The Indian Partnership Act

1
The Indian Partnership Act
2

•   A partnership is the relationship between
  persons who have agreed to share the profits of a
  business carried on by all or any of them acting
  or all.

3

• In India it is governed by the Indian Partnership
  Act, 1932, which extends to the whole of India
  except the State of Jammu and Kashmir. It came
  into force on 1st October 1932.  

4

• ELIGIBILITY
• A partnership agreement can be entered into
  between persons who are competent to contract.
  Every person who is of the age of majority
  according to the law to which he is subject and
  who is of sound mind and is not disqualified from
  contracting by any law to which he is subject can
  enter into a partnership.

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• The following can enter into a partnership
• INDIVIDUAL
• FIRM
• HINDU UNDIVIDED FAMILY
• COMPANY
• TRUSTEES

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• INDIVIDUAL An individual, who is competent to
  contract, can become a partner in the partnership
  firm. If there are more than two partners in a
  firm, an individual can be a partner in his
  individual capacity as well as in a
  representative capacity as Karta of the Hindu
  undivided family.

7

• FIRM A partnership firm is not a person and
  therefore a firm can not enter into partnership
  with any firm or individual. But a partner of the
  partnership firm can enter into partnership with
  other persons and he can share the profits of the
  said firm with his other co-partners of the
  parent firm.

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• HINDU UNDIVIDED FAMILY A Karta of the Hindu
  undivided family can become a partner in a
  partnership in his individual capacity, provided
  the member has contributed his self acquired or
  personal skill and labour

9

• COMPANY A company is a juristic person and
  therefore can become a partner in a partnership
  firm, if it is authorised to do so by its
  objects.

10

• TRUSTEES Trustees of private religious trust,
  family trust and trustees of Hindu mutts or other
  religious endowments are juristic persons and can
  therefore enter into partnership, unless their
  constitution or objects forbid

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• NUMBER OF PARTNERS
• The number of partners in a firm shall not exceed
  20 and a partnership having more than 20 persons
  is illegal.
• If the partnership is between the karta or
  member of Hindu undivided family the members of
  the joint Hindu family will not be taken into
  account.

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ESSENTIALS OF A PARTNERSHIP

• AGREEMENT - The relationship between partners
  arises from contract and not status. If after the
  death of sole proprietor of a firm, his heirs
  inherit firm they do not become partners, as
  there is no agreement between them

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• SHARING OF PROFITS The partners may agree to
  share profits out of partnership business, but
  not share the losses. Sharing of losses is not
  necessary to constitute the partnership. The
  partners may agree to share the profits of the
  business in any way they like.

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• BUSINESS Business includes every trade,
  occupation, or profession. There must be course
  of dealings either actually continued or
  contemplated to be continued with a profit motive
  and not for sport or pleasure.

15

• RELATION BETWEEN PARTNERS The partner while
  carrying on the business of the partnership acts
  a principle and an agent. He is a principal
  because he acts for himself, and he is an agent
  as he simultaneously acts for the rest of the
  partners.

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GENERAL DUTIES OF A PARTNER

• Subject to a contract to the contrary between the
  partners the following are the duties of a
  partner.
• To carry on the business of the firm to the
  greatest common advantage. Good faith requires
  that a partner shall not obtain a private
  advantage at the expense of the firm.

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• Where a partner carries on a rival business in
  competition with the partnership, the other
  partners are entitled to restrain him.

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• To be just and faithful. Partnership as a rule is
  presumed to be based on mutual trust and
  confidence of each partner, not only in the skill
  and knowledge, but also in the integrity, of each
  other partner

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• To render true accounts and full information of
  all things done by them to their co-partners.
• To indemnify for loss caused by fraud. Every
  partner shall indemnify the firm for loss caused
  to it by his fraud in the conduct of the business
  of the firm.

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• Not to carry on business competing with 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.

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• To indemnify the firm for willful neglect of a
  partner. A partner shall indemnify the firm for
  any loss caused to it by his willful neglect in
  the conduct of the business of the firm.

