INDIAN

BUSINESS LAW PARTNERSHIP

ACT, 1932
 SECTION-C
THE INDIAN PARTNERSHIP ACT, 1932:

ESSENTIALS OF PARTNERSHIP
(SECTION 4,5 AND6)

KINDS OF PARTNERSHIP (SECTIONS 7

AND 8)
BUSINESS LAW
RELATION OF PARTNERS TO ONE
ANOTHER (SECTION 9-17)

RELATION OF PARTNERS TO THIRD

PARTY (SECTION 18-30)

OUTGOING AND INCOMING

PARTNERS (SECTION 31-38)
 MODES OF DISSOLUTION OF A FIRM
(SECTION 39 TO44)

REGISTRATION OF A FIRM (SECTION 56

TO 59)
EFFECTS OF NON-REGISTRATION OF A
FIRM (SECTION 69)

JUDGEMENTS:
COX V HICKMANN 1860
BUSINESS LAW
VISHNU CHANDRA VS CHANDRIKA
PRASAD AGARWAL AND ORS AIR 1983 SC
523, 1982 (2) SCALE 1078, (1983) 1 SCC 22,
1982 (14) UJ 882 SC

DHULIA-AMALNER MOTOR
TRANSPORT ... VS RAYCHAND RUPSI
DHARAMSI AND ORS. AIR 1952 BOM 337,
(1952) 54 BOMLR 294, ILR 1952 BOM 795
 Traditional business was sole owner
business. So, only small size business
was carried out and in carrying such
business very less capital is required.
The concept of sole business changed
NEED into partnership business as demand
AND increase for big businesses.
ADVANTAGES Advantages of Partnership Business
Contribution of capital
Contribution of labour or skills
Share of risk
Solves the management problems
 Initially, all the provisions relating
to partnership and partners were
contained in chapter XI , Sections
239 to 266 of the Indian Contract
Act, 1872, but these sections were
ENACTMENT repealed in 1930 and a new act –
OF IPA, 1932 the Indian Partnership Act, 1932
was passed. The Act came into
force on the 1st of October 1932,
except Section 69 which came into
force on the 1st of October 1933.
 Why need a separate Act?
As In some matters ICA were
not exhaustive like
ENACTMENT
OF IPA, 1932 Eg : It is silent about minor’s
position in Partnership firm,
Sharing of loss was mandatory
(Defect in the definition), No
provision of registration
 Why postponement of enforcement
of Section 69 IPA
The reason for postponing the
enforcement of section 69 for one
REASON OF year was that if the partnership firm
SECTION 69 is not registered, then such firm can’t
POSTPONED sue its partners or 3rd party so it was
necessary to give time to firms to
get themselves registered before
any disability could be clinched on
them.
 • Section 1(2) It extends to whole of India
including J&K after 31 Oct, 2019 (before
that it exclude J&K).

SECTION 1,2, • Section 2 is a definition part

• The Partnership Act is not an exhaustive
3 OF IPA, code of the law of partnership. The Act itself
1932 admits this fact in its declaration of section 3.
• Section 3, “The unrepealed provisions of
the Indian Contract Act, 1872, save in so far
as they are inconsistent with the express
provisions of this Act, shall continue to
apply to firms.”
 • Section 3 application of Indian
Contact Act 1872 shall continue to
apply to firm unless they are
SECTION 1,2, inconsistent with the express
3 OF IPA, provisions of this Act. Partnership is
1932 a special kind of contract and thus,
the provisions of Indian Contract
Act, 1872 also apply to a
partnership firm unless the Indian
Partnership Act provides otherwise.
 It means Indian Contract Act is a
parent Act in so far as for
PARENT ACT IS functioning and general principles
ICA AND IPA IS contained therein –It follows Indian
NOT Contract Act 1872 but for any
RETROSPECTI
special and exceptional legal issues
VE
then follow express provisions under
Indian Partnership Act 1932.
 Its provisions cannot be given a
retrospective operation. Even
PARENT ACT IS Section 74 expressly provides that
ICA AND IPA IS the Act shall not deemed to affect
NOT any right, title, interest, obligation or
RETROSPECTI liability already acquired, accrued or
VE incurred before the commencement
of the Act.
 • A partnership is an
association of people
who have common
PARTNERSHI objectives and goals.
P Even a business managed
or owned by two or more
people is termed as
‘partnership’.
 • The idea of a partnership or such
collaboration is that every member
or partner contributes something,
which helps to achieve an aim, and
PARTNERSHI is beneficial to all the members of
P such partnership or collaboration.
A member may contribute money,
labour or skill which in turn makes
it easier to achieve the common
objective or objectives.
 Partnership is an
arrangement where people
consent to work together and
advance their mutual
PARTNERSHI
P interests. For example, two
doctors may decide to work
together on the same case as
partners and share the fees.
 The term ‘partner’ is linked to
various other words. It is said to be
derived from the Latin term
‘partitionem’, which means ‘portion
or division’. The word ‘partner’ is
PARTNERSHI
also associated with the French term
P ‘parçener’ which means ‘joint heir’
or ‘one that shares or has a part
with another’. The term can also be
broken down to ‘to part’, which
means ‘to divide’ or ‘to share’.
 • Section 4 of the Indian Partnership Act
1932 defines ‘partnership’ as the
“relation between persons who have
agreed to share the profit of a
DEFINITION business carried on by all or any of
OF them acting for all”. Persons who
PARTNERSHI have entered into partnership with
one another are called individually
P
‘partners’ and collectively a ‘firm’
and the name under which their
business is carried on is called the
‘firm name’.
 Both, A and B are carpenters. They
decide to work together. But they
have an agreement under which A
will keep all the profits and pay B a
predetermined salary. Here, A and B
EXAMPLES are not partners.
A is a goldsmith. He agrees with B
to buy and provide gold to B for
making ornaments. They plan to sell
the ornaments and share the profit.
Here, A and B are partners.
 • Under the English Partnership Act, 1890
‘Partnership’ is defined as “the relation
subsisting between persons carrying on
business in common with a view to profits”.
• Thus in simple words, if two people agree to
OTHER combine money, skill or labour in a business
DEFINITION and to share profits thereof, their relationship
is called partnership.
S
• According to Sir Fredrick Pollock,
“partnership is a relationship between
persons who have agreed to share the profits
of a business that is carried on by one of
them or all of them”.
 The essential features of partnership as
per the definition of partnership
contained in Section 4 are listed below:

ESSENTIAL 1) It is the result of an agreement

between two or more persons
FEATURES
2) it is organized to carry on a business
3) the persons concerned agree to Share
the Profits of the business
5) the business is to be carried on by
all or any of them acting for all
 Partnership is actually the relation of
partners and one person chooses the
other as a partner only when there is a
mutual trust and confidence. And
if this trust and confidence is shaken,
RELATION them it results into breaking of
partnership. The word relation is
used and not association because the
word association denotes any other
kind of union also eg Company is an
association of persons.
 Section 4 uses the words
“persons” which is used in plural
sense so that means minimum
two people are needed to create
a partnership. The people who are
PERSONS
partners in a firm must be
competent to contract. If all
partners are minors or if there is
only one adult partner, it is not a
partnership at all.
 The partnership Act is silent about the maximum
number of partners but Section 11 of the Companies
Act, 1956 provides that number of partners cannot
exceed 10 persons in case of banking business and
20 in other businesses. If the number of partners
NUMBER OF exceeds the limit, the partnership becomes an illegal

