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Indian Partnership Act is one of very old mercantile law. Partnership is one of the special
types of contract. Initially, this was part of Indian Contract Act itself, but later converted into
separate Act in 1932.
Partnership, partner, firm and firm name: ‘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.
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 on is called the ‘firm
name’.
Partnership can be formed only with intention to share profits of business. People coming
together for some social or philanthropic or religious purpose do not constitute ‘Partnership’.
Sleeping and nominal partners not taking active part in business are equally liable for
acts of the firm: Though all partners are entitled to take active part in the business of firm, it is
not compulsory for them to do so. Partner who is not active in business is often termed as
‘dormant partner’ or ‘sleeping partner’ in common language, though there is no such term in
Partnership act. However, even a dormant partner or nominal partner is equally liable for acts of
the firm.
Partnership firm is not a legal entity: it may be surprising but true that a Partnership
Firm is not legal entity. It has limited identity for purpose of tax law like Income Tax, GST etc.
Partnership is not a legal entity but a mere AOP (Association of Person) to carry
on business and is only a collective name carrying on business of partnership held in
Sham Sunder v. State of Haryana (SC)(1982).
A partnership firm can be sued even if not registered but can sue only if it is
registered.
Partnership at will As per the Section 7 of the Act, partnership at will is a partnership
when:
1. No fixed period has been agreed upon for the duration of the partnership; and
These two conditions must be satisfied before a partnership can be regarded as partnership at
will. But, where there is an agreement between the partners either for the duration of the
partnership or for the determination of the partnership, the partnership is not partnership at
will.
Where a partnership entered into for fixed term is continued after the expiry of such term, it is
to be treated as having become partnership at will.
A partnership at will may be dissolved by any person by giving notice in writing to all the other
partners of his intention to dissolve the same.
Partnership not created by status: Section 5 of Partnership Act states that the relation
of partnership arises from contract and not from status. In particular, the members of Hindu
Undivided Family carrying on a family business as such are not partners in such business.
Fundamental principle of partnership is that the relationship arises out of contract and not out
of status- held in CIT v. Seth Govindram Sugar Mills (1966)(SC).
Sharing of profit is necessary condition for partnership firm, but it is not conclusive test.
Section 6 makes it clear that-
a) Mere sharing of profits or gross returns does not make the persons partners
b) Mere fact that a person shares profit of firm does not mean that he is a ‘partner’
Since firm is responsible for acts of a partner, acts of one partner binds all other
partners. Any partner can bind firm (and hence automatically other partners). Thus, they
are ‘mutual agents’.
The real test of ‘partnership firm’ is ‘mutual agency’, i.e. whether a partner can
bind the firm (and hence indirectly other partners) by his act and whether other
partners can bind him by their acts.
Partners can bind others by signing Bill of Exchange – Section 34 of Negotiable
Instruments Act provides that where there are several drawees of a bill of exchange who
are partners, any partner can accept on behalf of all the partners.
The mutual rights and duties of the partners of a firm can be determined by contract
between the partners. Partners are free to determine the mutual rights and duties by
contract. Such contract or variation may be in writing or it may be implied by their actions.
Variation in written agreement by oral/implied consent- The action makes it clear that
even if partnership deed is written, its variation may be presumed by course of dealings.
Thus variation in partnership agreement may be by oral or even implied.
Partner can be prohibited from carrying on other business – Section 27 of Contract Act
provides that agreement in restraint of trade are void. Any agreement in restraint of lawful
profession, trade or business is void. However, section 11(2) of Partnership Act is a specific
exception, which specifically provides that notwithstanding anything contained in section 27
of Indian Contract Act, partnership contract may provide that a partner shall not carry on
any business other than that of the firm while he is a partner.
Reasonable restrictions even after retirement – Partnership deed can provide that a
partner shall not carry on any other business. In fact, rsonable restrictions can be can be
permitted. Whether the restrictions are ‘reasonable’ is question of fact to be decided by
Court.
DUTIES OF PARTNERS:
There is fiduciary relationship among partners. Mutual confidence is really most vital
aspect of a successful partnership firm. It is contract of ‘uberrimae fidai’ .
