Partnership Act 1932

Outline

• Partnership Definition• Essentials of Partnership• Types of partnership• Registration of Partnership• Effect of Non-Registration• Method of Registration• When does partnership become illegal?

Outline (Continue…..)

• Partnership Agreement• Rules regarding rights and liabilities of

partners.• Personal profits earned by the partners• The property of the firm• Implied authority of the partners• Reconstitution of a firm• Dissolution of partnership

Partnership

• Partnership has been defined by the Partnership Act as 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. Persons who have entered into partnership with one another are called individually as partners, and collectively as firm and the name under which their business is carried on is called the firm name.

Essentials

• There must be a business• Two to twenty members• Contract between persons• Object is to earn profit• Carried on by all or any of them on behalf of

all.

Types of Partnership

• Partnership at will• Particular partnership

Registration of Partnership

• The law does not require that every firm must be registered.

Effects of non-registration

• No partner can bring a suit in any court against the firm or his co-partner in the firm.

• The firm cannot file a suit against any third party.

• Third party : Any person who is not a partner in the firm.

When partnership becomes illegal?

The following circumstances make partnership illegal:• If all or all but one partner become insolvent.• If the business transacted by a firm becomes illegal• Partnership is for limited time period, and time has

expired• If a firm continues after a partner has given a notice that

partnership should be dissolved provided that is partnership at will.

• If a partnership continues after its dissolution by the court• If there are more than 20 partners

Mode of determining existence of partnership (Test of partnership)

In order to determine the existence of partnership, the following must be proved:• There must be an agreement among the persons to be

held as partners• The agreement must be for doing some business• The agreement must be to share the profits of a business• There must be a relationship of principal and agent

among the partners• There must be an agreement to carry on the business by

all or any of them acting for all

Kinds of Partners

• Active partner / working partner• Sleeping partner• Nominal partner• Senior partner• Junior partner• Partner in profits only• Secret partner• Minor partner

Method of registration

Partnership Agreement

• Partnership agreement is also known as “deed of partnership” or “Articles of Partnership”

• The partnership agreement may be written on paper or entered into orally. But it is always advisable to have it in black and white.

• The Partnership agreement must state:The name of the firmThe nature of the business to be carried on.

Partnership Agreement (Cont…)

The term or duration of partnershipThe amount of capital each partner is to contributeThe drawingsThe interest to be allowed on capital and drawingsPowers and authorities of partnersRemuneration of partnersMethod of division of profits and losses

Partnership Agreement (Cont…)

Method to be followed in the event of death of a partner, dissolution, etc.

Treatment of goodwill at the time of winding up

Keeping of books of accounts, and auditArbitration clause, laying down the procedure

to be followed in case of disputes

RULES REGARDING RIGHTS AND LIABILITIES OF PARTNERS

Rules Regarding Rights/Liabilities

• As Partnership is the creation of contract between the partners, the mutual rights and liabilities of the partners may be determined by contract between the partners, such a contract may be expressed or implied.

• But in all cases, following two principles will govern the rights and liabilities of partners:

Rules Regarding Rights/Liabilities (Cont..)

1. Partners are bound to carry on the business of the firm to the great common advantage to be just and faithful to each other, and to share true accounts and full information of all things affecting the firm to any partner and his legal representative.

2. Every partner must indemnify the firm for any loss caused to it by his fraud in the conduct of the business of the firm.

Rules Regarding Rights/Liabilities (Cont..)

• Every partner has a right to take part in the conduct of the business.

• Every partner is bound to perform his duties diligently in the conduct of the business.

• Any difference arising as to ordinary matters may be decided by a majority of the partners, and every partner has a right to express his opinion before the matter is decided, but no change may be made in the nature of the business without the consent of all the partners.

Rules Regarding Rights/Liabilities (Cont..)

• Every partner has a right to have access to and to inspect and copy any of the books of the firm

• A partner is not entitled to receive any remuneration for taking part in the conduct of the business.

• The partners are entitled to share profits earned, and shall contribute losses according to predetermined ratio.

• In the absence of agreement, no partner is entitled to receive interest on the capital contributed by him.

Rules Regarding Rights/Liabilities (Cont..)

• A partner making, for the purposes of the business, any payment or advance beyond the amount of capital he agreed to subscribe, is entitled to interest thereon at 6 percent per annum from the date of the advance.

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

Rules Regarding Rights/Liabilities (Cont..)

