This article is written by Richa Goel of Banasthali Vidyapith. In this article, she has discussed the scope, nature of Partnership Act, 1932 and various provision related to admission, death, the retirement of a partner.
An Act was enacted in 1932 and it came into force on the 1st day of October 1932. The present Act superseded the earlier law, which was contained in Chapter XI of the Indian Contract Act, 1872.
This Act is not complete and has the intention to define and amend laws relating to Partnership.
Partnership results from a contract and is governed by the Partnership Act 1932. The partnership is also governed by the general provision of the Indian Contract Act on such matters where the Partnership Act is silent. It is expressly mentioned that the provision of India Contract Act which is not repealed will be applicable on Partnership until and unless such provision is in contrary to any provision of Partnership Act, 1932. The rules of contract regarding the capacity to contract, offer, acceptance etc will also be applicable to the partnership. But the rules regarding the status of minor will be governed by the Partnership Act, 1932 since Section 30 of the Act talks about the position of the minor.
Nature of Business
It is a business organization where two or more persons agreed to join together to carry out the business for the purpose of earning the profits. It is an extension of a sole proprietorship. It is better than sole proprietorship because in sole proprietorship the business is carried out by the individual with limited capital and limited skill. Due to the limited resources of a single individual carrying a sole proprietorship, a larger business requiring more resources and investment than available to the sole proprietor cannot be thought of such business. On the other hand in partnership, a number of partners join together with their capital to form an agreement and carry out a business jointly.
According to Section 4 of the 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 one of them acting for all”.
Essential requirements of a partnership
- There must exist an agreement between the partners.
- The motive is to earn the profit and share between the partners.
- The agreement must be to carry out the business jointly or by any of them acting on the behalf of all.
A and B buy 100 tons of oil which they agree to sell for their joint account. This forms a partnership and A and B are considered as partners.
A and B buy 100 tons of oil and agreed to share it among them. It does not form a partnership as they had no intention to carry out business.
Number of members
Any two or more persons may form a partnership. There is no limit imposed on the minimum and the maximum number of partners under the Partnership Act,1932. According to Companies Act 2013, the maximum number of 100 must not exceed in case of partnership and minimum is 2 partners.
If in any case, it exceeds the maximum limit then it will amount to the illegal association under Section 464 of Companies Act,2013. According to Section 11 of Companies Act the maximum number of partner in case of:
- Banking purpose-10 persons
- Other purposes- 20 persons
The partnership is an agreement in which two or more person has decided to carry out business and share the profit and losses equally. To create a legal relationship it is necessary to form a partnership agreement.
The partnership agreement becomes the foundation or the basis on which it is based. It can be either written or oral. The written agreement is known as a partnership deed. Partnership deed mainly consists of the following details:
- Name and address of its firm and business
- Name and address of its partner
- Capital contributed by each partner
- Profit and loss sharing ratio
- Rate of interest on capital, loan, drawings etc
- Rights, duties and obligation of partners
- Settlement of accounts on the dissolution of the firm
- Salaries, commission payable to partners
- Rules to be followed in case of admission, retirement and death of a partner
- Mode of settlement on disputes among partner.
- Any other affecting the rights of the partners
Business (Section 12)
The partnership must be created for the purpose of carrying the business which is legal in nature. Co-ownership of property does not amount to the partnership.
Mutual agency (Section 13)
The business is to be carried by all of them or by any one of them on behalf of all. It gives two assumptions
Each partner is entitled to carry out the business. The mutual agency exists between the partners. Each partner is a principal as well as an agent for the other partners.he is bound by the acts of other partners as well as can bind others by his own act.
Sharing of profit
The agreement is to share profit and losses among the partners. The sharing of profit and losses can be according to the ratio of the capital contributed or equally.
It helps to distribute the burden among the partners in the case when the partnership suffers losses.
Liability of partnership
All the partners are jointly liable for paying the debts of the firm. The liability is unlimited which means that the partner’s private assets can be disposed of for the purpose of paying the debts of the firm.
Kinds of partnership
The various types of partnership are based on two different criteria.
With regard to the duration of the term of partnership:
Partnership at will
when no fixed period is prescribed for the expiration of partnership then it is a partnership at will. According to Section 7 two conditions need to be fulfilled:
- No agreement about the determination of the fixed period of partnership
- No clause with respect to the determination of partnership.
