After reading this chapter, you will be able to understand:
This act extends to the whole of India except the State of Jammu and Kashmir. It came into force w.e.f. 1 October 1932.
A partnership is the relation between two or more persons who have agreed to share the profits of a business, carried out by all or any of them acting for all.
Persons who have entered into the partnership with one another are called individually ‘partner’ and collectively ‘firm’, and the name under which their business is carried on is called ‘firm name’.
The relation between the partners is created by an agreement. As per Section 5, the relation of partnership arises from a contract and not from status. If the agreement between the partners is in writing, it is called as partnership deed. It may be expressing (i.e., oral or written) or implied. The agreement must be lawful. The partnership agreement should not necessarily be in writing. Prior to the Indian Partnership Act, 1932, the provisions relating to partnership were contained in the Indian Contract Act, 1872 and therefore, all the elements of the contract are applicable to the partnership agreement.
There must be at least two persons. All the persons must be competent to enter into a contract. A minor cannot become a partner of the firm. A person of unsound mind cannot become a partner in the firm.
Example
A, minor, and B, major, agree to carry on a cloth business in partnership. It is not a valid partnership. Since A is a minor, not capable to entering in to contract.
In case of a banking business, the maximum number of partners is 10. In case of other business, the maximum number of partners is 20. If the number of partners exceeds this limit, the partnership will become an illegal association (as per Companies Act 1956).
The partnership can be formed to carry on business and not for social welfare or charitable activity. The business includes every lawful trade, occupation and profession. If no business is carried on, there is no partnership. The word ‘carry on business’ implies to the presence of a series of business transactions. Single or isolated activity cannot be considered within the meaning of a business.
There must be a sharing of profits. The requirement of the sharing of profits does not require that all the partners must share the profits equally. It is possible for the partners to agree to share the profits in such a ratio as they may mutually agree. However, in the absence of an agreement between the partners, all the partners shall share the profit equally. The sharing of profit also includes sharing of losses.
There must be a mutual agency. The mutual agency means the principle—agent relation. It means any one partner can act for the others and bind them as well as to the firm by his act. The partner of a firm is not an employee or officer of the firm.
Example
A and B are partners. A purchased the raw material for the business of a firm in the ordinary course of business. Here, B is bound by the act of A as well as the firm is also liable for the purchased made by A.
20 individuals form an association to which each person contributes ₹ 1000. The purpose is to distribute food for free to poor children. Is it a valid partnership? Why?
Whether an association of persons is a partnership or not, shall depend upon various factors. No single factor can determine the existence of a partnership.
The principle of the true test of partnership was held in the case of Cox vs Hickman. A mutual agency is a fundamental test of partnership. Sharing of profit is not a true test of partnership. There is a chance that the person is getting a profit but not able to bind the other for his act. When he cannot bind others by his act, it is simply said that there is no mutual agency. This mutual agency distinguishes a partnership from co-ownership, HUF and Company.
A and B entered into an agreement to carry on a business of manufacturing and selling toys. Each one of them contributed ₹ 35 lacs as their capital with a condition that A and B will share the profits equally but the loss, if any, is to be borne by A alone. Referring to the provisions of the Indian Partnership Act, 1932, decide whether there exists a partnership between A and B?
One of the essentials of a partnership is the sharing of profits. However, mere sharing of the profits does not necessarily mean that the association is the partnership. Similarly, even the person who gets a share in the profits of the firm may not always be a person. In the following cases, there is the sharing of profit but there is no partnership:
The joint owners of a property sharing the profits or gross returns arising from the property, do not become partners. Mere owning a joint property does not mean that some business is carried on. Also there is no mutual agency, i.e., one joint owner cannot make the other joint owner liable for the acts done by him.
Example
X and Y are the co-owners of a house, let out to a tenant. X and Y divide the net rents between themselves. It is not a partnership.
The lender of a firm who receives a share in the profit.
Example
The bank has provided the loan to the firm and the firm has agreed to pay 4% of its profit as interest. Here the bank does not become a partner, just for the reason that it is getting percentage of profit.
A is employed by a partnership firm entitled to the remuneration of ₹ 5000 per month plus 7% on the profits of the firm if profits exceed ₹ 1 lakh. Is he a partner of the firm If so, what kind of partner he is?
A and B purchase a factory jointly. They purchased the equipments and other things contributing equally. They let out the factory and shared the rent equally. Is it a partnership?
