12

The Partnership Act, 1932

12.1 APPLICABILITY OF THE ACT

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.

12.2 DEFINITION OF PARTNERSHIP—SECTION 4

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’.

12.3 ESSENTIAL CHARACTERISTICS OF PARTNERSHIP

12.3.1 Agreement

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.

12.3.2 Number of Persons

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.

12.3.3 Maximum Number of Persons

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).

12.3.4 Business

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.

12.3.5 Sharing or Profit

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.

12.3.6 Mutual Agency

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.

12.4 TRUE TEST OF PARTNERSHIP

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.

12.5 CASES WHERE NO PARTNERSHIP EXISTS—SECTION 6

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:

1. 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.

2. 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.

3. The servant or employee engaged in a business receives his remuneration as a share of the profit. The mere fact that an employee gets a share of profits does not make him a partner.
4. The widow or the child of a deceased partner receives a portion of the profits. In such a case the legal representative does not become the partner even though he is paid a certain share of the profits.
5. Where a person has sold his business along with its goodwill and receives a portion of the profits in consideration of the sale. In this case, although the old partners receive the profits, they cannot be called as the partners of the new firm.
6. The members of the HUF carrying the family business are not partners and HUF is not a partnership firm.

12.6 DISTINGUISH BETWEEN A PARTNERSHIP AND A HINDU UNDIVIDED FAMILY

Matter	Partnership	H.U.F.
Applicable law	Partnership Act 1932	Hindu Law
Made of creation	It is created by an agreement.	It is created by status.
Mutual agency	Mutual agency present in the partnership.	No mutual agency among the family members of HUF.
Right to carry on business	Yes, every partner can carry on business on behalf of the firm.	Only Karta can manage business.
Nature of liability	Every partner’s liability is joint and severally.	The liability of Karta is unlimited. Every member is liable up to his share.
Right to inspect accounts	Every partner has the right to inspect the accounts.	Every member of the family has no right to inspect the accounts.
Minor	A minor can be admitted to partnership.	A minor cannot be admitted to family.
Maximum number	10 for banking business and 20 for other business.	No limit for the number of members.
Admission of new partner	A new partner can be admitted with the consent of all the partners.	A new person gets entry in the family on birth, marriage and adoption.

12.7 DISTINGUISH BETWEEN A PARTNERSHIP AND AN ASSOCIATION

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.

12.8 DISTINGUISH BETWEEN A PARTNERSHIP AND A CO-OWNERSHIP

Matter	Partnership	Co-Ownership
Creation	The partnership is created by an agreement.	Co-ownership is created by an agreement or the operation of the law or status.
Mutual agency	Mutual agency among the partners of the firm.	No mutual agency among the co-owners.
Business	The partnership is created for business.	Co-ownership may or may not be created for business.
Right of partition	The partner cannot demand the partition of property.	Yes, the co-owner can demand partition.
Maximum number of members	10 for banking business and 20 for other business.	No limit for the number of members.
Lien for expenses	Yes, the partners have lien on partnership property.	The co-owner does not have lien on the property.

12.9 DISTINGUISH BETWEEN A PARTNERSHIP AND A CLUB

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.

12.10 REGISTRATION OF FIRM—SECTIONS 56–71

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.

12.10.1 Procedure for Registration of Firm—Sections 58 and 59

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:

1. The firm name.
2. The place or principal place of business of the firm.
3. The names of any other places where the firm carries on business.
4. The date when each partner joined the firm.
5. The names in full and permanent addresses of the partners.
6. The duration of the firm, if any.

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).

12.11 REGISTRATION OF ALTERATIONS—SECTIONS 60–63

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:

1. Alteration in the firm’s name.
2. Alteration in the location of the principal place of business of a registered firm.
3. When a branch is closed or a new one is opened.
4. Changes in the names and address of the partners.
5. Changes in the constitution of a registered firm due to the admission and retirement of the partners. Dissolution of a firm should also be reported.
6. Withdrawal or continuation by a minor on attaining the majority.

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.

12.12 TIME FOR REGISTRATION

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.

