Indian Partnership Act 1932 | CMA Inter Syllabus
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A partnership is a business form wherein two or more persons agree to come together for carrying out a business for economic gains. However, presence of profits is not always a determinative criterion to ascertain if a business form is a partnership. Prior to partnerships being established and legalized by legislation, sole proprietorship used to be carried out by individuals. Even though such businessforms still exist, the challenges faced by such business forms led to the emergence of other business forms that could be used to conduct business more efficiently. In sole proprietorship the business is carried out by an individual with limited capital and skills. Due to this paucity of resources, larger businesses could seldom be conceived by such individuals. Therefore, with the emergence of partnerships, a number of partners could now join their resources and skills to carry out bigger businesses.
1.1 Definition
Section 4 defines the term ‘partnership’ as the relationship between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. The term ‘partners’ is defined as persons, who have entered into partnership with one another are called individually partners. A ‘firm’ is the collective of the partners. The ‘firm name’ is the name under which the business is carried on.
The following are the essential ingredients for the constitution of a partnership-
1.2 Different types of partnership
There are four types of partnership which are as detailed below-
1.3 Different types of partners
The following are the various types of partners-
Active partner contributes capital and also takes active part in the management of the firm. He bears an unlimited liability for the firm’s debts. He is known to outsiders. He shares profits of the firm. He is a full-fledged partner.
A sleeping or inactive partner simply contributes capital. He does not take active part in the management of the firm. He shares in the profits or losses of the firm. His liability for the firm’s debts is unlimited. He is not known to the outside world.
Secret partner contributes capital and takes active part in the management of the firm’s business. He shares in the profits and losses of firm and his liability is unlimited. However, his connection with the firm is not known to the outside world.
The liability of such a partner is limited to the extent of his share in the capital and profits of the firm. He is not entitled to take active part in the management of the firm’s business. The firm is not dissolved in the event of his death, lunacy or bankruptcy.
Partners in profit only share in the profits of the firm but not in the losses. But his liability for the firm’s debt is unlimited. He is not allowed to take part in the management of the firm. Such a partner is associated for his money and goodwill.
Nominal Partner neither contributes capital nor takes part in the management of business. He does not share in the profits or losses of the firm. He only lends his name and reputation for the benefit of the firm. He represents himself or knowingly allows himself to be represented as a partner. He becomes liable to outsiders for the debts of the firm. A nominal partner can be of two types - Partner by estoppels and partner by holding out. A person who by his words (spoken or written) or conduct represents himself as a partner becomes liable to those who advance money to the firm on the basis of such representation. He cannot avoid the consequences of his previous act. Suppose a rich man, Jalal, is not a partner but he tells Ramu that he is a partner in a firm called Alpha Enterprises. On this impression, Ramu sells good worth ` 20,000 to the firm. Later on the firm is unable to pay the amount. Ramu can recover the amount from Jalal. Here, Jalal is a partner by estoppels. When a person is declared as a partner and he does not deny this even after becoming aware of it, he becomes liable to third parties who lent money or credit to the firm on the basis of such a declaration. Suppose, Alpha tells Ramu in the presence of Jalal that Jalal is a partner in the firm of Alpha Enterprises. Jalal does not deny it. Later on Ramu gives a loan of ` 20,000 to Alpha Enterprises on the basis of the impression that Jalal is a partner in the firm. The firm fails to repay the loan to Ramu. Jalal is s liable to pay ` 20,000 to Ramu. Here, Jalal is a partner by holding out.
1.4 Partnership is a creation of contract
Section 5 provides that the relation of partnership arises from contract and not from status. The members of a Hindu Undivided Family carrying on a family business as such, or a Burmese Buddhist husband and wife, carrying on business as such, are not partners in such business.
This section lays down that partnership is not a status, but a creation of contract. The partnership is entirely different from a company, Limited Liability partnership, Hindu Undivided Family.
1.5 Difference between a partnership and a company
| Basis | Partnership | Company |
| Legal entity | It is not a separate legal entity. | A company is a separate legal entity. |
| Liability | The liability of the partners is unlimited. | The liability of the members of the company is limited. |
| Number of members | Minimum required is two. Maximum number can be 100 subject to some exceptions present Rules provide 50. | Minimum number of members for a private company is 2 and maximum 200. Minimum number of members for a public limited company is 7 and there is no limited for maximum. |
| Transfer of shares | A partner cannot transfer his share without the consent of other members | Transfer of shares in a public limited company is not a restricted one. |
| Management | The firm can be run by all or any of the partners. | The Board of Directors has responsibility to run the management |
| Relationship | The relationship with partners is of that of agency. | No such relationship in the company. |
| Profit distribution | Profit is distributed according to the agreement entered between partners; if no agreement equal distribution. | No requirement of profit distribution to members. It is at the discretion of the management to declare dividend that too only out of profits. |
| Remedy to creditors | The creditors of a firm can proceed against the partners jointly and severally. | The creditors can proceed only against the company and not against shareholders. |
| Audit | Audit is not compulsory for the partnership firm. | Various types of audit are compulsory for the company |
| Dissolution | Firm can be dissolved on the eve of death of partner, retirement of partner etc., unless otherwise than agreed to in the agreement. | A company can be dissolved only by the winding up process as ordered by the Court. |
In ‘Gurugubilli Chendran Naidu V. Achanti Pydisetti’ – AIR 1985 NOC 135 (AP) it was held that right to share the profits of the partnership in equal shares can arise only when there is no contract between the partners regarding it. But there is no specific provision in the Indian Partnership Act, 1932 to share capital equally.