Duty to share losses equally – Partner have duty to shares losses of firm equally,
unless agreed otherwise [Section 13(b) of Partnership Act]
Every partner has right to take part in business – Subject to contract between
partners (to the contrary), every partner has right to take part in the conduct of the
business. [Section 12(a) of Partnership Act]
Right to be consulted and decision by majority – if there is any difference
among partners as to ordinary matters connected with the business, decisions will be
taken by majority of the partners. Every partner shall have the right to express his
opinion before the matter is decided. However, no change may be made in the nature of
the business without the consent of all the partners. [Section 12(c) of Partnership Act]
Property of the firm and its application: Since partnership is not legal entity, property of
the firm (eg. Land, share etc.) has to be held in joint name of partners, for benefit of the
partnership firm. Partner can decide which will be treated as property of firm and which will be
individual property of a partner.
When there is no contract to contrary, property of the firm includes all property
and rights and interest in property-
c) Acquired for the purposes and in the course of the business of the firm,
i.e. from money of the firm and
Since definition of ‘property’ in section 14 is ‘inclusive’, it will also cover stock of goods,
debts receivable by the firm and moveable property of the firm.
Property acquired with money of firm belongs to firm – Unless the contrary
intention appears, property and rights and interests in property acquired with money
belonging to the firm are deemed to have been acquired for the firm. This is subject to
contract to contrary.
Application of the property of the firm only for purposes of 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 purposes of the business. [section 15 of
Partnership Act]
Rights and duties of a partner after a change in the constitution of the firm –
Change in the firm may take place in any of the following ways:
b) firm constituted for a fixed term continues even after fixed term is over.
Rights and duties of partners remain same, even after change in firm, subject to contract
to contrary – section 17 of Partnership Act.
Partners to be agent of the firm: Subject to the provisions of this Act, a partner is
the agent of the firm for the purposes of the business of the firm. [Section 18 ]
The exception is that in the case of a fraud on the firm committed by or with the consent
of that partner, notice to partner will not amount as notice to firm. The obvious reason is
that a partner cannot be permitted to take benefit of his own fraud or fraud committed
with his consent.
Liabilities of firm and partner: As per section 25 of Partnership Act, every partner is
liable, jointly with all the other partners and also severally, for acts of the firm done while he is a
partner. ‘Joint and severally’ means each partner is liable for all acts. Thus, if amount due cannot
be recovered from other partners, any one partner will be liable for payment of entire dues of
the firm.
Liability of the firm for wrongful acts of a partner: Firm is liable not only for
lawful acts but also wrongful acts of partner, if done in ordinary course of business of
the firm.
Section 26 of Partnership Act states that firm is liable to the same extent as partner is
liable, if-
c) The partner was acting in the ordinary course of the business of a firm,
or with the authority of his partners.
Sub-partner: A partner may agree to share part of his profits of partnership firm with
outsider. He may even agree to pay 100% of his share of profit of the firm to an outsider. Such
outsider is termed as ‘sub-partner’. It is partnership within partnership. However, the outsider
does not become partner of the main firm.
How interest can be transferred: A partner can transfer his interest in the firm-
a) Absolutely i.e. by sale or
b) By mortgage or
c) By the creation by him of a charge on such interest.
Transferee i.e. person to whom interest is transferred is usually termed as sub-
partner. The transfer may be complete or partial.
Admission of a partner: A firm can admit new partners. As per section 31(1) of
Partnership Act, no person shall be introduced as a partner into a firm without the
consent of all the existing partners. This is subject to (a) contract between the partners
and (b) to the provisions of section 30 of Partnership Act.
Incoming partner not liable for acts of firm before he became partner: Section
31(2) of Partnership Act makes it clear that the new partner is not liable for acts of firm
before he became a partner. Thus, he is not liable for old debts of firm, unless he
specifically agrees. The exception is that in case of minor, if he becomes partner after
attaining majority, section 30(7) provides that he is liable for all acts of the firm since
date he was admitted to benefit of partnership.
Retirement of a partner:
A partner may retire -
a) With the consent of all other partners,
b) In accordance with an express agreement by the partners, or
c) Where the partnership is at will, by giving notice in writing to all other
partners of his intention to retire [Section 32(1) of Partnership Act].