12.13 EFFECTS OF NON-REGISTRATION—SECTION 69

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:

1. An unregistered firm or its partners cannot file a suit against the other partners or the firm to enforce a right arising out of a contract.
2. An unregistered firm or its partners cannot file a suit against the third parties.
3. An unregistered firm or its partners cannot claim the set-off in a suit filed against the firm by a third party except for a sum not exceeding ₹ 100.

The non-registration of the firm, however, does not affect the followings:

1. The right of the third parties to sue the firm or its partners.
2. The partner of the unregistered firm can file a suit for the three matters as under:
   1. For the dissolution of firm.
   2. For the accounts of a dissolved firm.
   3. For the realization of the property of a dissolved firm.
3. The power of an official assignee or receiver to realize the property of an insolvent partner.
4. The rights of the firms or the partners of the firms having no place of business in India.
5. Right to set off where the claim does not exceed ₹ 100.
6. The right of an unregistered firm to enforce any other right arising otherwise than out of a partnership contract.

12.14 TYPES OF PARTNERS

12.14.1 Actual or Active Partner

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.

12.14.2 Sleeping or Dormant Partner

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.

12.14.3 Nominal Partner

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.

12.14.4 Partner in Profit

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.

12.14.5 Sub-partner

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.

12.14.6 Partner by Estoppel or Holding Out

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:

1. He must have expressly or impliedly represented himself to be a partner or he must have knowingly permitted himself to be represented as a partner to the other person.
2. The other person must have acted on the faith of such representation and given credit to the firm. This rule is based on the principle of equity and natural justice.

12.14.7 A Minor Partner

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.

12.15 POSITION OF A MINOR PARTNER AFTER ATTAINING MAJORITY

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:

• From the date of his attaining majority.
• From the date when he first comes to know that he had been admitted to the benefits of partnership.

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.

12.15.1 Where a Minor Elects to Become a Full Fledged Partner

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.

12.15.2 Where He Elects Not to Become a Partner

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.

12.16 WHO CAN BE A PARTNER IN THE FIRM?

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.

12.17 RIGHTS OF A PARTNER

12.17.1 Right to Take Part in Business

In the absence of any agreement between the partners, every partner has a right to take part in the conduct of the business.

12.17.2 Right to Be Consulted

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.

12.17.3 Right to Access the Books of Account

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.

12.17.4 Right to Share Profit

All the partners are entitled to share the profit equally. The agreement between the partners may provide otherwise also.

12.17.5 Right to Interest

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.

12.17.6 Right to Be Indemnified

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.

12.17.7 Right to the Use the Firm’s Property

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.

12.17.8 Right to Retire from Partnership

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.

12.17.9 Right to Receive Remuneration

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.

12.17.10 Right Not to Be Expelled from Partnership

Every partner is entitled to continue as a partner until death or retirement. No partner shall be expelled.

12.18 PARTNER’S OPTIONAL DUTIES

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.

12.18.1 Duty to Share Losses Equally

Every partner is liable to contribute equally to the losses of the firm. However, an agreement between the partners may provide otherwise.

12.18.2 Duty Not to Act for Individual Benefit

All the partners are duty bound to carry on the firm’s business to the greatest common advantage and not for their individual benefit.

12.18.3 Duty Not to Carry on Any Other Business

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)

12.18.4 Duty to Indemnify the Firm from Loss Cause Due to Willful Neglect

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.

12.18.5 Duty to Make Proper Use of Property of Firm

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.

12.19 PARTNER’S COMPULSORY DUTIES

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.

12.19.1 Duty of Good Faith

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.

12.19.2 Duty to Carry on Business to the Greatest Common Advantage

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.

12.19.3 Duty to Render True Accounts 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.

12.19.4 Duty to Give Full Information

No partner should hide or conceal any material facts and information affecting the business of the firm from any other partner.

12.19.5 Duty to Indemnify for Loss Caused by Fraud

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.

12.19.6 Duty to Act Within Authority

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.

12.19.7 Duty to be Liable Jointly and Severally

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.

12.20 PARTNERSHIP PROPERTY—SECTION 14

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.

12.21 AUTHORITY OF PARTNER—SECTIONS 19 AND 22

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.