A and B agreed to act together in one movie and share the profits of the film with the producer of the film. Is it a partnership?
A and B enter into an agreement for preparing Ahmedabad Bombay Express Highway. Is this arrangement is a partnership?
Matter | Partnership | Association |
---|---|---|
Meaning | It is the relation between persons who agreed to share the profit for business carried out by all of them or anyone of them on behalf of all. | Is the body of a person gathered for some mutual benefit. |
Business | A parternership cannot exist without business. | The association may exist without business. |
Sharing of profit | The partners of a firm share the profit. | It is not to earn profit. |
Nature of liability | Every partner is jointly and severally liable | A member is liable for his act only. |
Mutual agency | A mutual agency among the partners of a firm. | No mutual agency among the members of an association. |
Dissolution on death or insolvency | The partnership comes to an end on the death or insolvency of the partner unless otherwise agreed | The association is not automatically dissolved on the death or insolvency of any member. |
Maximum number of persons | 10 for banking business and 20 for the other business. | No limit for the number of members. |
Matter | Partnership | Club |
---|---|---|
Meaning | The partnership is a relationship between the partners who have agreed to share the profit of the business carried out by any one of them or all of them. | It is an association of the person with the object of the promotion of interest of the members. |
Business | The partnership cannot exist without business. | The club is not created for business. |
Sharing of profit | The partnership is created for earning and sharing profit. | The club is not to earn profit. |
Mutual agency | A mutual agency among the partners of firm. | No mutual agency among the members of the club. |
Nature of liability | Every partner is jointly and severally liable. | The member is liable for his act only. |
Periodical subscription | The capital is contributed once by every partner. | Yes. The annual fee is paid each year. |
Dissolution | The partnership firm can be dissolved easily. | The club cannot be dissolved without certain formalities. |
Maximum number | 10 for banking business and 20 for other business. | No limit for the number of members. |
A registration of partnership firm is not compulsory. It is optional. Therefore, the registration of the firm can be affected at any time. It can be affected at the time of commencing the partnership or at any time after the firm has started its business.
An application for the registration is required to be made in the prescribed format to the Registrar of Firms with the prescribed fees and shall contain the following particulars:
The application shall be accompanied with the partnership agreement, if any. The application may be sent to the registrar of the firm by hand or by registered post.
Generally, the firm can select any name but the name should not be familiar with the name of any existing firm. A firm name shall not contain any of the following words without the consent of the State Government, namely Crown, Emperor, Empress, Empire, Imperial, King, Queen, Royal or words implying the patronage of Government. The application shall be signed by all the partners.
When the Registrar is satisfied that the above provisions have been duly complied with, he shall make an entry in the Register of Firms and he shall then issue under his hands, a certificate of registration. The registration is effective from the date when the Registrar files the statement and makes entries in the register. (CIT vs Jaylakshmi Rice and Oil Mill).
If any changes occur in the constitution of a firm, it is to be informed to the Registrar of firm. The following changes are required to be registered with the Registrar:
If a registered firm changes its name or location of the principal place of business, a new application form is sent to the Registrar of firm. Thus, a change in the firm name and the principal place of business requires almost a new registration. If the change is made in any other particulars, the firm shall send a notice of change to the Registrar of firm. The notice shall be accompanied with the prescribed fees.
The act does not provide any time for the registration of the firm. It is possible at any time. The act has not prescribed any penalty for the non-registration of the firm. No suit can be filed in any court by the firm against any third party unless the firm is registered. This means before any suit is filed in a court, the registration must be affected. The subsequent registration does not cure the initial defect at the time of the institution of the suit.
The non-registration of the firm does not affect the validity of any act, dealing, transaction or any contract entered into by the firm. Mere non-registration of the firm does not make the business of the firm illegal. However, if the firm is not registered, following disabilities are created:
The non-registration of the firm, however, does not affect the followings:
Abhinav buys certain goods worth ₹ 50,000 from an unregistered firm Ram and Sons. Ram and Sons has to pay ₹ 60,000 to Abhinav for the goods purchased by the firm in the past. Referring to the provisions of the Indian Partnership Act, 1932, decide whether Ram and Sons can compel Abhinav to accept ₹ 10,000, i.e., the difference between ₹ 60,000 and ₹ 50,000 as the final settlement?