Partnership for a fixed period
When the partners fixed the duration of the partnership firm then after the expiration of the fixed period the partnership comes to an end. When the partners decided to continue with the partnership even after the expiry of the fixed period then it becomes a partnership at will.
On the basis of the extent of the business carried by a partnership
Particular Partnership (Section 8)
When the partnership is created for completing any project or undertaking. When such an undertaking or project have been completed then partnership comes to an end. The partners have a choice to continue with the firm.
when the partnership is created for the purpose of carrying out the business. There is no particular task that has to be completed. The task is general in nature.
Scope of Partnership Act (Section 5)
The partnership arises from the contract but not from the status. The intention of partners is a question of the partnership. the partners may exercise any of its power at time but must not exercise in the pursuance of illegal, fraudulent or misconduct.
If any of the partners have made the contract without the consent of all other partners then the question as to the validity of such contract arises. If all the partners have accepted or ratified the contract then no question as to the validity of such contract arise.
With the consent of all the partners, the partnership can become a member of another firm.
The member of a partnership is called partners.it is not mandatory that all the partners are the same or all the partners participate in the conduct of the business or share the profit or losses equally. The partners are classified depending on the nature of work, the extent of liability, etc. There are basically six types of partner:
- Active/managing partner: The partner who takes participation in the conduct of the business daily. This partner is also called an ostensible partner.
- Sleeping/Dormant: He does not participate in the conduct of the business but he is bound by the conduct of all the partners.
- Nominal partner: He is a partner to the firm only by his name. In reality, he has no significant or real interest in the firm.
- Partner in profit only: The partner who agrees to share the profit but does not suffer losses. He is not liable for any liabilities in case of dealing with the third party.
- Minor partner: A minor cannot be a partner according to the Indian Contract Act, but he can be admitted to get the benefit of all the partners gives the consent. His will share the profit equally but his liability will be limited in case of loss of the firm.
- Partner by estoppel: it means when the person is not a partner but he has represented himself by conduct, or words to another person to be the partner then he cannot deny afterwards. Even though he is not a partner but he becomes the partner by holding out or by estoppel.
Relation of partner with one another
All the partners have a right to create their own terms and condition with regard to the affairs of the business in the partnership deed. The Indian Partnership Act has prescribed the provision to govern the relation of partners and this provision is applicable in case when there is no deed. The various rights of the partners are explained below:
- Right to determine the relationship by contract (Section 11)
The partnership deed determines the general administration of the partnership like what will be the profit-sharing ratio, who will do what work etc. The partnership contains the rights and duties of the partners.
Such a deed can be made either expressly or by necessary implication. For example, if one partner looks into sales daily and other partners do not object to it, his conduct will be presumed as the right of all the partners in the absence of written agreement. So it can be concluded that all partners create a right for their own.
Section 27 of the Indian Contract Act,1872
Agreement in restraint of trade is void
All the agreements which restrain the person from carrying any lawful profession, trade or business are void.
But Section 11 of the Partnership Act states that the partners can restrain each other from carrying a business other than the firm. but such restraint must contain in the partnership deed.
Rights of the Partners
- Right to participate in the conduct of business (Section 12(a)): each partner has a right to participate in the conduct of the business. A partner right to participate in business is curtailed in a case where some of them only participate in the business affairs of the firm. this right can be curtailed only when the partnership deed states so.
- Rights to access and inspect books and accounts (Section 12(d)): This right is also given to the active and dormant partner. Each partner has a right to access and inspect the book of account of the firm. In case of death of a partner, his legal heir can inspect the copies of accounts.
- Right to be indemnified: The partners have a right to be indemnified for the decision taken in the course of the business. But such a decision is to be taken in the case of urgency and should be of such nature that the ordinarily prudent person would take.
- Rights to express his opinion (Section 12(c)): Each partner has a right to express his opinion with regard to the business affairs. They also have the right to participate in the decision-making process.
- Rights to get interested on capital or advances: Generally, partners are not entitled to get any interest on the capital that they invest .but when they agree to give interest, then such interest would be paid from the capital. They are also entitled to 6%interest on the advances made towards the business of the firm.
- Right to share profit and loss: The partners share the profit and losses equally in the absence of any deed. But when there is a partnership deed prescribing the ratio of profit and losses it will be shared in accordance with the partnership deed.