12.21.1 Express Authority

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.

12.21.2 Implied Authority

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:

1. The act must be done in the ordinary course of business.
2. The act must be done in the usual way. ‘What is a usual way?’ It is a question of facts and circumstances.
3. The act must be done in the firm’s name.

12.22 ACTS WITHIN THE IMPLIED AUTHORITY OF A PARTNER

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:

1. To purchase and sell the goods on behalf of the firm in which the firm deals.
2. To receive payments from the debtors of the firm and give receipts for same.
3. To settle accounts with the persons dealing with the firm.
4. To engage servants for the partnership business.
5. To borrow money on the credit of the firm.
6. To draw, accept indorse negotiable instruments in the name of the firm.
7. Pledge any goods of the firm for the purpose of borrowing money.
8. To employ a lawyer to defend an action against the firm.

12.23 ACTS OUTSIDE THE IMPLIED AUTHORITY OF A PARTNER

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:

1. To submit a dispute relating to the business of the firm to arbitration.
2. To open a bank account on behalf of the firm in his own name.
3. To compromise any claim or a portion of a claim by the firm.
4. To withdraw a suit or proceeding filed on behalf of the firm.
5. To admit any liability in a suit or proceeding against the firm.
6. To acquire immovable property on behalf of the firm.
7. To transfer immovable property belonging to the firm.
8. To enter into a partnership on behalf of the firm.

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.

12.24 RESTRICTION ON AN IMPLIED AUTHORITY

A restrictions on the implied authority of a partner may be imposed by the partnership agreement.

12.25 LIABILITY OF A PARTNER

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:

1. Where a partner acting within his apparent authority receives money or property from a third party and misapplies it.
2. Where a firm in the course of its business receives money or property from a third party and the money or property is misapplied by any of the partners while it is in the custody of the firm.

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)

12.26 PARTNER’S AUTHORITY IN EMERGENCY

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:

1. There was an emergency.
2. The partner has exceeded his authority to save the firm from loss.
3. The partner has acted prudently.

12.27 RECONSTITUTION OF A FIRM

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:

12.27.1 Admission of a Partner—Section 31

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.

12.27.2 Liability of an Incoming Partner

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:

1. The newly constituted firm has agreed to pay the debts.
2. The creditors have agreed to accept the new firm as their debtor and discharge the old firm form its liability.

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.

12.27.3 Retirement of a Partner—Section 32

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.

12.27.4 Liability of a Retired Partner

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.

12.27.5 Rights of a Retired Partner

A retired partner may carry on a business competing with the firm and he may advertise such business but he cannot:

1. Use the firm’s name.
2. Represent himself as carrying on the business of the firm.
3. Solicit the old customer of the firm.

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:

1. The interest at the rate of 6% per annum on money unpaid.
2. The proportion of the profit earned by the firm after his retirement.

However, the partnership agreement may provide otherwise.

12.27.6 Expulsion of a Partner—Section 33

The general rule suggests that the partner cannot be expelled from the partnership. However, the partner may be expelled, subject to the following conditions:

1. The power of expulsion of a partner should be conferred by the partnership deed.
2. The power should be exercised by a majority of the partners.
3. The power should be exercised in good faith.

12.27.7 Test of Good Faith for Expulsion

The following are the three criteria for the test of good faith:

1. The expulsion must be in the interest of the partnership.
2. A proper notice is served to the expelled partner.
3. He is given an opportunity of being heard.

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.

12.27.8 Insolvency of a Partner—Section 34

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.

12.27.9 Death of a Partner—Section 35

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:

1. The interest at the rate of 6% per annum on the money unpaid to the retiring partner or
2. The proportion of the profit earned by the firm after his retirement.

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.

12.27.10 Transfer of Partner’s Interest—Section 29

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:

1. To participate into the business of the firm.
2. To require the accounts of the firm.
3. To inspect the books of the firm.

But such a transferee is entitled:

1. To receive the share of the profit of the transferring partner. He is bound to accept the account of the profit agreed to by the partners.
2. In the case of dissolution, to receive the transferring partner’s share in the assets of the firm.

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.