Anil and Sunil purchased a lorry to ply it in the partnership. They plied the lorry for about two years when Anil, without the consent of Sunil, disposed of the lorry. Sunil brought an action to recover his share in the sale proceeds. Anil resisted Sunil’s claim on the plea that the firm was not registered. Will Sunil succeed in his claim? Decide with reference to the provisions of the Indian Partnership Act, 1932.
He is also known as the ostensible partner. He takes active part into the business of the firm. He is liable for all the acts of the firm. He must give a public notice of his retirement from the firm. His insolvency or permanent incapacity to perform his duties may be ground for the dissolution of the firm.
He does not take part in the business but is liable for all the acts of the firm. He need not give public notice of his retirement from the firm because the public does not have any idea that he is a partner. His insolvency or permanent incapacity to perform his duties is not the ground for the dissolution of the firm.
He lends his name to the firm. He does not take part in the business of the firm but is liable for all the acts of the firm. He does not contribute any capital to the firm and does not share any profits from the firm. The purpose of admitting a partner as the nominal partner is to use the name of such person. He must give public notice of his retirement from the firm. His insolvency or permanent incapacity to perform his duties is not the ground for the dissolution of the firm.
The partners may lawfully agree that one or more of them shall not be liable for the losses. In such a case, the partner who is entitled to share the profit but is not liable for the losses is called as the partner in profit. He is like any other normal active partner. He is liable for all the acts of the firm. He requires giving public notice of his retirement. His insolvency or permanent incapacity to perform his duties may be ground for the dissolution of the firm.
He is one who shares the profits of another partner. The sub partner is not a partner in the original firm. He is not liable for the act of the firm. He does not require giving public notice. His insolvency or permanent incapacity to perform his duties is not the ground for the dissolution of the firm. The sub-partner is excluded while counting the total number of partners of the firm. A sub-partner is a transferee.
Sometimes, a person is not a partner in a firm. But he may be liable for the debts of the firm as if he were a partner. Such a partner is called a partner by estoppel or holding out. For this, the following conditions must be fulfilled:
The minor may be admitted to the benefits of a partnership with the consent of all the partners. The liability of the minor partner is confined only to the extent of his share in the profits and the property of the firm. Over and above this, he is neither personally liable nor is his private estate liable. He cannot be declared insolvent but if the firm is declared insolvent, his share in the firm vests in the official receiver or official assignee.
A introduces B to C as a partner in his business. B, in fact, was not a partner but he did not deny the statement. C advanced a loan to A. A could not repay the loan. Can C hold B responsible for the repayment of loan?
A, B and C are partners in a firm. A introduces D to X as a partner in the business. D, infact, was not a partner in the firm’s business. D did not deny this statement. X advanced a loan of ₹ 20 lakhs to the firm. Firm’s failure to repay the loan, X wants to hold D responsible for the repayment of the above loan. Referring to the provisions of the Indian Partnership Act, 1932, decide whether X would succeed in recovering the loan from D?
On attaining a majority, the minor partner has to decide whether he shall continue in the firm or leave it. He has to decide within six months:
The minor has to give a public notice of his choice within the above period. If he fails to give a public notice, he is deemed to have become a partner after the expiry of the above period.
He becomes personally liable to the third parties for all the acts of the firm done, since he was admitted to the benefit of the partnership and not from the date he becomes a major. When the minor elects to become a full fledged partner, his share in the property and the profits of the firm remains the same as before.
He continues to be liable as before, until the date of public notice. His share shall not be liable for any acts of the firm done after the date of the notice. He shall be entitled to sue the partners for his share of the property and the profits.
A person, if competent to enter into a contract can be a partner in the firm. One person can be a partner in any number of firms. A minor can not be a partner in the firm but he can be admitted to the benefit of the partnership firm. A company, or a corporation or a body corporate can become a partner in the partnership firm. A partnership firm cannot enter into a partnership with another partnership firm. The HUF cannot be a partner in the partnership firm. However, Karta of HUF can become a partner in the partnership firm in his individual capacity. Trust cannot become a partner in the partnership firm.
The foreigner or NRI can become a partner in the parternship firm.
In the absence of any agreement between the partners, every partner has a right to take part in the conduct of the business.
The ordinary matters of the business may be decided by the majority. But no change can be made in the nature of the business without the consent of all the partners. Every partner has a right to be consulted for the admission of any new partner to the firm.