PARTNERS association. Similarly, if the number falls below two,

the partnership is deemed dissolved.
Now Section 464 of the Companies Act, 2013 has put
a limit of 100 partners in any association or
partnership firm.
However the rule given under the Companies (Misc)
Rules, 2014 restrict the present limit to 50.
 • The word person also includes in
itself natural persons as well as
juristic persons. But in case of
NATURAL natural person, person must be
AND competent to contract. Eg
JURISTIC • One natural person and another
PERSON natural person can enter into
partnership
• One natural person can enter into
partnership with juristic person.
 The foundation of partnership is an
agreement. There can be no
partnership without an agreement.
VALID Partnership must be the result of an
AGREEMENT agreement between two or more
persons. There must be an agreement
entered into by all the persons
concerned. This element relates to
voluntary contractual nature of
partnership. Thus, the nature of the
partnership is voluntary and
contractual.
 The agreement to create partnership may be express
or 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 writing.
VALID That agreement must be enforceable by law. Enforceable
AGREEMENT by law is not provided under IPA but it is provided
under ICA under Section 10.
So, the partnership agreement must fulfil all the
requirements of a valid contract. There should be
free consent, competency of the parties, lawful
consideration and object and not expressly
declared to be void.
 • The agreement can also be inferred from the
conduct of the parties. The agreement need not be
in writing except where required under the Income
Tax Act if the partners desire their firm to be
assessed to income tax for getting advantage of
taxable income of the firm can be materially
reduced or if the partners wish to get the firm
PARTNERSHIP registered.
BY CONDUCT • An agreement to create a partnership may arise
from the conduct of the parties concerned as held
in the case of Abdul v Century Wood Industries.
(1954)
 • The validity of a partnership firm does not depend
upon capital contribution by partners. A person
can become a partner without having to make any
NO CAPITAL contribution towards the capital of the firm. A
CONTRIBUTION person may contribute his know-how, or
NEEDED intellectually property rights, or skill and
experience or even sheer labour in consideration of
becoming a partner. As held in the case of Shivraj
Reddy & Bros v S. Raghu Rao Reddy (2002)
 A minor or person of unsound mind
who are not competent to contract
cannot become partners. There is
nothing which prevent a person
incompetent to contract from
MINOR accepting any benefit and hence the
POSITION partnership act permits a minor to be
admitted to the benefits of
partnership Under Section 30. but
that itself does not make him a partner.
 According to Section 30(5), a minor on
attaining age of majority has the option
to become or not to become a partner, it
means that, before attaining the
majority, he is not considered as a
MINOR partner. Such minor has a right to such
POSITION share of property and profits as may
be agreed upon. Minor’s share is liable
for the acts of the firm but the minor is
not personally liable for any such act
 Can HUF enter into partnership with
natural person
No because HUF has no separate legal entity
or personality. So that is why they are not
competent to form partnership.
HUF, Can a partnership firm enter into a
PARTNERSHI partnership with another firm

P FIRM AND A partnership firm is not a legal person so a

firm is not entitled to enter into partnership
COMPANY with another firm but partners of the firm can
enter into partnership in their individual
capacity with another individual. As Section 4
uses the words “the persons entering into
partnership with one another are called
individually “partners” and collectively “a firm”.
That means firm has no separate personality
from their partners.
 Section 25 provides for liability of
partners and states that they are
liable jointly as well as severally so
firm has no separate legal status.
HUF, That's why one partnership firm can’t
PARTNERSHI enter into partnership with another
P FIRM AND partnership firm. Duli Chand v CIT
(1956)SC A partnership firm not a
COMPANY legal person, so, an individual or a
company can’t enter into partnership
with a partnership firm.
 Can a Company make a partnership
with another company
Yes Steel Bros & Co ltd v CIT (1957)
SC A Company can enter into partnership
HUF, with other company/s as it has legal entity
PARTNERSHI but facing practical difficulties under
P FIRM AND Companies Act as in that case any
stranger to company can have an access to
COMPANY the books, accounts and papers of the
companies whereas under Companies Act
they are only limited to their own
members and shareholders.
 • Partnership Act not mentioned about only solvent
person can become a partner but Section 34 states
that when a partner is adjudicated insolvent, he
ceases to be a partner. It means who is not
insolvent can become a partner.

INSOLVENT • The main reason of such provision is to safeguard

the interest of third parties when they want to
PERSON enforce their rights against various partners.
• If a person after becoming a partner is adjudicated
an insolvent, then according to Section 42, it is a
ground of dissolution of the firm also. An
insolvent can’t enter into partnership because
insolvent is disqualified by law.
 Partnership is not created by status –
the relationship of partnership can arise
only out of a contract. Section 5
clearly states that

PARTNERSHIP IS “The relation of partnership arises

from contract and not from status;
A CONTRACT
and, in particular, the members of a
NOT STATUS Hindu undivided family carrying on a
SECTION 5 family business as such, or a
Burmese Buddhist husband and wife
carrying on business as such are not
partners in such business.“
 If the basis of relationship between certain
persons is not an agreement, the association
would not be a partnership. Some association
may be created without an agreement. Eg
the association between certain persons may
PARTNERSHIP IS arise from the status like if a Hindu
A CONTRACT Undivided Family is carrying on a family
NOT STATUS business, it is not a partnership. Or Burmese
SECTION 5 Buddhist Husband and wife carrying on
business as such are not partners in such
business as held in the case of Rakesh
Kumar Dinesh Kumar v UG hotels &
Resorts Ltd (2006)
 Partnership does not arise by
mere joint acquisition of
property like in the case of
PARTNERSHIP IS co-ownership. Eg on the
A CONTRACT
NOT STATUS death of the father, the two
SECTION 5 sons inherit his joint
business. They are co owner
of that business not partners.
 Sanyasi Charan v Krishna
Dhan (1919) Cal HC It was
held that joint family business
means an ancestral business
but it doesn’t mean that the
CASES members of Joint Hindu family
can’t form partnership, they
can form partnership by
contract only and not by status.
 If a wife entrusts her stridhan to her husband, it
is not an agreement of partnership even if the
husband uses the property for business. As held
in the case of Pratibha Rani v Suraj Kumar
(1985)
There is nothing in law to prohibit a family
members of HUF from forming a partnership.
CASES Moreover, grant of exclusive control to any one
partner or non registration of firm for one year
under partnership Act did not indicate that the
partnership agreement was not genuine as held
in the case of Murlidhar v The Comm. of
Income Tax MP (1964)
 Rasikh Lal v CIT (1998) SC the Court held that
the HUF is not competent to enter into a contract
of partnership, therefore, if HUF enters into a
partnership, then it could not be considered to be
a partnership by HUF but it will be considered to
be a partnership by its members in their personal
capacity.

CASES S.K.P Naidu v Rama Naidu (2001) SC When a

deed is named as a partnership deed, it can’t be
said that it is a partnership because the nature of
partnership can’t be determined by the mere use
of the word partnership in the agreement. So
there must be following elements for the
existence of partnership. 2 or more persons,
agreement between the partners, contractual
relation (oral/writing), sharing of profit and mutual
agency.
 Created for the purpose of carrying on
business:
According to Section 4 of the IPA 1932, the
partnership must have been created to carry
on business. Business must be carried out
CARRY ON means series of transactions. It may be any
business which is not unlawful. It is not
BUSINESS necessary that all the partners actively
participate in the conduct of the business. For
example, one partner may contribute skill or
experience while another may contribute
capital for the firm. The business may be
permanent or temporary, trading or non-
trading.
 • Section 2(b) of the Indian Partnership Act, 1932 says
that ‘Business’ includes every trade, occupation
and profession” but we have not to take it literally,
as every trade is a business but not every occupation
or profession. So it has to be seen in practical sense