12.27.11 Rights and Duties of a Partner After Re-constitution—Section 17

The mutual rights and duties of the partners in the reconstituted firm remain the same as they were before the change.

12.28 DISTINGUISH BETWEEN DISSOLUTION OF A PARTNERSHIP AND DISSOLUTION OF A FIRM

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.

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.

12.29 DISSOLUTION WITHOUT THE ORDER OF COURT—SECTIONS 40–43

The dissolution of the firm without order of the court may take place in any of the following ways:

12.29.1 Dissolution by Mutual Agreement

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:

1. The partnership is for a fixed period.
2. The partnership is for a particular venture.
3. The partnership is at will.

12.29.2 Compulsory Dissolution

It is also known as dissolution by the operation of law. The compulsory dissolution of the firm takes place in the following circumstances:

1. All the partners die.
2. All the partners except one die.
3. All the business of the firm becomes unlawful.

12.29.3 Dissolution on Happening of Certain Contingencies

On happening of any of following contingencies (i.e., events), the firm is automatically dissolved:

1. When any partner is adjudicated as an insolvent.
2. When any partner dies.
3. Where the partnership is formed for a fixed period and such period is expired.
4. Where the partnership is for a particular venture and such venture is completed.

However, the partnership agreement may provide otherwise.

12.29.4 Dissolution by Notice

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.

12.30 DISSOLUTION WITH THE ORDER OF COURT—SECTION 44

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:

12.30.1 Unsoundness of Mind

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.

12.30.2 Permanent Incapacity

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.

12.30.3 Misconduct

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.

12.30.4 Persistent Breach of Agreement

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.

12.30.5 Transfer of Interest

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.

12.30.6 Perpetual Losses

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.

12.30.7 Just and Equitable Ground

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.

12.31 RIGHTS OF PARTNERS ON DISSOLUTION

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:

1. Is due to the death of a partner or
2. Is due to the misconduct of the partner who had paid the premium or
3. Is in pursuance of an agreement, which contains no provisions for the refund of the premium or any part thereof.

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:

1. When there is a contract between the partners to the contrary.
2. When a partner has bought the goodwill of the firm.

12.32 LIABILITIES OF PARTNERS ON DISSOLUTION

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:

1. To wind up the firm.
2. To complete the transactions begun but unfinished at the time of the dissolution.

12.33 SETTLEMENT OF ACCOUNTS

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:

12.33.1 Sale of Goodwill

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.

12.33.2 Sharing of Deficiency

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:

1. First out of profits.
2. Next out of capital.
3. Lastly, if necessary, by the partners, individually in the profit sharing ratio.

12.33.3 Application of Assets

The assets of the firm shall be applied in the following order:

1. In paying the debts of the firm to the third party.
2. In paying to each partner’s for advances.
3. In paying to each partner’s capital.
4. The surplus, if any, shall be divided among the partners in the profit sharing ratio.
5. If the assets are sufficient to pay the outside debts and the advance of the partner but insufficient to repay to each partner his full capital, the deficiency in the capital shall be borne by the partners in the proportion in which they are entitled to share the profits.

12.34 GARNER VERSUS MURRAY RULE

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:

1. The solvent partners should bring the share of their loss in cash.
2. The solvent partners shall bear the deficiency of the capital of the insolvent partner in the ratio of their capitals.

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.

12.35 MODE OF GIVING A PUBLIC NOTICE

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.	—

LIST OF LANDMARK JUDGEMENTS

1. Malabar Fisheries Co. vs CIT (1979)

   The partnership is not a separate legal entity, apart from the partners constituting it.

2. Sham Sunder vs State of Haryana (1989)

   The partnership is not a legal entity but a mere association of persons.

3. Mahavir Cold Storage vs CIT (1991)

   The partnership firm cannot enter into a partnership with another partnership firm, HUF or individual.

4. CIT vs Bhagyalakshmi and Co. (1965)

   The partnership is a contract.

5. 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.

6. Russel vs Russel (1980)

   The expelled partner must be given an opportunity of being heard.

7. Jiwan Singh vs Laxmi Chand (1935)

   An illegal expulsion of the partners does not put an end to the partnership.