Every partner has a right to access and inspect and take copy of the books of the firm. The minor partner has a right to inspect and copy the accounts of the firm but not the books.
All the partners are entitled to share the profit equally. The agreement between the partners may provide otherwise also.
A partner is entitled to claim interest on the capital out of the profit if the agreement provides so. The partner is entitled to claim interest on any loan or advances he has made to firm at the rate of 6% per annum. The interest on the loan is payable whether or not firm makes profit.
Every partner has the right to be indemnified by the firm in respect of the payment and liability incurred by him in the ordinary course of business.
Every partner has the right to use partnership property for the purpose of the business of the firm. However, a partner may use the partnership property for his personal purpose if the agreement provides so.
Every partner has the right to retire from the partnership either by giving a notice in writing to the other partners or as per the method agreed under the partnership agreement. The retired partner has the right to carry on the competition business and also has the right to advertise his new business. Every retiring partner has the right to receive a proportionate profit from the firm.
No partner is entitled to receive any salary or remuneration for taking part into conduct of business. However, the agreement between partners may expressly provide for payment to remuneration to working partners.
Every partner is entitled to continue as a partner until death or retirement. No partner shall be expelled.
A and B entered into an agreement to carry on a business of manufacturing and selling toys. Each one of them contributed ₹ 35 lakhs as their capital with a condition that A and B will share the profits equally but the loss, if any, is to be borne by A alone. Referring to the provisions of the Indian Partnership Act, 1932, decide whether there exists a partnership between A and B.
The duties which can be modified by an agreement are known as optional duties. They are also known as the general duties of the partner. Unless otherwise agreed by the partner, every partner has the following duties.
Every partner is liable to contribute equally to the losses of the firm. However, an agreement between the partners may provide otherwise.
All the partners are duty bound to carry on the firm’s business to the greatest common advantage and not for their individual benefit.
If any personal profit is made by any partner from the partnership transactions or from any use of the partnership property, name or business connection, he must account for it and pay it to the firm.
In the absence of any agreement, a partner cannot carry on the competing business. If he does, he is bound to account for and pay to the firm all the profits made by him in that business.
Example
A and B are partners in a firm, which consists of supplying meat to the Government. Subsequently, it is found out that A is engaged with C in the supplying of meat to the same Government. Held, A is bound to account to the firm for the profits so made by him. (Loch vs Lynam)
The partner has to indemnity (compensate) the firm for any loss caused to the firm by his willful neglect. However, this duty may be excluded by an agreement between the partners.
The partner must use the firm’s property for the purpose of the business of the firm. No partner should use the partnership property for his personal benefit otherwise he is liable for the profit he has made by using the property. However, this duty may be excluded by an agreement between the partners.
Compulsory duties are the duties which cannot modify by an agreement or otherwise. They are also known as mandatory duties. The mandatory duties are as follows.
This is the primary and the most important duty of every partner. Every partner is duty bound to act in good faith. It means to remain faithful to one another.
Every partner must conduct the business of the firm in such a manner which is most beneficial to the firm. No partner should make any personal profit at the expenses of firm.
Every partner should keep proper accounts of all the money transactions relating to the business of the firm. Every partner should explain all the accounts to the other partners.
No partner should hide or conceal any material facts and information affecting the business of the firm from any other partner.
If any fraud is committed by any partner in the conduct of the business of the firm, he shall be liable to indemnify the firm from loss caused to it.
Every partner is duty bound to act within the scope of his authority, expressed and implied. Where he exceeds the authority conferred on him and the firm suffers a loss, he shall have to compensate the firm such loss.
Every partner is liable jointly and severally for the acts of the firm while he was partner.
Note:
The mutual rights and duties of partners are governed by the Partnership Agreement and Partnership Act.
A property originally brought in the common stock of the firm by the partner while at the time of joining the firm is the property of the firm. The property acquired for the purpose of business of the firm also belongs to the firm. The property acquired with the firm’s money is also the partnership property. The goodwill created or developed over a period of time is the property of the firm.
The authority of the partner may be express or implied. Any act of the partner done within his express authority or implied authority shall be the act of the firm and consequently the firm shall be bound by it.
An express authority is given to a partner by an agreement.
Example
One of the partners may be authorized to operate the bank account on behalf of the firm.