BUSINESS means it is taken to refer to any activity which if

successful would result in profit.
U/S 2(B) • It has two propositions:
• -first, there must exist a business.
• -secondly, the motive of the business is the
“acquisition of gains” which leads to the
formation of partnership. Therefore, there can no
partnership where there is no intention to carry
on the business and to share the profit thereof.
 • The definition is not exhaustive and is capable
of including any kind of commercial activity
aimed at earning profits. Thus, a partnership
does not exist between members of a religious
or charitable association and the like.
CHARITY IS • The main essence of partnership is to earn
NOT A profit, therefore, every business has one
BUSINESS motive i.e. to earn profit. So, if in any event,
that motive is not there then it is not a
business.
• If group of persons are combined for the
purpose of charity that combination is not a
partnership, because there is no business.
 • Whether goods purchased for self consumption is
a business?
• NO
• When the goods are purchased for the purpose of re-
sale it is a business transaction but if a number of
persons join together to make a bulk purchase of
SELF certain goods and divide the very goods amongst
CONSUMPTION themselves to get the benefit of bulk purchase, they
GOODS are not partners even each one of them gain
something out of bulk purchase without any idea of
selling as held in the case of Coope v Eyre. (1788)
Court held that agreement between the persons was
in relation to self consumption of goods, therefore,
the agreement was not for the purpose of business.
So there is no mutual agency, because there is no
partnership.
 • According to section 4 there must
be business for partnership but that
business must be lawful. It means
object and consideration of the
BUSINESS business must be lawful.
MUST BE According to case Usha
LAWFUL Gopiratham v P.S. Ranganathan
(2008), if the partnership is based
on contract which is not lawful,
then in such a case, the partnership
will not be valid partnership.
 • If a firm starts a business which is lawful
on its initial stage but subsequently
becomes unlawful, then, according to
Section 41 of IPA, 1932, it is a ground of
dissolution of firm and that dissolution is
LAWFUL compulsory.
BUSINESS • But where more than one separate
advantages or undertakings are carried on
by firm and one of them becomes
unlawful, then firm is not dissolved for
those businesses which are lawful.
(Section 24 ICA)
 • But if agreement is illegal or opposed
to public policy then its void and
unenforceable under section 23 of ICA.
BUSINESS IF Eg where partnership between two
OPPOSED TO persons to carry on business of
transport service obtaining permit in
PUBLIC contravention of Motor Vehicle Act
POLICY then a claim on the basis of settlement
THEN VOID of accounts of such partnership is
illegal and void and unenforceable as
held in the case of AVV Naidu v KVT
Nadar (1963)
 • Services rendered jointly also
constitute a partnership. For example,
BUSINESS if two advocates may agree to jointly
MUST BE plead a case and divide the fees, they
PRESENT are partners in respect to that case. But
an agreement to carry on business in
AND CARRY the future is not a partnership. Business
ON BUT NOT must be in existence. An agreement to
FUTURE carry on business at a future time does
BUSINESS not result in present partnership. As
held in the case of R.R Sarna v
Reuben (1946)
 Sharing of Profits:
According to Section 239 of ICA 1872
which earlier provided that there must be
sharing of losses but in IPA 1932, Section
4 provides that sharing of profit is must
SHARING OF but sharing of losses is not necessary.
PROFITS The purpose of a partnership is to carry on
business for the sake of profit and to share
the same. The word Partnership is derived
from the word “to part” means “to divide”.
The division of profits is an essential
condition of the existence of a partnership
 The sharing of profits is an essential
feature of partnership. There can be
no partnership where only one of the
partners is entitled to the whole of the
profits of the business. Partners must
SHARING OF agree to share the profits in any
manner they choose.
PROFITS
But an agreement to share losses is not
essential element. It is open to one or
more partners to agree to share all the
losses. However, in the event of losses,
unless agreed otherwise, these must be
borne in profit-sharing ratio.
 Thus, it is obvious that the
partners have an interest in
sharing the profits so earned
from the business of the firm.
SHARING OF Division of profits is an
PROFITS important element in a
partnership. So clubs and
societies which do not aim at
making profits are not
partnerships.
 • Section 13 provides for equal share of profits
as well as equal share of losses but section 13
is subject to the contract between the
partners. That means:
• If the contract between the partners provides
that any partner is exempted to share the
SECTION 13 loss, than that is a valid contract.
• If the contract between the partners provides
that any partner doesn’t share the profit, than
that is not a valid contract of partnership
because Section 4 provides that for making a
valid partnership, there must be sharing of
profit.
 • The word partnership is derived
from the word ‘part’ which means to
divide or share. So, division of profit
is an essential condition for the
SHARING OF existence of partnership firm.
PROFIT • Every person who receives a part of
profit of business is not necessarily a
partner in the firm but no man
acquires the status of partner without
the right of sharing of profit.
 • Sharing of profit is one of the essential
elements of every partnership but every
person who shares the profit need not
always be a partner. Eg, I may pay a share
of profits to the manager of my business
instead of paying him fixed salary so that
EXAMPLES he takes more interest in the progress of
my business such person can be my
servant or agent but not my partner.
Similarly, share of profit may be paid by a
business man to money lender by way of
payment of loan and advances such
money lender does not become a partner.
 whether sharing of profits is the sole
test of partnership - There was a time
when sharing of profits and losses was
used as a test to determine whether a
CASES- partnership existed or not. If a person
GRACE VS. shared the profits and incurred liabilities
SMITH too, he was deemed a partner as held in
Grace vs. Smith [1775 2 WM Blacks
998]. Court held that “every man who
has a share of the profits of a trade,
ought also to bear his share of the loss”.
 • In this case, 4 members were engaged
in a business, one was the sleeping
partner who contributed major portion
and sharing 50% of profit. But
business was run by other partners. In
GRACE VS. this case, a third party filed a suit
SMITH against the sleeping partner also. He
took the defence that he is not a partner.
Problem arose to prove whether
sleeping partner was a partner and only
proof was that of the entries in the
account of sleeping partner.
 Court in this case for the first time held
that in the absence of any explanation for
the payment, then sharing of profits
becomes an evidence for a person being
liable as a partner.
GRACE VS. Reasons-
SMITH Only partners share the profit and not
strangers. If a person has shared the profit,
then the money have been withdrawn from
firm which if not would have been shared,
then it must be in the accounts of the firm.
 • In the case of Waugh v Carver 1793 again the
same principle was confirmed which was given in
the case of Grace v Smith.
• After the decision in Waugh v Carver case, it
was the law of the land that any person who
CASES- shares the profit is a partner. But the following
problem arose:
WAUGH V • When the money lender is sharing the profit
CARVER • Agent working in a firm bought shares by
bringing business as a salary
• When children were granted a share of profit of
deceased partner
• Sale of goodwill by a partner in consideration of
share of profit.
 • In all the above mentioned
instances, all the persons are
sharing profits but they are
not really partners. So,
CASES
holding them liable as a
partner will be unjust and
unfair, but according to Grace
v Smith, they are liable.
 • This was the state of the law up to the
year 1864. the test was again
examined when in Cox v Hickman the
house of lords reconsidered the test of
determining the existence of a
COX V
partnership. The net result of this
HICKMAN historic decision is that no man is a
partner unless he has the right to share
the profits of the business. But every
man who received profits is not
necessarily a partner.
 • Cox v Hickman (1860)
Smith and his son were iron merchants in
partnership. They became financially embarrassed
and therefore, made a compromise with their
creditors. Under the compromise the property of the
firm was assigned to few creditors headed by Cox
COX V selected as trustees. They were empowered to carry
on the business to divide the net income among the
HICKMAN creditors in a rateable proportion and after the debts
had been discharged, the business was to be returned
to Smith and son. Hickman, plaintiff supplied the
large quantity of material to one of the trustee and
gave him a bill of exchange for the price. The bill
remaining unpaid, Hickman brought an action
against the trustees, including Cox for the price.
 • House of lords rejected the test of
sharing of profits laid down in the
case of Grace v Smith and held
that whether a person is a partner
COX V or not or a group of persons is a
HICKMAN firm or not, sharing of profits is a
good evidence to prove that they
are partners but such sharing of
profits is not a conclusive proof
that a person is a partner.
 • Therefore, in relation to evidence of
sharing of profits it should be kept in
mind that it is not a sole method to
decide whether a person is partner or
not. In each case one has to determine
COX V the law and why profit is given to one
HICKMAN person and at that time, we have to find
out the real relationship between the
partners. So, house of lords substituted
a new test i.e. real relation existing
between the persons and this test is
adopted by IPA,1932 in Section 6.
 • In this case House of Lords held
that although the creditors were
sharing the profits and business
was being managed by the
COX V trustees, still the relationship
HICKMAN between the Smith and son on the
one hand and the creditors on the
other was of debtor and creditor
and not that of the partners. So
Cox could not be held liable.
 Thus sharing of profits is only a prima
facie evidence of the existence of a
partnership. The conclusive test is that
of mutual agency. It was held that the
conclusive test for partnership is mutual
COX V agency because it is possible that every
man who gets a share in the profits
HICKMAN might not be liable for the losses of the
firm or might not be a partner. So the
persons sharing the profits of a business
do not always incur the liability of
partners unless the real relation between
them is that of partners.
 • However, Now, a person does not become a
partner merely because he shares the profits
of the business. Similarly, sharing of losses
is not a must for a partnership. Sharing
profits and contributing to losses are
PRESENT indications or prima facie evidence of a
partnership but not the conclusive test of
POSITION partnership. It is possible that a partner may
be paid salary or a fixed sum periodically in
lieu of profits. The section does not insist
upon sharing of losses. Thus loss sharing is
not essential as held in the case of Walker
west Developments v F.J Emmett (1978)
 • For example, a servant or agent may
receive a share of profits instead of his
salary or as a bonus.
• Similarly, a person who sells his
business and goodwill may be given a
EXAMPLE share of profits as consideration for sale.
• An employee of the firm may loan some
money to the firm.
But these persons do not ipso facto become
partners in the firm due to such
participation.
 • In the case of Mollow vs. Court of
Wards [1872 LR 4 PC 419], a Hindu Raja
loaned some money to a company. In
return, he was given a certain percentage
of profit and also allowed to exercise
control on some aspects of the business.
CASES But the Raja was not empowered to direct
the transactions of the company. It was
held that although sharing of profits is a
very strong test, the relationship of
partnership depends on the real intention
and conduct of the parties.
 • The partners can decide the ratio
or proportion of share in profits
and losses through an agreement
NO NEED OF between them. A partner may get
EQUAL more percentage of the profits
SHARING than the other(s) based on factors
like contribution of capital,
special skills or taking a more
active part in the daily functioning
of the firm.
 Mutual Agency:
The word agency is not defined in IPA and not
even defined in ICA but Section 182 of ICA
defines the words ‘principal’ and ‘agent’ so the
relation between principal and agent is called
agency. According to agency, principal is liable for
MUTUAL the act of the agent but agent is not liable for the
act of the principal. In mutual agency both persons
AGENCY are principal as well as agents, it means act of one
person is the act of other.
Before 1932, there was no provision like mutual
agency but after the commencement of IPA, 1932,
partners have mutual agency
 • Section 4 of the Act states that the
business of the partnership must be carried
on by all or any of them acting for all.
MUTUAL • Thus if the person carrying on the business
AGENCY- acts not only for himself but for others
PRINCIPAL also, so that they stand in the position of
AND AGENT principals and agents, they are partners.
This is the principle of Cox v Hickman.
Thus, there must be a relationship of
mutual agency amongst all the partners.
 • The business must be carried on by all the
partners or by anyone or more of the partners
acting for all. This is the cardinal principle of
the partnership law. In other words, there

