Lucknow College of Architecture, Lucknow

Final Year B. Arch. AR 1003 Development Legislation

UNIT-2 MERCANTILE LAW

Lecture 4 - Law of Partnership

- Prof. Mukul Singh
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The Indian Partnership Act-1932

PART NERSHIP : Part ners hip is the rela tion betw een pers ons who have agre ed to shar e the
pro fits of a business carried on by all or anyone of them acting for all [S.4]
Essential Elements:
1. Contract/Agreement
2. Between two or more persons
3. Who agree to carry on business
4. With the object of sharing profits
5. Business must be carried on by all or any one of them acting for all.
1. Contract:
Partnership is the result of a contract. It does not arise from status, operation of law or inheritance.
Contract may be either express or implied. It may be oral or in writing. 'Deed of partnership' is
necessary under The Income Tax Act-I961' if the partners desire their firm to be assessed as a 'firm'.
One of the chief advantages of getting assessed is that the working partners can be paid salary, thus
the taxable income of the firm can be significantly reduced.
All ingredients of agreement required to enter into a valid contract also apply in this agreement,
i.e. capacity to contract, consideration for agreement, lawful purpose etc.
2. Association of two or more persons: Since partnership is the result of contract, at least two
persons are necessary to constitute a partnership. The Act does not provide for maximum number
but Companies Act, 1956, lays down that a partnership consisting of more than 10 persons for
banking business and 20 persons for any other business would be illegal. A Company being
artificial person can enter into partnership.
A partnership consisted of 32 partners and was not registered as a company under
The Companies Act'. A suit filed by one of the partners for rendition of accounts
was held to be not maintainable.
For the Income tax Purposes, such unregistered firms will be treated as 'Other Association of
Partners' and its income, profits, and gains are assessable for tax.
3. Carrying on Business: It is essential that parties must have agreed to carry on a business. The
business must be carried on. Merely one single isolated transaction of purchase and sale by a
number of persons does not mean carrying on a business. An agreement to canyon business at a
future time does not result in partnership unless that time arrives and the business is commenced.
It is not necessary that the business should consist of long and permanent undertaking. A
partnership may exist in a single business venture.
Thus where two persons agreed to produce a film and share profits of hiring it
out, that was held to be sufficient to constitute a partnership.
Whether temporary or permanent, the business must be in existence. An agreement to canyon
business at a future date does not result in partnership at present.
4. Sharing of Profits: This essential element provides that the agreement to carryon business must be
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Principal at Lucknow College of Architecture
 with the object of sharing profits among the partners. Partners may agree to share profits in any ratio
they like. Sharing of losses is not necessary, one or more partners may agree to bear all the losses of
the business. Section 13 (b) provides that partners are entitled to share profits equally unless
otherwise agreed. Sharing of losses may be consequential.
Where certain persons joined in the purchase of wheat and oil with the intention
of dividing and paying for it equally, It was held that not being interested in
profit or loss were not partners. Where on the other hand, two persons horses a
coach with their individual horses and shared the profit, this was held to be a
partnership business.
Persons other than partners sharing profits:
1 Joint owners sharing gross return
2 Lender of money receiving profits.
3 Servant or agent receiving profits
4 Widow or child of a deceased partner
5 Seller of Goodwill
5. Mutual Agency : The business must be carried on "by all or any of them acting for all"
Each partner can bind by his acts the other partners and can be bound by the acts of other
partners in the ordinary course of business. Every partners in trade is the agent of his co-partners,
all are, therefore, liable for the ordinary trade contract of the other.
Test of Partnership: In determining whether a group of persons is or is not a firm or whether a person
is or is not a partner in a firm, regard shall be had to the real relation between the parties, as shown by
all relevant facts taken together.
Partners, Firm and Firm Name: Persons who have entered into Partnership with one another are called
individually 'Partners' and collectively a 'Firm' and the name under which their business is carried out
is called 'Firm Name'.
Firm Name: The selection of a name is matter entirely for the partners but certain things have to
be kept in mind while making the choice. The name should not be misleading or adopt a name
identical with another firm. However, a firm can adopt name of a partner even if it resembles an
existing firm. But he can be restrained if he tries to derive an unfair advantage of the similarity of
names. A firm can get its product registered under The Trade and Merchandise Marks Act-1958
'. Such registration enables the person who first gets his product under a trade name to exclude
others from adopting a similar name.
Section 58 (3) Lays down that a firm name shall not contain any of the following words, namely-
"Crown", Emperor, Empress, Empire, Imperial, Kind, Queen, Royal or words expressing or
implying the sanction, approval or patronage of Government except when the State Government
signifies its consent to the use of such words as part of the firm name by order in writing