This is an authority which is not given to a partner by an agreement but by the law. It flows from the legal relations of the partners and is based on the law of agency. It is also known as the apparent, ostensible and ordinary authority.
The act of the partner will be within the implied authority of the partner if the following conditions are satisfied:
If the following activities are performed or done by the partner then it is considered as an act within the meaning of the implied authority:
In the absence of any usage or custom of trade to the contrary, the implied authority of a partner does not empower him to do the following acts:
A partner has no implied authority to bind the firm by giving a guarantee which is apparently unconnected with the partnership trade. He cannot accept the shares of a company against the debt due to the firm. He has no right to set off his own separate debts against the debt due to the firm.
A, B and C are the partners in a firm called the ABC Firm. A has the intention of deceiving D, a supplier of office stationery, buys certain stationery on behalf of the ABC Firm. The stationery is of use in the ordinary course of the firm’s business. A does not give the stationery to the firm, instead brings it to his own use. The supplier D, who is unaware of the private use of the stationery by A, claims the price from the firm. The firm refuses to pay for the price on the ground that the stationery was never received by it (firm). Referring to the provisions of the Indian Partnership Act, 1932, decide:
Mahesh, Suresh and Dinesh are partners in a trading firm. Mahesh, without the knowledge or consent of Suresh and Dinesh, borrows himself ₹ 50,000 from Ramesh, a customer of the firm, in the name of the firm. Mahesh then buys some goods for his personal use with that borrowed money. Can Mr. Ramesh hold Mr. Suresh and Mr. Dinesh liable for the loan? Explain the relevant provisions of the Indian Partnership Act,1932.
A restrictions on the implied authority of a partner may be imposed by the partnership agreement.
Every partner is liable jointly with all the other partners and also severally for all the acts of the firm done while he is a partner. The firm is liable for any loss caused to a third party by the wrongful act or omission of a partner, while acting in the ordinary course of the business or with the authority of his partner.
In the ordinary course of the business of the firm, the money or property belonging to the third party is received by the firm or its partner. If the partner misapplies it to his own use, the firm is liable for same as per following rules:
Example
A appointed a firm of B and C to buy and sell wine for him on commission. A left money with the firm for the purpose. B, the active partner, rendered false accounts of purchase and sale to A and misappropriated the money. Held, the firm was liable. (Mellors vs Shaw)
Generally, the partner cannot act beyond his authority. However, the firm is liable if the partner has acted beyond his authority in case of an emergency. The following conditions must be satisfied:
The reconstitution of the firm means a change in the constitution of the firm. It means the old partnership ends up and a new partnership commences. The reconstitution of the firm can take place in the following manner:
Figure 12.1 Reconstitution of firm.
A person may be admitted as a new partner either in accordance with the partnership deed or with the consent of all the existing partners.
A new partner is not liable for any act of the firm done before his admission. However, an incoming partner may, by an agreement, agree to become liable for the acts done before his admission, provided:
If a minor on attaining the majority elects to become the partner, he will be liable for all the acts of the firm done since he was admitted to the benefit of the partnership and not from the date he becomes a major.
A partner may retire in accordance with the partnership deed or with the consent of all the other partners or where the partnership is at will, by giving a notice in writing to all the other partners of his intention to retire.
A retired partner is not liable for any act of the firm done after his retirement. However, he is liable for the act of the firm done before his retirement unless he is discharged. He is liable for all the transaction which had began but remained unfinished on the date of retirement. He is liable as per the principle of holding out if after retirement no notice is given. If no notice is given of retirement, the firm shall be liable for the act of the retired partner.
A retired partner may carry on a business competing with the firm and he may advertise such business but he cannot:
When the retiring partner is not paid the amount due to him (final settlement money) he has the right to receive the higher of the following amount:
However, the partnership agreement may provide otherwise.
The general rule suggests that the partner cannot be expelled from the partnership. However, the partner may be expelled, subject to the following conditions:
The following are the three criteria for the test of good faith:
If a partner is expelled without complying with the above conditions, the expulsion is called irregular. In such a case, the expelled partner may claim re-instatement as a partner or sue for the refund of his share of capital and profits in the firm but he cannot claim damages. The rights and liabilities of an expelled partner is the same as the retired partner. The expelled partner has to give public notice otherwise he is liable for the act of the firm after his expulsion. The firm is also liable for the act of the expelled partner if no notice is given.
