MODULE VII:

THE INDIAN
PARTNERSHIP ACT
● Definition and Nature
● Mutual relationship between Partners, Duties and Liabilities of
Partner
● Partner's Authority in emergency, Effect of Admission by
Partner, Effect of Notice to a Partner,
● Registration of Partnership
● Dissolution of Partnership

PARTNERSHIP ACT 1932

Partnership is one of the specific contracts which were a part of the Indian Contract Act, of
1872. In 1930, however, the provisions relating to partnership contracts were repealed and a
separate Act called the Indian Partnership Act, of 1932 was passed which is in force till
today. It extends to the whole of India except the State of Jammu and Kashmir. It came into
force on the 1st day of October 1932 except Section 69, which came into force on the 1st day
of October 1933.
Partnerships in India are governed by the Indian Partnership Act 1932. The partnership is
formed as a result of an agreement between two or more persons who have agreed to share
the profits of a business carried by all or any of them acting for all. Hence, the general
principles of the law of contracts and agency (as contained in the Indian Contract Act 1872)
also apply to partnerships except where the Act specifically provides to the contrary. The Act
mainly contains the provisions relating to the formation of the partnership, the rights, duties,
and liabilities of partners, and the procedure for its dissolution, etc.

Meaning and Definition

Partnership is the relation between persons who have agreed to share the profits of a business
carried on by all or any one of them acting for all (Section 4). It, therefore, follows that a
partnership consists of three essential elements:
(i) It must be a result of an agreement between two or more persons.
(ii) The agreement must be to share the profits of the business.
(iii) The business must be carried on by all or any of them acting for all.
All these essentials must coexist before a partnership can come into existence.
Example: A manager, as a part of his remuneration, may be given a share in the profits of the
business.

MEANING OF 'PARTNER', 'FIRM' AND 'FIRM NAME' [SECTION 4]

Persons who have entered into partnership with one another are called individually ‘partners’
and collectively ‘a firm’, and the name under which their business is carried on is called the
'firm name'.

MAXIMUM LIMIT ON NUMBER OF PARTNERS

(a) In case of a partnership firm carrying on a banking business - maximum 10 members
(b) In case of a partnership firm carrying on any other business - maximum 20 members
If the number of partners exceeds the aforesaid limit, the partnership firm becomes an illegal
association.
Essential Elements of Partnership:
The aforesaid definition clearly indicates the essential elements of partnership as below:

1. Two or more Persons - There must be at least two persons to form a partnership and all
such persons must be competent to contract. According to Section 11 of the Indian
Contract Act, 1872, every person except the following, is competent to contract:
(i) Minor
(ii) Persons of unsound mind (e.g., lunatics, idiots), and
(iii) Persons disqualified by law (e.g., alien enemies, insolvents)
Shivaram v. Gauri Shankar, in this case, court held that there must be at least two persons
and such persons must be competent to contract. But after the formation of partnership, a
minor can be admitted to the benefits of partnership with the consent of all other partners
of the firm as per the provisions of Section 30 of the Act.
The partnership can be formed between companies, but firms can’t form partnerships
because the act makes it clear that by way of an agreement between competent persons,
partnership can be established. A company, being an artificial person, can be a party to
the partnership deed, but unlike a company, a firm is not a legal person and therefore, a
firm is not capable of entering into a partnership deed (Dulichand v. Commissioner of
Income Tax, Nagpur).

2. Agreement: Partnership must be the result of an agreement between two or more persons.
An agreement from which the relationship of Partnership arises may be express. It may
also be implied from the act done by partners and from a consistent course of conduct
being followed, showing mutual understanding between them. It may be oral or in
writing. This essential element is further clarified under Section 5. Section 5 provides
that the relation of partnership arises from contract and not from status. That is why a
Hindu undivided family carrying on a family business is not considered a partnership.
The reason is that the coparceners of a Hindu undivided family acquire interest in the
business because of their status (i.e., birth) in the family and not because of any
agreement between them. Thus, partnership is voluntary and contractual in nature.

3. Business - There must exist a business. According to Section 2(b), the term ‘Business’
includes every trade, occupation, and profession. For example, when two or more persons
agree to share the income of joint property (e.g., rent from a building). It does not amount
to a partnership because there does not exist any business. Similarly, an association
created for charitable, religious, or social purposes cannot be regarded as a partnership
because there does not exist any business. It may also be noted that an agreement to carry
on business at a future time does not result in partnership unless that time arrives and the
business is started (R.R. Sorna, v. Reuben).
When goods are purchased for self-consumption, not for resale, then it is not considered a
business transaction; accordingly, there will be no Partnership (Coope v. Eyre). Business
should be carried on, and business should be of lawful business as per section 23 of the
Contract Act 1872.

