firms or partners in the firms which have no place of business in [the territories to which
this Act extends], or whose place of business in [the said territories], are situated in areas to
which, by the notification under [section 56], this Chapter does not apply; or

b) to any suit or claim of set off not exceeding one hundred rupees in value which, in the
Presidency-towns, is not of a kind specified in section 19 of the Presidency Small Cause Courts
Act, 1882 (5 of 1882), or, outside the Presidency-towns, is not of a kind specified in Schedule II
to the Provincial Small Cause Courts Act, 1887 (9 of 1887), or to any proceeding in execution or

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otter proceeding incidental to or arising from such suit or claim. Registration of firms is not
compulsory. It is optional and there is no penalty for non-registration. Yet registration becomes
necessary at one time or the other, because section 69 seriously cuts short the capacity of an
unregistered firm and its partners to sue. The firm cannot, for example, sue any person for the price of
the goods supplied to it. This disability is too great a compelling force to bring the firm to the Register.

DISSOLUTION OF FIRMS
When a firm is put to an end as between all the partners, it is called the dissolution. Section 39
declares:

Dissolution of a Firm- The dissolution of a partnership between all the partners of a firm is
called the “dissolution of the firm.”

Thus dissolution is something different from the retirement of a partner, because in retirement,
the business is continued by one or more of the partners. Where immediately after dissolution,
the firm is reconstituted and the business is resumed by some of the partners, even if in the same
name and place, that remains a dissolution.

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

1. By Consent [S.40]

A firm may be dissolved at any time with the consent of all the partners. This applies for all
cases whether the firm is for a fixed period or at will.

2. By Agreement [S.40]

A firm may be dissolved in accordance to the contract between the partners. The contract
providing for the dissolution may be contained in the partnership deed itself or in a separate
agreement.

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3. Compulsory Dissolution [S.41]

A firm is dissolved

(a) by the adjudication of all the partners or of all the partners but one as insolvent, or

(b) by the happening of any event which makes it unlawful for the business of the firm to be
carried on or for the partners to carry it on in partnership:

Provided that, where more than one separate adventure or undertaking is carried on by the firm,
the illegality of one or more shall not of itself cause the dissolution of the firm in respect of its
lawful adventures and undertakings.

4. Contingent Dissolution [S.42]

A firm is dissolved on the happening of any of the following contingencies, provided that there is
no agreement on the contrary-

a) if the firm is constituted for a fixed period, by the expiry of that term.

b) If the firm is constituted to carry out one or more adventures or undertakings, when they are
completed.

c) by the death of a partner.

d) by the adjudication of a partner as insolvent.

5. By Notice [S.43]

When a partnership is at will, which means partnership, the duration of which is not fixed, it may
be dissolved at any time by any partner by giving a notice of his intention to dissolve it. The
notice should be in writing and signed by the partner giving it and should be served upon all the
partners.

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The firm is dissolved as from the date mentioned in the notice or, if no date is mentioned, as
from the date of communication of the notice. But where a partner gives notice at an importune
moment or at a time when the dissolution will give him some advantage over the other partners,
the court may hold him until the pending transactions are completed and the liabilities are paid
off. A partnership which is not at the will cannot be determined by notice.

Thus in Moss v. Elphicck11 a deed, constituting a partnership of two persons for an unidentified
time, provided that the firm could be terminated “by mutual agreement only”. It was held that the
notice of dissolution given by one of the partners was invalid as the operation of Section 43 was
excluded by agreement to the contrary.

In Talakchand Kanji Vora v. Keshavlal12 the Supreme Court has expressed the opinion that in
a partnership consisting of two partners only, if there is any provision regulating the mode of
retirement, it will in essence be an agreement as to dissolution. The firm will not be “at will” and
the provisions regulating the retirement will have to be followed for dissolution.

6. Dissolution by Court [S.44]

Section44. 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

11
1910 102 LT 639; 1910 1 KB 846
12
AIR 1973 Cal 279

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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.

By section 44 the court is empowered to order the dissolution of a firm at a suit of a partner in
the following cases:

a) Insanity- When one of the partners has become a person of unsound mind, any partner,
including the insane, may apply for dissolution.

b) Permanent Incapacity – When a partner, other than the partner suing becomes permanently
incapable of performing his duties as a partner, any of the partners may apply for dissolution.
The incapacity should be of permanent nature. In Whitwell vs. Arthur13, a partner suffered from
an attack of paralysis and that would be a strong ground for dissolution. But the medical
evidence showed that the attack was only temporary and that he already was improving.
Dissolution was not allowed.

(c) Misconduct- When a partner other than the partner suing is guilty of conduct which is likely
to affect prejudicially the conduct of the firm, the Court may order dissolution. In Snow v.
Milford14 a partner of the firm of bankers committed adultery with several women in the city
where the business was carried on and his wife had left him. The other partners applied for
dissolution on this ground. The court disallowed saying that the misconduct was not likely to
affect the business of bankers.
13
1865 147 RR 73; 55 ER 826
14
1868 18 LT 142

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(d) Persistent Breach of Agreement- when a partner, other than the partner suing, persistently
commits breach of agreements relating to the management of the firm or otherwise conducts
himself in matters relating to the business that is reasonably not practicable for the other partners
to carry on the business in partnership with him.

(e) Transfer of Interest- when a partner, other than the partner suing, has transferred the whole
interest of the firm to a third party, or has allowed his interest to be charged, 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, the court may order dissolution.

(f) Perpetual losses- when the business of the firm cannot be carried on save at a loss, the court
may dissolve it. The whole purpose of a firm is to make profit.

(g) Just and Equitable- when on any grounds the court thinks that it is just and equitable to
dissolve the firm, it may dissolve it.

PAYMENT BY FIRM DEBT AND PRIVATE DEBT

Section 49 of Indian Partnership Act, 1932 talks about Payment of firm debts and of separate

debts.—“Where there are joint debts due from the firm, and also separate debts due from any

partner, the property of the firm shall be applied in the first instance in payment of the debts of

the firm, and, if there is any surplus, then the share of each partner shall be applied in payment of

his separate debts or paid to him. The separate property of any partner shall be applied first in the

payment of his separate debts, and the surplus (if any) in the payment of the debts of the firm.”

Firm Debts:

When a firm owes to an outsider, this debt is called firm’s debt. The firm is basically responsible

to pay these debts. At the time of dissolution of the firm these debts are paid first out of the

money realized.

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Private Debts:

When a partner owes some amount from an outsider this debt is called his private debt. The firm

is basically not responsible for these types of debts. Such debts are paid off from the money

realized by selling the private property of the partner. If private property of partner exceeds the

amount of his private debt, surplus is used to settle the firm’s debts.

1. On the basis of meaning:

(a) Firm's debts are debts owed by the firm to outsiders. 
(b) Private debts are debts owed by the partners to the outsiders. 

2. On the basis of liability:

(a) All the partners of the firm are liable jointly to pay off the Firm's debts. 
(b) Only the concerned partner, who owes the debt, is liable to pay off the Private debts. 

3. On the basis of application of property:

(a) Firm's debts will be paid off first using the firm's property. However, they will be given the last
priority when using private property of the partners. 
(b) Private debts will be paid off last using the firm's property but will be given first priority when
using the private property of the partners. 

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