A "firm" is not a legal entity distinct from its members. It is merely a collective name of the
individuals composing it. Thus a firm cannot possess property or employ servants; neither can it
be debtor nor a creditor. It cannot sue or be sued by others.
For the purposes of The Income Tax Act, a partnership firm is an entity quite distinct from the
partners composing it and it is assessable separately.
Businessmen community tends to think otherwise and try to approximate the firm with a separate
existence from the partners.
Distinction between 'Partnership' and a 'Company':
1- Regulating Act: A Partnership firm is governed by the provisions of The Indian Partnership
Act-1932 ', whereas a Company is governed by the provisions of The Companies Act-1956'.
2- Number of Members: The Maximum number of members in the case of a firm is fixed at 10
for banking business and 20 for any other business. There is no limit for Public Company,
while in Private Company there can be upto 50 members excluding its employees. Minimum
 numbers of members in a 'Public Company' is seven.
3- Entity: A partnership firm has no separate legal entity distinct from the members composing
it. A company is a separate legal entity different from its members.
4- Liability: In partnership, each partner has unlimited liability and is personally liable for all
the debts of the firm. In a company, a shareholder has limited liability, limited to the extent
of the unpaid amount on the shares held by him.
5 - Authority of members: In partnership each partner has an implied authority to bind his co-
partners by acts done within the ordinary course of business but in a company a shareholder
has no such authority.
6 - Management: All the partners of a firm are entitled to take part in the management of the
business, but in the case of a company the right to control and manage the business is vested
in the Board of Directors elected by the shareholders.
7 - Transfer of Interest: A partner can not transfer his interest in the firm without the consent
of all the partners. In case of Private Company permission of the Board of Directors is
required but in case of Public Company a shareholder can transfer his shares freely.
8 - Audit: A partnership firm does not need audit but for a Company it is legal necessity.
9 - Registration: A partnership firm may or may not be registered whereas a company has to
be registered.
10 - Winding up: A Company needs legal formalities.
Duration of Firm:
Where no duration is fixed, a partnership firm can last as long as the members are willing to continue
as partners. It can be dissolved by any partner anytime just by giving a notice to that effect. A
partnership entered into, for carrying out a specific job would continue till the completion of the job,
therefore, it would not be a partnership at will.
After expiry of a fixed period term, the original contract is prolonged by tacit consent their
partnership will then become a firm at will.
RIGHTS, DUTIES AND LIABILITIES OF PARTNERS:
MUTUAL RELATIONS:
(A) DUTIES:
1. Duty of absolute good faith- [S-9]
Partners are bound to carry on the business of the firm to the greatest common advantage, to
be just and faithful to each other and to render true accounts and full information of all things
affecting the firm to any partner or his legal representative.
A partnership a firm of sugar refiners who had great skill in buying sugar at
right time was entrusted to buy sugar for the firm. He supplied sugar from his
personal stock which he had bought earlier when the prices were low. He
charged the prevailing market price and thus made considerable profit. When
his co-partners discovered this they brought an action for an account of profit.
The firm was held entitled to the profit.
2. Duty not to Compete [S-16 (b)]:
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.
Section 11 clearly provides that the partner's agreement may provide that a partner shall not
carry on any business other than that of the firm while he is a partner. This being restraint of
trade, is void under Section 27 of the Contract Act, 1972, but Section 11 expressly clarifies
that such agreement will be valid " notwithstanding any thing contained in Section-27 of the
Contract Act 1872.
3. Duty of Due Diligence [S-12 (b)] and [13 (f)]:
Every partner is bound to attend diligently to his duties in the conduct of the business. 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.
"Willful neglect" has bee described as "Culpable negligence". But a partner will not be
liable for "mere errors of judgment" or for acts done in good faith.
4. Duty to indemnify for fraud [S-10]:
"Every partner shall indemnify the firm for any loss caused to it by his fraud in the conduct of
the business of the Firm".
The purpose of the rule is to induce partners to deal honestly with the customers of the firm.
Where a partner falters from the path and loss is caused to the firm, he will be exclusively
liable for the same.
One of the partners of a distillery, who did not take part in conduct of business,
had to pay penalties which were levied upon the firm in consequences of the
purchase of a illicit whiskey. The purchase was affected by the managing