1.6 Difference between partnership and limited liability partnership
| Basis | Partnership | Company |
| Legal entity | It is not a separate legal entity. | A company is a separate legal entity. |
| Liability | The liability of the partners is unlimited. | The liability of the members of the LLP is limited. |
| Number of members | Minimum required is two. Maximum number is 50 subject to some exceptions | Minimum number of members for a LLP is 2 and no limit for maximum numbers. |
| Entering into contracts | Partnership is not a separate person and enter into contract on behalf of its partners | LLP is capable of entering into contracts and holding property in its own name |
| Compliance of law | Lesser compliance | More compliance under LLP Act. |
| Dissolution | Firm can be dissolved on the eve of death of partner, retirement of partner etc., unless otherwise than agreed to in the agreement. | LLP can be dissolved by complying with the provisions of LLP (Winding up and Dissolution) Rules, 2012. |
1.7 Differences between the partnership and Hindu Undivided Family
| Basis | Partnership | Hindu undividend family |
| Relationship | Relation subsists between the partners. | It is a single person and it cannot have a partnership by itself. |
| Management | All of the partners may involve in the management | Karta of HUF is managing the business |
| Share of profit | Partners can share profit as per the agreement | No such sharing of profits in HUF |
| Property | The properties even though in the name of partnership firm belongs to all partners | This business is a species of ancestral joint property in which every member of a family acquires |
| Authority | Each partner is the agent of others | It has implied authority to contract debts and pledge the properties and credit of the family for the ordinary purposes of the family business |
| Dissolution | Firm can be dissolved on the eve of death of partner, retirement of partner etc., unless otherwise than agreed to in the agreement. | The death of Karta will not lead to the dissolution of the HUF business. |
Duties of partners
Section 9 of the Act deals with the general duties of partners. Partners are bound-
Rights and duties of partners
Section 11(1) provides that the mutual rights and duties of the partners of a firm may be determined by contract entered between the partners. Such contract may be expressed or may be implied by a course of dealing. Such contract may be varied by consent of all partners. Such consent may be expressed or may be implied by a course of dealing.
Agreements in restraint of trade
Section 11(2) of the Act provides that the contracts entered between partners may provide that a partner shall not carry on any business other than that of the firm while he is a partner. Section 36 (2) provides that a partner may make an agreement with his partners on ceasing to be a partner, he will not carry on any business similar to that of the firm within a specified period or within specified local limits. Such agreement shall be valid if the restrictions imposed are reasonable.
Section 54 provides that the partners may, upon or anticipation of the dissolution of the firm, make an agreement that some of them will not carry on a business similar to that of a firm within a specified period or within specified local limits.
Section 55(3) provides that any partner may, upon the sale of the goodwill of a firm, make an agreement with the buyer that such partner will not carry on any business similar to that of the firm within a specified period or within specified local limits.
Conduct of business
In ‘Rajnikanth Hasmukhlal Golwala V. Nataraj Theatre, Navsari’ – AIR 2000 Guj 80 (88) it was held that Section 12 of the Act gives right to every partner to take part in the conduct of the business. Of course, the right which is enshrined in the Act takes effect subject to any express or implied contract amongstthe partners. This right cannot be fettered by any court unless there is a contract to the contrary arrived at amongst the partners themselves. Further their transferees have no right to do the business sin view of the Section 29 of the Act.
In ‘Sasthi Kenker v. Gobinda’ – AIR 1919 Pat 419 IC 2 it was held that a partner is not liable for negligence if he can show that used such skill and intelligence as he possessed in the conduct of the business.
Mutual rights and liabilities
Section 13 provides that subject to the contract between the partners-
When the profits are not shared equally, the losses are, in the absence of the agreement, to be borne in the same proportion as the profits are shares, regardless, whether one partner has put up more capital than other.
In ‘Bhagchand v. Kaluram’ – AIR 1966 Raj 24 (25) it was held that in the absence of a stipulation in the partnership agreement to the effect that the interest would be paid on all the investments, irrespective of the fact as to whether there was any profit or loss, Section 13 comes into play and interest is, therefore, payable only out of the profits earned by the partnership business.
An advance by a partner to a firm is not treated as an increase of his capital but rather as loan on which interest ought to be paid. An agreement to pay a different rate may be inferred if a different rate is payable by the custom of the particular trade, or has been charged and allowed in the books of the particular partnership. Compound interest may be allowed if there is an agreement, whether express of implied, to that effect as held in ‘Chandrika Prasad Ram Swarup V. Commissioner of Income Tax’ – AIR 1939 All 341.
In ‘Banwari Lal v. Shaikh Shukrullah’ – AIR 1940 Pat 2014: 19 it was held that a partner, who is guilty of willful negligence in the conduct of partnership business, is liable to indemnify the firm for any loss, caused to it, by his willful neglect and is not himself entitled to be indemnified by his co-partners.
Section 16 provides that if a partner derives any profit for himself-
he shall account for that profit and pay it to the firm.
If a partner carries on any business of the same nature as, and competing with, that of the firm, he shall account for and pay, to the firm, all profits made by him in that business.