4. Sharing of Profits – There must be sharing of profits. Unless otherwise agreed, sharing
of profits implies sharing of losses too. It may also be noted that sharing of profits is
prima facie evidence and not a conclusive evidence of partnership. Because of that,
everyone who shares the profits of the business need not necessarily be a partner. For
example, a manager who receives a particular share in the profits of a business as part of
his remuneration is simply an employee and not a partner.
5. Mutual Agency - There must be existence of a mutual agency relationship among the
partners. 'Mutual Agency' relationship means that each partner is both an agent and a
principal. Each partner is an agent in the sense that he has the capacity to bind other
partners by his acts done. Each partner is a principal in the sense that he is bound by the
acts of other partners. The mutual relationship of agency is emphasized in Section 18 of
the Indian Partnership Act, which reads as under: "Subject to the provisions of this Act, a
partner is the agent of the firm for the business of the firm." Moreover, the use of the
words ‘carried as by all or by any of them acting for all, in Section 4 of the Act clearly
emphasizes the agency relationship.

Because of the existence of a mutual agency relationship among the partners, the law of
partnership is also regarded as an extension of the general law of agency. It may be noted that
the mutual agency relationship distinguishes a partnership from co-ownership and simple
agreements for sharing profits.

In Cox v. Hickman, it has been held that although the trustees were managing the business of
Smith and Son, they did not become partners because trustees were acting as agents but they
were not the principals.

NATURE OF A PARTNERSHIP FIRM

A partnership firm is not a person in the eyes of law [except under Section 2(31) of the
Income Tax Act, 1961]. It has no separate legal entity apart from the partners constituting it
(Malabar Fisheries Co. v. CIT). Thus, firms themselves cannot enter into a contract for
partnership, though their partners can. For example, two firms, namely, M/s A&B and M/s
X&Y, themselves cannot form a new partnership though the partners of the individual firms
can form a partnership.

Partnership is a form of business in which two or more persons come together with their
resources to invest in a common business with the purpose of sharing the profits of the
business.
There are some limitations of sole proprietorship viz limited capital, no risk sharing, limited
skill, etc. Partnership is the solution to such problems faced by a sole proprietor. In a
partnership, a few persons can come together to start a new business with an agreement to
share the profits and losses of the business.

TEST OF PARTNERSHIP [SECTION 6]

According to Section 6, "In determining whether a group of persons is or is not a firm, regard
shall be had to the real relation between the parties as shown by all relevant facts taken
together." The real relation between the partners can be ascertained as under:

i. If there is an express contract: The real relation is ascertained from the terms of the
partnership contract.
ii. If there is no express contract: The real relation is ascertained from all the relevant factors
such as contract of parties, books of accounts, statement of employees, etc.

The Section 6 is based on the principle laid down in an important case of Cox v. Hickman
(1860). The analysis of this section reveals that the following is the true test of partnership:

(a) The partnership is determined from the real relation between partners and such relation
must show the existence of mutual agency relationship, and

(b) The sharing of profit is prima facie evidence but not a conclusive test of partnership.
A group of persons shall be regarded as a partnership if the real relation between the partners
shows that all essential elements of partnership are present.

A group of persons shall be regarded as partnership if the real relation between the
partners shows that all essential elements of partnership are present.

Cases where the Partnership Relation does not Exist

[Explanations I and II to Section 6]

The two cases where the partnership relation does not exist are given below:

(a) Joint owners of some property sharing profits or gross returns arising from the
property [Explanation I to Section 6].
Example: X and Y jointly purchased a building and contributed capital equally to convert the
building into a hotel. They let it out on a rent of As 1,00,000 per annum and share the rental
Income equally. Here X and Y are regarded as co-owners and not partners. Because X and Y
do not have mutual agency relationship. [Leading case: Govind Nair v. Maga]

(b) Persons sharing the profits but not having mutual agency [Explanation II to Section
6] - The sharing of profits is prima facie evidence. This statement is true in the sense that
some persons though sharing the profits of a business are not regarded as partners since they
do not have mutual agency relationship. Such persons are:

(i) Money lender (who has lent money to the firm) who receives a share of profits: [Mallow
Mantle & Co. v. The Court of Wards and Cox v. Hickman]

(ii) Widow or child of a deceased partner sharing profits; Sometimes on the death of the
partner the widow or child of the deceased partner may be given share of profits according to
terms and conditions of contract. Merely sharing profits such widow or child doesn’t become
partner in the firm [Holme v. Hammond] in this case court held that executors of deceased
partner who shares profit had not become partners and therefore they couldn’t made liable.
And [I.T. Commissioner v. Kesharmal Keshardeo] there is no bar to the widow or son of
the deceased partner to join firm after the death of the partner based on the terms and
conditions provided in the agreement.

(iii) A servant or an agent who receives a share of profits as part of his remuneration; In
partnership sometimes share may be given profits to the servants or agents to carry out the
firm’s business effectively merely, sharing profits he doesn’t become partner in the
partnership [Munshi Abdul Latif v. Gopeshwar and Walker v. Hrisch]
(iv) The seller of the goodwill sharing the profits . seller of goodwill also may be entitle to
the share in the profits in the form of consideration for the sale of goodwill, such person
person doesn’t become partner. [Rawlinson v. Clarke and Pratt v. Strick]

Who are not partners?