He ceases to be a partner on the date on which the order of insolvency is made.
The firm is also dissolved on the date of the order except the agreement that provides the contrary. The estate of the insolvent-partner is not liable for the acts of the firm done after the date of the order of insolvency. A public notice to the effect that a partner has been adjudicated insolvent is not required. The firm is also not liable for any act of the insolvent partner after the date of the order of adjudication.
The death of any one partner results into the dissolution of the partnership. The firm is dissolved unless otherwise agreed in the partnership agreement. No requirement of the public notice. The estate of the deceased partner is not liable for act of firm after his death.
Example
M was a partner in a firm. The firm ordered goods in M’s lifetime but the delivery was made after M’s death. Held, M’s estate was not liable for the price for goods sold and delivered. (Bagel vs Miller)
On the death of the partner, his legal representative has the right to get the final settlement money. If the firm makes a delay in the payment of the final settlement amount, the legal representative is entitled to receive the higher of following amount:
However, the agreement may provide otherwise. Upon the death of a partner, the legal heir does become the partner. If they want to become partners, a fresh contract has to be made as the partnership is created by a contract.
When a partner agrees to shares his own share in the profits and assets with an outsider, it is called as sub-partnership and the outsider is called the sub-partner. The transfer of interest may be made by a way of absolute sale, creation or charge or otherwise. The transfer of interest may be absolute or in part. A partner can assign his share of the profit and his share in the assets of the firm to the outsider. In that case, the transferee does not entitle:
But such a transferee is entitled:
Where a partner has transferred the whole of his interest in the firm to a third party or where his share has been attached under a decree or sold in the recovery of the arrears of the land revenue, the court may dissolve the firm at the instance of any other partner.
The mutual rights and duties of the partners in the reconstituted firm remain the same as they were before the change.
Ram, Mohan and Gopal were partners in a firm. During the course of partnership, the firm ordered Sunrise Ltd to supply a machine to the firm. Before the machine was delivered, Ram expired. The machine, however, was later delivered to the firm. Thereafter, the remaining partners became insolvent and the firm failed to pay the price of machine to Sunrise Ltd. Explain with reasons:
Ram and Co., a firm consists of three partners A, B and C having one third share each in the firm. According to A and B, the activities of C are not in the interest of the partnership and thus want to expel C from the firm. Advise A and B whether they can do so quoting the relevant provisions of the Indian Partnership Act.
A, B, C are partners. Can A and C continue the firm’s business on the death of B?
A, B and C are in partnership. A is adjudicated insolvent but B and C agree to continue the firm. Advise.
A, B and C are partners in a firm. As per the terms of the partnership deed, A is entitled to 20% of the partnership property and profits. A retires from the firm and dies after 15 days. B and C continue business of the firm without settling accounts. What are the rights of A’s legal representatives against the firm under the Indian Partnership Act, 1932?
Ram, Shyam and Gopal are partners in a firm. Ram retires. Shyam and Gopal continue to carry on firm’s business in the same ‘firm name’. Do you agree that in this situation change in the relationship between partners is involved but this is not extinguishment of the existence of the firm itself? Give reasons.
Basis of Distinction | Dissolution of Partnership | Dissolution of Firm |
---|---|---|
Termination of the old partnership and formation of a new partnership. | The old partnership comes to an end and a new partnership comes into existence. | The old partnership comes to an end but no new partnership comes into existence. |
Continuation of the business under the firm’s name. | The business continues under the firm’s name. | The business does not continue under the firm’s name. |
Which type of account is prepared? | The revaluation account is prepared. | Under the firm’s dissolution realization account is prepared. |
Figure 12.2 Dissolution of firms.
The dissolution of a partnership between all the partners of a firm is called the ‘dissolution of the firm’. It means closing business of the firm.
The dissolution of the firm without order of the court may take place in any of the following ways:
It is also called as dissolution with the consent of all the partners. The partnership can be brought to an end by entering the agreement. It is applied in all the cases:
It is also known as dissolution by the operation of law. The compulsory dissolution of the firm takes place in the following circumstances:
On happening of any of following contingencies (i.e., events), the firm is automatically dissolved:
However, the partnership agreement may provide otherwise.
The partnership at will can be dissolved anytime by giving a notice to all the other partners in writing. If the date is specified in the notice then it will dissolve from that date. If the notice is silent then the firm will dissolve from the date on which the notice is served.