Retired partner liable for acts of firm done after retirement if public notice not
given: a retire partner is liable to debts of firm incurred up to date of his retirement but
not debts incurred after he retires. A public notice is required to be given about
retirement of a partner. If such public notice is not given, the retiring partner and other
partners will be liable as partners to third parties even in respect of liabilities of firm
incurred after his retirement. However, a retired partner will not liable to any third party
who deals with the firm without knowing that he was a partner. [Section 32(3) of
Partnership Act].
Where under a contract between the partners the firm is not dissolved by the adjudication of a
partner as an insolvent, the estate of a partner so adjudicated is not liable for any act of the firm
and the firm is not liable for any act of the insolvent, done after the date on which the order of
adjudication is made. [Section 34(2)]
Where under a contract between the partners, the firm is not dissolved by the death of a
partner, the estate of deceased partner is not liable for any act of the firm done after his death
[Section 35 of Partnership Act].
Dissolution by agreement: A firm may be dissolved with the consent of all the
partners or in accordance with a contract between the partners [Section 40].
Dissolution if all but one partner adjudicated insolvent: Firm gets compulsorily
dissolved by operation of law if all the partners or all the partners except one are
adjudicated as insolvent [section 41(a)]. A partnership will require at least two solvent
partners.
Payment of firm debt 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 he applied first in the payment of his separate debts, and the
surplus (if any) in payment of the debts of the firm [Section 49].
Restrictions on name of the firm: A firm shall not have any of the names or emblems
specified in the Schedule to the Emblems and Names (Prevention of Improper Use) Act, 1950, or
any colourable imitation thereof, unless permitted so to do under that Act, or any name which is
likely to be associated by the public with the name of any other firm on account of similarity, or
any name which, in the opinion of the Registrar, for reasons to be recorded in writing, is
undesirable :
Provided that nothing in this sub-section shall apply to any firm registered under any such name
before the date of the commencement of the Indian Partnership (Maharashtra Amendment) Act,
1984.
Records with registrar: Registrar of firms maintains records relating to registration and
changes in the firm in the registers maintained by him.
Public Notice: The Partnership Act envisages giving public notice in following situations-
Minor becoming major electing or not electing to become member [Section
30(5)]
Partner retiring or expelled [Section 32(3)]
Dissolution of firm [Section 45(1)].
A public notice under the Act is given by notice to the Registrar of Firms under Section 63 of
Partnership Act, and by publication in the Official Gazette and in at least one vernacular
newspaper circulating in the district where the firm, to which it relates has its place or principal
place of business.
In case of unregistered firm, publication in Gazette and newspaper is necessary, but notice to
Registrar is not required [Section 72(a) of Partnership Act].
Partner cannot sue firm or other partner if firm is unregistered: If a firm is not
registered, any partner cannot file any suit against the firm or any other partner
(present, past or alleged to be partner), to enforce a right arising from a contract or a
right conferred by Partnership Act. The suit can be filed only if name of partner who is
filing a suit is shown in the Registrar of firms as a partner [Section 69(1)].
Thus, even if firm is registered, a partner whose name does not appear in the record or
Registrar of Firms cannot file a suit against firm or another past, present or alleged
partner.
Unregistered firm cannot sue third party: If a firm is not registered, the firm
cannot file any suit against third party to enforce a right arising from a contract. The suit
against third party to enforce a right arising from a contract. The suit has to be filed by a
partner on behalf of firm. The suit is maintainable only if name of partner who is filling a
suit is shown in the Registrar of firms as a partner [Section 69(2)].
THE LIMITED LIABILITY PARTNERSHIP ACT, 2008
Meaning: A LLP is a new form of legal business entity with limited liability. It is
an alternative corporate business vehicle that not only gives the benefits of limited
liability at low compliance cost but allows its partners the flexibility of organising their
internal structure as a traditional partnership. The LLP is a separate legal entity and,
while the LLP itself will be liable for the full extent of its assets, the liability of the
partners will be limited.
