Chapter- Seven

Law of Partnership

Southeast Business School

Southeast University
 Definition of Partnership
 Section 4 of the Indian Partnership Act, 1932, lays down
that “Partnership is the relation between persons who have
agreed to share the profits of a business carried on by all or
any one of them acting for all.”
 All the aspects and functions of the partnership are
administered under ‘The Partnership Act 1932’. This
specific law explains that partnership is an association
between two or more individuals or parties who have
accepted to share the profits generated from the business
under the supervision of all the members or behalf of other
members.
 Essential Elements of A partnership
. The five essential elements of a partnership firm are given below.
 Contract for Partnership: A partnership results from a contract. A
partnership does not arise from the operation of law. Neither can it
be inherited. It has to be a voluntary agreement between partners.
A partnership agreement can be written or oral..
 Essential Elements of A partnership
 Association of Two or More Persons: A partnership is an
association between two or more persons. The law also prohibits
minors from being partners. But minors can be admitted to
the benefits of a partnership. A partnership can only have a
maximum of 10 partners in a banking firm and 20 partners in all
other kinds of firms.
 Carrying on of Business: There are two aspects of this element.
Firstly the firm must be carrying on some business. Here the
business will include any trade, profession or occupation. Also, the
business must be run on a profit motive. The ultimate aim of the
business should be to make gains, which are then distributed among
the partners. So a firm carrying on charitable work will not be a
partnership. If there is no intention to earn profits, there is no
partnership.
 Essential Elements of A partnership
 Profit Sharing: The sharing of profits is one of the
essential elements of a partnership. It is up to the partners
whether the losses will be shared by all the partners. If nothing
is said then the losses are also split in the profit sharing ratio.
 Mutual Agency: Partnership is a contract of mutual agency.
This means that every partner is both a principal as well as an
agent for all the other partners of the firm. An act done by any
of the partners is binding on all the other partners and the firm
as well.
 Definition of Partner
 Persons who have entered into partnership with one
another are called individually ‘partners’ and collectively
‘a firm’ and the name under which their business is carried
on is called the firm-name.
 A partnership firm cannot be distinguished from its
partners. The right, duties and obligation of a firm are
actually the rights, duties, and obligations of the persons
who own the firm.
 Types of Partner
Persons who have entered into an agreement with one another are individually known as
partners. There are several types of partner. These are -
• Active/Managing Partner
• Sleeping Partner
• Nominal Partner
• Partner by Estoppel
• Partner in Profits only
• Minor Partner
• Secret Partner
• Outgoing Partner
• Limited Partner
• Sub-Partner
 Types of Partner
 Active/Managing Partner: An active partner mainly takes part in
the day-to-day running of the business and also takes participation
in the conduct and management of the business firm.
 Sleeping Partner: A sleeping partner is also known as a dormant
partner. This partner does not participate in the day-to-day
functioning activities of the partnership firm. A person who have
sufficient money or interest in the firm, but can not devote his time
to the business, can act as a sleeping partner in the firm. However,
he is bound by all the acts of the other partners.
 Types of Partner
 Nominal Partner: A nominal partner does not have any real
or significant interest in the partnership firm. In simple words,
he is only lending his name to the firm and does not have a
voice in the management of the firm. On the strength of his
name, the firm can promote its sale in the market or can get
more credit from the market.
 Partner by Estoppel: A partner by estoppel is a partner who
displays by his words, actions or conduct that he is the partner
of the firm. In simple words, even though he is not the partner
of the firm but he has represented himself in such a manner
which depicts that he has become a partner by estoppel or
partner by holding out.
 Types of Partner
 Partner in Profits Only: This partner of a firm will only
share the profits of the firm and won’t be liable for any
losses of the firm. Moreover, if a partner who is in “partner
in profit only” deals with any of the third parties or outsiders
then he will be liable for the acts of profit only and not any
of the liability. He is not allowed to take part in management
of the firm.
 Minor Partner: However, the Partnership Act, 1932 allows
a minor to enjoy benefits of partnership when a set of rules
and procedures are complied in accordance with law. A
minor will share the profits of the firms, however, his
liability for losses is only limited to his share of the firm.
 Types of Partner
 Secret Partner: In a partnership, the position of secret partner
lies in between the active and sleeping partner. The
membership of the firm of a secret partner is kept secret from
outsiders and third parties. His liability is unlimited since he
holds a share in profit and shares liabilities for losses in the
business. He can even take part in working for the business.
 Outgoing Partner: An outgoing partner is a partner who
voluntarily retires without dissolving the firm. He leaves the
existing firm, therefore he is called as an outgoing partner.
Such a partner is liable for all his debts and obligation incurred
before his retirement.
 Types of Partner
 Limited Partner: A limited partner is a partner whose
liability is only upto the extent of his contributions for the
capital of the partnership firm.
 Sub-Partner: A sub-partner is a partner who associates
someone else in his share of the firm. He gives a part of
his share to the person. It is pertinent to note that, the
relationship is not between the sub-partner and
partnership firm but is between him and the partner.