8. 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.

9. 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.

10. CIT vs ST Phoolchand (1965)

    The minor is incompetent to contract. Hence, he cannot become a partner because he cannot contract.

11. 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.

12. 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.

13. CIT vs Seth Govindram Sugar Mills (1965)

    If there are only two partners and one of them dies, the firm automatically dissolves.

14. CIT vs Jaylaxmi Rice and Oil Mills (1971)

    The firm becomes registered only when the entries are made in the register of the firms.

TEST YOUR KNOWLEDGE

1. Define partnership. Explain the essential elements of a partnership.

   (Ref. Para-12.2,12.3)

2. 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)

3. Distinguish between a partnership and a Hindu undivided family.

   (Ref. Para-12.6)

4. Distinguish between a partnership and a co-ownership.

   (Ref. Para-12.8)

5. 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)

6. What are the consequences of non-registration of the firm?

   (Ref. Para-12.13)

7. Enumerate the difference types of partners and briefly explain the extent of their liabilities.

   (Ref. Para-12.14)

8. Can a minor be admitted to partnership? If so, what are the rights and liabilities to him?

   (Ref. Para-12.14)

9. Write a short note on the partner by estoppels.

   (Ref. Para-12.14)

10. Write a short note on the rights of the partners.

    (Ref. Para-12.17)

11. What are the mandatory duties of partners?

    (Ref. Para-12.18)

12. What is partnership property?

    (Ref. Para-12.19)

13. What is meant by the implied authority of a partner?

    (Ref. Para-12.20)

14. Write a short note on the partner’s authority in an emergency.

    (Ref. Para-12.25)

15. 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)

16. How can a partner retire from a firm? Is a retiring partner liable for the acts done before his retirement?

    (Ref. Para-12.26)

17. Explain the rights of the retiring partner.

    (Ref. Para-12.26)

18. Can a partner be expelled? If so, what are the conditions to be fulfilled for the expulsion?

    (Ref. Para-12.26)

19. What are the rights and liabilities of the expelled partners?

    (Ref. Para-12.26)

20. What are the rights available to the partner who has been wrongly expelled?

    (Ref. Para-12.26)

21. Write a short note on the insolvency of a person.

    (Ref. Para-12.26)

22. Does the death of a partner necessarily result in the dissolution of the firm?

    (Ref. Para-12.26)

23. What is meant by the dissolution of the firm?

    (Ref. Para-12.27)

24. Distinguish between dissolution of a partnership and dissolution of the firm.

    (Ref. Para-12.27)

25. Under what circumstances is a firm compulsorily dissolved?

    (Ref. Para-12.28)

26. Discuss the grounds on which the firm may be dissolved by the court?

    (Ref. Para-12.29)

27. Discuss the rights and liabilities of the partners on the dissolution of the firm.

    (Ref. Para-12.30,12.31)

28. Write a short note on the settlement of the accounts.

    (Ref. Para-12.32)

29. Explain the mode of giving public notice under the Indian Partnership Act, 1932?

    (Ref. Para-12.34)