3) Separate Legal Entity: The LLP is a separate legal entity, is liable to the
full extent of its assets but liability of the partners is limited to their agreed
contribution in the LLP. In other words, creditors of LLP shall be the creditors of
LLP alone.
7) Common Seal: A LLP being an artificial person can act through its
partners and designated partners. LLP may have a common seal, if it decides to
have one [Section 14(c)]. Thus, it is not mandatory for a LLP to have a common
seal. It shall remain under the custody of some responsible official and it shall be
affixed in the presence of at least 2 designated partners of the LLP.
8) Limited Liability: Every partner of a LLP is, for the purpose of the
business of LLP, the agent of the LLP, but not of other partners (Section 26). The
liability of the partners will be limited to their agreed contribution in the LLP.
10) Minimum and Maximum number of Partners: Every LLP shall have least
two partners and shall also have at least 2 individuals as designated partners, of
whom at least one shall be resident in India. There is no maximum limit on the
partners in LLP.
11) Business for Profit Only: The essential requirement for forming LLP is
carrying on a lawful business with a view to earn profit. Thus LLP cannot be
formed for charitable or non-economic purpose.
16) Foreign LLPs: Section 2(1)(m) defines foreign limited liability partnership
“as a limited liability partnership formed, incorporated, or registered outside
India which established a place of business within India”. Foreign LLP can
become a partner in an Indian LLP.
To have registered office in India to which all communications will be made and
received;
LLP Name.
Every LLP have at least two designated partners who are individuals and at least
one of them shall be a resident of India.
In case of a LLP in which all the partners are body corporate or in which one or
more partners are individuals who are partners of such LLP or nominees of such bodies
corporate shall act as designated partners.
a) Responsible for the doing all acts, matters and things are required to be
done by the limited liability partnership in respect of compliance to the
provisions of this Act including filling of any document, return statement and the
like report pursuant to the provisions of this Act and as may be specified in the
LLP agreement; and
b) Liable to all penalties imposed on the limited liability partnership for any
contravention of those provisions.
Provided that if no designated partner is appointed, or if at any time there is only one
designated partner, each partner shall be deemed to be a designated partner.
The registrar may accept the statement as sufficient evidence that the
requirement imposed by clause (a) of that sub-section has been complied with.
The certificate issued shall be signed by the Registrar and the authenticated by
his official seal.
The certificate shall be conclusive evidence that the limited liability partnership
is incorporated by the name specified therein.
Registered office (Section 13): Every limited liability partnership shall have a registered
office to which all communication and notices may be addressed and where they shall be
received. LLP may change the place of its registered office and the file the notice of such change
with the Registrar in the prescribed manner.
1) Every limited liability partnership shall have either the words “limited
liability partnership” or the acronym “LLP” as the last words of its name.
a) Undesirable; or
b) Identical to or too nearly resembles that of any other
partnership firm or limited liability partnership or body corporate or a
registered trademark, or a trademark which is subject of an application
for registration, of any other person under the Trade Mark Act, 1999
Reservation of Name (Section 16): A person may apply in the prescribed form
and with the prescribed fee to the Registrar for reservation of name. Upon satisfaction,
the Registrar may, subject to the rules prescribed by the Central Government in the
matter, reserve the name for a period of three months from the date of intimation by
the Registrar.
b) is identical with or too nearly resembles the name of any other limited
liability partnership or body corporate or other name as to be likely to be
mistaken for it.
the Central Government may direct such limited liability partnership to change its name,
and the limited liability partnership shall comply with the said direction within three
months after the date of the direction or such longer period as the Central Government
may allow.
If a LLP is to initiate winding up voluntarily, then the LLP must pass a resolution
to wind up the LLP with approval of at least three-fourth of the total number of partners.
If the LLP has lenders, secured or unsecured, then the approval of lenders would also be
required for winding up of the LLP.
Winding up of the LLP can be initiated by a Tribunal for the following reasons:
There are less than two partners in the LLP for a period of more than six
months.
The LLP has acted against the interest of the sovereignty and integrity of
India.
The LLP has not filed with the Registrar Statement of Accounts and
Solvency or LLP Annual Returns for any five consecutive financial years.
The Tribunal is of the opinion that it is just and equitable that the LLP
should be wound up.