MUTUAL should be a binding contract of mutual agency

between the partners.
AGENCY- • An act of one partner in the course of the
PRINCIPAL business of the firm is in fact an act of all
partners. Each partner carrying on the
AND AGENT business is the principal as well as the agent for
all the other partners. He is an agent in so far
as he can bind the other partners by his acts
and he is a principal to the extent that he is
bound by the act of other partners.
 • Mutual agency means that every
partner has a dual role – that of a
principal and of an agent. Every
MUTUAL partner is an agent of the other partners
and can bind other partners by his acts
AGENCY-
done on behalf of the firm in all
PRINCIPAL matters that are within the scope and
AND AGENT object of the partnership. Similarly,
every agent is also the principal for the
other partners in the firm and in turn, is
bound by their acts.
 • Section 18 stresses the necessity of mutual agency
again and states that a partner is an agent of the
firm for the purpose of business of the firm.
Section 2 (a) defines that ‘an act of the partner is
the act of the firm.

MUTUAL • The act of the partner is binding on the firm just

like an act of an agent is binding upon the principal.
AGENCY U/S The foundation or basis of the law of partnership is
agency. The law of partnership is undoubtedly, a
18 branch of the law of the principal and agent.
• Every partner is both – an agent and principal for
the other partners. For example, a notice to partner
serves as a notice to the firm. The acts of a partner
during the ordinary course of business bind the
other partners and they are liable for the same.
 • Subject to limitations under Section
20 of the Act, one partner can always
bind the other partner(s) in any matter
that falls within the scope of
MUTUAL partnership. Partners are not agents
AGENCY for each other outside of the firm or
U/S 20 for other purposes. Whether there was
a partnership or not is a mixed
question of fact and law, depending
upon the varying circumstances in
different cases.
 • But mutual agency has to be read with Section
19 and 22 of the IPA, 1932. It provides that
act of the agent (partner) is the act of the firm.
When that act is done with the intention to bind
the firm i.e. If any act is done which partner
has no authority eg compromise the claim or
MUTUAL withdraw the suit, then the firm is not liable.

AGENCY • According to Section 12, every partner has a

right to take part in the conduct of the business.
But sometimes, a partner becomes a sleeping
partner i.e. Who is not participating in the
conduct of the business of the firm. That
agreement is valid because Section 12 is
subject to contract between the partners.
 • So, it is clear that there are two types of
partners- sleeping and active partners
• Active partners does all the acts for the firm
but the act of the active partners makes the
sleeping partners liable as Section 25
MUTUAL provides that every partner is liable
AGENCY jointly as well as severally for all the acts
of the firm.
• If active partner wants to retire, he has to
give public notice, otherwise he becomes
liable by way of holding out but this public
notice is not required for sleeping partner.
 • The true test of partnership is mutual agency rather
than sharing of profits. If the element of mutual agency
is absent then there will be no partnership.
• KD Kamath and Co v CIT 1971, the SC has held that
the two essential conditions to be satisfied are that
• 1)there should be an agreement to share the profits as
well as the losses of business; and
MUTUAL • 2)the business must be carried on by all or any of them

AGENCY acting for all, within the meaning of the definition of

partnership under section 4.
• The facts of the case is that the exclusive power and
control by the agreement of the parties, is vested in one
partner or the further circumstance that only one
partner can operate the bank accounts or borrow on
behalf of the firm are not destructive of the theory of
partnership provided the two essential conditions are
satisfied.
 • Section 6 MODE OF DETERMINING
EXISTENCE OF PARTNERSHIP
In determining whether a group of persons is
or is not a firm, or whether a person is or is not
a partner in a firm, regard shall be had to the
real relation between the parties, as shown by
all relevant facts taken together.
SECTION 6 Explanation I : The sharing of profits or of
gross returns arising from property by persons
holding a joint or common interest in that
property does not of itself make such persons
partners.
 Explanation II : The receipt by a person of a share of the
profits of a business, or of a payment contingent upon
the earning of profits or varying with the profits earned
by a business, does not itself make him a partner with
the persons carrying on the business;

and, in particular, the receipt of such share or payment –

(a) by a lender of money to persons engaged or about to

engage in any business
SECTION 6 (b) by a servant or agent as remuneration,

(c) by the widow or child of a deceased partner, as

annuity, or

(d) by a previous owner or part-owner of the business, as

consideration for the sale of the goodwill or share
thereof,

does not of itself make the receiver a partner with the

persons carrying on the business.
 • Section 6 provides that:
• Whether a person is partner or not?
• Whether a group of persons is a firm or not?
• In testing whether a person is a partner or
not, we have to see the real relationship.
SECTION 6 That means we have to find out all the
relevant facts taken together to determine
what is the real relationship between them:
• The facts and circumstances of each case
• Terms of the contract
• Intention of the parties
 The principle laid down in Cox v Hickman
forms the basis of the Section 6 which
emphasis on real intention between the
parties as shown by all the relevant facts
together to determine whether the persons
COX V are partners or not.

HICKMAN In determining whether a group of persons is or

is not a firm or whether a person is or not a
partner in a firm, regard shall be had to the
real relation between the parties, as shown by
all relevant facts taken together.
 Explanation 1 makes it clear that the persons
having a joint or common interest in the
property do not become partners merely
because they share profits or gross returns
COX V arising from property.

HICKMAN We have to see the intention of the parties. If

their intention shows that they want to create
a partnership, then they have to fulfil all the
essentials of Section 4 and they have to show
intention to form a partnership
 • Explanation 2 mentioned for particular
instances that merely because a person
receives a share of the profits of a
business or a payment contingent or
varying upon the profits earned by the
SECTION 6 business, he does not become a partner.
In determining whether a group of
persons is a firm or not, mere
participation in profits of the business or
receiving the payment out of the profit is
not enough. It doesn’t render the receiver
of profit in itself liable as a partner.
 • A employ B in his firm but A
has no money to pay B’s
salary. So they made an
arrangement by contract that A
EXAMPLE will give 10% share of profit
to B. B is not a partner
because their real relationship
is of employer and employee
and not of partners.
 The persons who have joint interest or common interest
in the property are not partners. They may be joint
owners also. So sharing of the profits by them or gross
PERSONS returns arising from property by them does not make

HAVING A them partners. As joint ownership is not a business.

So when two persons purchase a tea-shop and also
JOINT OR purchase the pottery and utensils by spending the equal
amount of money, but thereafter they lease out the shop
COMMON and share the rent equally, they do not become partners

INTEREST as held in the case of Govind Nair v Maya (1948).

But when the co-owners of the land jointly invest the
IN THE money in raising the crop and jointly look after the
cultivation and borrow the money for this purpose and
PROPERTY share the profits, they are partners. Chettyar Firm v
Chettyar Firm (1933)
 • If money lender gives credit to the
firm but on the condition that he will
MONEY share certain %age of profit of
LENDER business, then the money lender is not
SHARING liable as a partner

THE • A lender of money to the persons who

PROFIT are engaged or about to engage in any
business does not become partner only
because he receives the share or
payment. Badley v Consolidated
Bank (1888)
 Sometimes an agent or servant are given a
share of the profit of the business as an
incentive or salary, so that he takes more
interest in the business, so such a person does
SERVANT not thereby become a partner in the firm. Eg
an agent in car showroom sharing certain
OR AGENT %age of sale.
SHARING Sometimes a servant or agent of a business is

PROFITS allowed in addition to or in place of his

regular remuneration a portion of profits of
the business, but that does not make him a
partner in the business. Munshi Abdul Latif
v Gopeshwar Chattoraj (1933)
 On the death of a partner the surviving
partners sometimes agree to give a share in
the profits to the widow or to the child of the
deceased partner in accordance with the
WIDOW OR agreement between the partners. Such a
widow or child does not of itself become a
CHILD OF partner in the firm. Holme v Hammond
DECEASED There is no bar to the widow or the son of a
PARTNER deceased partner to enter into partnership
after the death of the deceased, but a clear
agreement to that effect has to be proved.
CIT v Kesharmal Keshardeo (1968)
 A person who sells his business along with the
goodwill is sometimes given a share in the profits of
the business he has sold, as a consideration for sale
of goodwill but such a person does not of itself
become a partner in the business only because he is
sharing the profit in the firm and their relationship

SELLER OF is of the buyer and seller and not of partners.