MULTIPLE-CHOICE QUESTIONS

1. Prior to the Indian Partnership Act, 1932, the provisions relating to partnerships were contained in
   1. The Indian Contract Act, 1972.
   2. The Partnership Act, 1912.
   3. The Indian Contract Act, 1872.
   4. The English Partnership Act, 1845.
2. According to the Partnership Act, ‘Business’ includes
   1. trade.
   2. occupation.
   3. profession.
   4. all of the above.
3. Which of the following constitutes partnership?
   1. Family business of HUF.
   2. Persons who have inherited a house property jointly.
   3. Two parties carrying on a business for sharing the profits.
   4. A Burmese Buddhist husband and wife carrying on a business.
4. Which of these gives the correct definition of partnership?
   1. It is a written agreement between the persons for sharing the profits of the business.
   2. It is an oral arrangement between the partners for sharing the profit.
   3. It is a relation between the persons who have agreed to share the profits of the business, carried on by all or any of them acting for all.
   4. All of the above.
5. A and B agree to share profits of a business in equal but if any loss, it will be borne by A alone. The partnership agreement is
   1. valid.
   2. unlawful.
   3. illegal.
   4. voidable.
6. Which of this is not a valid partnership?
   1. Minor admitted to benefits of the partnership.
   2. Company admitted as a partner.
   3. Partnership between Indian national and alien friend.
   4. Partnership between Indian national and alien enemies.
7. To form a partnership, the minimum capital contribution should be
   1. ₹ l lakh.
   2. ₹ 5 lakhs.
   3. ₹ l0 lakhs.
   4. none of the above.
8. Partnership agreements may be
   1. expressed.
   2. implied.
   3. neither (i) nor (ii).
   4. either (i) or (ii).
9. Which of these statements does not reflect the mutual agency principle in partnership?
   1. The partner is both an agent and principal.
   2. A partner can, by his act bind other partners and is in turn bound by acts of other partners.
   3. All partners should actively participate in the business.
   4. Business may be managed by one or more partners.
10. A is employed by a partnership firm entitled to remuneration of ₹ 5000 per month plus 7% on the profits of the firm if profits exceed ₹ 1 lakh. Here,
    1. A is not a partner in the firm.
    2. A is a partner in the firm.
    3. appointment of A is invalid.
    4. A can claim only ₹ 5000 per month but not the share of the profits.
11. Which of the following is correct?
    1. Partnership arises by status.
    2. HUF is created by an agreement between the members.
    3. Partnership may arise from the conduct of the parties concerned.
    4. None of the above.
12. Which of the following is incorrect?
    1. The partnership may be formed with two partnership firms as partners.
    2. A company can become partner in firm.
    3. A HUF can be created by an agreement of members.
    4. Both (i) and (iii).
13. In the HUF ……….. is personally liable to the third party.
    1. Karta and major members
    2. Karta
    3. all major members
    4. all the members
14. A person may become a partner with another person for particular adventures. This arrangement is called
    1. partnership at will.
    2. particular partnership.
    3. undisclosed partnership.
    4. joint venture.
15. A and B enter into an agreement for preparing Ahmedabad to Bombay Express Highway. The partnership comes to an end after preparing of Highway. This arrangement is called
    1. particular partnership.
    2. partnership at will.
    3. undisclosed partnership.
    4. joint venture.
16. A partner who is not partner but represents himself as a partner in a firm is called a
    1. sleeping partner.
    2. partner by estoppels.
    3. working partner.
    4. sub-partner.
17. Active partner is also known as a
    1. dormant partner.
    2. working partner.
    3. sub-partner.
    4. ostensible partner.
18. Partners are bound to carry on the business of the firm
    1. to the advantage of the working partner.
    2. for his benefit.
    3. for the benefit of minor partners.
    4. to the greatest common advantage.
19. Which of the following is not covered by general duties of partners?
    1. To carry on the business of the firm to the greatest common advantage of the firm.
    2. To be just and faithful to each other.
    3. To arrange for the audit of accounts of the firm.
    4. To render true accounts.
20. Ordinary matters of business may be decided by consent of
    1. all the partners.
    2. majority partners.
    3. working partners.
    4. sleeping partners.
21. A change in nature of business can be effected only based on
    1. unanimous consent of all the partners.
    2. consent of majority partners.
    3. consent of the working partners.
    4. consent of the sleeping partners.
22. When agreement is silent, rate of interest payable on advance by any partner is