partners and the plaintiff partner had no Knowledge of it. They were had liable
jointly and severally to indemni6, him against the amount so paid and interest
on it.
5. Duty to render true accounts [S-9]:
Partners are bound to each other by the principle of utmost good faith. This requires each
parting to make a frank and full disclosure of fact affecting the affairs of the firm. Sec-9 lays
down that "Partners are bound to render true accounts and full information of all things
affecting the firm to any partner or his legal representative.
6. Proper use of property [S-15]:
Application of the property of the firm- "Subject to contract between the partners, the property
of the firm shall be held and used by the partners exclusively for the purposes of the business"
[S-15]
No partner should use the assets of the firm for any of his personal purpose. Any such
exploitation will render the partner accountable to the firm for any private advantage obtained
by him. He shall also be responsible to indemnify the firm for damages, if any, thereby caused
to its assets.
Generally the partner is not charged with criminal misappropriation of property or criminal
breach of trust u/s 409 IPC, because he is also the owner of the property jointly.
7. Duty to account for personal profits [S-16]:
"Personal profits earned by partners-subject to contract between the partners
(a) If a partner derives any profit for himself from any transaction of the firm or the firm-
names, he shall account for the profit and pay it to the firm;
(b) 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.
The captain of a ship which was owned by him and his co-partners made
considerable profits making certain contracts, while the ship was operating
under the charter parties. He was held liable to account for such profits.
(B) RIGHTS OF PARTNERS:
1. Right to take part in business-[S-12 (a)] Every Partner has a right to take part in the conduct of
the business of the firm.
2. Majority rights [S-13(c)]. Every Partner has the right to be consulted in the formulation of
business policy. Differences of opinion among the partners may arise.
Sec-12 (c) provides that "any difference arising as to ordinary matters connected with the
business may be decided by a majority of the partners and every partner shall have the right to
express his opinion before the matter is decided, but no change may be made in the nature of
the business without the consent of all the partners".
 A difference of opinion may relate to (1) an ordinary matter or (2) a fundamental matter. The
first one is to be settled by majority of the partners, and the second one by all the partners.
3. Access to books [S-12(d)] 'Every partner has a right to have access to and to inspect and copy
any of the books of the form'.
A partner may exercise this right himself or by an agent, but either can be restrained from
making use of the knowledge thus grained against the interest of the firm.
The right does not include the right to carry the books to place other than the registered office
without the consent of the other partners.
4. Right to indemnity [S-13(e)] Section 13 (e) provides that "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 against loss, as
would have been done by a person of ordinary prudence, in his own case, under similar
circumstances.
5. Right to profits [S-13 (b)] Unless otherwise agreed, partners are entitled to share equally in the
profits earned by the firm. Similarly, they are bound to contribute equally in the losses
sustained by the firm. This would be so even where there is disproportionate capital
contribution or some of the partners render extra ordinary services.
6. Right to interest [S-13(c) & (d)] If a partner has advanced, for the purpose of the firm
business, a sum of money beyond the capital, he has agreed to subscribe, he is entitled to
interest on the advance at the rate of 6% per annum. Where a partner is entitled to interest on
the capital subscribed by him, such interest shall be payable only out of profits.
7. Right to remuneration [S-1 3(a)] Unless otherwise agreed, partners are not entitled to receive
salary or remuneration for taking part in the conduct of the business. Even when there is an
agreement for payment of remuneration to a working partner, the firm can not be regarded as
an employer of a partner.
Partnership property [S.14]
Theoretically a partnership, being not a legal person, is not capable of owning any property and the
so-called property of the firm is nothing but the joint estate of all the partners. But for all practical
purposes, the joint estate is regarded as so much separate from the partners that none of them can
claim any personal ownership over any item of it.
The property of the firm includes all property and rights and interest in the property originally
brought into the stock of the firm, or acquired, by purchase or otherwise, by or for the firm, or for
the purposes and in the course of business of the firm, and includes also the goodwill of the
business.
'A' A partner buys land in his own name with funds belonging to the partnership.
'A' holds such land for the benefit of the partnership.
Where a partner renews a lease of the firm in his own name the renewed lease is
the property of the firm.