Relations of partners to third parties
Section 18 to 22 of the Act talks about the relation of partners third parties
Section 18 prescribes that the partners are an agent of the firm for the purpose of conducting the affairs of the business. The partners act as the principal and agent as well. when he performs the act in his own interest he is the principal and when he does in the interest of another partner then he is an agent. He is not an agent for the dealings or the transactions between the partners themselves.
Section 19 states that any act which is performed by the partners in the usual course of its business binds the firm itself. The authority to bind the firm is implied authority
Section 20 states that partners can make a contract to restrict or expand the implied authority of a partner.
Section 21 states that if any act is done by any partners in case of an emergency which a prudent man would do, then such acts need to bind the firm.
Section 22 specifies that if any act is done by any partner then it must be done in the name of the firm or in such manner which binds the firm.
Duties of partners
The rights and duties are correlated with each other. When the rights are given to the partners then there must be some which the partners should perform..the various duties of partners are as follows:
- Duty to act diligently (Section 12(b)): It is the duty of the partners to act with due care and diligence because his actions will affect all other partners. If his wilful act causes a loss or injury to other partners he is entitled to pay compensation to the affected partners.
- Duty to indemnify fraud (Section 10): whenever any fraud is committed by partners then every partner is liable to indemnify the firm for losses because the firm is liable for the wrongful acts of the partners. If the fraud causes the losses to other partners he is entitled to indemnify for the loss caused.
- Duty to use the firm property exclusively for the purpose of business (Section 15): The partners can use the firm property for the purpose of the business but not for its personal purpose. The partner must use the property in a lawful manner. they must not earn a person gains from such property.
- Duty to hand over personal gains (Section 16): All the partners should act towards achieving the common goal. they must not engage in other profession or engage in any competitive business venture. If they earn any personal gains from the conduct of business then they should hand over to all the partners.
- General duties (Section 9): It is the duty of all partners to make all the efforts to achieve a common goal, to render a true account and provides all the information affecting a firm to partners, or his representative
When do Rights and Duties change?
The existing relationship between the partners come to an end when there is a change in the constitution of the firms. Such changes in the constitution of the firm may occur due to the following reasons (Section 17)
- Expiration of term of the firm.
- Carrying out the additional business other than agreed upon.
- Changes in the composition of members due to admission, retirement or the death of a partner.
The duties and rights of partners remain the same until there is any change in agreement but such right and duties may vary or modified by creating a fresh agreement.
Status of a minor
Section 30 states the legal provision related to the minor according to Section 18 of the Indian Contract act 1872, no person below the age of 18 years can enter into the contract which implies that no minor can enter into a contract. But Section 30 states that the minor cannot be a partner in a partnership firm but he can be admitted to benefit from the partnership firm. The minor will be liable to get only the benefits from the partnership but is not liable for any losses or liability. The minor can be admitted to the partnership only with the consent of all the partners.
There are various rights that are granted to the minor.
Various rights are as follows:
- Right to inspect the books of account
- Rights to share the profits from the firm
- Rights to sue any partner or all for his share of benefit or profit
- He has a limited liability which means his personal assets may not be disposed of to pay the firm debts
- A minor has a right to become a partner on attaining the age of 18 years.
Liabilities of a minor
- A minor has Limited liability. If minor is declared as insolvent his share will be kept in the possession of official liquidator.
- If after attaining the age of 18 years he decided to become the partner then he has to give public notice within 6 months of attaining the majority. If notice not given then minor will become liable for all the acts of others until the notice is given
- When a minor partner becomes the major he will be liable for the acts of all partners to the third parties.
- If he decided to become a full-time partner then he will be considered as a normal partner and will take part in the conduct of the business.
- Liability of partners for the acts of the firm (Section 25): All the partners is jointly and severally liable for the acts of the firms. He is liable only for those acts which are done at the time he is a partner.
- Liability of a firm for the wrongful act of partner (Section 26): When any wrongful act or omission is done by any of its partners in the ordinary course of its business or with the consent of others partners then the firm is liable to the same extent as a partner.
- Liability of a firm for the misapplications by partner (Section 27): when any partner acting as an agent receives the money from the third party and misapplies it or the firm receives the money and money are misappropriated by any of its partners then the firm is liable to pay for the loss suffered.
How is registration done?
Section 58 explains the procedure of the registration of a partnership firm.