Rights and duties of partners
Section 17 of the Act provides for the rights and duties of partners. Subject to the contract between the partners-
Partner to be agent of the firm
Section 18 provides that a partner is the agent of the firm for the purpose of the business of the firm.
Implied Authority
Section 22 provides that in order to bind a firm, an act or instrument, done or executed by a partner or other person on behalf of the firm, shall be done or executed in the firm name, or in any other manner expressing or implying an intention to bind the firm.
Section 19 provides that subject to the provisions of Section 22, the act of a partner, which is done to carry on, in the usual way, business of the kind carried on by firm, binds the firm.
The authority of a partner to bind the firm, conferred by this section, is called his ‘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-
Extension and restriction of implied authority
Section 20 provides that the partners may extend or restrict the implied authority of any partner by contract between the partners. Despite such restrictions, any act done by a partner on behalf of the firm, which falls within his implied authority, binds the firm unless the person, with whom he is dealing, knows of the restriction or does not know or believe that partner to be a partner.
Authority in emergency
Section 21 provides that in case of emergency a partner has authority to do all such acts for the purpose of protecting the firm from loss as would be done by a person of ordinary prudence, in his own case acting under similar circumstances, and such acts bind the firm.
Effect of admission
Section 23 provides that an admission or representation made by a partner about the affairs of the firm is the evidence against the firm, if it is made in the ordinary course of business.
Effect of notice
Section 24 provides that a notice issued to a partner, who habitually acts in the business of the firm, of any matter, relating to the affairs of the firm, will be the notice issued to the firm unless in the case of a fraud on the firm committed by, or with the consent of the partner.
Liability of a partner
Section 25 provides that every partner is liable, jointly with all other partners and also severally, for all acts of the firm done while he is a partner.
Liability of the firm
Section 26 provides that where, by the wrongful act or omission of a partner, acting in the ordinary course of the business of a firm, or with the authority of his partners, loss or injury is caused to any third party, or any penalty is incurred, the firm is liable therefore to the same extent as the partner.
Section 27 provides that the firm is liable for misapplication by partners. If -
Holding out/Deemed Partners
Section 28 provides that any person, who -
To be represented to be a partner in a firm, is liable as a partner in that firm to anyone who has, on the faith of any such representation, given credit to the firm, whether the person, representing himself or represented to be a partner does or does not know that the representation has reached the person so giving credit. Two or more persons doing some activity with common understanding and for gain shall be deemed as partners even when they themselves deny to be partners when they are liable to third parties.
If the business is continued, after the death of a partner, in the old firm name, the continued use of that name, or of the deceased partner’s name, as a part thereof, shall not, of itself, make his legal representative, or his estate, liability for any act of the firm done after his death.
Rights of Transferee of a partner’s interest
Section 29 deals with the rights of transferee of a partner’s interest. This section allows a partner to transfer his interest in the firm, either absolutely or by mortgage or by the creation of a charge on such interest during the continuance of the firm. The transferee who receives such interest in the firm, does not entitled to-
He is entitled to receive the share of profits of the transferring partners and the transferee is to accept the account of profits agreed to by the partners.
If the firm is dissolved or the transferring partner ceases to be a partner, the transferee is entitled to receive the share of the assets of the firm to which the transferring partner is entitled and for the purpose of ascertaining that share, to an account as from the date of dissolution.
Minors as partners
Section 30 of the Indian partnership act provides that though a minor cannot be a partner of a firm, but, with the consent of all the partners for the time being, he may be admitted to the benefits of the partnership by an agreement executed through his guardian with the other partners.
Rights and liability of minor
A minor in a partnership has a right to such share of the property and of the profits of the firm as may be agreed upon. He is having power to have access to and inspect and to get copy, any of the accounts of the firm.The share of a minor in a partnership firm is liable for the acts of the firm. But he is not personally liable for any such act. When a minor severs his connection with the firm he may not sue the partners for an account or payment of his share of the property or profits of the firm. The account of his share shall be determined by a valuation made, as far as possible.
All the partners of a firm together or any partner entitled to dissolve the firm, upon notice to other partners, may elect to dissolve the firm. The Court shall proceed with the suit as one for dissolutionand for settling accounts between the partners, and the amount of the share of the minor shall be determined along with the shares of the partners.
Election on majority
On attaining majority, or of his obtaining knowledge that he had been admitted to the benefits of partnership whichever date is later, a minor may within six months from such date give public notice that he has elected to become or that he has elected not to become a partner in the firm. Such notice shall determine his position as regards to the firm. If a minor fail to give such notice, he shall become a partner in the firm on the expiry of the said six months.
If a minor elect to become a partner-
Where any person has been admitted as a minor to the benefits of partnership in a firm, the burden of proving the fact that such person had no knowledge of such admission until a particular date after the expiry of six months of his attaining majority shall lie on the person, asserting the fact.
Rights of outgoing partners
Section 36 provides that an outgoing partner may carry on a business competing with that of the firm.