    1. 6%.
    2. 8%.
    3. 7%.
    4. 10%.
23. Which of the following conditions is not necessary for the exercise of implied authority?
    1. The act must relate to the business of the firm.
    2. The act must be done in the firm’s business name.
    3. The act must be done in the usual way of carrying on the firm’s business.
    4. The act must be done in an emergency.
24. Which of the following is incorrect?
    1. Maintain bank A/c of the firm by the partner is not within implied authority of a partner.
    2. A partner in a firm has a right to receive interest on advances at the rate of 12 per cent p.a.
    3. The irregular expulsion of a partner does not give any right to the expelled partner.
    4. All of the above.
25. Which of these acts falls outside the implied authority?
    1. Purchase of goods on behalf of the firm.
    2. Sale of the goods of the firm.
    3. Receiving payments of debts due to the firm.
    4. Withdraw any suit filed on behalf of the firm.
26. Which of this falls outside the implied authority?
    1. Pledging of the goods of the firm for loans.
    2. Drawing, accepting and endorsing the negotiable instruments on behalf of the firm.
    3. Acquire immovable property on behalf of the firm.
    4. Engage the lawyer to defend suit against the firm.
27. Which of these acts are within the implied authority?
    1. Settlement of the accounts with the third party on behalf of the firm.
    2. Open a bank account on behalf of the firm in his name.
    3. Compromise any claim by the firm.
    4. Submit the dispute to arbitration.
28. For all acts of the firm done while he is a partner, every partner is
    1. jointly liable only
    2. severally liable only
    3. jointly and severally liable.
    4. not liable at all.
29. Partner’s duty of good faith _____ be excluded by an agreement to the contrary.
    1. cannot
    2. can
    3. may
    4. may not.
30. It is the right of every partner to be consulted in
    1. the matters affecting to him only.
    2. all matters relating to the business of the firm.
    3. both (i) and (ii).
    4. none of the above.
31. Which matter can be decided with the consent of all the partners?
    1. Alteration of business.
    2. Addition to the business.
    3. Admission of a new partner.
    4. All of the above.
32. Which of the following is not covered by the term ‘Property of the Firm’?
    1. Property and rights and interest in property originally brought into the firm.
    2. Property acquired by the firm.
    3. Goodwill of the business.
    4. Property of the partners.
33. Which of the following person may be admitted as a partner?
    1. Person of unsound mind.
    2. A minor.
    3. Alien enemy.
    4. An insolvent.
34. Which of the following is incorrect?
    1. One major and another minor can form a partnership.
    2. One minor and another minor can form a partnership.
    3. One minor female with another major female can form partnership.
    4. All of the above.
35. On attaining majority, within how many months a minor may give public notice of his decision to continue or withdraw from the firm?
    1. 3 months.
    2. 4 months.
    3. 6 months.
    4. 12 months.
36. New partner’s liability commences from
    1. the date of his admission.
    2. the financial year in which he was admitted.
    3. the day he start working for firm.
    4. either (i) or (ii) whichever is earlier.
37. In case of partnership at will, a retiring partner has to give a written notice
    1. to the firm.
    2. to the working partners.
    3. to all the partners.
    4. to the state government.
38. Retiring partner continues to be liable for acts of the firm done
    1. upto the date of admission of a new partner.
    2. upto the date of giving public notice of retirement.
    3. upto the end of the financial year in which he retires.
    4. all of the above.
39. Public notice of retirement should be given by
    1. retiring partner only.
    2. any partner of firm only.
    3. by the retiring partner or any partner of the reconstituted firm.
    4. all the partners of the reconstituted firm.
40. Where a partner in a firm is declared as insolvent by court order
    1. the firm is automatically dissolved.
    2. the firm is not automatically dissolved.
    3. the firm becomes illegal association.
    4. the firm is also considered as insolvent.
41. According to the Partnership Act, a partner can
    1. transfer his interest in the firm.
    2. transfer his interest in the firm with consent of all the other partners.
    3. transfer his interest in the firm with consent of majority of partners.
    4. transfer his interest to any third party without the consent.
42. Which of the following statements is correct?
    1. The estate of insolvent partner is not liable for the acts of the firm done after the order of insolvency.
    2. The public notice of insolvency of a partner is not necessary.