The following persons are not treated as partners:
(a) Members of a Hindu undivided family (HUF) carrying on family business.
(b) Burmese Buddhist husband and wife carrying on a business.

Thus, partnership can be presumed when (a) there is an agreement to share the profits of a
business and (b) The business must be carried on by all or by any of them acting for all. Even
when the exclusive power and control is vested with one partner under an agreement,
partnership shall be presumed to exist. [K.D. Kamath & Co. v. Commissioner of Income
Tax]

PARTNERSHIP AND CO-OWNERSHIP

Co-ownership means joint ownership of some property. The two or more persons who
own some property jointly arc called co-owners. As per Explanation I to Section 6, the
joint owners of some property sharing profits or gross returns arising from the
property do not become partners.
PARTNERSHIP AND HINDU UNDIVIDED FAMILY (HUF)

According to Hindu Law, "Hindu undivided family is a family which consists of all persons
lineally descended from a common ancestor and includes their wives and unmarried
daughters." Three successive generations in the male line (son, grandson, and great-grandson)
who inherit the ancestral property are called 'Coparceners'.
The property which a man inherits from any of his three immediate male ancestors (i.e., his
father, grandfather, and great-grandfather) is called 'ancestral property'.

There are two schools of Hindu Law—Dayabhaga and Mitakshara.

 Under Dayabhaga School of Law, which is applicable to West Bengal and Assam, a
son acquires an interest in the ancestral property only after the death of his father.
  Under Mitakshara School of Law, which is applicable to the whole of India (except
West Bengal and Assam), each son acquires by birth an interest in the ancestral
property.

The partnership and Hindu undivided family can be distinguished as follows:

KINDS OF PARTNERSHIP

The various types of partnership are based on two different criteria.

With regard to the duration of the term of partnership:

1. Partnership at Will
When no fixed period is prescribed for the expiration of the partnership, it is classified as
a partnership at will. According to Section 7, two conditions need to be fulfilled:
o No agreement about the determination of the fixed period of partnership.

o No clause with respect to the determination of partnership.

2. Partnership for a Fixed Period

When the partners fix the duration of the partnership firm, the partnership comes to an
end after the expiration of the fixed period. If the partners decide to continue with the
partnership even after the expiry of the fixed period, it then becomes a partnership at will.

On the basis of the extent of the business carried by a partnership:

1. Particular Partnership (Section 8)

When the partnership is created for completing any specific project or undertaking.
The partnership comes to an end once such an undertaking or project is completed,
although the partners have the option to continue with the firm.
2. General Partnership
When the partnership is created for the purpose of carrying out a business without any
particular task that has to be completed. The tasks undertaken are general in nature.

Scope of Partnership Act (Section 5)

The partnership arises from a contract and not from status. The intention of the partners is
crucial for establishing a partnership. The partners may exercise any of their powers at any
time but must not do so in pursuance of illegal, fraudulent, or misconduct.
If any partner makes a contract without the consent of all other partners, the question of the
validity of such a contract arises. If all partners accept or ratify the contract, then no question
regarding its validity arises.
With the consent of all partners, the partnership can become a member of another firm.

Partners
The members of a partnership are called partners. It is not mandatory for all partners to be the
same, nor do they have to participate in the conduct of the business or share profits or losses
equally. Partners are classified depending on the nature of work, the extent of liability, etc.
There are basically six types of partners:

1. Active/Managing Partner
The partner who participates in the conduct of the business daily. This partner is also
referred to as an ostensible partner.
2. Sleeping/Dormant Partner
This partner does not participate in the conduct of the business but is bound by the
conduct of all other partners.
3. Nominal Partner
A partner to the firm only by name. In reality, this partner has no significant or real
interest in the firm.
4. Partner in Profit Only
A partner who agrees to share the profits but does not suffer losses. This partner is not
liable for any liabilities in dealings with third parties.
5. Minor Partner
A minor cannot be a partner according to the Indian Contract Act, but they can be
admitted to receive benefits with the consent of all partners. Their share of profits is
equal, but their liability is limited in the case of firm losses.
6. Partner by Estoppel
This term refers to a person who is not a partner but has represented themselves by
conduct or words as a partner to another party. Such a person cannot deny the
partnership afterwards. Although not a partner, they become a partner by holding out
or by estoppel.

