PARTNERSHIP Act
I. DEFINITION AND ESSENTIALS OF PARTNERSHIP
Legal Definition
Section 4 of the Partnership Act, 1932 defines partnership as:
“The relation between persons who have agreed to share the profits of a business carried on by all or any
of them acting for all.”
Essentials of a Partnership
1. Agreement between two or more persons
Partnership arises from an agreement—express or implied. There must be at least two partners,
and a maximum of 20 (10 for banking).
2. Lawful Business
The purpose must be to carry on a lawful business. Any illegal activity will not constitute a valid
partnership (Sec. 11).
3. Profit Motive
The intention must be to earn and share profits. Even if profits are not actually earned, the
intention suffices.
4. Mutual Agency
The most essential feature—each partner is both a principal and an agent. Any partner’s act binds
the firm (Sec. 18).
Case Law: Cox v. Hickman (1860)
Held: Sharing of profits is not conclusive evidence of partnership unless there's mutual agency.
II. PARTNERSHIP VS OTHER BUSINESS ENTITIES
Basis Partnership Company Co-ownership
Legal Status No separate legal entity Separate legal entity No separate legal entity
By registration under By agreement or operation
Formation By agreement
Companies Act of law
Limited to respective
Liability Unlimited Limited to shareholding
ownership
Mutual Agency Present Not present Not present
Transfer of Not transferable without Freely transferable (public Transferable without
Interest consent companies) consent
III. RIGHTS AND DUTIES OF PARTNERS (Sec. 12–17)
A. Rights of Partners
1. Right to take part in conduct of business – Sec. 12(a)
2. Right to equal share in profits – Sec. 13(b)
3. Right to be indemnified for firm’s expenses – Sec. 13(e)
4. Right to access and inspect books of accounts – Sec. 12(d)
5. Right to interest on capital and advances, if agreed – Sec. 13(c)(d)
B. Duties of Partners
1. Duty of Good Faith (Fiduciary Duty) – Partners must act honestly and in the firm’s interest.
2. Duty to account for private profits
o Case: Bentley v. Craven (1853) – Partner bought goods cheaper and sold to firm at a
profit. Court held him liable to return profits.
3. Duty not to compete – Sec. 16(b)
o Cannot run competing business. If done, must surrender profits to the firm.
4. Duty to be diligent and not negligent – Sec. 12(b)
5. Duty to account for firm property – Sec. 15, 16(a)
IV. REGISTRATION OF PARTNERSHIPS
A. Procedure (Sec. 58)
Application to Registrar of Firms with:
o Firm name and business address
o Names and addresses of all partners
o Date of joining
o Duration (if any)
Signed by all partners and filed with the prescribed fee.
B. Legal Effects of Registration
1. Firm becomes capable of suing and being sued – Sec. 69(1)
2. Partners can sue each other for rights arising out of partnership.
3. Legal protection for contracts, recovery of debts, and enforcement of duties.
V. LEGAL CONSEQUENCES OF AN UNREGISTERED FIRM (Sec. 69)
A. Limitations
Cannot file a suit against third parties.
Partners cannot sue each other or the firm.
B. Exceptions
Third parties can sue the firm.
Right to sue for:
o Dissolution of firm
o Settlement of accounts
o Realization of property after dissolution
Case: Jagdish Chandra Gupta v. Kajaria Traders (1964)
Held: Unregistered firms cannot institute a suit for recovery.
Case: Purushottam v. Manilal (1961)
Held: Firm’s claim dismissed for being unregistered.
VI. DISSOLUTION OF PARTNERSHIP
A. Modes of Dissolution
1. By Agreement – Sec. 40
Partners mutually agree to dissolve the firm.
2. Compulsory Dissolution – Sec. 41
o On insolvency of a partner
o Unlawful business (e.g., smuggling)
o Case: Khan v. Miah (2000) – Illegal business = automatic dissolution.
3. By Notice (At-will firms) – Sec. 43
Any partner may dissolve the firm by written notice.
4. By Court Decree – Sec. 44
On grounds such as:
o Insanity of a partner
o Misconduct
o Persistent breach of agreements
o Fraud or unfair treatment
Case: Haji Ismail v. Francis Peixotto (1968)
Held: Fraud by a partner is valid ground for dissolution.
Case: Ebrahimi v. Westbourne Galleries (1973)
Held: Minority partner unfairly excluded—firm dissolved on equitable grounds.
VII. CONSEQUENCES OF DISSOLUTION
1. Settlement of Accounts (Sec. 48)
o Pay debts
o Return capital
o Distribute surplus as per ratio
2. Distribution of Losses – In profit-sharing ratio.
3. Rights of Outgoing Partners
o Sec. 36: Right to goodwill
o Sec. 37: Right to interest on capital
CONCLUSION
The Partnership Act, 1932 establishes a robust framework governing the formation, operation, and
dissolution of partnerships. It emphasizes mutual trust and good faith, while also ensuring clarity of
rights, obligations, and remedies in case of disputes. Registration, although not mandatory, significantly
enhances legal enforceability. Partnership continues to be a flexible and popular business model,
especially for small and medium enterprises.