- Making an application to Registrar: Any of its partners can send an application along with the prescribed fee and copy of partnership deed o the registrar of the area in which any place of business is proposed to be situated or is situated. Such a statement shall be signed by all of its partners. Such a statement should contain:
- Name of the firm
- Principal place of business
- Any other place where the business is carried on
- Duration of partnership firm
- Name and address of all partners of a firm
- The date on which each partner joined the firm
- Verification: Each partner who has signed the statements needs to be verified.
- The name of the firm shall not contain any name resembling the name of Crown, Emperor, king, Royal, Emperors’, or any other words implying or expressing the sanction of the government.
Section 59 states that when the Registrar is satisfied that the conditions of Section 58 are complied with then he shall record an entry of the statement in a register called the Register of Firms, and shall file the statement.
Non- registration of partnership firm
In India, it is not compulsory to register the partnership and no penalty is being imposed for non-registration but if we talk about English law it is compulsory to register partnership firm and if it is not registered then the penalty is imposed. Non-registration leads to a certain disability in accordance with Section 69 of the Act.
Effect of non-registration (Section 69)
- No suit can be initiated in civil court by the firm or other co-partners against the third party
- In case of breach of contract by the third party; the suit cannot be brought in any civil suit. The suit must be filed by the one whose name is registered as a partner in a register of the firm.
- No partners can claim a relief of set-off.
- Any action which is brought out by the third party against the firm having a value of Rs 100 cannot be set off by the firm or any of its partners.
- An aggrieved person cannot sue against firms or other partners
Generally, no action can be brought against the firm or the partners but there is an exception to it. In a case when the firm is dissolved it can bring a suit for the realization of his share in the firm’s property.
Non-registrations do not affect the following rights
- A third party can bring a suit against the firm
- Right of the partners or firm to claim a relief of set off the claim for the value which does not exceed Rs 100
- Power of official liquidator, official assignees to release the property of insolvent partners and brings a legal action
- Partner right to claim for the realization of his share in case of dissolution of the firm
Introduction or Admission of partner (Section 31)
A new partner may be admitted into partnership firm only with the consent of all the partners. A new partner admitted will not be liable for any acts of other partners or firms before his admission.
What are the rights and liabilities of a new partner?
The liabilities of new partner commences from the date when he is admitted as a partner in a partnership firm.
After the admission of a new partner, the new firm is liable for the debts of the old firm and the creditor has to discharge the old firm and accept a new firm as its debtor. It can be called as a novation. It can be done only when the creditor gives the consent to it.
Retirement of partner (Section 32)
Section 32 of Act talks about the retirement of partners. When the partner withdraws from the partnership by dissolving it then it is dissolution but not a retirement.
Any partner may retire:
- When there is a partnership at will, by serving a notice to all the existing partners
- When there is an express agreement among the partners
- When the consent of all the partners is given
Liabilities of retired partner
A retired partner continues to be liable for the acts of firms and other partners till he or any other partners give public notice about his retirement. When the third party does not know that he was a partner and deals with the firm; then in such case a retired partner is not liable. if it is a partnership at will then there is no requirement to give public notice about his retirement.
The outgoing partner may enter into an agreement to not carry similar business or activities within a specified period of time.
Expulsion of partner (Section 33)
A partner can be expelled only when below three conditions are satisfied:
- Expulsion of the partner is necessary for the interest of the partnership
- Notice is served to the expelled partner
- An opportunity of being heard is given to the expelled partner
If the above three conditions are not fulfilled then such expulsion will be considered as null and void.
Insolvency of a partner (Section 34)
When a partner is declared as insolvent by the court, it leads to the following consequences:
- He ceases to be the partner of a partnership firm from the date of adjudication
- His estate which is in possession of official liquidator ceases to be liable for any acts of the firm whether the partnership subsequently dissolves or not
- Partnership ceases to be liable for any act of insolvency partner
Liability of estate of a deceased person (Section 35)
Generally, the partnership comes to end on the death of a partner but if there is a contract between partners to continue with the partnership on the death of a partner then surviving partner continues with the business after clearing the deceased partner estate from any liability for the future acts of the firms.
The outgoing partner is restricted to perform acts like:
- Using the name of the firm
- Representing himself as a partner
- Make the customer of the firm in which he was a partner as its own.
