1. Business lawsBusiness laws
Unit-IVUnit-IV
Partnership Act, 1932Partnership Act, 1932
2/1/2011 1Astt. prof VIPIN KUMAR

2. Introduction to TopicIntroduction to Topic
 One of the forms in which business can be carried on isOne of the forms in which business can be carried on is
‘partnership’, where two or more persons join together to form‘partnership’, where two or more persons join together to form
the partnership and run the business. In order to govern andthe partnership and run the business. In order to govern and
guide partnership, the Indian Partnership Act, 1932 wasguide partnership, the Indian Partnership Act, 1932 was
enacted.enacted.
 Since public at large would be dealing with the partnership asSince public at large would be dealing with the partnership as
customers, suppliers, creditors, lendors, employees or anycustomers, suppliers, creditors, lendors, employees or any
other capacity, it is also very important for them to know theother capacity, it is also very important for them to know the
legal consequences of their transactions and other actions inlegal consequences of their transactions and other actions in
relation with the partnership.relation with the partnership.
2/1/2011 2Astt. prof VIPIN KUMAR

3. Features of Partnership Act, 1932Features of Partnership Act, 1932
 Indian Partnership Act, 1932 is a Central Act. (madeIndian Partnership Act, 1932 is a Central Act. (made
by Parliamentby Parliament
 This Act deals with special type of contract.( contractThis Act deals with special type of contract.( contract
of partnership)of partnership)
 Provisions regarding contract of partnership wereProvisions regarding contract of partnership were
earlier contained in the Indian Contract Act, 1872.earlier contained in the Indian Contract Act, 1872.
 This Act extends to the whole of India except theThis Act extends to the whole of India except the
state of Jammu and Kashmir.state of Jammu and Kashmir.
 This Act came in to force onThis Act came in to force on 1.10.19321.10.1932, except, except
section 69 which came into force on thesection 69 which came into force on the 11stst
Day ofDay of
October, 1933.October, 1933.
2/1/2011 3Astt. prof VIPIN KUMAR

4. Meaning &Definition of ‘Partnership’Meaning &Definition of ‘Partnership’
Section 4Section 4 of the Partnership Act, 1932 defines the termof the Partnership Act, 1932 defines the term
‘Partnership’ as under:‘Partnership’ as under:
‘’‘’PARTNERSHIP IS THE RELATION BETWEENPARTNERSHIP IS THE RELATION BETWEEN
TWO OR MORE PERSONS WHO HAVE AGREEDTWO OR MORE PERSONS WHO HAVE AGREED
TO SHARE THE PROFITS OF A BUSINESSTO SHARE THE PROFITS OF A BUSINESS
CARRIED ON BY ALL OR ANY OF THEMCARRIED ON BY ALL OR ANY OF THEM
ACTING FOR ALL’’.ACTING FOR ALL’’.
Thus, Partnership is the name of legal relationshipThus, Partnership is the name of legal relationship
between/among persons who have entered in to thebetween/among persons who have entered in to the
contract.contract.
2/1/2011 4Astt. prof VIPIN KUMAR

5. Meaning of ‘Partner’ ‘Firm’ and ‘Firm Name’Meaning of ‘Partner’ ‘Firm’ and ‘Firm Name’
 Section 4 of Indian Partnership Act, 1932Section 4 of Indian Partnership Act, 1932
provides that:provides that:
Persons who have agreed into partnership withPersons who have agreed into partnership with
one another are called individuallyone another are called individually
‘PARTNERS’‘PARTNERS’ and collectivelyand collectively ‘FIRM’‘FIRM’ and theand the
name under which their business is carried on isname under which their business is carried on is
called thecalled the ‘FIRM NAME’‘FIRM NAME’
““Partnership is thus Invisibility which binds thePartnership is thus Invisibility which binds the
partners together and firm is the visible form ofpartners together and firm is the visible form of
those partners who are thus bound together”.those partners who are thus bound together”.
2/1/2011 5Astt. prof VIPIN KUMAR