RIGHTS OF THE PARTNERS

1. Right to Take Part in the Conduct of the Firm’s Business

Section 12(a) provides that every partner has the right to be involved in the conduct of
the firm’s business. All partners have the right to manage the firm’s business.
2. Right to Express Opinion
Section 12(c) provides that all partners can freely express their opinion in matters
concerning the firm’s business. However, consent from other partners must be
obtained before making decisions based on a partner’s opinion.
3. Right to Have Access to Books of the Firm
According to Section 12(d) of the Act, every partner has the right to examine the
firm’s books, regardless of whether they pertain to accounts.
4. Right to Profit
Per Section 13(b), all partners must equally share the profits earned through the
business.
5. Right to Interest on Capital
Section 13(c) provides that partners have the right to claim interest on the firm's
profits from their capital, based on mutual agreement.
 6. Right to Interest on Advances Made by Partner
In certain situations, a partner may make advances to the firm beyond their capital,
and they may claim interest on such advances.
7. Right to Indemnity
Section 13(e) states that a partner may incur liabilities while acting on behalf of the
firm. The firm shall indemnify that partner for such payments and liabilities,
regardless of whether they occurred in the ordinary course of business or in
emergencies.
8. Right to Dissolve the Partnership
Section 44 allows a partner to file a suit for dissolving the partnership. Grounds for
dissolution include:
o Unsoundness of mind of a partner (the suit can be brought by another partner
or the next friend of the unsound partner).
o Permanent incapability of another partner to fulfill their duties.
o Conduct of another partner that prejudices the business.
o Breach of agreement by another partner.
o Transfer of interest in the firm by a partner to a third person.
o Business cannot be carried on due to losses.
o Any other ground that makes it just and equitable to dissolve the partnership.

Section 46 provides that after dissolution, a partner has the right to wind up the firm’s
business, and every partner or their representative is entitled to have the firm’s
property applied in payment of debts and liabilities, with any surplus distributed
among partners or their representatives.

9. Right to Not Get Expelled

Section 33 ensures that all partners have the right not to be expelled, except on
specific grounds, and they must be given reasonable warning and an opportunity to
explain before expulsion.
10. Right to Prevent Introduction of New Person
Section 31 provides that every partner has the right to prevent the introduction of a
new partner without their consent, unless the partnership agreement expressly allows
it.
11. Right to Retire
According to Section 32, a partner has the right to retire with the consent of other
partners, unless the requirement for consent is waived by the agreement. Partners in a
partnership at will can retire simply by providing notice to the others.

RELATIONS OF PARTNERS TO THIRD PARTIES

Sections 18 to 22 of the Act address the relationship of partners to third parties.

1. Section 18
Partners are agents of the firm for conducting business affairs. A partner acts as both
principal and agent; they act in their own interest as a principal and as an agent for
another partner’s interest. They are not agents in transactions among themselves.
2. Section 19
Any act performed by partners in the usual course of business binds the firm. This
authority is implied authority.
 3. Section 20
Partners can contract to restrict or expand the implied authority of a partner.
4. Section 21
If any act is performed by a partner in an emergency, as a prudent person would, such
acts bind the firm.
5. Section 22
Any act done by a partner must be done in the name of the firm or in a manner that
binds the firm.

DUTIES OF PARTNERS

1. Duty of Greatest Common Advantage

According to Section 9, partners must conduct business for the greatest common
advantage of the firm, ensuring that all partners benefit and maximize profits without
acting for personal gain.
2. Duty of Good Faith
Section 9 emphasizes the need for partners to act justly towards one another, as the
relationship is based on mutual trust. Partners must act faithfully throughout their
partnership.
3. Duty to Render True Accounts
Partners must keep and provide true and complete accounts of the partnership’s
business. This duty ensures transparency among partners.
4. Duty to Render Full Information
Section 9 mandates that partners must provide true and complete information about
the business. As agents of each other, partners must communicate all relevant
information.
5. Duty to Not Carry Another Business
As per Section 11(2), a partner must not conduct any business other than that of the
firm. Partners may restrain one another from conducting outside business, provided
the restraint is reasonable.
6. Duty to Act Diligently
Section 12(b) requires partners to act diligently in managing the business.
7. Duty to Perform Without Remuneration
Section 13(a) states that partners must perform their duties without expecting
remuneration, as they work for the common advantage of the firm.
8. Duty to Share Losses
Section 13(b) states that partners must share losses as provided by the partnership
agreement; if there is no agreement, losses must be shared in proportion to how
profits are shared.
9. Duty to Indemnify for Wilful Neglect
Under Section 13(f), a partner must indemnify the firm for losses caused by their
wilful neglect in the course of business.
10. Duty to Not Assign Rights
Partners cannot assign their rights in the partnership firm to third parties to make them
partners.
11. Duty to Act Within Authority
Partners must act within the authority conferred upon them by the partnership
agreement.
 12. Duty to Account for Private Profits
Section 16(a) prohibits partners from using the partnership's property for personal use
or profits. Any such use must be accounted for.
13. Duty Not to Compete
Section 16(b) states that partners cannot simultaneously run another business without
the consent of other partners. Failure to obtain consent requires accounting for profits
made and compensating for any losses to the firm.
14. Duty to Properly Use the Firm’s Property
Sections 14 and 15 stipulate that the firm’s property must be used solely for the firm’s
business purposes, not for private purposes. This includes all properties, rights, and
interests acquired for business, including goodwill.

o Notice Requirement: Upon reaching majority, if the minor wishes to become

a partner, they must give public notice within 6 months. Failure to do so
makes them liable for acts of the firm until notice is given.
o Post-Majority: When the minor becomes a major, they will be liable for the
acts of the partnership to third parties.

