PARTNERSHIP ACT, 1932

Section 4 of the Indian Partnership Act defines partnership as “the

relationship between [b/w] persons who have agreed to share the profits of
a business carried on by all OR any of them acting for all”.
The minimum number of partners in a partnership is 2. The maximum number
of partners incase of a banking business is 10 & incase of any other business
is 20.
Where the total number of partners exceed the allowed / maximum limits
they are termed as an ” Illegal association” & are deemed to be companies
registered under the Companies Act.
Essentials of partnership :-
1) There must be an association of 2 OR more persons :
At least 2 persons should join together to constitute a partnership.
Persons who have entered into partnership with another are called
individually ”partners”. Collectively they are called a ”firm”.
2) There must be an agreement :
All the persons who come together to form a partnership must enter into an
agreement.
The agreement may be express OR implied.
The validity of the agreement may be for a fixed period OR it may be for a
indefinite period. Where it is for a fixed period it is termed as a
“partnership venture / partnership”. Where it is not for a fixed period it is
called, as “partnership at will”.
3) The association must be for a legal purpose :
The association must be for the purpose of carrying on a business which
includes any lawful trade, occupation OR profession.
Eg :
2 OR more doctors on the basis of partnership can start a polyclinic.
4) It must be with a view to share the profits of the business :
Sharing of the loss of the business is not an essential of a partnership
i.e. when 2 persons agree to carry on a business with a view of sharing
profits under a specific understanding that the loss of the business if any
will be borne by only one of them it will constitute a valid partnership.
Eg :
 1) A & B buy 100 bales of cotton that they agree to sell for their joint
account [a/c]. Each party sharing profits & bearing loses equally. A &
B are partners in respect of such a/c.
2) A & B buy 100 bales of cotton agreeing to divide these b/w them. A &
B are not partners.
5) Mutual agency :
The business of the partnership must be carried out by all the partners OR
by any 1 of them acting for others as their agent.
i.e. mutually the partners must be each others agent.

Distinguish between Partnership business & Joint hindu family business :

Sr. No. Partnership business Joint Hindu Family business

1 A Partnership is created by an
agreement.
2 A partner acquires interest by
an agreement.
3 A new partner can be included
with the consent of all other
partners.
4 The total number of partners in
a firm is limited.
5 Partners are mutual agents
i.e. any partner can contract on
behalf of the other partners.
6 The partners have a right to
demand a/cs from the other
partners.
7 The liability of the partner is
unlimited & personal.
A Joint Hindu Family business is
created by status OR by
operation of law
i.e. Hindu law
A co-parcener acquires interest
by birth.
A co-parcener can become a
member only by virtue of his
birth.
There is no limit on the total
number of co-parceners.
In a Joint Hindu Family business
it is only the karta who can
contract.
A co-parcener cannot demand
a/cs from the karta. He may
demand a/cs only in the case of
misappropriation of funds by the
karta.
In a Joint Hindu Family business
only the karta is personally
liable.
The liability of the other co-
parceners is only to the extent

8 A partnership firm is indirectly
required to be registered
because of certain disabilities of
an unregistered firm.
9 The death of a partner results
in the dissolution of the firm
unless otherwise provided in the
contract of Partnership.
10 A minor cannot be a member of a
Partnership firm except with
the consent of all partners.
of the value of their shares in
the business.
A Joint Hindu Family business
need not be registered.
The death of any co-parcener
does not dissolve the Joint
Hindu Family business.
A minor of a Joint Hindu Family
business is a member of the firm
from the date of his birth.

Rights of a partner :

1) Every partner has a right to take part in the conduct & management
of the business.
2) Every partner has a right to share the profits of the business.
3) Every partner has a right to be indemnified from the act of the other
partners.
4) Every partner has a right to have access to & inspect & take copies of
any of the books of the firm to have access to the a/cs.
5) Every partner has a right to be heard & consulted.
6) Every partner has a right to claim interest on loans & capital advanced
to the firm
i.e. a partner is entitled to an interest at the rate of 6% p.a. on any
payment OR advance made by him beyond the capital he has agreed to
subscribe. Such an interest is payable not only out of the profits of
the firm but also out of the assets of the firm.
The partners may agree to pay higher rate of interest on the capital
contribution by him unless there is an agreement expressed OR
implied to that effect. Such an interest is payable only out of the
profits unless the partners agree to the contrary.
7) Every partner has a right to do acts in the interest of the firm in
cases of emergency.
8) As per Section 32(1) every partner has a right to retire.
 9) As per Section 15 every partner has a right to use the property of
the partnership for the purpose of the business.
10) As per Section 46 every partner has a right to have the business
wound up after dissolution of the partnership.

