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Law of Partnership

Jay Singh (2014C58)

Jagdeep Singh (2014C57)
Medha Gupta (2014C25)
Vratika Mittal (2014C20)

Nature of Partnership
In India Partnership is governed by the Indian Partnership Act, 1932. Section 4 of
this Act defines Partnership as the relationship between persons who have
agreed to share the Profit of a business carried on by all or any of them
acting for all.
The partnership consists of three essential elements.
Partnership must be the result of an agreement between two or more persons.
The agreement must be to share Profits or Losses of the business.
The business must be carried on by all or any of them acting for all.
Is Sharing of Profits only prima facie evidence of
Sharing of profits, is important but not conclusive. Sharing of profits may exists under
circumstances where there is no question of partnership. For example :
A creditor taking a share of profits in lieu of interest & part payment of principal.
An employee getting a share of profits as remuneration.
Share of profits given to workers as bonus etc.
As per Sec.6 of the partnership Act, a true partnership can be tested where all the
essential elements of partnership are present.
Limited Partnership
Limited partnership are partnerships containing one or more limited partners.
Limited partnerships must be registered with the Registrar of Companies. Limited
partners are not liable for the debts as in Section 41.2.

Characteristics of Limited Partners
Their liability for the debts of the partnership is limited to the capital they have put in.
They can lose that capital, but they cannot be asked for any more money to pay the debts
unless they contravene the regulations relating to their involvement in the partnership.
They are not allowed to take out or receive back any part of their contribution to the
partnership during its lifetime.
They are not allowed to take part in the management of the partnership or to have the
power to make the partnership take a decision.
If they do, they become liable for all the debts and obligations of the partnership up to
the amount taken out or received back or incurred while taking part in the management
of the partnership.
All the partners cannot be limited partners, so there must be at least one general partner
with unlimited liability.

Must a firm be registered?
Registration of a partnership firm is not compulsory under the Indian Partnership Act.
A firm may be registered (Sections 56-71) any time by sending by post or delivering a
statement in the prescribed form to the registrar of firms of the area in which the firm
is situated.
The statement must be signed by all partners & must be accompanied by the
prescribed fees. After this the registrar will record an entry in the register of firms.
What are the effects of Non registration of a

Consequences of Non registration :
As per the provision of Section 69 of the Indian partnership Act, non registration leads to
following disabilities :
No partner can file a suit against the firm or any co-partner.
The firm can not file a suit against third party for breach of contract.
An unregistered firm can not claim a set-off in a suit.
Active partner, Sleeping partner & Nominal

Active partner A person who becomes a partner by an agreement & is actively
engaged in the conduct of business of the partnership. He contributes capital & is also
entitled to share the profits of the business. He is also liable for the debts of the firm.
Sleeping / Dormant partner He does not take active part in the conduct of the
business of the firm. He invests capital & shares in the profits of the business. He is
liable along with other partners for all the debts of the firm.
Nominal partner These partners only allow the firm to use their name as a partner.
They do not have any real interest in the business of the firm. They do not invest any
capital, or share profits & also do not take part in the business of the firm. However,
they do remain liable to third parties for the acts of the firm.

Liabilities of a Partner.
Partnership Act lays down two general rules :
General duties of Partners Partners are bound to carry on the business of the firm to
the greatest common advantage, to be faithful to each other & to render true accounts
to any partner or his legal representative-Sec.9. This section lays down that the
relationship between partners is one of utmost good faith.
Indemnity Every partner shall indemnify the firm for any loss caused to it by his fraud
in the conduct of the business of the firm Sec.10.