22

• To carry out the duties created by the contract.
  The partners are bound to perform all the duties
  created by the agreement between the partners.

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RIGHTS OF THE PARTNERS

• Subject to a contract to the contrary a partner
  has the following rights.
• To take part in the conduct and management of the
  business
• To express opinion in matters connected with the
  business. He has a right to be consulted and
  heard in all matters affecting the business of
  the firm

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• To have free access to all the records, books of
  account of the firm and take copy from them.
• To share in the profits of the business. Every
  partner is entitled to share in the profits in
  proportion agreed to between the parties.

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• To get interest on the payment of advance. Where
  a partner makes for the purpose of the business,
  any payment or advance beyond the amount of
  capital he has agreed to subscribe, he is
  entitled to interest thereon at the rate of 6
  per annum.
• To be indemnified by the firm against losses or
  expenses incurred by him for the benefit of the
  firm.

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• RESTRICTIONS ON AUTHORITY OF A PARTNER
  -Restrictions are governed by Contract and by the
  Partnership Act .
• The partners may by contract extend or restrict
  the implied authority of any partner.

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• Under the Partnership Act in the absence of any
  usage of trade to the contrary, the implied
  authority of a partner does not empower him to do
  the following acts
• Submit a dispute relating to the business of a
  firm to arbitration
• Open a bank account in his own name

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• Compromise or relinquish any claim of the firm
• Withdraw a suit or proceeding on behalf of the
  firm
• Admit any liability in a suit or proceeding
  against the firm

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• Acquire immovable property on behalf of the firm
• Transfer immovable property belonging to the
  firm, or
• Enter into partnership on behalf of the firm.

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  RIGHTS OF A MINOR

• A person who is a minor according to the law to
  which he is subject may not be a partner in a
  firm, but, with the consent of all the partners
  for the time being, he may be admitted to the
  benefits of partnership.

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• Such minor has a right to such share of the
  property and of the profits of the firm as may be
  agreed upon, and he may have access to and
  inspect and of the accounts of the firm

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• Such minors share is liable for the acts of the
  firm, but the minor is not personally liable for
  any such act.
• Such minor may not sue the partners for an
  account or payment of his share of the property
  or profits of the firm

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• At any time within six months of his attaining
  majority, or of his obtaining knowledge that he
  had been admitted to the benefits of partnership,
  whichever date is later, such person may give
  public notice that he has elected to become or
  not to become a partner in the firm, and such
  notice shall determine his position as regards
  the firm, provided that, if he fails to give such
  notice, he shall become a partner in the firm on
  the expiry of the said six months.

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• 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 that fact

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• Where such person becomes a partner-
• his rights and liabilities as a minor continue
  upto the date on which he becomes a partner, but
  he also becomes personally liable to third
  parties for all acts of the firm done since he
  was admitted to the benefits of the partnership,
  and

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• his share in the property and profits of the firm
  shall be the share to which he was entitled as a
  minor

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• Where such person elects not to become a partner-
• his rights and liabilities shall continue to be
  those of a minor upto the date on which he gives
  public notice,
• his share shall not be liable for any acts of the
  firm done after the date of the notice, and
• he shall be entitled to sue the partners for his
  share of the property and profits.

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  DISSOLUTION OF A FIRM

• A firm may be dissolved in the following manner
• Dissolution by Court
• Dissolution by agreement
• Dissolution by operation of law
• Dissolution on the happening of certain
  contingencies
• Dissolution by notice

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• DISSOLUTION BY COURT
• The court may dissolve a firm at the suit of any
  partners on any of the following grounds namely
• INSANITY OF A PARTNER that a partner has become
  of unsound mind. The insanity of a partner does
  not ipso facto dissolve the firm and the next
  friend or continuing partners has to file suit
  foe dissolution.

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• PERMANENT INCAPACITY OF A PARTNER that a partner
  has become permanently incapable of performing
  his duties as partner.
• CONDUCT AFFECTING PREJUDICIALLY THE BUSINESS
  that a partner is guilty of conduct, which is
  likely to affect prejudicially the carrying on
  the business of the firm.

