Law notes 2

Indian partnership act 1932

1.Definition and Nature of the Indian
Partnership Act, 1932
Definition:
The Indian Partnership Act, 1932 is a law enacted to
regulate partnership firms in India. A partnership is defined
under Section 4 of the Act as:
"Partnership is the relation between persons who have
agreed to share the profits of a business carried on by
all or any of them acting for all."
This means a partnership arises from a contract where two or
more persons come together to carry on a lawful business with
a view to earning and sharing profits.
Nature / Characteristics of the Indian Partnership
Act, 1932:
1. Contractual Relationship:
o A partnership is formed by an agreement (written or
oral), not by status.
o Mutual consent is essential.
2. Number of Partners:
o Minimum: 2
o Maximum: 50 (As per Companies Act rules; not
specified in the Partnership Act directly)
3. Profit Sharing:
o The primary purpose of the partnership is to earn and
share profits.
o Losses are also shared unless agreed otherwise.
4. Mutual Agency:
 o A key feature: Every partner is both an agent and
principal.
o A partner can bind the firm and other partners by
their acts done in the course of business.
5. Business Activity:
o There must be a lawful business.
o Mere sharing of income (e.g., co-ownership) is not a
partnership.
6. Unlimited Liability:
o Partners have unlimited liability, meaning their
personal assets can be used to settle the firm’s
debts.
7. No Separate Legal Entity:
o A partnership firm is not a separate legal entity
from its partners, unlike a company.
8. Voluntary Registration:
o Registration of a partnership firm is not mandatory,
but an unregistered firm faces legal limitations (e.g.,
cannot sue to enforce contracts).
9. Governed by Indian Partnership Act, 1932:
o The Act lays down rights, duties, and liabilities of
partners and procedures for reconstitution and
dissolution.

Summary of nature
Nature / Characteristics:
1. ✅ Agreement-based – Partnership is formed by a
contract (not by birth or status).
2. 👥 Minimum 2, Maximum 50 partners.
 3. 💰 Profit Sharing – Partners share profits (and losses
unless agreed otherwise).
4. 🔄 Mutual Agency – Each partner is an agent and principal
for others.
5. 🏢 Lawful Business Only – Must be a legal business
activity.
6. 📉 Unlimited Liability – Partners are personally liable for
firm’s debts.
7. ⚖️No Separate Legal Entity – The firm and partners are
not distinct in law.
8. 📝 Voluntary Registration – Not mandatory, but
unregistered firms have limited legal rights.
9. 📚 Governed by the Indian Partnership Act, 1932 –
Specifies duties, rights, and rules.
2. Essentials of Indian partnership act 1932
Essentials of a Partnership (As per Section 4 of
the Act):
1. Agreement Between Persons
o Partnership arises from a contract, not from status
(like inheritance).
o Can be oral or written.

2. Number of Persons
o Minimum: 2 persons
o Maximum: 50 persons (as per Companies Act rules)
3. Lawful Business
o The purpose must be to carry on a lawful business
(not charity or illegal acts).
4. Profit Motive
o The main aim must be to earn and share profits.
 o Losses may also be shared (if agreed).
5. Mutual Agency
o Every partner is an agent and principal.
o One partner’s act binds the others and the firm.
6. Sharing of Profits
o Sharing profits is essential (not necessarily losses).
o Sharing of profits is evidence, not proof of
partnership.
7. Business Carried on by All or Any Acting for All
o Any one or more partners can manage the business
on behalf of others.
Summary
"Partnership is formed by an agreement between two or
more persons to carry on a lawful business, with the
intention of sharing profits and where every partner
acts as an agent and principal for others."

3. Kinds of Partnership under Indian Partnership Act,

1932
A. Based on Duration:
1. Partnership at Will
o No fixed duration mentioned in the agreement.
o Can be dissolved any time by giving notice.
o Example: Friends start a business with no mention of
time period.
2. Particular Partnership
o Formed for a specific venture/project or period.
o Automatically ends after the project is completed.
o Example: A partnership to complete a construction
contract.
B. Based on Liability:
1. General Partnership
o All partners have unlimited liability.
o Partners are involved in the day-to-day business.
o Most common type under the Act.
2. Limited Partnership (Not covered under 1932 Act, but
under LLP Act, 2008)
o At least one partner has limited liability.
o Rare under the traditional Partnership Act, but
important to know for comparison.

✅ Types of Partners (Also covered under the Act):

1. Active Partner – Takes part in day-to-day business.
2. Sleeping (Dormant) Partner – Invests capital but
doesn’t actively participate.
3. Nominal Partner – Lends name to the firm, but doesn’t
invest or manage.
4. Partner in Profits Only – Shares profits but not losses.
5. Minor Partner – Can be admitted only to the benefits
of partnership (not liable for losses).
6. Incoming Partner – Joins an existing firm.
7. Outgoing Partner – Leaves the firm but others continue
business.
 3. Registration of Partnership Firm
Procedure for Registration:
1. Application to Registrar
o Submit application (Form No. 1) to the Registrar of
Firms of the area where the firm is located.
2. Details to be Provided:
o Name of the firm
o Place of business
o Names and addresses of all partners
o Date when each partner joined the firm
o Duration of the firm (if any)
3. Signed by All Partners
o The statement must be signed and verified by all
partners.
4. Fees and Documents
o Pay the prescribed fee and submit required
documents.
5. Certificate of Registration
o If all is in order, the Registrar records the entry and
issues a Certificate of Registration.