6. Maximum Limit on Number of PartnersMaximum Limit on Number of Partners
 Section 11 Companies Act provides that theSection 11 Companies Act provides that the
maximum no. of persons, a firm can have:maximum no. of persons, a firm can have:
In case of partnership firm carrying on a banking businessIn case of partnership firm carrying on a banking business
1010
In case of partnership firm carrying on any other businessIn case of partnership firm carrying on any other business
2020
If the number of partners exceeds the aforesaid limit,
the partnership firm becomes an illegal association.
If an association of persons or firm having members or partners
exceeding the Above limit will not be an illegal association if that firm’s
objective is not to earn profit.2/1/2011 6Astt. prof VIPIN KUMAR

7. Two or more
persons
An agreement
Sharing of profit
Business
Mutual agency
Essential elements of Partnership
For forming a partnership the above elements should be present. Though
each element is important, ‘Mutual Agency is the conclusive proof
2/1/2011 7Astt. prof VIPIN KUMAR

8. Nature of PartnershipNature of Partnership
 A partnership firm is not a person in the eyes of LawA partnership firm is not a person in the eyes of Law
(except for the purpose of taxation [sec.2 (31)] ). It(except for the purpose of taxation [sec.2 (31)] ). It
has no separate legal entity (like company) apart fromhas no separate legal entity (like company) apart from
the partners constituting it.the partners constituting it.
 Further Section 5 of the Act provides that partnershipFurther Section 5 of the Act provides that partnership
arises from contract and not from status.arises from contract and not from status.
2/1/2011 8Astt. prof VIPIN KUMAR

9. Real test of partnership [Sec. 6]Real test of partnership [Sec. 6]
 The true test of partnership is the existence ofThe true test of partnership is the existence of ‘Mutual‘Mutual
Agency’Agency’ relationship, i.e. the capacity of a partner to bindrelationship, i.e. the capacity of a partner to bind
other partners by his acts done in firm’s name and be bound byother partners by his acts done in firm’s name and be bound by
the acts of other partners.the acts of other partners.
 Sharing of profit is an essential element of partnership but it isSharing of profit is an essential element of partnership but it is
not a conclusive proof of partnership.not a conclusive proof of partnership.
 Sharing of profit isSharing of profit is Prima faciePrima facie evidence.evidence.
Thus partnership can be presumed when
a.There is an agreement to share the profits of business and
b.The business is carried on by all or by any of them acting for all.
Contd.2/1/2011 9Astt. prof VIPIN KUMAR

10. Contd.
 The relation among partners can be ascertainedThe relation among partners can be ascertained
as under:as under:
a.If there is an expressa.If there is an express
contract.contract.
The real relation is ascertainedThe real relation is ascertained
from the partnership contract.from the partnership contract.
b.If there is no expressb.If there is no express
contractcontract
The real relation is ascertainedThe real relation is ascertained
from all the relevant factors suchfrom all the relevant factors such
as contract of parties, books ofas contract of parties, books of
account, statement of employeesaccount, statement of employees
etc.etc.
2/1/2011 10Astt. prof VIPIN KUMAR

11. Meaning of Mutual AgencyMeaning of Mutual Agency
Mutual agency refers to the relationship of
principal and agent Among partners
Example in case of
firm of A,B and C
When A acts
A- Agent
B and C- Principal
When B acts
B- Agent
A and C- Principal
When C acts
C- Agent
A and B- Principal
2/1/2011 11Astt. prof VIPIN KUMAR

12. Partnership does not exist thoughPartnership does not exist though
there is profit sharingthere is profit sharing..
 In the following cases there is profit sharing butIn the following cases there is profit sharing but
partnership does not exist just because of lack ofpartnership does not exist just because of lack of MutualMutual
AgencyAgency::
1. Joint owners of some property sharing profits or gross1. Joint owners of some property sharing profits or gross
returns arising from the property. [explanation I to Sec. 6]returns arising from the property. [explanation I to Sec. 6]
Example: X and Y jointly purchased a building and contributed capital
Equally to convert the building into a hotel. They let it out on a rent Of
Rs. 1,00,000 per annum and share the rental income equally.
Contd.2/1/2011 12Astt. prof VIPIN KUMAR