REGISTRATION

Procedure for Registration (Sections 58 & 59)

The procedure to register a partnership firm involves submitting a statement in the prescribed
format, along with the requisite fee, to the Registrar of Firms appointed by the State
Government. The statement must include:

 Firm’s Name
 Principal Place of Business
 Other Business Locations
 Date of Each Partner’s Joining
 Full Names and Addresses of Partners
 Duration of the Firm

This statement must be signed and verified by all partners or their authorized agents as per
Section 58(2). Registration can occur anytime after the firm’s formation, with no stipulated
time limit for initial registration or for updating subsequent changes as per Section 63. Any
state-imposed limitations on the registration period would be considered ultra vires and
invalid (as highlighted in Harijan Boot House v Registrar of Firms).

Restrictions and Conditions for Firm Names (Section 58(3))

Firm names must avoid words like “Crown,” “Emperor,” “Royal,” or any terms implying
government sanction unless approved by the State Government.
Registration Completion

Once the Registrar verifies compliance with all requirements, the firm is registered by
recording its details in the Register of Firms.

Penalties for False Declarations (Section 70)

Section 70 imposes penalties for signing documents with false information, with punishments
up to three months’ imprisonment, a fine, or both. This section ensures accuracy in the
information available to third parties about the firm’s composition and partners.

Rule-Making Authority (Section 71)

Under Section 71, the State Government may establish rules regarding fees, statement
submissions, procedural regulations, dispute resolutions, and document filings. The validity
of these rules has been confirmed in Salem Chit Funds v State of Tamil Nadu, where the
Madras High Court upheld a requirement for registered firms to file annual operation
declarations.

Recording Changes Post-Registration (Sections 60–65)

1. Change in Firm’s Name or Principal Business Location (Section 60): The firm
must comply with similar formalities as during initial registration, and upon
verification, the Registrar amends the entry.
2. Opening and Closing of Branches (Section 61): Any branch adjustments should be
reported to the Registrar for the necessary updates.
3. Partner’s Name and Address Changes (Section 62): If a partner’s name or address
changes, the Registrar updates the Register upon notification.
4. Changes in Firm Constitution or Dissolution (Section 63): Any structural changes,
such as the introduction or departure of a partner (by retirement, expulsion, or death),
should be reported to the Registrar. Failure to comply results only in penalties under
Section 69A, not in the cancellation of registration (Sharad Vasant Kotak v
Ramniklal Mohanlal Chawda).
5. Correction of Mistakes (Section 64): The Registrar can correct any entry errors or
rectify mistakes upon request from all signing parties.
6. Court-Ordered Register Amendments (Section 65): Courts may direct the
Registrar to amend register entries based on rulings affecting the firm’s structure.

Public Notice Requirements

To avoid partner liability for each other's acts after retirement, expulsion, or dissolution,
firms must issue a public notice, which, for registered firms, includes notifying the Registrar.

Inspection and Evidentiary Value of Register Entries (Sections 66–68)

The Register of Firms is open for public inspection upon payment of a prescribed fee
(Section 66). Certified copies of Register entries serve as conclusive evidence of a firm’s
registration status, binding the persons whose signatures appear in the filed documents
(Section 68). For example, in Shivraj Reddy and Brothers v Raghuraj Reddy, the court
ruled that a plaintiff, having signed the registration application, could not deny partnership
status.

Disabilities Due to Non-Registration

1. Suits between Partners and the Firm (Sec 69(1))

Non-registration prevents any partner from initiating legal action to enforce rights
under a contract or the Partnership Act against the firm or co-partners unless:
o The partnership firm is registered.
o The partner filing the suit is listed in the Register of Firms.

Case References:

o Neelakantan Omana v Neelakantan Raveendran: A suit for accounts by a

partner of an unregistered firm was deemed unmaintainable.
o Oriental Fire & General Insurance Co. Ltd. v Union of India: A suit to
enforce a motor vehicle insurance claim for an unregistered firm was barred.
o Mahendra Singh Chaudhary v Tej Ram Singh: A partner’s injunction request
to ensure payments to the firm was dismissed due to the firm’s unregistered
status.
o Popular Automobiles v G.K. Channi: A suit filed by a manager of an
unregistered firm without authority was dismissed as it did not meet Sec 69(2)
requirements.

2. Suits between the Firm and Third Parties (Sec 69(2))

A partnership firm, if unregistered, cannot sue third parties to enforce contractual
rights unless:
o The firm is registered.
o The persons suing are listed as partners in the Register of Firms.

Case Reference:

o Gandhi & Co. v Krishna Glass Pvt. Ltd.: If any partner’s name is missing
from the Register of Firms, the suit by the firm fails.