He may advertise such business, but, subject to contract to the contrary, he may not-
Section 37 provides that in case where a partner has died or ceased to be a partner, the surviving and continuing partners may carry on the business of the firm with the property of the firm without any final settlement of accounts as between them and the outgoing partner or the estate of deceased partner. In the absence of a contract to the contrary, the outgoing partner of the representative of the deceased partner is entitled at the option-
Where an option is given to surviving or continuing partners to purchase the interest of a deceased or outgoing partner and the same is duly exercised, the estate of the deceased partner or the outgoing partner is not entitled to any further or other share of profits. But if any partner, assuming to act in exercise of the option, does not, in all material respects comply with the terms, he is liable to account under the provisions of this section.
3. Formation, Reconstitution and Dissolution of Firms
3.1 Determining existence of partnership
Section 6 provides that in order to determine-
regard shall be had to the real intention between the parties, taking into the facts together.
The sharing of profits or of gross returns arising from property by persons holding a joint or common interest in that property does not make such persons as partners.
The receipt-
by a person does not of itself, make him a partner with the persons carrying on the business.
The receipt of such share or payment-
In ‘S.K. Parthasarathy Naidu V. K. Rama Naidu’ – AIR 2001 Mad 399 (405) it was held that the legal existence of a partnership is proved by facts to support such a claim. There need not be any particular form of document and in fact, the partnership can even be oral, but, whether a relationship of partners exists or does not exist depends on what was intended by parties.
In ‘Shiv Narain & Sons V. Commissioner of Income Tax’ – AIR 1935 Lah 896 it was held that a partnership firm is not a ‘person’, but merely a collective name for the individuals who are members of the partnership, and as such it cannot be a partner in another partnership firm. A partnership is a relationship which subsists between persons. A partnership firm is not a legal entity, is incompetent to enter into a partnership with another partnership firm.
3.2 Partnership at will
Section 7 defines the expression ‘partnership at will’. According to this section, where no provision is made by contract between the partners for the duration of their partnership, or for the determination of their partnership, the partnership is ‘partnership at will’.
Such a partnership could be dissolved by any partner giving notice in writing to all other partners, of his intention to dissolve the firm. On such notice being given, the firm is dissolved from the date mentioned in the notice as the date of dissolution or if not date is so mentioned, as from the date of communication of the notice.
The following are the essential ingredients of a ‘partnership-at-will’-
If either of the above said provision exists, the partnership would not be a partnership-at-will.
3.3 Particular partnership
Section 8 provides that a person may become a partner with another person in particular adventures or undertakings.
3.4 Property of the firm
Section 14 provides that subject to contract between the partners, the property of the firm includes all property and rights and interests in property, originally brought into the stock of the firm, or acquired, by purchase or otherwise, by or for the firm, or for the purposes and in the course of the business of the firm and includes also the goodwill of the business.
The property and rights and interests in property acquired with money belonging to the firm are deemed to have been acquired for the firm unless the contrary intention appears.
In ‘Arjun Kanaji Tankar v. Shantaram’ (1969) 3 SCC 555 a contention was raised that in any event, by virtue of Section 14 of the Partnership Act, all the assets with the aid of which the business was carried on by the plaintiff must be deemed in law to have become the partnership assets under the deed of partnership. It was held that under Section14, the property belonging to a person, in the absence of any agreement to the contrary, does not, on a person entering into a partnership with others, become the property of the partnership merely because it is used for the business of the partnership. It will become the property of the partnership only if there is an agreement, express or implied, that the property was, under the agreement of partnership, to be treated as the property of the partnership.
Section 15 provides that subject to the contract between the partners, the property of the firm shall be held and used by partners exclusively for the purposes of the business.
In ‘Reddi Verraju V. Chittori Lakshminarasamma’ AIR 1971 AP 266 it was held that no partner can claim an exclusive right in any article of the partnership property. But upon on a dissolution, any part of the partnership property may, by contract of the partners, be converted into the separate individual property of either. It, therefore, follows, so long as there is a partnership in existence, no partner has any right to take any portion of the partnership property or to say that it belongs to him exclusively so as to assign or transfer the partnership property. The right, that he possesses in the partnership property, is as a member of the partnership, and not a right which can claim in his individual capacity.
3.5 Formation of a Partnership
Partnership is one of the modes of business. It is governed under the Indian Partnership Act, 1932. For constituting a partnership, the following ingredients are necessary-
All the above ingredients must exist before a partnership come into existence. Actual starting of business to registration is not a condition precedent.
In ‘Meenakshi Achi v. P.S.M. Subramanian Chettiar’ – AIR 1957 Mad 8 the High Court held that in determining whether a particular group of persons constitutes a partnership, regard has to be had to the real relationship between the parties as drawn by all relevant facts taken together. However, it is often a difficult question to decide. There are several indicators for testing the existence of a partnership like books of account, existence of other employees of the partnership, proof of business dealing etc., While sharing of profits is an important criterion, it is not conclusive.
The first element relates to the voluntary contractual nature of partnership; the second gives the motive which leads to the formation of firms, i.e., the acquisition of gain; and the third shows that the persons of the group, who conduct the business, do so as agents for the persons in the group and therefore liable to account to all.If any of the said essential ingredients is lacking there can be no partnership.
Procedure to form a partnership
The first step is to decide the number of partners of a firm. The law provides for minimum 2 number ofpartners. The upper limit is 10 in case of banking business and 20 in respect of other business.