13. Contd.
 A lender of a firm (who has lent money) who receives a share ofA lender of a firm (who has lent money) who receives a share of
profit. (Mollow March V. The court of Wards)profit. (Mollow March V. The court of Wards)
 A widow or child of a deceased partner who receives a share ofA widow or child of a deceased partner who receives a share of
profits. (I. T. Commissioner V. Keshamal Keshardeo)profits. (I. T. Commissioner V. Keshamal Keshardeo)
 A servant (a manager) or an agent who receives a share of profitA servant (a manager) or an agent who receives a share of profit
as part of his remuneration. (Munshi Abdul Latif V. Gopeshwaras part of his remuneration. (Munshi Abdul Latif V. Gopeshwar
Chatoraj)Chatoraj)
 A person who receives a share of profit in consideration of sale ofA person who receives a share of profit in consideration of sale of
business or goodwill of the business.business or goodwill of the business.
 A member of a Hindu Undivided Family carrying on familyA member of a Hindu Undivided Family carrying on family
business. [Sec. 5]business. [Sec. 5]
 Burmese Buddhist husband and wife carrying on business.[Sec. 5]Burmese Buddhist husband and wife carrying on business.[Sec. 5]2/1/2011 13Astt. prof VIPIN KUMAR

14. Characteristics of PartnershipCharacteristics of Partnership
A partnership firm has the following characteristics:A partnership firm has the following characteristics:
1.1. Two or more membersTwo or more members
2.2. Unlimited liabilityUnlimited liability
3.3. Voluntary registrationVoluntary registration
4.4. No separate legal existenceNo separate legal existence
5.5. Restriction on transfer of interest:Restriction on transfer of interest:
6.6. Based on agreementBased on agreement
7.7. Partners are competent to contractPartners are competent to contract
8.8. Partnership may be only for lawful business.Partnership may be only for lawful business.
2/1/2011 14Astt. prof VIPIN KUMAR

15. Types of PartnershipTypes of Partnership
Partnership at Will
(Sec.7)
Particular Partnership
(Sec.8)
On the Basis of Duration
2/1/2011 15Astt. prof VIPIN KUMAR

16. Partnership at Will [Sec.7 read withPartnership at Will [Sec.7 read with
Sec.43)]Sec.43)]
 When there is no provision in partnership agreementWhen there is no provision in partnership agreement
(known as partnership Deed, if in writing) for:(known as partnership Deed, if in writing) for:
 The duration of their partnership, orThe duration of their partnership, or
 The determination of their partnership,The determination of their partnership,
then the partnership is called ‘Partnership at Will’.then the partnership is called ‘Partnership at Will’.
 Special feature ofSpecial feature of ‘‘Partnership at will’Partnership at will’ is that such firmis that such firm
may be dissolved by any partner by giving a notice inmay be dissolved by any partner by giving a notice in
writing to all other partners of his intention to dissolve thewriting to all other partners of his intention to dissolve the
firmfirm
 The firm will be dissolved from that date which isThe firm will be dissolved from that date which is
mentioned in the notice as the date of dissolution and if nomentioned in the notice as the date of dissolution and if no
date is mentioned then from the date of communication ofdate is mentioned then from the date of communication of
notice.notice.2/1/2011 16Astt. prof VIPIN KUMAR

17. Particular Partnership [sec. 8]Particular Partnership [sec. 8]
 When a partnership is formed for aWhen a partnership is formed for a
 Specific venture or undertaking, orSpecific venture or undertaking, or
 Particular period (fixed term)Particular period (fixed term)
then such partnership is called a ‘particular partnership’.then such partnership is called a ‘particular partnership’.
 Such partnership comes to an end on the completion ofSuch partnership comes to an end on the completion of
the venture or the expiry of time period.the venture or the expiry of time period.
 If such partnership is continued after the expiry of termIf such partnership is continued after the expiry of term
or completion of venture,or completion of venture, it is deemed to be ait is deemed to be a
partnership at will.partnership at will.
 A particular partnership may be dissolved before theA particular partnership may be dissolved before the
expiry of the term or completion of the ventureexpiry of the term or completion of the venture only byonly by
the mutual consent of all the partners.the mutual consent of all the partners.2/1/2011 17Astt. prof VIPIN KUMAR

18. Contd.Contd.
 Sec. 17 (b)Sec. 17 (b) of the Act provides that if a firmof the Act provides that if a firm
,constituted for a fixed term, continues to carry on,constituted for a fixed term, continues to carry on
business after the expiry of that term,business after the expiry of that term, thenthen thethe
partnership will becomepartnership will become partnership at willpartnership at will ANDAND
mutual rights and duties of partners will remain samemutual rights and duties of partners will remain same
as they were before the expiry.as they were before the expiry.
2/1/2011 18Astt. prof VIPIN KUMAR