A partner may file a suit for the dissolution of the firm on anyone of the following groups and the court may dissolve the firm on the following grounds:
The application for dissolution can be made by his next friend if the partner has become insane or of unsound mind. The court may dissolve the firm if due to unsoundness of mind he is incapable to perform his duties as a partner.
If the partner becomes permanently incapable to perform his duties as a partner, any other partner may apply to the court to dissolve the firm. The incapacity may be due to the illness, mental or physical disability of any kind but it should be permanent in nature. This is not applicable to the sleeping partner.
Example
The partner becomes blind or is paralyzed due to polio.
If the partner is guilty of misconduct, the application to dissolve the firm can be made by the other partner. It is not necessary that misconduct should be connected with the business but misconduct should be likely to affect carrying on the business.
Example
Traveling on railway by a partner without a ticket.
If any partner continuously and willfully breaches the partnership agreement, the application to dissolve the firm can be made by the other partner.
Example
A partner having the keys of the shop continuously fails to come to the shop in time.
When a partner agrees to shares his own share in the profits and assets with an outsider, it is called as sub-partnership and the outsider is called the sub-partner. The transfer of interest may be made by a way of absolute sale, creation or charge or otherwise. The transfer of interest may be absolute or in part. A partner can assign his share of the profit and his share in the assets of the firm to the outsider.
The business of the firm cannot be carried on except the loss; the court may allow the dissolution of the firm on the application of any partner.
The firm may also be dissolved by the court on ‘just and equitable’ ground. The just and equitable ground means any ground which is fair and reasonable according to the opinion of the court. The just and equitable grounds may be continued quarrelling, deadlock in the management etc.
On the dissolution of a firm, every partner is entitled to have the property of the firm applied in the payment of the outside debts and the liabilities of the firm and have the surplus distributed among the partners in accordance with their rights. This right of a partner is called ‘Partner’s Lien’. The debts of the firm shall be paid first out of property of the firm and if there is any surplus, it shall be distributed among the partners. If the firm is dissolved due the death of a partner and the surviving partners or the representatives of the deceased partner have earned any personal profit from the use of the firm’s property or firm’s name or firm’s business connections before the firm have been completely wound up, a partner has a right to a share in such personal profits. Where a partner has paid a premium on entering into the partnership for a fixed term and the firm is dissolved before the expiry of the term, he is entitled to the repayment of the whole or part of the premium. However, no refund can be claimed where the dissolution:
After the firm is dissolved, every partner may restrain any other partner from carrying on a similar business in the firm’s name or from using any of the property of the firm for his own benefit, until the affairs of the firm have been completely wound up. However, it is to be noted that this restriction does not apply in the following two conditions:
If the public notice for the dissolution is not given, the partners continue to be liable to the third party for any act done by it after the dissolution. After the dissolution of a firm, the authority of each partner to bind the firm and the other mutual rights and obligations of the partners continue so far as may be necessary for the following purposes:
The partners are free to lay down the modes in which the accounts will be settled on the dissolution of the firm. In the absence of any specific agreement, the provisions of partnership will apply, which are as follows:
In settling the account, the goodwill shall be included in the assets and it may be sold either separately or along with the other property of the firm.
If at the time of settlement, any deficiency arises, the partners shall bear such deficiency in the profit sharing ratio. Thus, the losses shall be paid in the following order:
The assets of the firm shall be applied in the following order:
G, M and W were partners in a firm on the terms that the profits should be divided equally. The capital was contributed in unequal shares. The capital contributed by G was more than the capital contributed by M. On the dissolution of the firm, the assets were insufficient to repay the capital in full. W became the insolvent. The following decisions are given in this case:
It is to be noted that the rule of Garner vs Murray is applicable only when there is no other agreement between the partners. Again, this rule is not strictly applied in India, in as much as, the solvent partners are not asked to bring the share of their loss in cash.
In Case of a Registered Firm | In Case of The Unregistered Firm |
---|---|
Publication in the official gazette. | Publication in the official gazette. |
At least one vernacular (regional) news paper. | At least one vernacular (regional) news paper. |
Must be given to the Registrar of the firm. | — |
Malabar Fisheries Co. vs CIT (1979)
The partnership is not a separate legal entity, apart from the partners constituting it.