3.6 Reconstitution of Firm
Partnership is an agreement between the members of a firm for sharing the profits of the business carried on by all or any of them acting for all. Any change in this relationship amounts to reconstitution of the partnership firm. Any change in the existing agreement of partnership amounts to reconstitution of a firm. A change in the partnership agreement brings to an end the existing agreement and a new agreement comes into being. This new agreement changes the relationship among the members of the partnership firm. Hence, whenever there is a change in the partnership agreement, the firm continues but it amounts to the reconstitution of the partnership firm.
The reconstitution of a partnership firm may take place in the following occasions-
Change in profit sharing ratio
When all the partners of a firm agree to change their profit-sharing ratio, the ratio may be changed. For example, Ram, Mohan and Sohan are partners in the firm sharing profits in the ratio of 3:2:1. With effect from April 1, 2022, they decided to share profits equally. Here, change in the existing profit-sharing ratio results into reconstitution of the firm.
In this case one profit is purchasing a share of partner from another one. In other words, share of one partner may increase and share of another partner may decrease. In case of change in profit sharing ratio, the gaining partner must compensate the sacrificing partner by paying the proportionate amount of goodwill. At the time of change in profit sharing ratio, if there are some reserves or accumulated profits/losses existing in the books of the firm, these should be distributed to partners in their old profit-sharing ratio.
Partners may decide that reserves and accumulated profits/losses will not be affected and remains in the books with same figure. In this case, the gaining partner must compensate the sacrificing partner by the share gained by him.
At the time of change in profit sharing ratio of existing partners’ assets and liabilities of a firm must be revalued because actual realizable value of assets and liabilities may be different from their book values. Change in the assets and liabilities to the period prior to change in profit sharing ratio and therefore it must be share in old profit-sharing ratio.
Admission of a new partner
Admission of a partner is one of the modes of reconstitution of a partnership firm. A new partner may be admitted in a partnership firm either for the increase of capital of the firm or to strengthen the management of the firm. A new partner may be admitted with the consent of all existing partners as per the provisions of the agreement of the firm. For example, Hari and Haqque are partners sharing profit in the ratio of 3:2. On April 1, 2022 they admitted John as a new partner with 1/6th share in the profits of the firm. In this case, with the admission of John the firm is reconstituted.
The new partner is entitled the following rights-
Retirement of an existing partner
Retiring of a partner from the firm amounts to reconstitution of the firm. On the retirement of a partner, the existing partnership deed comes to an end. In its place the new partnership deed needs to be framed, i.e. the firm requires reconstitution. The remaining partners shall continue to do their business but on the different terms and conditions. For example, Roy, Ravi and Rao are partners in the firm sharing profit in the ratio of 2:2:1. Ravi retires from the firm on March 31, 2022. Retirement of Ravi from the firm of Roy, Ravi and Rao results into reconstitution of firm.
A partner can retire from the firm in three ways-
The outgoing partner’s account is settled as per the terms of partnership deed i.e., in lump sum immediately or in various installments with or without interest as agreed or partly in cash immediately and partly in installment at the agreed intervals. In the absence of any agreement, Section 37 of the Indian Partnership Act, 1932 is applicable, which states that the outgoing partner has an option to receive either interest @ 6% p.a. till the date of payment or such share of profits which has been earned with his/her money (i.e., based on capital ratio). Hence, the total amount due to the retiring partner which is ascertained after all adjustments have been made is to be paid immediately to the retiring partner. In case the firm is not in a position to make the payment immediately, the amount due is transferred to the retiring Partner’s Loan Account, and as and when the amount is paid it is
debited to his account.
Liability of a retiring partner
A retiring partner may be discharged from any liability to any third part for acts of the firm done before his retirement by anagreement made by him with such third party and the partners of the reconstituted firm. Such agreement may be implied by a course of dealing between such third party and the reconstituted firm after he had knowledge of the retirement.
Despite the retirement of a partner of a firm, he and the partners continue to be liable as partners to third parties for any act done by any of them which would have been an act of the firm if done before the retirement, until public notice is given of the retirement. He is not liable to any third party who deals with the firm without knowing that he was a partner. The notice may be given by the retired partner or any partner of the reconstituted firm.
Death of a partner
The death of a partner in partnership firm amounts to reconstitution of the firm since the vacant of one partner arises. For example, X, Y and Z are partners in a firm sharing profits in the ratio 3:2:1. X dies on March 31, 2022. Y and Z decide to carry on the business sharing future profits equally. In this case, continuity of business by Y and Z sharing future profits equally amounts to reconstitution of the firm.
The accounting treatment for disposal of amount due to retiring partner and deceased partner is similar with a difference that in case of death of a partner, the amount credited to him/her is transferred to his Executors’ Account and the payment has to be made to him/her. However, there is one major difference that, while the retirement normally takes place at the end of an accounting period, the death of a partner may occur any time. Hence, in case of a partner, his claim shall also include his share of profit or loss, interest on capital, interest on drawings (if any) from the date of the last Balance Sheet to the date of his death of these, the main problem relates to the calculation of profit for the intervening period (i.e., the period from date of the last balance sheet and the date of the partner’s death. Since, it is considered cumbersome to close the books and prepare final account, for the period, the deceased partner’s share of profit may be calculated on the basis of last year’s profit (or average of past few years) or on the basis of sales.
Liability of estate of deceased partner
Section 35 provides that where, under a contract between the partners, the firm is not dissolved by the death of a partner, the estate of a deceased partner is not liable for any act of the firm done after his death.