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• BREACH OF PARTNERSHIP AGREEMENT that a partner
  willfully or persistently commits breach of
  agreements relating to the management of the
  affairs of the firm or the conduct of its
  business or otherwise conducts himself in matters
  relating to the business, that it is not
  reasonably practical for the other partners to
  carry on the business with him.

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• TRANSFER OF INTEREST OF A PARTNER that a
  partner has in any way transferred the whole of
  his interest in the firm to a third party.
• LOSS that the business of the firm cannot be
  carried on save at a loss
• JUST AND EQUITABLE on any other ground that
  renders it just an equitable that the firm should
  be dissolved

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• DISSOLUTION BY AGREEMENT
• A firm may be dissolved with the consent of all
  the partners or in accordance with the contract
  between the partners. The partnership agreement
  may contain a proviso that the firm will be
  dissolved on the happening of certain contingency

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• DISSOLUTION BY OPERATION OF LAW
• A firm is compulsorily dissolved on the following
  grounds
• Insolvency of partners
• By the happening of any event which makes it
  unlawful for the business of the firm to e
  carried on.

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• DISSOLUTION ON THE HAPPENING OF CERTAIN
  CONTINGENCIES
• Subject to contract between the partners a firm
  is dissolved on the happening of the following
  contingencies.
• If constituted for a fixed term, by the expiry of
  that term

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• If constituted to carry out one or more
  adventures or undertakings, by its completion.
• By the death of a partner
• On insolvency of a partner

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• DISSOLUTION BY NOTICE
• If the partnership is at will, the same may be
  dissolved by service of a notice by one partner
  to dissolve the firm.

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REGISTRATION

• It is not compulsory to register the firm.
  However there are serious effects of
  non-registration.

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• No suit to enforce a right arising from a
  contract or conferred by the Indian Partnership
  Act shall be instituted in any court by or on
  behalf of any person suing as partner in a firm
  against the firm or any person alleged to be or
  to have been a partner in the firm, unless the
  firm is registered and the person suing is or has
  been shown on the Register of firms as a partner
  in the firm

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• Similarly, no suit to enforce a right rising from
  a contract shall be instituted in any court by or
  on behalf of a firm against any third party
  unless the firm is registered.

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• PROCEDURE FOR REGISTRATION The registration of a
  firm may be effected at any time by sending by
  post or delivering to the Registrar of Firms of
  the area in which any place of business of the
  firm is situated or proposed to be situated, a
  statement in the prescribed form and accompanied
  by the prescribed fee, stating
• the firm name

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• the place or principal place of business of the
  firm
• the names of any other places where the firm
  carries on business
• the date when each partner joined the firm

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• the names in full and permanent addresses of the
  partners and
• the duration of the firm.

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• The statement shall be signed by all the partners
  or by their agents specially authorised in this
  behalf. Each person signing the statement shall
  also verify in the manner prescribed.

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• A firm name shall not contain any of the
  following words viz. "Crown", Emperor",
  "Empress", "Empire", "Imperial", "King", "Queen",
  "Royal", or words expressing or implying the
  sanction, approval or patronage of Government,
  except when the State Government signifies its
  consent to the use of such words as part of the
  firm name by order in writing.

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• All the States have framed rules prescribing the
  forms, fee for registration and verification of
  the statement. The application for registration
  has to be made to the Registrar of Firms in the
  prescribed form

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• When the Registrar is satisfied that the
  provisions have been complied with, he shall
  record and entry of the statement in a register
  called the Register of Firms and shall file the
  statement. The Registrar is the competent
  authority and if he acts bona fide and follows
  the procedure, his satisfaction cannot be
  challenged.

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• CHECKLIST FOR DRAFTING A PARTNERSHIP DEED
• A partnership deed should contain the following
  clauses
• Name of the parties
• Nature of business

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• Duration of partnership
• Name of the firm
• Capital
• Share of partners in profits and losses
• Banking, Account firm
• Books of account

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• Powers of partners
• Retirement and expulsion of partners
• Death of partner
• Dissolution of firm
• Settlement of disputes