3. Set-Off and Other Proceedings (Sec 69(3))

The restrictions in subsections (1) and (2) also apply to set-offs and other legal actions
aimed at enforcing rights under a contract.
Exceptions to Section 69

1. Dissolution of Firm or Accounting of Dissolved Firm (Sec 69(3)(a))

Partners of an unregistered firm may sue for the firm’s dissolution, the settlement of
accounts post-dissolution, or the realization of firm property after dissolution.

Case References:

o Biharilal Shyamsunder v Union of India: An unregistered dissolved firm could

sue for compensation due to non-delivery of goods.
o Premlata v Ishar Dass Chaman Lal: Arbitration rights are valid even after
dissolution in enforcing rights to dissolved firm property.

2. Suits by Official Assignee or Receiver (Sec 69(3)(b))

An official assignee or receiver representing an insolvent partner may sue to realize
the partner’s property in an unregistered firm.
3. Exemption Based on Location (Sec 69(4)(a))
Firms operating outside India, or within regions where the government exempts firms
from registration requirements, are not subject to Sec 69 restrictions.
4. Low-Value Suits (Sec 69(4)(b))
If the suit’s value is under Rs. 100, an unregistered firm or its partners can file claims
against third parties.

Additional Points

 Third-Party Rights: Section 69 does not restrict third parties from suing an
unregistered firm, as highlighted in Kantilal Jethalal Gandhi v Ghanshyam Ratilal
Vyas.
 Non-Retroactivity of Subsequent Registration: If a firm registers after filing an
unregistered suit, the suit will not be validated retrospectively. M/s Jammu Cold
Storage v M/s Khairati Lal and Sons held that a suit instituted before registration
cannot proceed further, and the court must dismiss it.

DISSOLUTION OF FIRM [SECTIONS 39 TO 47]

Meaning of Dissolution
The term 'dissolution' stands for discontinuation. Under the Indian Partnership Act, 1932, the
dissolution may be either of Partnership or of a firm.

Meaning of Dissolution of Partnership:

Dissolution of partnership means coming to an end of the relation known as partnership
between various partners. The firm continues its business after being reconstituted. This may
happen on admission, retirement, or death of a partner in the firm.
Example: X, Y, and Z are partners in a firm. X retires. The partnership between X, Y, and Z
comes to an end, and a new partnership between Y and Z comes into existence. This new
partnership between Y and Z shall be known as ‘reconstituted firm’. Thus, on the retirement
of a partner, the old partnership stands dissolved, but the firm continues its business with the
remaining partners Y and Z.

Meaning of Dissolution of Firm:

According to Section 39, dissolution of a firm means the dissolution of partnership between
all the partners of a firm. In such a situation, the business of the firm is discontinued, its
assets are realized, the liabilities are paid off, and the surplus (if any) is distributed among the
partners according to their rights.
Example: If a firm consisting of A, B, and C sees all of them cease to be partners with one
another, it amounts to dissolution of the firm.

Dissolution of partnership is different from the dissolution of the firm. Dissolution of a

partnership firm merely involves a change in the relation of partners; whereas the dissolution
of the firm amounts to a complete closure of the business. When any of the partners dies,
retires, or becomes insolvent but if the remaining partners still agree to continue the business
of the partnership firm, then it is dissolution of partnership, not the dissolution of the firm.
Dissolution of partnership changes the mutual relations of the partners. But in the case of
dissolution of the firm, all the relations and the business of the firm come to an end. On
dissolution of the firm, the business of the firm ceases to exist since its affairs are wound up
by selling the assets and by paying the liabilities and discharging the claims of the partners.
The dissolution of partnership among all partners of a firm is called dissolution of the firm.

Modes of Dissolution (Sections 40-41)

A firm may be dissolved in the following ways:

1. By Agreement
2. Compulsory dissolution
3. On happening of certain events
4. By Notice
5. By the court

Dissolution by mutual agreement [Section 40]:

A firm may be dissolved by mutual agreement among all the partners. Even a firm for a fixed
duration may be dissolved by mutual agreement.

Compulsory dissolution [Section 41]:

A firm is compulsorily dissolved in the following two circumstances:
(i) If all the partners, or all but one partner of the firm are declared insolvent. [The reason is
that there must be at least two persons to continue a firm, and such persons must be
competent to contract].
(ii) If some event takes place which makes it unlawful for the firm's business to be carried on.
Example: A, a resident of India, and Y, a resident of Pakistan, are partners in a firm. War
breaks out between India and Pakistan. In such a situation, on the outbreak of war, the
business of the firm becomes unlawful to be carried on.

Dissolution on the happening of contingent event (S.42):

A firm may be dissolved on the happening of any of the following contingent events:
(i) Expiry of Fixed Period:
A firm constituted for a term is of course not exempt from dissolution by any of the other
possible causes before the expiration of the term. The contract may expressly provide that the
partnership will determine in certain circumstances, but even if there is no such express term,
an implied term as to when the partnership will determine may be gathered from the contract
and the nature of the business. The provision of this section makes it clear that unless some
contract between the partners to the contrary is proved, the firm, if constituted for a fixed
term, would be dissolved by the expiry of that term.