Duties & liabilities of the partners :

1) To carry on the business of the firm for the common advantage of all
the partners.
2) To indemnify the other partner as his agent.
3) To be diligent in carrying on the business of the firm.
4) He must account for personal profits.
5) He must not claim remuneration.
6) He must not carry on any competing business.
7) He must share losses.
8) He is liable as the principal for every act of the firm OR the other
partner.
9) He must not assign all his rights in the firm
i.e. no partner should assign his rights & interest in a partnership
firm to an outsider so as to constitute the outsider as a partner of
the firm. However he may assign his share in the profits OR assets of
the firm to an outsider.

Minor partner :

A minor is incompetent to contract hence a partnership, which involves a

contract, cannot be entered into by a minor. A minor may however through
his guardian be admitted to the benefits of the firm. The share of the minor
so admitted is not liable for the acts of the firm. There must be at least 2
major partners before a minor can be admitted to the firm.
Rights of a minor partner :-
1) To share profits.
2) To have access to the a/cs of the firm.
3) To sue the firm.
i.e. a minor has a right to sue the firm for a/cs only on severing
{breaking} his connection with the firm.
4) To elect to become a partner
i.e. a minor has a right to elect to become a partner of the firm
within 6 months of his attaining majority. Once a minor elects to
become a partner his shares are liable for the acts of the firm.
5) To elect not to become a partner
i.e. when a minor elects on attaining majority not to become a partner
his shares are not liable for the acts of the firm.
Liabilities of a minor :
1) A minor is liable only to the extent of his share in the partnership
business. He is not personally liable for any act during his minority.
He can be declared insolvent.
2) If on attaining majority a minor elects to become a partner he will be
personally liable as the other partners to 3rd parties for all acts of
the firm since he was admitted to the benefits of the partnership.
Disabilities of a minor partner :
A minor admitted to the benefits of the firm cannot sue the firm OR the
other partners for a/cs OR for payment of his share without severing his
connections with the firm.
At any time within 6 months of his attaining majority OR his obtaining
the knowledge that he has been admitted to the benefits of the firm
whichever is later a minor may :-
1) Elect to become a member :
On his electing to become a partner his share in the property &
profits shall be the share he was entitled to as a minor partner. He
becomes personally liable for the acts of the firm from the time of
his admission to the benefits of the firm.
2) Elect not to become a member :
On his electing not to become a partner his rights & liabilities shall
continue to be those of a minor partner till the date of such election.
However he will not be liable for the acts of the firm after such an
option has been exercised by him. A minor may exercise the above
rights by issuing a public notice to that effect. If a minor fails to
issue such a notice he will be deemed to have become a partner after
the expiry of the said 6 months.

Outgoing partners :
 A person admitted as a partner in a partnership is called as an
incoming partner. An outgoing partner is one who ceases to be a
partner in the firm.
A person may cease to be a partner in the firm in any of the following
ways :-
1) By retirement [Section 32] :
A partner may retire from the firm in accordance with an express
agreement b/w the parties OR with an express OR implied consent of
the parties OR at his own will.
Liabilities of a retiring partner :
A retiring partner is liable for all the acts done by him before
retirement. However the other partners may discharge him of his
liabilities to any 3rd party.
He may be discharged of his liabilities in the following cases :-
a) By an agreement made b/w him & the 3rd party & all the partners
of the reconstituted firm. Such an agreement may be implied by a
course of dealing b/w the 3rd party & the re-constituted firm after
the 3rd party had the knowledge of retirement.
b) A partner who retires can with the consent of the creditors & the
existing partners be discharged of his liabilities if the new partner
{incoming partner} accepts to take over all the liabilities of the
retiring partner {outgoing partner}. A partner has to give a public
notice to be discharged for the acts of his firm on retirement.
Failure to issue such a notice entitles any creditor who supplies
goods to the new firm to hold the retiring partner liable. The
creditor may either hold the new partnership liable OR it may hold
the retiring partner liable but not both.
2) By expulsion [Section 33] :
A partner cannot be expelled from a partnership firm by any majority
of the partners except in the exercise of powers in good faith
conferred by a contract b/w the partners. Such a power to expel can
be given only by an express agreement b/w them.
A partner to be expelled must be given a notice stating the intention
of expulsion. He must be allowed an opportunity to explain himself.
A partner wrongfully expelled can claim re-instatement. A partner
rightfully expelled can claim refund of his shares in the capital &
profits of the firm.
3) By insolvency [Section 34] :
 Where a partner of a firm is declared insolvent he ceases to be a
partner of the firm from the date on which he is declared insolvent.
However the shares of the partner in the firm are not liable for any
act of the firm after the date of insolvency. The shares vests on the
official assignee. The official assignee will have no right to participate
in the business of the firm.
4) By death [Section 35] :
When a partner dies he ceases to be a partner & his property in the
firm is liable only for the acts done prior to his death.
5) By transfer of his interest in the share of the partnership :
A partner can transfer his interest in a partnership to a stranger. On
such a transfer he ceases to be a partner. The stranger however
cannot acquire the rights of the partner without the consent of all
partners.
Whenever a partner ceases to be a partner he has a right to carry on
a competing business. However he cannot use the name of the firm nor
can he represent himself as carry on the firms business.