19. Advantages of Partnership FirmAdvantages of Partnership Firm
 Easy to formEasy to form:: Like sole proprietorships, partnershipLike sole proprietorships, partnership
businesses can be formed easily without any compulsory legalbusinesses can be formed easily without any compulsory legal
formalities. It is not necessary to get the firm registered. Aformalities. It is not necessary to get the firm registered. A
simple agreement or partnership deed, either oral or in writing,simple agreement or partnership deed, either oral or in writing,
is sufficient to create a partnership.is sufficient to create a partnership.
 Availability of large resources:Availability of large resources: Since two or more partnersSince two or more partners
join hands to start a partnership business, it may be possible tojoin hands to start a partnership business, it may be possible to
pool together more resources as compared to a solepool together more resources as compared to a sole
proprietorship. The partners can contribute more capital, moreproprietorship. The partners can contribute more capital, more
effort and more time for the business.effort and more time for the business.
2/1/2011 19Astt. prof VIPIN KUMAR

20. Advantages contd.Advantages contd.
 Better decisions:Better decisions: The partners are the owners of the business.The partners are the owners of the business.
Each of them has equal right to participate in the managementEach of them has equal right to participate in the management
of the business. In case of any conflict, they can sit together toof the business. In case of any conflict, they can sit together to
solve the problem. Since all partners participate in thesolve the problem. Since all partners participate in the
decision-making process, there is less scope for reckless anddecision-making process, there is less scope for reckless and
hasty decisions.hasty decisions.
 Flexibility in operationsFlexibility in operations:: A partnership firm is a flexibleA partnership firm is a flexible
organization. At any time, the partners can decide to changeorganization. At any time, the partners can decide to change
the size or nature of the business or area of it’s operation.the size or nature of the business or area of it’s operation.
There is no need to follow any legal procedure. Only theThere is no need to follow any legal procedure. Only the
consent of all the partners is required.consent of all the partners is required.
2/1/2011 20Astt. prof VIPIN KUMAR

21. Contd.Contd.
 Sharing risks:Sharing risks: In a partnership firm all the partners “share” theIn a partnership firm all the partners “share” the
business risks. For example, if there are three partners and the firmbusiness risks. For example, if there are three partners and the firm
makes a loss of Rs.12,000 in a particular period, then all partnersmakes a loss of Rs.12,000 in a particular period, then all partners
may share it and the individual burden will be Rs.4000 only.may share it and the individual burden will be Rs.4000 only.
Because of this, the partners may be encouraged to take up moreBecause of this, the partners may be encouraged to take up more
risk and hence expand their business more.risk and hence expand their business more.
 Benefits of specialization:Benefits of specialization:Since all the partners are owners ofSince all the partners are owners of
the business, they can actively participate in every aspect ofthe business, they can actively participate in every aspect of
business as per their specialization, knowledge andbusiness as per their specialization, knowledge and
experience. If you want to start a firm to provide legalexperience. If you want to start a firm to provide legal
consultancy to people, then one partner may deal with civilconsultancy to people, then one partner may deal with civil
cases, one in criminal cases, and another in labor cases and socases, one in criminal cases, and another in labor cases and so
on as per the individual specialization. Similarly, two or moreon as per the individual specialization. Similarly, two or more
doctors of different specialization may start a clinic indoctors of different specialization may start a clinic in
partnership.partnership.
2/1/2011 21Astt. prof VIPIN KUMAR

22. Contd.Contd.
 Protection of interest of each partner:Protection of interest of each partner: In aIn a
partnership firm, every partner has an equal say in decisionpartnership firm, every partner has an equal say in decision
making and the management of the business. If any decisionmaking and the management of the business. If any decision
goes against the interest of any partner, he can prevent thegoes against the interest of any partner, he can prevent the
decision from being taken. In extreme cases an unsatisfieddecision from being taken. In extreme cases an unsatisfied
partner may withdraw from the business and can dissolve it. Inpartner may withdraw from the business and can dissolve it. In
such extreme cases the “partnership deed” is required. Insuch extreme cases the “partnership deed” is required. In
absence of the partnership deed, no legal protection is given toabsence of the partnership deed, no legal protection is given to
the partners.the partners.
2/1/2011 22Astt. prof VIPIN KUMAR