(ii) On achievement of specific task:

A partnership constituted to carry out contracts with specified persons during a particular
season would be taken to be dissolved once the contracts are closed. In the case of Basantlal
Jalan v. Chiranjilal, where the firm was constituted for a specific undertaking to supply a
certain quantity of grain, and the contract was prematurely terminated after the supply of a
part of the goods, it was held that the partnership did not come to an end and was dissolved
only on the final realization of the assets.

(iii) Death of Partner:

When the deed of partnership did not provide that the death of a partner would not dissolve
the partnership, the partnership stood dissolved on the death of a partner. The firm stands
dissolved automatically on the death of one partner. Continuance of business after such death
would not tantamount to the continuance of the earlier partnership.

(iv) Insolvency of Partner:

In the absence of a contract to the contrary, the insolvency of any partner may dissolve the
firm. The rule shall apply even though the partnership has been constituted for a fixed term
and the term has not yet expired or has been constituted for a particular adventure, and the
same has yet not been completed.

(v) Resignation of Partner:

Resignation by any of the partners dissolves the partnership. If all the partners or all but one
partner of the firm are dead or become insolvent, the firm shall be compulsorily dissolved
even if the partnership agreement provided that the firm shall not be dissolved on the death of
a partner. The reason is that there must be at least two partners to continue a firm.

Dissolution by notice (S.43):

In the case of partnership at will, a partner can dissolve it by giving written notice of
dissolution to other partners duly signed by him. Notice must be very clear and certain. A
notice once given cannot be withdrawn without the consent of other partners, as held in the
case of Banarsidas v. Kanshi Ram. In those cases where a partner has given notice of
dissolution at a time when dissolution will give him some advantage over the other partners,
he may be held in the firm until the pending transactions are completed.

Dissolution by Court (S.44):

The court may order for the dissolution of the firm on the following grounds:
(i) Insanity of Partner:
On the application of any of the partners, the court may order for the dissolution of the firm if
a partner has become of an unsound mind. Lunacy of a partner does not itself dissolve the
partnership, but it will be a ground for dissolution at the instance of other partners. It is not
necessary that the lunacy should be permanent. In the case of a dormant partner, the court
may not order dissolution even on the ground of permanent insanity, except in special
circumstances.

(ii) Incapacity of Partner:

If a partner has become permanently incapable of discharging his duties and obligations, then
the court may order for the dissolution of the firm on the application of any of the partners.
Where a partner is imprisoned for a long period of time, the court may dissolve the
partnership, as held in the case of Whitwell v. Arthur.

(iii) Misconduct of Partner:

If any partner other than the partner suing is responsible for any loss to the firm, which
amounts to misconduct and prejudicially affects the carrying on of business, then the court
may order for the dissolution of the firm. In Carmichael v. Evans, a partner of the firm was
convicted for travelling without a ticket on the railway; the court ordered the firm to be
dissolved on the petition by other partners as such an act of the partner was detrimental to the
interest of the firm. Similarly, in Abbot v. Grump, the court ordered the firm to be dissolved
on account of adultery committed by one partner against the wife of the other partner.
Dissolution was ordered as such an act of adultery would adversely affect the mutual trust
and confidence among partners.

(iv) Constant breach of agreement by partner:

The court may order for the dissolution of the firm if the partner other than the suing partner
is found guilty of constant breach of agreement regarding the conduct of business or the
management of the affairs of the firm and it becomes impossible to continue the business
with such a partner.

(v) Transfer of Interest:

When any of the partners other than the suing partner transfers the whole of its share to the
third party permanently.

(vi) Continuous Losses:

The court may order for dissolution if the firm is continuously suffering losses and there is no
more capital available for the future growth of the firm.

(vii) Just and Equitable:

The court may order for dissolution on any other ground which the court thinks is just, fair,
and equitable. e.g., loss of total confidence between the partners was held in Abbot v. Crump,
where the adulterous act has been committed by one partner with another partner's wife,
which was held to be a valid ground for the dissolution of the firm by the court.

RIGHTS AND LIABILITIES OF A PARTNER ON DISSOLUTION

Rights of a Partner on Dissolution [Sections 46, 51 to 53]

The various rights of a partner on dissolution are as follows:

(a) Partner's General Lien [Section 46]: Every partner or his representative is entitled:

 (i) to have the firm's property applied in payment of the firm's debts, and
 (ii) to have the surplus distributed amongst the partners or their representatives
according to their respective rights.

(b) Right to Claim the Return of Premium on Premature Winding Up [Section 51]: If a
partner joined a firm for a fixed term and paid a premium, and the firm dissolves before that
term, they may claim the premium's return, depending on:

 (i) the terms of partnership, and

 (ii) the duration of partnership. However, no return is granted if:
o (i) dissolution is due to a partner's death,
o (ii) the partner seeking the premium's return was at fault, or
o (iii) no return is agreed upon.