Pratt v Strick (1932) A doctor sold the goodwill of
GOODWILL medical practice and entered into an agreement with
the buyer of the goodwill that he would help such
buyer to introduce patients for 3 months and he
would be entitled to half the share of profits and
incur half the expenses. It was held that the doctor
had not become a partner with the person to whom
the goodwill was sold.
 Thus sharing of profit is an essential element to
constitute a partnership. But is it only a prima
facie evidence and not conclusive evidence.
Although the right to participate in profits is a
strong test of partnership, and there may be
cases where, upon a simple participation in
profits, there is a partnership, yet whether the
SECTION 6 relation does or does not exist must depend
upon the whole contract between the parties.
Where there is an express agreement between
partners to share profit of a business and the
business is being carried on by all or any of
them acting for all, there will no difficulty in the
light of provisions of section 4 in determining
the existence or other wise of partnership
 But the task becomes difficult when either
there is no specific agreement or the
agreement is such as does not specifically
speak of partnership. In such a case for
testing the existence or otherwise of
partnership relation, section 6 has to be
referred. Which says” regard must be had
SECTION 6 to the real relation between the parties as
shown by all the relevant facts taken
together such as written or verbal
agreement, real intention and conduct of the
parties, other surrounding circumstances
etc. are to be considered while deciding the
relationship between the parties and
ascertaining the existence of partnership
 In the end, the existence of mutual agency
which is the cardinal principle of
partnership law, is very much helpful in
reaching a conclusion in this regard.
Each partner carrying on the business is
the principal as well as an agent of other
SECTION 6 partners. So, the act of one partner done
on behalf of firm, binds all the partners. If
the elements of mutual agency relationship
exist between the parties constituting a
group formed with a view to earn profits
by running a business, a partnership may
be deemed to exist.
 Santiranjan Das Gupta v Dasuram
Murzamull 1973 SC, held that there is no
partnership between the parties as:
-parties have not retained any record of terms
and conditions of partnership
- Partnership business has maintained no
SECTION 6 accounts of its own, which would be open to
inspection by both the parties.
- No account of the partnership was opened
with any bank
- no written intimation was conveyed to the
Deputy Director of Procurement with respect
to the newly created partnership
 • If any partner takes amount as a
salary from the firm, he is called a
salaried partner. According to
Section 13, no partner has the right to
receive remuneration to take part in
SALARIED the conduct of the business but
PARTNER Section 13 is subject to contract
between the partners. That means if
the contract provides that any partner
can receive the salary for taking part
in the business then that contract will
prevail.
 • The concept of salaried partner found
recognition in the case of Stekel v Ellice
(1973). Then in the case of March v Stacey
(1963) and Ellis v Joseph Ellis & Co (1905)
Court held that a true partner who in addition is
paid a fixed wage for doing specific work does
SALARIED not thereby become a workman and
PARTNER relationship could not become master and
servant. But we have to see from contract he
may or may not be a partner depending on the
facts of the case. What must be done is to look
at the substance of the relationship between the
parties. Whether or not there is a partnership
depends on what the true relationship is?
 • A person who occupies the position of
a partner remains a partner whatever be
the mode in which profits are shared
with him and a person who occupies
the position of a servant or agent will
SALARIED remain so whatever be the mode in
PARTNER which remuneration is paid to him.
Thus the position which is granted to
the person in question in the business
set up is the most important factor in
determining whether that person is a
partner or not.
 • De Mclares Morrison v S. Verschoyle (1901) An
assistant in a firm of brokers, received over and
above his salary, a share in the profits. With the
knowledge of the partners he occasionally signed
for and on behalf of the firm, on delivery orders
which came from buyers in favour of the firm; he

SALARIED also occasionally signed letters of the firm dealing

with mere matters of detail and also made firm
PARTNER business offers to customers on behalf of the firm
and initialled alterations, if any, in the contracts of
the firm. He committed a fraud upon a customer
of the firm misusing the position which was
allowed to him. The firm was sued for the fraud
and would have been held liable if he occupied
the position of a partner. The court held that he
was not a partner.
 • Section 4 further provides that

Persons who have entered into

partnership with one another are called
individually ‘partners’ and collectively a
‘firm’ and the name under which their
MEANING business is carried on is called the ‘firm
name’.
AND Thus a firm is a collection of the partners.
NATURE OF It is not a legal person or a separate legal
entity having any independent or distinct
FIRM existence. It is nothing but partners
bracketed together under one name. When
a partner dies or becomes insolvent the
firm is dissolved. The asset of the firm are
the joint property of the partners and the
partners are personally liable for all the
business obligations of the firm.
 • SC in the case of CAG v kamlesh Vadilal
Mehta (2003) held that a firm or partnership
is not a legal entity separate and distinct from
partners and is only a compendious
MEANING (comprehensive)description of individuals
who compose the firm.
AND Same partners may constitute more than one
NATURE OF distinct and separate firms but firms have no
FIRM juristic personality. So its partners are its real
repersentative. A suit against a firm merely
means a suit against all the partners of that
firm.
 • The name in which the partners of
a firm carry on their business is
called the ‘firm name’. The
selection of name is entirely
FIRM NAME depends on partners but it should
not be misleading, it should not be
identical or closely resemble with
the name of another firm or with
the trade mark of the goods of
another firm.
DIFFERENCES

Partnership Co-ownership
It arise only by agreement It may arise in any other way, may
be by status, or by operation of law
such as inheritance
Business and sharing of profit It can exist without engaging in any
is necessary business
There exist mutual agency Act of one co- owner does not bind
between partners others
A partner cannot transfer his Co-owner can sell his share
share to outsider without the without the consent of the others
consent of the other partners
The profit and losses must Co-ownership does not necessarily
have to be shared as per involve sharing of profits and
agreement losses
DIFFERENCES

Partnership HUF
Relationship arises from contract A HUF cannot be created by contract
but by status means relationship
arises by birth in the family
A new partner cannot be admitted Members in HUF gets an equal
into a partnership except with the share and profits by mere birth in
consent of all the partners family.
It is a mutual agency i.e. Partners Manager or Karta of the HUF is only
represent the other partners. Every representative of the family and
partner is agent of the other. contract by Karta is binding upon the
members of the family
Partners must be competent to Members are not required to be
contract so a minor can’t be a competent i.e. A minor can be a
partner but can be admitted to the member of HUF
benefits of the partnership
DIFFERENCES

Liability of partners is unlimited The liability of karta is only

unlimited but Members are liable
to the extent of their share in HUF
means limited liability
Liability of partners are joint and Liability of members is personal or
several limited to his share
Remedy of a partner is dissolution Remedy of coparcener is a suit for
of firm partition
Death of a partner leads to Death of a member does not give
dissolution of partnership rise to dissolution of family business.
All partners take part in the conduct This right is vested on the karta of
of business of the firm HUF
It is governed by IPA, 1932 It is governed by Hindu Law
In partnership partners should not Members of HUF have no limit
exceed 50
In partnership each partner has a In HUF no member has definite
defined share as per their share, its fluctuating one as it is
agreement capable of being enlarged by deaths
in the family and diminished by
DIFFERENCES

Partnership Company
The members of the Partnership are called The members of the company are called
partners shareholders
It’s business is governed by Indian It’s business is governed by Indian
Partnership Act,1932 Companies Act, 2013
Partnership firm is created by contract Company is created by law i.e. By
between 2 or more persons registration
It is regulated by State Govt It is regulated by Central Govt
Registration is not mandatory Registration is mandatory as per
Companies Act 2013
It has no separate legal entity from its It is a separate legal entity from the
partners. A common seal is not required shareholders of the company. There must
be a common seal
Liability of the members is unlimited Liability of members is limited to their
shares
A partner cannot transfer his share to The shares of the company are freely
outsider without the consent of the other transferable
partners
Management is to be done by active Management is to be done by Board of
Partnership Company
Every partner is an agent of the other A member is not an agent of the other
partners as well as of the firm members or of the company, his actions do
DIFFERENCES not bind either.

Profits of the firm shared according to No compulsion of distribution of profit its

agreement only done when dividends are declared

Firm’s property is not separate from its Company’s property is different from its
partners members property

A partnership firm can be dissolved at any A company being a legal person is either
time if all the partners agree. wind up by the National Company Law
Tribunal or its name is struck off by the
Registrar of Companies.