    3. The firm is not liable for any act of the insolvent partner done after the date of order of insolvency.
    4. All of the above.
43. Dissolution by agreement can be
    1. with the consent of all the partners.
    2. in accordance with a contract between the partners.
    3. either (i) or (ii).
    4. both (i) and (ii).
44. Which of the following is correct?
    1. The death of a partner automatically dissolves the firm.
    2. Any partner can dissolve the firm by giving notice if partnership is at will.
    3. All business of firm becomes unlawful.
    4. All of the above.
45. In partnership at will where no date has been mentioned in the notice, the firm is dissolved from
    1. the date decided by the registrar of firms.
    2. the date as decided by the partners.
    3. the date when the notice is communicated.
    4. the date decided by majority of partners.
46. Which of the following do not constitute ground for dissolution by court?
    1. Insanity of the partner.
    2. Incapacity of partner to perform his duties.
    3. Admission of minor to the benefits of partnership.
    4. Continuous losses of the firm.
47. Which of the following do not constitute a ground for dissolution by court?
    1. Misconduct by partner.
    2. Transfer of interest by partner.
    3. Just and equitable grounds.
    4. Suit by the dormant partner.
48. Which of the following is incorrect?
    1. The death of a partner automatically dissolves the firm.
    2. Any partner can dissolve the firm by given an oral notice if partnership is at will.
    3. Insolvency of a partner automatically dissolves a firm.
    4. All of the above.
49. Which of the following do not constitute just and equitable grounds for dissolution of firm?
    1. Deadlock in management.
    2. Disappearance of the substratum of business.
    3. Partners not in talking terms.
    4. None of the above.
50. The estate of a partner who dies is not liable for acts done after the date on which he ceases to be a partner.
    1. True
    2. Partly true
    3. False
    4. None of the above
51. No premium or part thereof shall be repaid if the dissolution is
    1. due to the partner’s own misconduct.
    2. in accordance with an agreement containing no provision as to return of premium.
    3. both (i) and (ii).
    4. either (i) or (ii).
52. Which of the following firm can be dissolved by a written notice of dissolution given by any partner?
    1. General partnership.
    2. Particular partnership.
    3. Partnership at will.
    4. Both (i) and (ii).
53. In a firm where a partner has become permanently incapable of performing his duties, the firm
    1. is automatically dissolved.
    2. may be dissolved by the court.
    3. cannot be dissolved.
    4. none of the above.
54. In a firm where a partner is guilty of misconduct which adversely affect the partnership business, the firm
    1. is automatically dissolved.
    2. is compulsorily dissolved.
    3. may be dissolved by the court.
    4. cannot be dissolved.
55. Which of the following words are permissible in a Firm’s name?
    1. Associates.
    2. King.
    3. Royal.
    4. Empress.
56. Which of the following rights are not applicable for unregistered firms?
    1. Right of partners to sue the firm for enforcing a right arising out of a contract.
    2. Right of partners to sue for dissolution of the firm.
    3. Right of partners to sue for settlement of accounts of a dissolved firm.
    4. Right of partners to sue for realizing the property of a dissolved firm.
57. If a firm is not-registered its business
    1. does not become illegal.
    2. becomes illegal.
    3. becomes void.
    4. becomes voidable.
58. In the case of the registered firms, public notice is given in the following manner:
    1. Serving a copy of the notice to the registrar of firms.
    2. Publishing the notice in the official gazette.
    3. Publishing the notice in one vernacular newspaper.
    4. All of the above.
59. The registration of a firm is made to the
    1. Registrar of companies.
    2. Registrar of firms.
    3. Registrar of trust.
    4. High court.
60. A partner shall pay to the firm any profit derived by him
    1. from any transaction of the firm.
    2. from the use of the property of the firm.
    3. from the business using the firm-name.
    4. all of the above.
61. The implied authority of any partner in a firm …………………………
    1. restricted
    2. extended.
    3. either (i) or (ii).
    4. none of the above.

ANSWER KEYS

1. iii
2. iv
3. iii
4. iii
5. i
6. iv
7. iv
8. iv
9. iii
10. i
11. iii
12. iv
13. ii
14. ii
15. i
16. ii
17. iv
18. iv
19. iii
20. ii
21. i
22. i
23. iv
24. iv
25. iv
26. iii
27. i
28. iii
29. i
30. ii
31. iv
32. iv
33. ii
34. iv
35. iii
36. i
37. iii
38. ii
39. iii
40. i
41. iv
42. iv
43. iii
44. iv
45. iii
46. iii
47. iv
48. ii
49. iv
50. i
51. iv
52. iii
53. ii
54. iii
55. i
56. i
57. i
58. iv
59. ii
60. iv
61. iii