(C) RELATION OF PARTNERS TO THIRD PARTIES:

The liability of partners to third parties may be divided into three categories:
1- Liability of a partner for acts of the firm-[S.25].
Every partner is liable, jointly with all the other partners and also severally, for all acts of the firm
done while he is a partner.
Every partner embraces the character both of principal and agent, but a partner is an agent only for
the business of the firm.
The authority of a partner to act on behalf of the firm may be 'express' or 'implied'.
When a partner is expressly authorized by an agreement of all the partners to do certain acts on
behalf of the firm, is called express authority of a partner. The firm is bound by all acts of a partner
 done within the scope of his express authority, even if the acts are not within the scope the
partnership business.
An implied authority of a partner can be inferred from the circumstances of the case. Generally
such acts of a partner which are incidental to or usually done in the course of the proper conduct of
the business come within the scope of his implied or apparent authority.
The significance of the joint and several liabilities is that for every act of the firm a partner can be
sued individually and also jointly with other partners. The liability is for the acts of the firm done
while they are partners; an act done after a partner ceases to be so will not bind him except where
the liability is continued by reason of the principle of holding out.
2- Liability of the firm for wrongful acts of a partner [S.26]
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, loss or injury is caused to any third party, or any
penalty is incurred, the firm is liable, therefore to the same extent as the partner.
3- Liability of the firm for misapplication by partners [S.27]
A firm must be treated as receiving what any partner receives in the ordinary course of business of
the firm.
Accordingly, if any partner misappropriates any money property, the third party can make the firm
or any of the partners liable for the same.