• The firm shall indemnify a partner in respect of payments made and liabilities incurred by him.i. In the ordinary and proper conduct of the

businessii. In doing such act, in any emergency for the

purpose of protecting the firm from loss, as would be done by a person of ordinary prudence, in his own case under similar circumstances.

Personal Profits Earned By Partners

Personal Profits Earned By Partners

If a partner derives any profit for himself from any transaction of the firm or from the use of property or business connection of the firm or the firm name, he shall account for that profit and pay it to the firm and share it with his co-partners.

If a partner carries on any business of the same nature and competing with that of the firm, he shall account for and pay to the firm all profits made by him in that business and share the same with his co-partners.

The Property Of The Firm

The Property Of The Firm

• The property of the firm shall be held and used by the partners exclusively for the purposes of the business.

Implied Authority of Partners

Implied Authority of Partners

• A partner is the agent of the firm, therefore, a transaction entered into by one partner on behalf of the firm is binding on the firm and makes every partner liable, provided the following conditions laid down in Section 19 (1).

The transaction must be related to the normal business of the firm,

The transaction must be an act for carrying on business in the usual way

The transaction must be executed in the firm name, or in any other manner expressing or implying an intention to bind the firm

Implied Authority of Partners (Cont.)

The Implied authority does not empower him to:1. Open a banking account on behalf of the firm2. Compromise any claim or portion of a claim by the

firm3. Withdraw a suit or proceeding filed on behalf of the

firm4. Admit any liability in a suit or proceeding against

the firm5. Acquire immoveable property on behalf of the firm

Reconstitution of a firm

A firm is said to be reconstituted when A new partner is introducedAny of the partners retiresAny of the partners is lawfully expelledAny of the partners becomes insolventAny of the partners dies

1-Introduction of New Partner

• In the absence of any contract, between the partners, no person shall be introduced as a partner into a firm without the consent of all the existing partners. If an existing partner sells his share in the partnership, the purchaser of the share does not become a partner unless all the other partners agree to such transfer.

2-Retirement of the partner

A partner may retire With the consent of all other partners In accordance with an express agreement by the partners Where the partnership is at will, by giving notice in writing

to all other partners of his intention to retire.The mode of retirement of partners in any firm may, however, be specified by a special agreement between the partners.A retiring partner has to give a public notice of retirement in order to obtain freedom from liability for the debts of the firm from the date of such notice.

3-Expulsion of a partner

A partner cannot be expelled except in the manner specified by the contract between the partners and unless the expulsion has been made in good faith.An expelled partner cannot claim damages. His only right is to seek reinstatement. A legal expelled partner stands on the same footing as a retire partner as regards his liabilities for the debts of the firm.

4-Insolvency of a partner

A partner ceases to be a partner as soon as he is adjudged an insolvent. But the firm is not dissolved unless all the partners or all but one are adjudged insolvent.

5-Death of a partner.

Unless otherwise provided by the contract of partnership. The death of a partner has the effect of dissolving the partnership. Where under a contract between the partners, the firm is not dissolved by the death of a partner, the estate of a deceased partner is not liable for any act of the firm done after the death.

Dissolution of Partnership

Dissolution of Partnership

A firm may be dissolved with the consent of all the partners, or according to the terms of the partnership agreement. It may be dissolved in the following cases:1-Compulsory Dissolution.2-Dissolution on the happening of certain contingencies3-Dissolution by notice of partnership at will4-Dissolution by the court

Compulsory Dissolution

A firm is compulsory dissolved if all the partners, or all of the partners but one, become insolvent, or if the business of the firm becomes unlawful.

Dissolution on the happening of certain contingencies

Subject to an agreement between the partners, a firm is dissolved:If constituted for a fixed term, by the expiry of

the termIf constituted to carry out one or more projects,

by the completion thereofBy the death of a partnerBy the adjudication of a partner as an insolvent

Dissolution by notice of partnership at will

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

Dissolution by the courtAt the suit of a partner, the court may dissolve a firm on any of the following grounds: That a partner has become of an unsound mind That a partner has become in any way permanently incapable of

performing his duties as a partner That a partner is guilty of misconduct That a partner willfully or persistently commits breach of partnership

agreement That a partner has in any way transferred his interest in the firm to a

third party That the business of a firm cannot be carried on except at a loss Any other ground that renders it just and equitable that the firm

should be dissolved.

Further topics

• Kinds of partners• Test determining the existence of partnership• Difference between partnership and co-

ownership