Unless there is a contract to the contrary, A company enjoys a perpetual succession

death, retirement or insolvency of a partner
results in the dissolution of the firm

Minimum number of partners is two and In private company min is 2 and max is 200
max in case of banking is 10 and other than and in public min is 7 and there is no limit for
banking is 20 after Companies Act 2013 its max. A private company can be formed by
100 then according to Companies Rules one person called as one person company
2014 its 50
A partnership firm get dissolve by death of A company is different from its members,
the partner or become insolvent members come and go but company is not
affected by it
DIFFERENCES

Partnership LLP
Governed by Indian Partnership Act,1932 Governed by Limited Liability Partnership Act, 2008
Registration of partnership firm is not mandatory Registration of LLP is mandatory
It has no separate legal entity apart from its partners, LLP is separate legal entity
individually called partners and collectively called firm

Liability of the partners is unlimited Liability of the partners is limited to the extent of which
the capital is contributed by them

It can be started by any name of their choice There must be use of the word ‘LLP’ at the end of its
name

Maintenance and audit of books of account is not Maintenance and audit of books of account is
mandatory mandatory

The partnership is defined as a relation of persons LLP has combined features of a partnership and a
joined for earning profits, carried out business by all or body corporate
any of them acting for all
 • With regards to duration:
• -Partnership at Will

KINDS OF • -Partnership for a fixed period

PARTNERSHIPS • With regard to extent of the business:
• -Particular Partnership
• -General Partnership
 • According to section 8 “Particular
partnership” A person may become a
partner with another person in particular
adventures or undertakings.
• A partnership may be organized for a single
adventure as well as for the conduct of a
PARTICULAR continuous business. Where a person becomes
PARTNERSHIP a partner with another person in any particular
adventure or undertaking the partnership is
called particular partnership.
• A partnership constituted for a single adventure
or undertaking is subject to any agreement
dissolved by the completion of the adventure or
undertaking
 • Merely a single isolated transaction of
purchase and sale by number of persons
does not mean carrying on of the
business. It is not necessary that the
PARTICULAR business should consist of a long and
PARTNERSHIP permanent undertaking but which
involve carrying on business. A partners
may engage in a single adventure or a
single undertaking that may involve the
carrying on business.
 • Thus persons can be partners in the
working out of a coal-mine,
construction of a building or
production of a film (Eg contract
with labour, purchasing raw
PARTICULAR
PARTNERSHIP material etc.) because although that
may be a single adventure but same
requires a series of transactions and
continuous relationship as held in
the case of K Juggiaha v
Venkatanant narayana (1984)
 • Where a partnership is constituted
with respect to the business in
general, it is called a general
partnership. A general partnership
GENERAL is different from a particular
PARTNERSHIP partnership. In case of a particular
partnership the liability of the
partners extends only to that
particular adventure or
undertaking but it is not so in the
case of general partnership
 • Where a provisions is made by a
contract for the duration of the
partnership, the partnership is
PARTNERSHI
called “partnership for a fixed
P FOR A
period”. It is a partnership created
FIXED
for a particular period of time.
PERIOD
Such a partnership comes to an
end on the expiry of the fixed
period.
 • Partners for free to decide as to how
long partnership between them shall
continue. It can be for a fixed term like
PARTNERSHI 2 years/ 5 years or for completion of
certain adventure or undertaking eg
P FOR A
production of film, or on determination
FIXED of partnership on the happening of
PERIOD certain event like firm runs into losses.
When the partners have not decide
about any duration then its is
partnership at will.
 • According to Section 7

“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".”
• A partnership is deemed to be a partnership at will in
PARTNERSHI two situations:

P AT WILL • When no provision is made in the partnership

agreement as to its duration and
• When there is no provision in the partnership agreement
as to its determination (coming to an end) of
partnership.
• If provision of its duration or for its determination is
there then it is not a partnership at will.
• It can be express or implied.
 • If the duration is for fixed term but it continue even
after that without specifying the time duration
subsequently then it becomes partnership at will.
Arunachalam & co v M Sadasivam (1985)
• In partnership at will there is no fixed duration nor
any determination, it can be ended at the sweet will
PARTNERSHI of any of the partners :

P AT WILL • According to Section 43 (1 and 2), “(1) Where the

partnership is at will, the firm may be dissolved by
any partner giving notice in writing to all the other
partners of his intention to dissolve the firm. (2)
The firm is dissolved as from the date mentioned
in the notice as the date of dissolution or, if no date
is so mentioned, as from the date of the
communication of the notice.”
 • So section 43 provides that it can be dissolved
by giving written notice to all but it must show
that there must be an intention to dissolve the
firm.
• Effect of notice:

PARTNERSHI • 1)if date is mentioned in the notice, then firm is

dissolved from that date.
P AT WILL • 2)if there is no date mentioned in the notice,
then from the date of communication of the
notice.
• According to Section 32(1)(c), “where the
partnership is at will, by giving notice in
writing to all the other partners of his
intention to retire.”
 • Although a partnership at will could be
dissolve by a mere notice but that does
not debar a partner from filing a suit for
dissolution. In such a case, the service of
the summons will deemed to be the
PARTNERSHI communication of notice for dissolution
and the firm shall stand dissolved when
P AT WILL the summons served. Banarsi Das v
Seth Kanshiram 1963 SC if there are
more than one defendant then date of
dissolution of the firm will be regarded
to be the one on which the last summon
was served.
 • Whether the partnership is at will
or not depends on the contract
between the partners. Karumuthu
T Chettiar v E M Muthappa
PARTNERSHI Chettiar (1961) SC The duration
of a partnership maybe expressly
P AT WILL
provided in the contract but even
where there is no express
provision, the courts have held
that the partnership not be at will
if duration be implied.
 • Where a partnership was
constituted for carrying on a
specific job and it was stated that
the partnership would continue
PARTNERSHI till completion of the job, it was
P AT WILL held that the partnership was not
at will. The partnership had to
be there till the completion of the
job. Deoki Prasad v Anar Dai
Poddar (1999)
 • When the partnership is not at will neither a
person can retire nor can he seek dissolution of
the partnership firm, just by giving a notice to
other partners as held in the case of Moss v
Elphick(1910)