Expulsion of a partner
Section 33 provides that a partner may not be expelled from a firm by any majority of the partners, save in the exercise, in good faith, of powers conferred by contract between the partners. The provisions of retired partners will be applicable to such expelled partner.
Insolvency of a partner
Section 34 provides that where a partner in a firm is adjudicated an insolvent, he ceases to be a partner on the date on which the order of adjudication is made, whether or not the firm is thereby dissolved.Where the firm is not dissolved by the adjudication of a partner as an insolvent, the estate of a partner so adjudicated is not liable for any act of the firm and the firm is not liable for any act of the insolvent, done after the date on which the order of adjudication is made.
Revocation of continuing guarantee
Section 38 provides that a continuing guarantee given to a firm or to a third party in respect of the transactions of a firm, is revoked as to future transactions from the date of any change in the constitution of the firm, in the absence of agreement to the contrary.
Amalgamation of two partnership firms
When two or more firms merge into one firm and makes a new firm, then this is called amalgamation of firms.
Example: Rai and Sanjeev are partners in the firm sharing profits in the ratio of 4:1. To avoid competition and bring down administrative expenses their firm was amalgamated with the firm of Sohan and Ashok who are sharing profits in the ratio of 1:2. It was decided that the new profit sharing ratio of Rai, Sanjeev, Sohan and Ashok will be 4:1:1:2. In this case, two firms have amalgamated into one which amounts to reconstitution of the firm of Raj and Sanjeev on the one hand and the firm of Sohan and Ashok on the other hand to form a new reconstituted firm.
When two firm amalgamate with each other, at this time we treat following accounting in the books of old firms so that all doubt solves-
The firm, reconstituted by any of the above methods, is required to be get registered with the Registrar of Firms.
3.6 Registration of Firms
Exemption from the Act
Section 56 gives power to the State Government to give exemptions either fully or any part thereof the State from the provisions of this Act by means of notification in the Official Gazette.
Registrars of Firms
Section 57 provides that the State Government may appoint Registrars of Firms for the purposes of this Act and may define the areas within which they shall exercise their powers and perform their duties.
Application for registration
Section 58 provides that for the purpose of registration a statement in the prescribed form stating-
shall be prepared and duly signed by all partners, or by their agents specifically authorized in this behalf. The prescribed fee is also paid for registration. Each person, signing the statement, shall also verify it in the manner prescribed
Name of the Firm
A firm name shall not contain any of the following words – Crown, Emperor, Empress, Empire, Imperial,King, Queen, Royal or words expressing or implying the sanction, approval or patronage of Government when the State Government signifies its consent to the use of such words as part of the firm name by order in writing.
Procedure
The registration of a firm may be effected at any time by sending by post or delivering to the Registrar of the area in which any place of business of the firm is situated or proposed to be situated.
Section 59 provides that when the Registrar is satisfied that the provisions of Section 58 have been duly complied with, he shall record an entry of the Statement in a register call the Register of Firms and shall file the statement.
Alteration in firm name or place of business
Section 60 provides that when there is an alteration in firm name or the principal place of business name, a statement may be sent to the Registrar accompanied by the prescribed fee, specifying the alteration and signed and verified in the prescribed manner. When the Registrar is satisfied that the provisions of Section 60 have been duly complied with, he shall amend the entry relating to the firm in the Register of Firms in accordance with the Statement and shall file it along with the statement relating to the firm.
Closing and opening of branches
Section 61 provides that when a registered firm discontinues its business at any place or begins to carry on business at any place, such place not being its principal place of business, any partner or agent of the firm may send intimation to the Registrar. The Registrar shall make a note of such intimation in the entry relating to the firm and file the intimation.
Changes in names and addresses of partners
Section 62 provides that when any partner of a firm alters his name or permanent address an intimation of the alteration may be sent by any partner or agent of the firm to the Registrar, who shall take note of the same in the entry relating to the firm and file the intimation.
Recoding dissolution of a firm
Section 63 provides that when a change occurs in the constitution of a firm, any incoming, continuing or outgoing partner and when a registered firm is dissolved, any person who was a partner immediately before the dissolution may give notice to the Registrar of such change or dissolution, specifying the date of charge or dissolution. The Registrar shall make a record of the notice in the entry relating to the firm in the Register of Firms and shall file the notice along with the statement.
Withdrawal of a minor
When a minor who has been admitted to the benefits of the partnership in a firm, attains majority and elects to become or not to become a partner then he may give notice to the Registrar that he has or has not become a partner. The Registrar shall make a record of the notice in the entry relating to the firm in the Register of Firms and shall file the notice along with the Statement.
Rectification of mistakes
Section 64 provides that the Registrar shall have the power to rectify any mistake at all times to bring the entry in the Register of Firms relating to any firm into conformity with the documents relating to that firm. On application made by all the parties, who have signed any document, the Registrar may rectify any mistake in such document or in the record or note made in the Register of firms.
Amendment by order of Court
Section 65 provides that a Court, deciding any manner, relating to a registered firm, may direct that the Registrar shall make any amendment, in the entry in the Register of Firms, relating to such firm, which is consequential upon its decision and the Registrar shall amend the entry accordingly.