✅ Effects of Registration:
1. The firm gets legal recognition.
2. It can sue and be sued in its own name.
3. Partners can enforce their rights in court.
4. Firm can claim set-off in a lawsuit.
5. Partners can inspect the Register of Firms.
5. Consequences of non-registration of
partnership.
Consequences of Non-Registration of a Partnership Firm
(As per Section 69 of the Indian Partnership Act, 1932)
If a partnership firm is not registered, it faces several legal
disadvantages:

🚫 1. No Right to Sue Third Parties

 An unregistered firm or its partners cannot file a suit
in court to enforce any contractual right (like recovering
money, goods, etc.).
 Example: If a customer doesn’t pay the bill, the firm
cannot sue to recover the amount.

🚫 2. No Right to Claim Set-Off

 If someone sues the unregistered firm, it cannot claim a
set-off (i.e., reduce the amount payable by adjusting its
own dues).
 Example: If Firm A owes ₹5,000 to X but X also owes
₹3,000 to Firm A, Firm A can’t claim this ₹3,000 as a set-
off in court.
🚫 3. Partners Cannot Sue Each Other or the Firm
 A partner of an unregistered firm cannot sue:
o The firm, or
o Any other partner
for enforcing rights under the partnership agreement.

✅ 4. Third Parties Can Sue the Firm

 Unregistered firms can be sued by outsiders (third
parties) without restriction.

✅ 5. Exceptions (Registration Not Required In These

Cases):
Even if the firm is unregistered, it can still sue in the following
situations:
 To dissolve the firm.
 For account of dissolved firm.
 To realize property of a dissolved firm.
 If the claim amount is less than ₹100 (very rare and
outdated clause).

📝 Summary Line for Exams:

"Non-registration of a partnership firm does not make it
illegal, but it severely limits its legal rights, especially
the right to sue or enforce contracts in court."

6.Mutual relationships between partners under

rights & liabilities of partners under the
Indian partnership act 1932

Mutual Rights of Partners:

1. Right to Take Part in Business (Sec. 12(a))
o Every partner has the right to participate in
management.
2. Right to be Consulted (Sec. 12(c))
o Decisions should be made with mutual consent,
especially on major matters.
3. Right to Access Books (Sec. 12(d))
o Every partner can inspect and copy the firm's
books/accounts.
4. Right to Share Profits (Sec. 13(b))
o Partners have an equal right to profits, unless
otherwise agreed.
5. Right to Interest on Capital (Sec. 13(c))
o If agreed, a partner is entitled to interest on
capital, only from profits.
6. Right to Be Indemnified (Sec. 13(e))
o A partner has the right to be reimbursed for
expenses made on behalf of the firm.
7. Right to Use Partnership Property
o For business purposes only, not personal use.
❌ Mutual Duties & Liabilities of Partners:
1. Duty of Good Faith (Sec. 9)
o Partners must act honestly and in the best interest
of the firm.
2. Duty to Work for Common Advantage (Sec. 9)
o Partners should work sincerely and avoid personal
gains at the firm's expense.
3. Duty to Render True Accounts (Sec. 9)
o Must maintain accurate and transparent accounts.
4. Duty Not to Compete (Sec. 16)
o A partner must not start a competing business; if
they do, profits go to the firm.
5. Liability to Share Losses (Sec. 13(b))
o Unless agreed otherwise, all partners equally bear
losses.
6. Liability for Acts of Other Partners (Sec. 18 & 25)
o All partners are jointly and severally liable for
actions done by any partner in the course of
business.

Summary Line:

"Partners are bound by mutual trust, equal

rights, shared responsibilities, and joint liabilities
while working towards the common goal of the
business."
 7. Authority of a partner under rights and
liabilities.

✅ 1. Meaning of Authority of a Partner:

The authority of a partner means the power to act on
behalf of the firm.
Every partner is an agent of the firm for the purpose of the
business (Section 18).

🔄 2. Types of Authority:

A. Implied Authority (Section 19)

 Authority that is normally exercised by a partner during
the usual course of business.
 Firm is bound by such acts, even if not specifically
authorized.
✅ Examples of Acts Under Implied Authority:
 Buying or selling goods on behalf of the firm
 Receiving payments and issuing receipts
 Hiring employees
 Settling accounts with customers
 Borrowing money (if usual in that business)

❌ Not Covered Under Implied Authority (Unless

Customary):
 Submitting disputes to arbitration
 Opening a bank account in partner’s own name
 Compromising or relinquishing claims
 Transferring immovable property
  Entering into partnership on behalf of the firm
⚠️Note: These acts need express authority or consent of all
partners.