INCOMING AND OUTGOING PARTNERS

Introduction of a partner-[S.31]:
1. Subject to contract between the partners and to the provisions of Section 30 (minor as partner),
no person shall be introduced as partner into a firm without the consent of all the existing
partners.
2. A person who is introduced as a partner into a firm does not thereby become liable for any act
of the firm done before he became a partner. A new partner may agree with his partners to be
liable for the debts incurred upto the date of his admission.
Outgoing Partner:
An outgoing partner means a partner who has retired from a firm and the business is continued
by remaining partners.
Modes of retirement: A Partner may retire -
1. By Consent [S.32] at any time with the consent of all his partners.
2. By agreement [S.32] where there is an agreement between the partners about retirement, a
partner may retire in accordance with the terms of that agreement.
3. By notice [S.32] where a partnership is 'at will' a partner may retire giving to his partners
notice of his intention to retire. Notice should be in writing, signed by the partner and
should be served upon all the partners.
4. By insolvency [S.34] where a partner in a firm is adjudicated an insolvent he ceases to be
a partner on the date on which the order of adjudication is made, whether or not the firm is
thereby dissolved.
5. By death [S.35]- where under a contract between the partners the firm is not dissolved
by the death of a partner, the estate of the deceased partner is not liable for any act of the
firm done after his death.
6. By Expulsion [S.33] A partner may be expelled from a firm by majority of the partners
only if
(a) The power to expel has been conferred by contract between the partners and
(b) Such a power has been exercised in good faith for the benefit of the firm. The partner
who is being expelled must be given reasonable notice and opportunity to explain his
position and to remove the cause of his expulsion.
The rights and liabilities of an expelled partner are exactly the same as that of a retiring
partner.
Liability of Retired Partner:
Liability for acts done before retirement [S.32 (2)]
A retired partner remains liable to the creators for acts of the firm done before and up to the date
of his retirement. But he may be discharged from any liability to any third party for acts of the firm
done before his retirement by an agreement made by him with such third party and the partners of the
reconstituted firm.
Rights of outgoing partner [S.36, 37, 38]
The rights of retired partner include the following.
1. Right to compete-[S.36]
The retired partner has the right to carry on any business competing with that of the firm. He may
setup his new business next door to the firm.
He may advertise his business and attract customers. This is necessary to assure freedom of trade
to every individual.
But with view to protect interest of the firm some restrictions have been imposed upon his trade
liberty.
1. He cannot use the name of the firm; he may establish his new business under any other
name.
2. He shall not represent that he is carrying on the business of the firm.
3. He does not have the right to break away the customers of the firm.
Any of these rights can be given to the retired partner by an agreement between him and
continuing partners. But Section 36(2) of the Partnership Act provides that restrictions on trade
may be imposed if:
(a) The agreement should specify either the period or the local limits of restraint.
(b) The restriction imposed should be reasonable.
2. Right to share subsequent profits [S.37]
When a partner retires from a firm for any reason, whatever, it is the duty of the remaining
partners to pay out the share of property and profits to the retired partner or to his
representative. But sometimes the continuing partners don't do so either because they are
waiting for a more opportune moment or because they have obtained consent of the party
entitled to the share. Such partner may receive interest at the rate of 6 percent per annum on the
amount of his share in the property of the firm or he may, at his choice, demand such share of
profits as may be attributable to the use of his share of the property of the firm.
DISSOLUTION [S.39]
Dissolution of Firm:
The dissolution of partnership between all the partners of a firm is called `dissolution of the firm'.
Modes of Dissolution:
A firm may be dissolved in any of the following ways.
1. By Consent [S.40] A firm may be dissolved with the consent of all the partners or in accordance
with a contract between the partners.
2. By Agreement [S.40] A firm may be dissolved in accordance with a contract between the partners.
The contract providing for dissolution may be contained in the partnership deed itself. Here the
partners have to follow their subsisting agreement, whether all the partners give their consent or
not.
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.
Where the firm is carrying on more than one type of business and at least one type of activity
remains lawful, the partnership escapes compulsory dissolution. It can continue lawful business.
4. Contingent Dissolution [ S.42] A firm is dissolved on the happening of any of the following
contingency, provided that there is no agreement to the contrary:
 (a) If the firm is constituted for a fixed period, by expiry of that term.
(b) If the firm is constituted to carry out one or more adventures or
undertakings, by the completion these of,
(c) By the death of a partner and
(d) By adjudication of a partner as an insolvent.
5. By Notice [S.43] where the partnership is at will, the firm may be dissolved by any partner giving
notice in writing to all the partners of his intention to dissolve the firm. A firm is dissolved from
the date given in the notice, and if no date is given then from the date of communication of the
notice.
6. Dissolution by Court [S.44] The Court is empowered to order the dissolution of a firm at the suit of
a partner in the following cases:
(i) Insanity: Any partner including the insane may apply for dissolution to protect interests of
the insane or the other partners.
(ii ) Permanent incapacity: of a partner be due to illness- mental or physical but of permanent
nature.
(iii) Misconduct: When a partner is guilty of conduct which is likely to affect prejudicially the
business of the firm the court may order dissolution.
(iv) Persistent breach of agreement: When a partner persistently commits breach of
agreements relating to the management of the firm or otherwise so conducts himself in
matters relation to the business that it is not reasonably practicable for the other partners to
carry on business in partnership with him.
(v) Transfer of Interest: When a partner has transferred the whole of his interest in the firm to
a third party the court may order dissolution.
(vi) Perpetual losses: When the business of the firm cannot be carried on except at a loss the
court may dissolve it.
(vii) Just and equitable: When on any other ground the court thinks it just and equitable that
the firm should be dissolved, the court can order dissolution.