Inspection
Section 66 provides that the Register of Firms shall be open to inspection by any person on payment of such fee as may be prescribed. All statements, notices and intimations, filed shall be open to inspection subject to such conditions and on payment of such fee, as may be prescribed.
Section 67 provides that the Registrar shall, on application, furnish to any person, on payment of such fee, as may be prescribed, a copy, a certified under his hand, of any entry or portion thereof in the Register of Firms.
Rules of evidence
Section 68 provides that any statement, intimation or notice, recorded or noted in the Register of Firms, shall, as against any person, by whom or on whose behalf such statement, intimation or notice was signed, be conclusive proof of any fact therein stated.
Effect of non-registration
Section 69 of the Act place an unregistered firm under some disadvantages as a result of which firms go for compulsory registration. The consequences of non-registration of a firm are as under;
Act, 1909 or the Provincial Insolvency Act, 1920. to realise the property of an insolvent partner.
Penalty
Section 70 provides that any person who signs any statement, amending statement, notice or intimation, containing any particular, which he knows to be false or does not believe to be true, or containing particulars which he knows to be incomplete or does not believe to be complete, shall be punishable with imprisonment which may extend to 3 months or with fine or with both.
Mode of giving public notice
Section 72 provides the mode of giving public notice. A public notice is given-
3.7 Dissolution of a Firm (Section 39-47)
Section 39 provides that the dissolution of partnership between all the partners of a firm is called the ‘dissolution of the firm’.
Modes of Dissolution of a firm
1. Dissolution without the order of the court or voluntary dissolution
2. Dissolution by the court [Section 44]
Section 44 prescribes the grounds on which the Court may direct dissolution of a firm in a suit as discussed below:
In ‘Sheoram vs. Prem Chand’ – AIR 1943 Nag 13 it was held that to a suit for dissolution of partnership and rendition of accounts, all the partners and legal representatives of the deceased partner/partners are necessary parties. The suit is to be dismissed if a necessary party is not impleaded or is impleaded beyond the period of limitation.
Liability of partners after dissolution
Section 45 provides that the liability of the partners will continue for the acts done before the dissolution, even after the dissolution, until public notice is given of the dissolution. The following partner is not liable for the acts after the date on which he ceases to be a partner-
In ‘Rajagopala Pillai v. Krishnaswai Chetti’ – 8 Mad LJ 261 it was held that the legal representatives of a deceased partner cannot be validly bound by an acknowledgement made by the surviving partner after dissolution caused by death. Once the partnership is dissolved, even the theory of implied agency disappears. After the jural relationship of partners having been put an end, there can be no question of any partner, acting in any representative capacity, so as to bind the firm.
Right of partners after dissolution
Section 46 provides that on the dissolution of a firm, every partner or his representative is entitled as against all the other partners or their representatives, to have the property of the firm applied in payment of the debts and liabilities of the firm and to have the surplus distributed among the partners or their representatives according to their rights.
Continuing authority of partners
Section 47 provides that 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, notwithstanding the dissolution, so far as may be necessary to wind up the affairs of the firm and to complete transactions begun but unfinished at the time of the dissolution, but not otherwise.
The firm is, in no case, bound by the acts of a partner who has been adjudicated insolvent. This will not affect the liability of any person who has, after the adjudication, represented himself, or knowingly permitted to be represented as partner of the insolvent.
Mode of settlement
Section 48 provides the mode of settlement of accounts between the partners after the dissolution. In this regard, the following shall be observed, subject to the agreements by the partners-
Payment of firm debts
Section 49 provides that where there are joint debts due from the firm and also separate debts due from any partner, the property of the firm shall be applied in the first instance in payment of the dues of the firm. If there is any surplus then the share of each partner shall be applied in payment of his separate debts or paid to him. The separate property of any partner shall be applied first in the payment of his separate debts and the surplus, if any, in the payment of the debts of the firm.
Personal profits after dissolution
Section 50 provides that the personal profits earned by any surviving partner or by the representatives of a deceased partner, undertaken after the firm is dissolved on account of the death of a partner and before the affairs have been completely wound up, then such personal profits shall be accounted to the firm. Where any partner or his representative has bought the goodwill of the firm, he shall have right to use the firm name.
Return of premium
Section 51 provides that where a partner has paid a premium on entering into partnership for a fixed term and the firm is dissolved before the expiration of that term otherwise than by the death of the partner, such partner is entitled to repayment of the premium or of such part there of as may be reasonable, regard being had to the terms upon which he became a partner and to the length of time during which he is a partner, unless-
Rescinding of contract
Section 52 provides that where a contract creating partnership is rescinded on the ground of the fraud or misrepresentation of any of the parties, the party entitled to rescind is, without prejudice to any other right, entitled-
Restrain to use firm name
Section 53 provides that after a firm is dissolved, every partner or his representative may, in the absence of a contract between the partners to the contrary, restrain any other partner from carrying on a similar business in the firm 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. Where any partner or his representative has brought the goodwill of the firm he has the right to use the firm name.
In ‘Ramesh Kumar V. Smt. Lata Devi’ AIR 2007 MP 153 it was held that in order to exercise an option under Section 53, it is necessary to establish that firm has been dissolved and after dissolution of the firm contract has to be seen. In the absence of contract to the contrary there is option available to restrain any other partner or his representative from carrying on the business in the firm name or using any of the property of the firm. The object underlying this section is to restrain a partner from doing anything, while the liquidation proceedings are pending which may prejudice the saleable value or otherwise affect the property of the firm until its use.