The outgoing partner may enter into an agreement not to carry similar business or activities within a specified period of time. After the specified period, the outgoing partner is allowed to carry on a similar business or advertise it.
Liabilities of outgoing partner to subsequent profits (Section 37)
When the any of the partners ceases to be a partner or dies and remaining partner continues with the business without settling the accounts then the outgoing partner is liable to get a share from the profit earned by the firm since the date he ceases to be a partner.
The share may be attributable to the use of a share of his property or 6% interest per annum on the amount of share in his property.
The surviving partner has the option to purchase the share of the deceased partner and if they purchase it then the deceased partner has no right to get the profit derived from such property.
Dissolution of a firm
Section 39 to 44 deals with the Dissolution of a firm.
Sometimes circumstances arise when the firm gets dissolved. Sometimes a firm is dissolved voluntary or by the order from the court. There are various modes prescribed under Section 39 to 44 for the dissolution of a partnership firm. Even when the partnership is dissolved then it gives certain rights and liabilities to the partners.
Lets us understand the concept of dissolution in detail through the Powerpoint Presentation given below.
Liability of partners in Different Situations
Liabilities of partners after the dissolution of the partnership firm (Section 45)
The partners are liable for the acts of the firm to the third party until public notice is given. A partner who is declared as insolvent, or who is retired, the estate of a person who dies, or who was not known as a partner at the time of dealing with the third party will not be liable for the act.
Wind up the Business Post-Dissolution (Section 46)
When the firm is dissolved every partner has a right to apply for the firm’s property in the payment of debts and liabilities. If there is any surplus it needs to be distributed among the partners.
The partners have mutual obligations and rights until the affairs of the firm is wound up.
Settlement of partnership account (Section 48)
When the partnership has dissolved the accounts of the partners needs to be settled under the usual course of business. Various modes can be used for the settlement of accounts.
If there is a deficiency in capital or loss is incurred when it is paid out of profit. If profit is not sufficient or no profit is earned then it is paid out by the capital and by the partners if necessary. The partners contribute to the proportion of the profit sharing ratio.
The asset of the firm and the capital contributed by the partners to meet up the deficiency in the capital is applied in the following order:
- Repayment to third parties
- The amount which is due to him from the capital
- The amount which is due to him on account of capital
- And if any amount is left then it is distributed among all the partners in their profit sharing ratio.
Paying Firm Debts and Separate Debts (Section 49)
In a case when there are joint debts from the firm and the separate debts from the partner then joint debts from the firm is given priority and if any surplus is left then separate debts from the partner is to be paid off.
The property of the individual partners is applied firstly for the payment of separate debts.
Personal Profit Earned After Dissolution of Firm (Section 50 and Section 53)
When the firm is dissolved by the death of the partner and business is carried out by the existing partners or his legal heirs then they have to account for the personal benefit earned before winding up the partnership.
Section 53 states that if there is no contract the partner can restrain other partners from carrying similar activities, or using the firm’s name or firm’s property for their own benefit until the winding up process is complete.
Return of Premium on the Premature Dissolution of the firm (Section 51)
When the firm is dissolved before the expiry of a fixed period, then a partner paying a premium can receive a return of a reasonable part of the premium. Such rules are not applicable in a case when the partnership is dissolved by:
Misconduct of partner paying a premium (Section 52)
Post an agreement in which there is no clause for return of premium.
Contract Rescinded for Fraud or Misrepresentation
When the partnership arising from the contract is rescinded due to fraud and misrepresentation then the party who has rescinded the contract will be liable as:
After the debt of the firm is paid the lien on remaining assets. He will be treated as a creditor for the payment of any debts made by him.
An indemnity from the partners guilty of misrepresentation or fraud against all debts of firms.
Sale of Goodwill After Dissolution of Firm (Section 55)
The goodwill is treated as an asset. The goodwill is included in the assets while settling the account after the dissolution of the firm. The goodwill may be sold separately or with other assets. Once the firm is dissolved and goodwill is sold then any partners can carry on a similar business or advertise a business competing with the buyers of the goodwill. The partners are prohibited from doing the following acts:
- To use the name of the firm
- To represent himself as carrying the business
- To solicit the customers of the firm dealing before dissolution.
Partnership is a very common type of business which is prevailing in the country. It has many advantages for the company. This Act is a complete Act as it covers all the aspect related to the partnership.