Sham Sunder vs State of Haryana (1989)
The partnership is not a legal entity but a mere association of persons.
Mahavir Cold Storage vs CIT (1991)
The partnership firm cannot enter into a partnership with another partnership firm, HUF or individual.
CIT vs Bhagyalakshmi and Co. (1965)
The partnership is a contract.
Surjitlal Chhabda vs CIT (1976)
The HUF is a creature of law and cannot be created by the act of the parties, except to the extent to which a stranger may be affiliated to the family by an adoption.
Russel vs Russel (1980)
The expelled partner must be given an opportunity of being heard.
Jiwan Singh vs Laxmi Chand (1935)
An illegal expulsion of the partners does not put an end to the partnership.
Kotak vs Chawda (1998)
In the case of the reconstitution of the firm, the existing firms continue and there is no need of getting fresh registration.
Cox vs Hickman (1860)
The profit sharing is an essential element of a partnership but it is not the essence of partnership. The real test of a partnership is mutual agency among the partners.
CIT vs ST Phoolchand (1965)
The minor is incompetent to contract. Hence, he cannot become a partner because he cannot contract.
Regional Director of ESIC vs Ramnuja Match Industries (1985)
The partners of the firm are not considered its employees even if they are drawing a remuneration of their services.
Badri Prasad vs Nagarmal (1959)
The partnership is illegal if it consists of more than 20 persons and if it is a banking partnership of more than 10 persons.
CIT vs Seth Govindram Sugar Mills (1965)
If there are only two partners and one of them dies, the firm automatically dissolves.
CIT vs Jaylaxmi Rice and Oil Mills (1971)
The firm becomes registered only when the entries are made in the register of the firms.
Define partnership. Explain the essential elements of a partnership.
(Ref. Para-12.2,12.3)
Sharing of profit is a prima-facie evidence of the existence of partnership but it is not the conclusive evidence. Comment.
(Ref. Para-12.4)
Distinguish between a partnership and a Hindu undivided family.
(Ref. Para-12.6)
Distinguish between a partnership and a co-ownership.
(Ref. Para-12.8)
Is it compulsory for the partnership firm to get itself registered? Explain briefly the procedure for the registration of the firm.
(Ref. Para-12.10)
What are the consequences of non-registration of the firm?
(Ref. Para-12.13)
Enumerate the difference types of partners and briefly explain the extent of their liabilities.
(Ref. Para-12.14)
Can a minor be admitted to partnership? If so, what are the rights and liabilities to him?
(Ref. Para-12.14)
Write a short note on the partner by estoppels.
(Ref. Para-12.14)
Write a short note on the rights of the partners.
(Ref. Para-12.17)
What are the mandatory duties of partners?
(Ref. Para-12.18)
What is partnership property?
(Ref. Para-12.19)
What is meant by the implied authority of a partner?
(Ref. Para-12.20)
Write a short note on the partner’s authority in an emergency.
(Ref. Para-12.25)
How can a person be admitted in an existing firm? Is an incoming partner liable for the firm’s acts done before his admission?
(Ref. Para-12.26)
How can a partner retire from a firm? Is a retiring partner liable for the acts done before his retirement?
(Ref. Para-12.26)
Explain the rights of the retiring partner.
(Ref. Para-12.26)
Can a partner be expelled? If so, what are the conditions to be fulfilled for the expulsion?
(Ref. Para-12.26)
What are the rights and liabilities of the expelled partners?
(Ref. Para-12.26)
What are the rights available to the partner who has been wrongly expelled?
(Ref. Para-12.26)
Write a short note on the insolvency of a person.
(Ref. Para-12.26)
Does the death of a partner necessarily result in the dissolution of the firm?
(Ref. Para-12.26)
What is meant by the dissolution of the firm?
(Ref. Para-12.27)
Distinguish between dissolution of a partnership and dissolution of the firm.
(Ref. Para-12.27)
Under what circumstances is a firm compulsorily dissolved?
(Ref. Para-12.28)
Discuss the grounds on which the firm may be dissolved by the court?
(Ref. Para-12.29)
Discuss the rights and liabilities of the partners on the dissolution of the firm.
(Ref. Para-12.30,12.31)
Write a short note on the settlement of the accounts.
(Ref. Para-12.32)
Explain the mode of giving public notice under the Indian Partnership Act, 1932?
(Ref. Para-12.34)