B. Express Authority
 Authority clearly given to a partner through:
o Partnership deed
o Agreement
o Decision of all partners

C. Emergency Authority (Section 21)

 A partner has the authority to do all acts necessary in
an emergency to protect the firm from loss.
 The firm will be bound by such acts if done in good faith.

📝 Summary Line:
"A partner can bind the firm by acts done in the ordinary
course of business through implied, express, or
emergency authority. But acts outside the usual
business require consent."

8. Admission and outgoing of partners

1. What is Admission?
 When a new person joins an existing partnership firm
with the consent of all partners, it is called admission.
2. Procedure for Admission:
 Consent of all existing partners is required (unless the
partnership deed states otherwise).
 New partner agrees to be bound by existing
partnership terms.
  New partner shares profits, losses, and liabilities from
the date of admission.
 Firm may change the partnership deed accordingly.
3. Effect of Admission:
 New partner becomes liable for all acts and debts of
the firm after joining.
 Existing partners are not liable for the new partner’s
past acts.

➖ Outgoing of a Partner
(When a Partner Leaves the Firm)
1. Types of Outgoing:
 Retirement: Partner leaves after giving notice or on
expiry of term.
 Expulsion: Partner is forced to leave due to breach or
misconduct (as per deed).
 Death: Automatically leads to outgoing.
 Insolvency: If a partner is declared insolvent.
2. Procedure for Retirement/Expulsion:
 Notice to other partners is generally required.
 Firm may need to settle accounts with the outgoing
partner.
 Partnership deed may specify the conditions.
3. Effect of Outgoing:
 Outgoing partner is liable for acts done while they
were a partner.
 They are not liable for new debts incurred after they
leave (if proper notice of retirement is given to third
parties).
  Outgoing partner can claim their share of profits and
capital.
Summary table : -

Aspect Admission Outgoing

Consent Required from all partners May require notice/consent
Liability New partner liable from Outgoing liable for past
admission acts
Effect New partner shares profits & No share in future profits
losses
Reason To increase capital/skills Retirement, expulsion,
death

9. Grounds under dissolution of firms under Indian

partnership act 1932
Grounds for Dissolution of Partnership Firm
(As per Sections 39 to 44 of the Indian Partnership Act, 1932)

1. Dissolution by Agreement
 Partners mutually agree to end the partnership at any
time.
2. Compulsory Dissolution
 Death of a Partner
o Partnership (not firm) is dissolved if a partner dies
(unless otherwise agreed).
 Insolvency of a Partner
o If any partner is declared insolvent, the partnership is
dissolved.
 Insolvency of the Firm
o If the firm itself is declared insolvent.
 Expiry of Duration
 o If the partnership was formed for a fixed term or
specific purpose, it dissolves automatically at term
end or project completion.
3. Dissolution by Notice
 In a Partnership at Will, any partner can dissolve the
firm by giving notice to others.
4. Dissolution by Court
The court may order dissolution on grounds such as:
 Incapacity of a partner to perform duties (mentally
unsound, etc.).
 Misconduct of a partner affecting business.
 Breach of agreement by a partner.
 Persistent breach of contract or partner’s willful
negligence.
 Just and equitable grounds (any reason the court finds
fair).
5. Dissolution on Insolvency of All Partners
 When all partners become insolvent.

Summary table:

Ground Description
Agreement Mutual consent to dissolve
Death Death of any partner (if not otherwise agreed)
Insolvency Insolvency of partner or firm
Expiry of Term Fixed-term or project completion
Notice Partner’s notice in partnership at will
Court Order Due to misconduct, incapacity, breach, or
fairness
10. Consequences of Dissolution of a
Partnership Firm

1. Partnership is at an End
 The partnership relation between partners
comes to an end.
 Partners no longer carry on business as
partners.
2. Business Can Continue for Winding Up
 The firm continues to exist for the purpose of
winding up — to settle debts, sell assets, and
distribute remaining assets.
3. Authority of Partners Ceases
 Partners no longer have authority to bind the
firm by new contracts (except for acts
related to winding up).
4. Rights and Liabilities Remain
 Partners remain liable for debts and
obligations incurred before dissolution.
 Also liable for acts done during winding up.
5. Assets Are Realized and Debts Paid
 Firm’s assets are sold to pay off creditors in
this order:
1.Outside creditors
2.Partner’s loans to firm
3.Capital returned to partners
4.Remaining profits shared among partners
6. Distribution of Surplus or Deficit
 After debts, if surplus remains, it is
distributed among partners as per profit
sharing ratio.
 If deficit occurs, partners share losses.
7. Partners Can Sue After Dissolution
 Partners or firm can sue for settlement of
accounts and recovery of debts even after
dissolution.

📝 Summary Line:
"Dissolution ends the partnership, but the
firm remains for winding up its affairs, paying
debts, and distributing assets among
partners."