(c) Rights in Cases of Dissolution on Account of Fraud or Misrepresentation [Section

52]: The aggrieved partner can:

 (i) retain a lien on the surplus assets after debt payments for their share or contributed
capital,
 (ii) rank as a creditor of the firm for payments towards debts, and
 (iii) claim indemnification from the guilty partner(s).

(d) Right to Restrain Use of Firm Name or Property [Section 53]: A partner or their
representative may prevent others from using the firm’s name or property for their benefit
until the firm's affairs are fully settled.

(e) Agreements in Restraint of Trade [Section 54]: Upon or before dissolution, partners
can agree to refrain from similar business in specific areas or timeframes, making the
restriction enforceable if reasonable.
Case: Curt Brothers Ltd. v. Webster: In this case, A sold goodwill but set up a similar
business. A cannot solicit former customers, but may continue dealings if customers choose
A on their own.

Liabilities of a Partner on Dissolution [Sections 45 and 47]

(a) Continuing Liability for Acts Done Post-Dissolution [Section 45]: Partners are liable to
third parties for post-dissolution acts unless public notice of dissolution is provided.

(b) Continuing Authority of Partners for Winding Up [Section 47]: After dissolution,
partners can bind the firm as needed to wind up affairs or complete unfinished transactions,
barring insolvency.

(c) Mode of Account Settlement [Section 48]: After dissolution, accounts settle by:
  Paying firm debts, advances, and then capital to each partner.
 Remaining surplus, if any, is distributed per agreement.
Case: Nowell v. Nowell: A deficiency in capital is shared proportionally between
partners.

(d) Payment of Firm and Separate Debts [Section 49]: Joint debts use firm assets first; any
remaining surplus settles separate debts. Conversely, separate property applies to separate
debts first.

Treatment of Loss Due to Insolvency of a Partner

If a partner is insolvent, the uncollectable amount is treated as a loss to be borne by solvent

partners based on their last agreed capital, as decided in Garner v. Murray.

Personal Profits After Dissolution [Section 50]: Partners must share any profits from firm
assets or reputation with other partners until the firm's affairs conclude.
Proviso: If a partner bought the goodwill, they may use the firm's name.

Return of Premium on Premature Dissolution [Section 51]: If dissolution occurs before a

fixed term and a premium was paid, the partner may reclaim part of it, barring misconduct or
lack of agreement.
Case: Airey v. Barbam: Premium was forfeited due to misconduct.

Sale of Goodwill After Dissolution [Section 55]: Upon sale of goodwill:

 A partner may start a competing business but cannot use the firm’s name, represent
themselves as the firm's successor, or solicit past clients.

Types of Partners

Here we will look at six types of partners we come across on a regular basis. This
list is not exhaustive, the Partnership Act does not restrict any unique kind of
partnership that the partners want to define for themselves. Let us take a look at
some of the important types of partners.

1] Active Partner/Managing Partner

An active partner is also known as Ostensible Partner. As the name suggests he

takes active participation in the firm and the running of the business. He carries on
the daily business on behalf of all the partners. This means he acts as an agent of
all the other partners on a day to day basis and with regards to all ordinary
business of the firm.

Hence when an active partner wishes to retire from the firm he must give a public
notice about the same. This will absolve him of the acts done by other partners
after his retirement. Unless he gives a public notice he will be liable for all acts
even after his retirement.

2] Dormant/Sleeping Partner

This is a partner that does not participate in the daily functioning of

the partnership firm, i.e. he does not take an active part in the daily activities of
the firm. He is however bound by the action of all the other partners.

He will continue to share the profits and losses of the firm and even bring in his
share of capital like any other partner. If such a dormant partner retires he need
not give a public notice of the same.

3] Nominal Partner

This is a partner that does not have any real or significant interest in the
partnership. So, in essence, he is only lending his name to the partnership. He will
not make any capital contributions to the firm, and so he will not have a share in
the profits either. But the nominal partner will be liable to outsiders and third
parties for acts done by any other partners.

4] Partner by Estoppel

If a person holds out to another that he is a partner of the firm, either by his words,
actions or conduct then such a partner cannot deny that he is not a partner. This
basically means that even though such a person is not a partner he has represented
himself as such, and so he becomes partner by estoppel or partner by holding out.

5] Partner in Profits Only

This partner will only share the profits of the firm, he will not be liable for any
liabilities. Even when dealing with third parties he will be liable for all acts of
profit only, he will share none of the liabilities.

6] Minor Partner

A minor cannot be a partner of a firm according to the Contract Act. However, a

partner can be admitted to the benefits of a partnership if all partner gives their
consent for the same. He will share profits of the firm but his liability for the
losses will be limited to his share in the firm.
Such a minor partner on attaining majority (becoming 18 years of age) has six
months to decide if he wishes to become a partner of the firm. He must then
declare his decision via a public notice. So whether he continues as a partner or
decides to retire, in both cases he will have to issue a public notice.