PARTNERSHI • Abott v Abott (1936) the partnership agreement

between a father and 5 sons provided that the
P NOT AT death or retirement of any partner shall not
WILL terminate the partnership and if any partner wants
he shall be considered as having retired. One of
them contended that its partnership at will so by
giving notice it can be dissolve. Held that its not
partnership at will, single partner can not
dissolve it by giving notice, he can retire or cease
to be a partner.
 • Characteristics
• (i) Number of Partners: A minimum of two persons are
required to start a partnership business.
• (ii) Contractual Relationship: The relation between the
partners of a partnership firm is created by contract. The
partners enter into partnership through an agreement which
may be verbal, written or implied. If the agreement is in
writing it is known as a ‘Partnership Deed’.
CHARACTERISTICS
• (iii) Competence of Partners: Since individuals have to
enter into a contract to become partners, they must be
competent enough to do so. Thus, minors, lunatics and
insolvent persons are not eligible to become partners.
However, a minor can be admitted to the benefits of
partnership i.e. he can have a share in the profits.
• (iv) Sharing of Profit and Loss: The partners can share
profit in any ratio as agreed. In the absence of an agreement,
they share it equally.
 • v) Unlimited Liability: The partners have unlimited liability.
They are liable jointly and severally for the debts and
obligations of the firm. Creditors can lay claim on the personal
properties of any individual partner or all the partners jointly.
Even a single partner may be called upon to pay the debts of
the firm. Of course, he can get back the money due from other
partners. The liability of a minor is, however, limited to the
extent of his share in the profits, in case of dissolution of a
firm.
CHARACTERISTICS • (vi) Principal-Agent Relationship: The business in a
partnership firm may be carried on by all the partners or any
one of them acting for all. This means that every partner is an
agent when he is acting on behalf of others and he is a principal
when others act on his behalf. It is, therefore, essential that
there should be mutual trust and faith among the partners in the
interest of the firm.
• (vii) Transfer of Interest: No partner can sell or transfer his
interest in the firm to anyone without the consent of other
partners.
 • (viii) Legal Status: A partnership firm is just a name for
the business as a whole. The firm means partners and the
partners mean the firm. Law does not recognize the firm as
a separate entity distinct from the partners.
• (ix) Voluntary Registration: Registration of partnership
is not compulsory. But since registration entitles the firm
to several benefits, it is considered desirable. For example,
if it is registered, any partner can file a case against other
CHARACTERISTICS partners, or a firm can file a suit against outsiders in case
of disputes, claims, disagreements, etc.
• (x) Dissolution of Partnership: Dissolution of partnership
implies not a complete closure or termination of
partnership business, but it includes any change in the
existing agreement among the partners due to a change in
the number of partners. Different from dissolution of firm
as it means termination of partnership firm between all the
partners of the firm completely
 • Advantages of Partnership Firm
• (i) Easy to Form: The partnership, can be easily organized. There
are no complicated legal formalities involved in the establishment
of partnership business. The partners enter into a partnership
agreement and start business.
• (ii) Favorable Credit Standing: The partnership enjoys a better
credit rating in the eyes of creditors. As the liability of each partner
in the organization is unlimited the financial institution can safely
ADVANTAGES OF advance loans to the firms.
PARTNERSHIP • (iii) Large Capital: In case of sole proprietorship, the capital is
FIRM limited to the savings of one owner or his borrowing capacity.
Partnership can bring more capital to the business by the joint
efforts of the partners. The partnership is normally in strong
position to raise capita and expand the business.
• (iv) Greater Management Ability: As there are many partners
involved in the operation of a business, the firm can distribute the
duties and responsibilities to each partner for which one is best
qualified and suited. Division of labour and specialization, thus,
can promote efficiency of the firm.
 • (v) Union of Business Ability: There is a old
age saying that two heads are better than one.
In case of partnership, the partner mutually
consults each other about the lay out,
production procedure, marketing channels, etc.
and as a result, a wise course of procedure
ADVANTAGES OF results.
PARTNERSHIP
FIRM • (vi) Profit Incentive: The profits are shared by
the partners as per agreement. They are
encouraged to do more work to earn more
profit. Higher the profits, higher will be the
partners share.
• (vii) Advantages of Secrecy: The partners can
keep the business secrets to themselves.
 • (viii) Retention of a Skilled Worker: If an
employee in the partnership business is found to be
a man of outstanding talent and ability, he with the
mutual consultation of other partners can be given
a status of a partner in the business.
• (ix) Brake on Hasty Decisions: As liability of
ADVANTAGES OF partners is unlimited, the partners, therefore, tend
PARTNERSHIP to be careful in taking business decisions. They
FIRM adopt sound practices in the conduct of business.
There is a brake on hasty decisions.
• (x) Special Protection to Minor: A death or
lunacy of a partner may not cause dissolution of
the partnership. His minor can be admitted only to
the benefits of partners with the consent of other
partners.
 • (xi) Increase in the Spirit of Co-operation: The
success of business depends upon mutual trust and
cooperation of the partners. The partners are fully
aware that a sight difference can cause the end of
partnership. This increases the spirit of working
together.
ADVANTAGES OF • (xii) Tax Advantage: The profits of a registered
PARTNERSHIP firm, after payment of tax, are divided among the
FIRM partners. Thus the partners of registered firm get
the benefit of lower assessment.
• (xiii) Ease of Dissolution: The partnership can
also be legally dissolved by mutual consent of the
partners or in accordance with a contract by the
partners. There are no formal documents required
to be drawn up as in the case of a company.
 • Disadvantages of Partnership Firm The partnership form of
organization suffers from certain disadvantages also. These in
brief are as follows.
• (i) Unlimited Liability of Partners: One of the basic defects
of partnership is that the partners are personally and jointly
responsible for all the debts of the firm. In case the business
suffers losses and the business assets are not sufficient to
DISADVANTAGES satisfy the claimants on liquidation, the personal property of
one or more than one partners can be sold under the Court
OF PARTNERSHIP order for the clearance of the debts of the business. The rich
FIRM and wealthy persons, therefore, avoid to be enlisted in
partnership because each individual partner in liable for the
firm’s debt.
• (ii) Limited Life of Firm: The duration of the partnership is
always uncertain. If partner dies, injured, withdraws, or a new
partner is admitted into the business, or their arises difference,
the partnership may come to an end. There are possibilities of
the dissolution of the firm due to internal differences.
 • (iii) Frozen Investment: It is very easy for a
partner to invest money but it is most difficult to
withdraw the investment from the business. A
person who wishes to withdraw investment has
to consult his partners. The funds remain
difficult to transfer and as such remain a frozen
DISADVANTAGES investment which creates lack of interest.
OF PARTNERSHIP
• (iv) Disputes Among the Partners: The
FIRM
partners should be like minded, have a common
objective, be large hearted, have a cool
temperament, should not unnecessarily cause
friction and confusion among the partners. In
case of dispute among the partners, quick action
should be taken by all the partners for the
remedial measures.
 • (v) Possibility of Misuse of Resources: It is
known to each and every partner that the
resources of the firm are owned jointly. There
can and does arise the misuse of resources by
a partner/partners.

DISADVANTAGES • (vi) Divided Control: In a partnership, the

OF PARTNERSHIP work of the business is divided among the
FIRM partners according to their ability, choice and
taste. Divided control - and responsibility
sometimes creates confusion and delay in
making decisions. The lack of efficiency on
the part of one partner can upset the whole
structure of the business and ultimately lead to
dissolution of the firm.
 • vii) Implied Authority: Implied
authority is the authority vested in a
partner to bind the firm with any of his
acts done in connection with the
DISADVANTAGES
business of the firms. In partnership
OF PARTNERSHIP
FIRM form of organization, each partner binds
other partners by his acts done on behalf
of the firm: Thus the other partners may
have to pay for the follies of a fellow
partner.
 • Partnership is the result of an agreement. No
particular formalities are required for an
agreement of partnership. It may be in
writing or formed verbally. But it is
desirable to have the partnership agreement
in writing to avoid future disputes. The
document in writing containing the various
PARTNERSHIP DEED
terms and conditions as to the relationship of
the partners to each other is called the
‘partnership deed’. Where the partnership
comprises immovable property the
instrument must be in writing, stamped under
Stamp Act 1899 and registered under the
Registration Act.
 • Partnership deed may contain the
following information:-
• -name of the partnership firm
• - name of all the partners

PARTNERSHIP DEED • - nature and place of the business of

the firm
• - date of commencement of
partnership
• - duration of partnership
• - capital contribution of each partner
 • - profit sharing ratio of the partners
• - admission and retirement of a partner
• -Rates of interest on capital and loans etc
• - provisions for settlement of accounts in
the case of dissolution of the firm
PARTNERSHIP DEED
• - provisions for salaries or commissions,
payable to the partners, if any
• -provisions for expulsion of a partner in
case of gross breach of duty or fraud
A partnership firm may add or delete any
provisions as per the need of the firm
KINDS OF
PARTNERS

BUSINESS LAW
SECTION 4 According to Section 4, ‘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’.
When analyzed, the definition tells us that in
order that persons may become partners, it is
essential that:
(i) There must be at least two persons
(ii) There must be a relationship arising out of
an agreement between two or more persons
to do a business
(iii) The agreement must be to share the
profits of a business
(iv) The business must be carried on by all or
any of them acting for all
ELEMENTS • All these four elements must be present before a
group or an association can be held to be partners.
In other words, it can be said that all the afore-
stated four elements must co-exist before a
partnership can be said to come into existence. If
any one of them is not proved to be present, there
cannot be a partnership.
• 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 gains;
• The third shows that the persons of the group who
conduct the business
• The fourth shows all the persons have mutual
agency and are therefore liable for the act of each
other having dual position as principal and agent.
KINDS OF The list is not exhaustive, the Partnership Act does not
PARTNERS restrict any unique kind of partnership that the partners
want to define for themselves. The following kinds of
partners generally exist in a partnership:
1) Active or ostensible partner
2) Nominal partner
3) Sub partner
4) Outgoing partner
5) Sleeping or dormant partner
6) Partner in profits only
7) Incoming partner
8) Partner by holding out
9) Minor admitted to the benefits of partnership
ACTUAL, ACTIVE
OR OSTENSIBLE These are the types of partners who
PARTNER invest money into the business of the
firm, actively participate in the
functioning and management of the
business and share its profits or losses.

Section 12(a) lays down that “Subject to

contract between the partners, every
partner is entitled to take part in the
conduct of the business of the firm”.
ACTUAL, ACTIVE
OR OSTENSIBLE Such partners actively participates in
PARTNER
the firm’s business, binds himself and
other partners by all his acts done in the
usual course of partnership business.
Such partners acts as an agent of other
partners for all acts done in the
ordinary course of business.
Such partner must give a public notice
of his retirement from the firm in order
to absolve (free) himself from liability
for the acts of the other partners done
after his retirement.
SLEEPING OR
DORMANT These partners invest money in the
PARTNER firm’s business and take their share of
profits but do not participate in the
functioning and management of the
business. But even then their liability is
unlimited. The Act specially provides
that in Section 18, “ … A partner is
the agent of the firm for the purposes
of the business of the firm”.
and Section 25, “every partner is liable
jointly will all the other partners and
also severally, for all acts of the firm
done while he is a partner”.
SLEEPING OR
DORMANT They share profit and losses as agreed or
PARTNER equally, and are liable to the third
parties for all acts of the firm. They are
not required to give public notice of
their retirement from the firm as they
are not known to third parties.
A sleeping partner can retire from the
firm without giving any public notice to
this effect. His liability for the acts of
the firm ceases soon after retirement.
Such partner has no duties to perform
but is entitled to have access to books
and accounts of the firm and he can
have a copy of them.
NOMINAL A person who lends his name to the
PARTNER
firm, without having any real interest in
it, is called a nominal partner.
These partners do not invest or
participate in the management of the
firm but only give their name to the
business or firm. But are liable to third
parties for all the acts of the firm as per
Section 18 and 25
Unlike a sleeping partner, they are
known to the outsiders as partners in
the firm, whereas actually they are not.
They require to give public notice at the
time of being separate from the firm.
PARTNER IN A partner who is entitled to share in
PROFITS
ONLY the profits of a partnership firm
without being liable to share the
losses, is called a partner in profits
only. Thus, a person who has
sufficient capital but is not prepared
to take risk may be admitted to the
partnership by the other partners.
Inspite of his specific position, he
continues to be liable to the third
parties for all acts of the profits only,
he will share none of the liabilities.
SUB-PARTNER Where a partner agrees to share his
profits in the firm with a third person,
that third person is called a sub partner.
All sub-partners is not the partner in
firm. He is partner of a partner. Such a
sub-partner has no rights or duties
towards the firm and does not carry any
liability for the debts of the firm. He
can neither participate in partnership
business nor check the accounts of such
partner and to claim share. Also he
cannot bind the firm or other partners
by his acts. The only right he has to
share the profits in property at the time
of winding-up.
SUB-PARTNER
A partner may associate
anybody else in his share in
the firm. He gives a part of
his share to the stranger. The
relationship is not between
the sub-partner and the firm
but between him and the
partner. The sub-partner is a
non-entity for the
partnership. He is not liable
for the debts of the firm.
INCOMING
PARTNER A person who is admitted as a partner into an
already existing firm with the consent of all
OUTGOING
PARTNER the existing partners is called as ‘incoming
partners’. Such a partner is not liable for
any act of the firm done before his
admission as a partner but subject to the
contract.