Agreements in restraint of trade
Section 54 provides that partners may, upon or in anticipation of the dissolution of the firm, make an agreement that some or all of them will not carry on a business similar to that of them within a specified period of within the specified local limits and notwithstanding anything contained in Section 27 of the Indian Contract Act, 1872, such agreement shall be valid if the restrictions imposed are reasonable.
In ‘Premji Damodar V. L.V. Govindji & Co’ – AIR 1943 Sind 197 it was held that an agreement between the two separating partners restrained one of them from doing any craft insurance business of any kind whatsoever, directly or indirectly, as agent or as broker, throughout the whole world except at Karachi, and except as broker and except through the other partner. It was held that the said agreement was void under Section 27 of the Contract Act,1872 and not saved by Section 54 because the agreement subjected the partner to a species of slavery as far as the insurance was concerned
1. An act of a firm means:
Answer: d. All of the above
2. 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. Does it mean that losses are not shared?
Answer: d. All of the above
3. Where no provision is made by contract between the partners for the duration of their partnership, or for the determination of their partnership, the partnership is called as:
Answer: c. partnership at will
4. What information shall be given to the Registrar of Firms by a registered partnership firm:
Answer: d. All of the above
5. Who can inspect the Register and filed documents at the office of the Registrar:
Answer: d. Any person
6. What are the right of partners after dissolution:
Answer: d. All of the above
7. Where any member of a firm has died or otherwise ceased to be a partner, and the surviving or continuing partners carry on the business of the firm with the property of the firm without any final settlement of accounts as between them and the outgoing partner or his estate, then, in the absence of a contract to the contrary, the outgoing partner or his estate is entitled at the option of himself or his representatives to such share of the profits made since he ceased to be a partner as may be attributable to the use of his share of the property of the firm or to interest at the rate of on the amount of his share in the property of the firm:
Answer: c. 6% p.a.
8. The dissolution of partnership means:
Answer: b. It means the change in the relations of the partners
9. In what circumstances a partner may retire:
Answer: d. All of the above
10. What would be the position, where a minor elect not to become a partner:
Answer: d. All of the above
1. Consideration, which is of essence for the formation of a contract, is essential for the formation of the partnership. False
2. The goodwill shall, subject to contract between the partners, be included in the assets and it may be sold either separately or along with other property of the firm. True
3. Debts of the firm shall be paid first out of the property of the firm, but in case of private debts of the partners, it shall be paid last after paying of all the dues of the firm. True
4. The implied authority of a partner is to carry on the business of the firm, in the usual way. True
5. Subject to contract between the partners, the property of the firm includes acquired, by purchase or otherwise, by or for the firm, or for the purposes and in the course of business of the firm, the goodwill of the business and all property and rights and interests in property originally brought into the stock of the firm. True
1. The partners in a firm may, by contract between the partners, restrict or extend the implied authority of any partner.
2. When there is any change in the constitution of the firm, the status of the continuing guarantee given to the firm shall be revoked as to future transactions from the date of any change in the constitution of the firm.
3. The State Government may appoint Registrars of Firms for the purposes of this Act, every Registrar shall be deemed to be a public servant within the meaning of section 21 of the Indian Penal Code.
4. A firm may be dissolved by the Court order or in accordance with a contract between the partners.
5. A person may be deemed as partner by estoppels or holding out when he by his conduct represents himself to be a partner in a firm.
1. What are the different types of partnership?
Answer :
2. Descibe the rights of a partner.
Answer :
3. Write short notes on-
(a) Partnership at will
(b) Liability of a retiring partner
Answer :
1. Discuss the duties of a partner in a partnership firm.
Answer :
2. Discuss the procedure for dissolution of the firm.
Answer :
3. When can a partnership firm be dissolved?
Answer :
4. Discuss the concept of implied authority of a partner.
Answer :
5. Discuss the procedure for registration of a partnership firm.
Answer :
1. M/s XYZ is partnership firm and X, Y and Z are the partners. During the course of business travel, partner X recovered a sum of ` 15,000 in cash from the debtor of the firm and credit in his personal bank account. Does the act of X will amount to mis-appropriating the funds of the firm and utilisation of the same for the personal gain.
Answer :
2. M/s ABC is a partnership firm where Mr. X, Y and Z are partners. Mr. X signs a contract with Coal India Limited for supply of some goods, on behalf of the partnership firm. Can he do so individually or would he require the consent from other two partners?
Answer :
Ruchika Saboo
An All India Ranker (AIR 7 - CA Finals, AIR 43 - CA Inter), she is one of those teachers who just loved studying as a student. Aims to bring the same drive in her students.
Ruchika Ma'am has been a meritorious student throughout her student life. She is one of those who did not study from exam point of view or out of fear but because of the fact that she JUST LOVED STUDYING. When she says - love what you study, it has a deeper meaning.
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Yashvardhan Saboo
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He cleared his CA Finals in May 2011 and has been into teaching since. He started teaching CA, CS, 11th, 12th, B.Com, M.Com students in an offline mode until 2016 when Konceptca was launched. One of the pioneers in Online Education, he believes in providing a learning experience which is NEAT, SMOOTH and AFFORDABLE.
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