23. Disadvantage of Partnership FirmDisadvantage of Partnership Firm
 Unlimited liability:Unlimited liability: All the partners are jointly liable for the debt of theAll the partners are jointly liable for the debt of the
firm. They can share the liability among themselves or any one can befirm. They can share the liability among themselves or any one can be
asked to pay all the debts even from his personal properties depending onasked to pay all the debts even from his personal properties depending on
the arrangement made between the partners.the arrangement made between the partners.
 Uncertain life:Uncertain life: The partnership firm has no legal existence separate fromThe partnership firm has no legal existence separate from
it’s partners. It comes to an end with death, insolvency, incapacity or theit’s partners. It comes to an end with death, insolvency, incapacity or the
retirement of a partner. Further, any unsatisfied or discontent partner canretirement of a partner. Further, any unsatisfied or discontent partner can
also give notice at any time for the dissolution of the partnership.also give notice at any time for the dissolution of the partnership.
 No transferability of share:No transferability of share:If you are a partner in any firm, you cannotIf you are a partner in any firm, you cannot
transfer your share or part of the company to outsiders, without the consenttransfer your share or part of the company to outsiders, without the consent
of other partners. This creates inconvenience for the partner who wants toof other partners. This creates inconvenience for the partner who wants to
leave the firm or sell part of his share to others.leave the firm or sell part of his share to others.
2/1/2011 23Astt. prof VIPIN KUMAR

24. Contd.Contd.
 Lack of harmony:Lack of harmony: In a partnership firm every partner has anIn a partnership firm every partner has an
equal right to participate in the management. Also, everyequal right to participate in the management. Also, every
partner can place his or her opinion or viewpoint before thepartner can place his or her opinion or viewpoint before the
management regarding any matter at any time. Because of this,management regarding any matter at any time. Because of this,
sometimes there is a possibility of friction and discontentsometimes there is a possibility of friction and discontent
among the partners. Difference of opinion may lead to the endamong the partners. Difference of opinion may lead to the end
of the partnership and the business.of the partnership and the business.
 Limited capital:Limited capital: Since the total number of partners cannotSince the total number of partners cannot
exceed 20, the capital to be raised is always limited. It may notexceed 20, the capital to be raised is always limited. It may not
be possible to start a very large business in partnership formbe possible to start a very large business in partnership form..
2/1/2011 24Astt. prof VIPIN KUMAR

25. Partnership deedPartnership deed
 A partnership is formed by an agreement. This agreement mayA partnership is formed by an agreement. This agreement may
be in writing or oral.though the law does not expressly requirebe in writing or oral.though the law does not expressly require
that the partnership agreement should be in writing, it isthat the partnership agreement should be in writing, it is
desirable t o have it in writing in order to avo8id any disputedesirable t o have it in writing in order to avo8id any dispute
with regard to the terms of the partnership.with regard to the terms of the partnership. The documentThe document
which contains the term of a partnership as agreed among thewhich contains the term of a partnership as agreed among the
partners is called “partnership deed”.partners is called “partnership deed”.
 The partnership Deed is to be duly stamped as per the IndianThe partnership Deed is to be duly stamped as per the Indian
Stamp Act, and duly signed by all the partners.Stamp Act, and duly signed by all the partners.
ContdContd..
2/1/2011 25Astt. prof VIPIN KUMAR

26. Contents of partnership DeedContents of partnership Deed
A partnership deed may contain any matter relating to theA partnership deed may contain any matter relating to the
regulation of partnership but all provisions in the deed should beregulation of partnership but all provisions in the deed should be
within the limits of Indian Partnership Act, 1932. However, Awithin the limits of Indian Partnership Act, 1932. However, A
Partnership Deed should contain the following clause:Partnership Deed should contain the following clause:
 Nature of businessNature of business
 Duration of partnershipDuration of partnership
 Name of the firmName of the firm
 CapitalCapital
 Share of partners in profits and lossesShare of partners in profits and losses
 Bank Account firmBank Account firm
 Books of accountBooks of account
 Powers of partnersPowers of partners
 Retirement and expulsion of partnersRetirement and expulsion of partners
 Death of partnerDeath of partner
 Dissolution of firmDissolution of firm
 Settlement of disputesSettlement of disputes2/1/2011 26Astt. prof VIPIN KUMAR