Liability of Partners to Outsiders

The partners liabilities can be discussed in three categories.
Liability of a Partner for Acts of the firm Every partner is liable, jointly with all the
other partners & also severally for all acts of the firm done while he is a partner.
Sec.25. This section lays down the rule that every partner is liable, to an unlimited
extent, for all debts due to third parties from the firm incurred while he was 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, causes injury or loss to any third party or any penalty is
incurred, the firm is liable therefore to the same extent as the partner Sec.26.
Liability of a firm for misapplication by partners where
A partner acting within his apparent authority receives money or property from a third
party & misapplies it or
A firm in the course of its business receives money or property from a third party, & the
money or property is misapplied by any of the partners while it is in the custody of the
firm, the firm is liable to make good the loss Sec.27.
Doctrine of Holding Out
Conditions necessary to make a person liable as a partner by holding out are:
A person may, under certain circumstances, be liable for the debts of a firm although he is
not a partner. If a person, by words spoken or written, or by conduct, represents himself or
knowingly permits himself to be represented, to be a partner in a firm, he is liable as a
partner in that firm to any one who has on the faith of any such representation given credit
to the firm-Sec.28.
If X induces Y to believe that X is a partner of a firm AB & Y believing that X is a partner, gives
credit to AB, X will be responsible for compensating Y. He will not be heard to say that he is
not a partner of AB. This is known as partnership by holding out.

Estoppel The principle of estoppel is a rule of evidence. Estoppel arises when you are
precluded from denying the truth of anything which you have represented as a fact,
although it is not a fact.
A minor who falsely represents himself to be a major, & thereby induces another person
to enter into an agreement with him, can nevertheless plead minority as a defense in an
action on the agreement. In a similar case Khan Gul vs Lakha Singh Court has directed
the minor to pay compensation to the other party.

To hold a person liable as a partner by holding out, it is necessary to establish the following
He represents himself, or knowingly permitted himself to be represented as partner.
Such representation occurred by words spoken or written or by conduct.
The other party on the faith of such representation gave credit to the firm.
Rights of Partners.
Subject to any contract to the contrary, the important rights of
partners are summarized below :
Conduct of business Sec.12(a).
Can express opinion Sec.12 c.
Access, inspection & copy books of the firm Sec.12(d).
Equality of Profits Sec.13(b).
Interest on Capital Sec 13 c.
Interest on Advance @ 6% P.A. Sec.13(d).
To get indemnity Sec.13(e).

Application of Property of firm Sec.15.
Partners authority Sec.18 & 19.
Powers in an emergency Sec.21.
Reconstitution through introduction of a new partner, death, retirement or insolvency
Dissolution of firm.
Right to carry on a competing business.
Right to share profits after retirement.
Duties of Partners
Justice, Faithful to partners, provide true accounts & information affecting the firm
To pay indemnity in case of loss Sec.10.
To attend diligently to his duties Sec.12(b).
No remuneration unless specifically given in the contract Sec .13(a).
Equality of losses Sec.13(b).
To pay indemnity for willful neglect by the partner Sec.13(f).
No private benefit Sec.15.

To account for secret Profit Sec. 16(a).
Unlimited Liability Sec.25.

Contract with a Minor
A minor can not enter into a contract of partnership business since an agreement with a
minor is void. But if all the partners agree, a minor may be admitted to the benefits of
an existing firm.
The rights & liabilities are governed by the following rules. Section 30
The minor has right to such share of property & profits of the firm as may be agreed by
the partners.
The minor may have access to & inspect accounts.
The minor is not personally liable for any act of the firm.
As long as a minor is a member of the firm, he can not file a suit against the other
partners for payment of his share of the property & profits.

At any time with in 6 months of his attaining majority or his obtaining knowledge that he
had been admitted to the benefits of partnership, whichever date is later, the minor may
give public notice that he has been elected to become or not to become a partner in the
The following rules apply when a minor elects to become partner :
He becomes personally liable to third parties for all acts of the firm.
His share in the property & profits of the firm shall be the share to which he was
entitled as a minor.
The following rules apply when the minor elects not to become a partner :
His rights & liabilities continue to be those of a minor up to the date on which he gives
public notice.
His share is not liable for any acts of the firm done after the date of the notice.
He is entitled to use the partners for his share of the property & profits of the firm.
Rights of an Outgoing Partner
Restraint of Trade from carrying out similar business within a specified period or local
limits Sec. 36(2).
To carry on competing business when there is no restraining agreement between the
partners Sec.36(1).
To share subsequent Profits is to be decided in the following way :
He or his estate is entitled at the option of himself or his representative to such share of
profits made since he ceased to be a partner or to interest @ 6% per annum on the
amount of his share capital in the property of the firm.
Revocation of continuing guarantee by change in firm : A continuing guarantee is revoked
as to future transactions from the date of any change in the constitution of the firm.
Thank You