Dissolution of a firm :

In the case of dissolution of a firm the firm ceases to exist. The relation
b/w the partners is discontinued. The whole firm is dissolved & the entire
partnership terminates. Hence the dissolution of the partnership would
constitute the dissolution of the firm.
A firm may be dissolved in the following ways :-
I By the act of the parties OR voluntary acts :
a) By an agreement :
When all the partners of a firm enter into an agreement
inorder to dissolve the firm the firm & the partnership stand
dissolved.
II By the operation of law OR compulsory dissolution :
a) By insolvency :
When the partner of a firm is declared insolvent leaving behind
less that 2 solvent partners the firm stands dissolved.
b) By carrying on unlawful business :
When the business of the firm becomes unlawful the firm will
be dissolved.
III On the happening of certain contingencies :
Eg :
i) On the death of the partner.
ii) In the case of a particular partnership when the time of the
partnership has elapsed OR expired OR the purpose of the
partnership has been accomplished.
IV By notice :
Whenever a partner desires to dissolve a firm he may do so by serving
a notice to that effect on all other partners.
If accepted the firm would be dissolved from the date specified in
the notice OR if no date has been specified from the date when the
notice has been served upon all the partners.
V By the intervention OR order of the court :
Any partner may file a suit for the dissolution of the firm if the firm
is registered in anyone of the following circumstances :-
a) Insanity of a partner {lunatic OR unsound partner}.
b) By the permanent incapacity of a partner.
c) The misconduct of any partner.
d) By the breach of the agreement of partnership by anyone of the
partners.
e) The partnership firm working at a loss.
f) By the transfer of interest in the firm by a partner.
Rights of a partner on dissolution :
1) Right of lien [Section 46]
i.e. the partners of a firm on the dissolution have a right of lien over the
property of the firm. Every partner has a right to have the property of
the firm applied in payment of his debts & liabilities in respect of the
firm & to have the surplus if any distributed amongst themselves
according to their rights.
2) Continuing authority of the partners for the purpose of winding up
[Section 47].
3) Right to have the debts settled out of the property of the firm [Section
49].
4) Right to account for personal profits made after dissolution
i.e. incase of any transaction by any partner after the firm is dissolved
but before the affairs of the business has been completely wound up the
partner shall account for any profit derived & pay it to the firm.
5) Right to restrain the use of the firm name OR the firms property
 i.e. every partner has a right to restrain the other partners from using
the name of the firm OR from using the property of the firm after
dissolution till the affairs of the firm have been completely wound up.

Goodwill :

It means the whole advantage whatever it may be of the reputation & the
connection of the firm that might have been built up by years of honest
work & lavish expenditure of money.
It signifies the value of the business gained through years of honest & hard
labour. It is the general public patronage & encouragement, which the firm
receives from constant & habitual customers.
Goodwill though easy to describe is difficult to define as it contains various
elements & differs from business to business.
Goodwill may be personal
i.e. attached to an individual OR to the use of the name of the owner OR
partner.
Goodwill could be local
i.e. attached to the premises of the firm.
Goodwill could be attached to the use of the name of the firm
i.e. firms goodwill.
The court on dissolution values goodwill. It depends on various factors like
the assets & liabilities of the firm, the value of the business gained over a
period of years, reputation & connections of the firm, the patronage read
from the customers, etc. On dissolution the goodwill can be sold in order to
liquidate the assets of the firm.
Right of the buyer of goodwill :
1) He can use the name of the firm.
2) He can trade OR represent himself as carrying on the business of the old
firm.
3) He can claim the benefits of any agreement / convinance of a partner not
to carry on any competing business
i.e. any partner may upon the sale of goodwill of the firm make an
agreement with the buyer that he shall not carry on any business similar
to that of the firm OR within a specified local limit.
Such an agreement shall be valid if the restrictions imposed are
reasonable & shall not be declared void merely because it is an agreement
 in restraint of trade.
Right of the seller of goodwill :
1) The seller may carry on a business competing with that of the buyer.
2) He may advertise such a business but he may not :-
(i) Use the name of the firm.
(ii) Represent himself as carrying on the business of the
firm.
(iii) Solicit the customers who have dealt with the old
firm.

Typical Questions

1. Define a Partnership. Explain in detail the essentials of a Partnership.

2. What are the right and duties of a partner?
3. Discuss in detail the position of a minor in a partnership firm.
4. What is reconstitution of a firm? Explain the provisions under the
Indian Partnerships Act, relating to an outgoing partner.
5. What are the different ways of dissolution of a firm? What are the
rights of a partner on dissolution?
6. Define a partnership. Distinguish between a partnership firm and a
Hindu Joint family business.

Short Notes:

1. Essentials of a partnership. 2. Types of Partners.

3. Rights of a partner. 4. Minor partner.
5. Effect of non-registration of a firm. 6. Goodwill.
7. Dissolution of a firm. 8. Outgoing partner.
9. Distinction between a partnership and Joint Family Business.