A partner who leaves a firm in which the rest

of the partners continue to carry on
business is called a retiring or outgoing
partner. Such a partner remains liable to
third parties for all acts of the firm until
public notice is given of his retirement.
PARTNER BY Partnership by holding out is also known as
ESTOPPEL OR partnership by estoppel. Where a man holds
HOLDING OUT
himself out as a partner, or allows others to
do it, he is then stopped from denying the
character he has assumed and upon the faith
of which creditors may be presumed to have
acted.
A person may himself by his words or conduct
have induced others to believe that he is a
partner or he may have allowed others to
represent him as a partner. The result in both
the cases is identical.
It is only the person to whom the representation
has been made and who has acted thereon
that has right to enforce liability arising out
of ‘holding out’.
PARTNER BY If the behaviour of a person arouses
ESTOPPEL OR
HOLDING OUT misunderstanding that he is a partner in a
firm (when actually he is not), such a
person is estopped from later on denying
the liabilities for the acts of the firm. Such
person is called partner by estoppel and is
liable to all third parties. Similarly, if a
person who is declared to be a partner
(when actually he is not) does not deny
the fact that he is a partner, he being held
out as a partner is responsible for all
liability of the business. The law relating
to partners by holding out is contained in
Section 28 of the Act, which lays down
thus:
PARTNER BY Anyone who by words, spoken or
ESTOPPEL OR
HOLDING OUT written or by conduct represents
himself, or knowingly permits
himself 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.
PARTNER BY Eg X and Y are partners in a partnership firm. X
ESTOPPEL OR introduced A, who is a manager in the firm, as
HOLDING OUT his partner to Z. A remained silent. Z a trader
believing A as partner supplied 100 TV sets to
the firm on credit. After the expiry of credit
period, Z did not get amount of TV sets sold to
the partnership firm. Z filed a suit against X and
A for the recovery of price. Here, A is also liable
for the price because he becomes a partner by
holding out.
The rule as to holding out is based on the doctrine
of estoppel as contained in Section 115 of the
Indian Evidence Act. Holding Out means, “to
represent”. Strangers, who hold themselves out
or represent themselves to be partners in a firm,
whereby they induce others to give credit to the
partnership are called “Partners by Holding Out”.
PARTNER BY The rule given in section 28 is also applicable to a
ESTOPPEL OR former partner who has retired from the firm without
HOLDING OUT giving proper public notice of his retirement. In such
cases a person who, even subsequent to the
retirement, give credit to the firm on the belief that he
was a partner, will be entitled to hold him liable.

An active partner who fails to give public notice at the

time of retirement is liable as partner by holding out.
In case of ‘Partnership by Estoppel’, the
representation is made by partners about a stranger
within his knowledge and hearing and he does not
contradict it. He is then held liable as a partner.
Eg A partnership firm consisting of P Q R and S. S
retires from the firm without giving public notice and
his name continues to be used on letter heads. S is
also liable as a partner by holding out to the creditors
who have lent on the faith of his being a partner.
EFFECTS OF The Holding Out partner becomes
HOLDING OUT
personally and individually liable for
the acts of the firm. But he does not
become a partner in the firm and is not
entitled to any rights or claim upon the
firm. An outsider, who has given credit
to the firm thinking him to be a partner,
can hold him liable as if he is a partner
in that firm. As the liability of the
partners is joint and several he can be
held liable to pay the entire amount. But
under the doctrine of subrogation as
well as on the basis of quasi-contract, he
can recover the amount so paid from the
partners of the firm.
EXCEPTIONS OF
HOLDING OUT The doctrine of Holding Out is not
applicable in the following cases:
(a) It does not apply to cases of torts
committed by partners. A person,
therefore, cannot be held liable for the
torts of another simply because that other
person held himself to be his partner.
(b) It does not extend to bind the estate of
a deceased partner, where after a partner’s
death the business of the firm is continued
in the old firm name. Section 28(2)
(c) It also does not apply where the
Holding Out partner has been adjudicated
insolvent. Section 45
MINOR’S POSITION IN
PARTNERSHIP In view of Section 11 of the Indian
Contract Act, 1872, and the decision of
the Privy Council in Mohri Bibi v.
Dharmo Das Ghose 1903 , a minor’s
agreement is altogether void and not
enforceable.
An agreement is an essential ingredient
in a partnership; it follows that a minor
cannot enter into an agreement of
partnership, as he is incompetent to
enter into a contract. On the same
principle, a minor cannot be clothed
with all the rights and obligations of a
full-fledged partner through a guardian.
MINOR’S POSITION IN
PARTNERSHIP Section 5 states “The relation of partnership
arises from a contract...” The minor is
incompetent to contract and, therefore,
partnership cannot come into existence if
the parties to a contract of partnership
consist of one major and one minor.
The only provision that Section 30 makes is
that with the “consent of all the partners
for the time being, a minor can be admitted
into the benefits of partnership to which a
minor is going to be admitted”. A
partnership firm cannot be formed with a
minor as partner. The only fact is that in an
existing firm a minor can be admitted only
for profits with the consent of all partners.
RIGHTS OF He is entitled to his agreed share and can
MINOR inspect books of account of the firm Section
30(2). He can bring a suit for account and his
share when he intends to sever his connections
with the firm, but not otherwise. Section 30(4)
A minor who was admitted to the benefits
during his minority within six months of his
attaining the age of majority or when he
comes to know of his being so admitted
(whichever date is later), he has to elect
whether he wants to become a partner, or sever
his connection with the firm. He may give
public notice of his election to continue or
repudiate, but if he fails to give any public
notice within the period stated above, he will
be deemed to have elected to become a partner
in the firm. Section 30(5)
LIABILITIES OF Share in Liability: A minor partner’s
MINOR
liability is confined only to the extent of
his share in the firm. Section 30(3)
provides that a minor’s share is liable for
the acts of the firm. But a minor is not
personally liable in any such act. Thus,
he is neither personally liable nor is his
private estate liable for the acts of the
firm.
Personal Liabilities: Where a minor on
attaining majority, elects to become a
partner, he becomes personally liable as
other partners to the third parties for all
the acts of the firm done since he was
admitted to the benefits of partnership.
ELECT TO Election by Minor: A minor who was
BECOME
admitted to the benefits during his
MINOR
minority within six months of his
attaining the age of majority or when he
comes to know of his being so admitted
(whichever date is later), he has to elect
whether he wants to become a partner,
or sever his connection with the firm.
He may give public notice of his
election to continue or repudiate, but if
he fails to give any public notice within
the period stated above, he will be
deemed to have elected to become a
partner in the firm. Section 30(5)
POSITION IF
ELECT TO
If he becomes or elects to become a
BECOME A partner, his position will be as under:
PARTNER
(a) His rights and liabilities will be
similar to those of a full-fledged
partner.
(b) He will be personally liable for all
the acts of the firm done since he was
first admitted to the benefits of the
partnership.
(c) His share of profits and property
remains the same as was before, unless
altered by agreement
POSITION IF
ELECT NOT TO If he elects not to become a partner,
BECOME A then:
PARTNER
(a) His rights and liabilities shall
continue to be those of a minor up-to
the date of his giving public notice.
(b) His share shall not be liable for
any acts of the firm done after the
date of the public notice.
(c) He is entitled to sue the partners
for his share of the property and
profits in the firm. Section 30(8)