Therefore, a sub-partner is a non-entity of the firm and he
does not hold any liability towards the firm.
 Who Can Be A Partner
 Person: Under the Partnership Act, a person may be a
partner if he has the capacity to enter into a contract. For
the purpose of the partnership act, the term ‘person’ does
not include a partnership or a limited company.
 Minor: A minor cannot be a partner. But in an existing
partnership, a minor can be admitted into a firm if all the
partners of the firm agree. Such a minor gets all the
benefits of the partnership.
 Person of Unsound Mind: A person who is of unsound
mind cannot become a partner.
 Who Can Be A Partner
 Woman: A woman can be a partner, married or
unmarried. Of course a woman cannot be partner if she is
a minor or she is of unsound mind.
 Company: In a company the capacity to inter into
contract is determined by the Memorandum and Articles
of the Association of the company. The liability of the
members of a firm under the Partnership Act, for the
debts of the firm, is unlimited. But a company cannot
incur unlimited liability. Therefore a company cannot
become a partner of a firm.
 An Alien Enemy: An alien enemy cannot enter into a
contract of partnership with a citizen of Bangladesh.
 Rights of Partner
The rights of partners, and the relations of partners to one another,
are determined by the agreement of the partners. Where there is no
express or implied terms in the agreement, the rules stated in the
Partnership Act will be applied. Subject to any contract to the
contrary, the important rights of partners are summarized below:
 Conduct of Business: Every partner has a right to take part in the
conduct of business.
 Can Express Opinion: Every partner shall have the right to
express his opinion.
 Access, Inspection, Copy: Every partner has a right to have
access to and inspect and copy any of the books of the firm.
 Rights of Partner
 Equality of Profits: The partners are entitled to share equally in the
profits.
 To Get Indemnity: The firm shall indemnify a partner in respect of
payment’s made and liabilities incurred by him, in the ordinary and proper
conduct of the business and in doing such act, in any emergency.
 Application of Property of Firm: The property of the firm shall be held
and used by the partners exclusively for the purpose of the business.
 Partner’s Authority: Every partner has right to act on behalf of the firm.
He has express and implied authority.
 Reconstitution: The constitution of a firm may be changed by the
introduction of a new partner, death, retirement, insolvency, expulsion, or
by the transfer of partner’s share to an outsider.
 Rights of Partner
 Dissolution: A partner has the right to get the firm dissolved under
appropriate circumstances. Upon dissolution, the partners have the
right to get accounts of the firm and surplus assets according to
their shares.
 Right to Carrying on a Competing Business: By a special
agreement, an outgoing partner can be prevented from carrying on
a similar business within a specified period or local limits. But if
there is no restraining agreement, an outgoing partner can carry on
a competing business.
 Right to Share Profit After Retirement: If the continuing
partners carry on the business of the firm with the property of the
firm (without any final settlement of accounts), the outgoing
partner will entitle to get share of profit.
 Duties of Partners
The important duties of partners are summarized below:
 Justice, Faithfulness, True Accounts, Full Information:
Partners are bound to carry on the business of the firm to the
greatest common advantages, to be just and faithful to each other
and to render true accounts and full information of all things
affecting the firm to any partner or his legal representative.
 To Pay Indemnity: Every partner shall indemnify the firm for
any loss caused to it by his fraud in the conduct of the business of
the firm.
 No Remuneration: Subject to any contract to the contrary, a
partner is not entitled to receive remuneration for taking part in
the contract of the business.
 Duties of Partners
 Equality of Losses: Subject to any contract to the contrary,
partners are bound to pay the losses of the firm equally.
 To Pay Indemnity for Willful Neglect: 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.
 No Secret Profit: If a partner carries on any competing business
of the firm, he shall account for and pay to the firm all profits
made by him in that business.
 Unlimited Liability: Every partner is liable for the acts of the
firm done while he is a partner. The liability is joint and several.
 Dissolution
 Dissolution of a firm means the end of a firm by the break
up of the relation of partnership between all the partners.
Dissolution is to be distinguished from reconstitution of a
firm. In the latter case, the partnership continues but there
is a change in the number of partners.
 Grounds of Dissolution
A firm may be dissolved on any of the following grounds:
 By Agreement (Sec. 40): A firm may be dissolved any time with
the consent of all the partners of the firm. Partnership is created by
contract, it can also be terminated by contracts.
 Compulsory Dissolution (sec. 41): A firm dissolved-
a) By the adjudication of all the partners but one as insolvent, or
b) By the happening of any event which makes the business of the
firm unlawful.
But if a firm has more than one undertaking, some of which become
unlawful and some remain lawful, the firm may continue to carry on
the lawful undertakings.
 Grounds of Dissolution
 On the Happening of Certain Contingencies (Sec. 42): Subject
to contract between the partners, a firm is dissolved –
a) If constituted for a fixed term, by the expiry of that term.
b) If constituted to carry out one or more adventures or
undertakings, by the completion thereof.
c) By the death of a partner.
The partnership agreement may provide that the firm will not be
dissolved in any of the aforementioned cases such a provision is
valid.
 By Notice (Sec. 43): Where partnership is at will, the firm may
be dissolved by any partner giving notice in writing to all other
partners of his intention to dissolve the firm. The firm is dissolved
as from the date mentioned in the notice as the date of dissolution.
 Grounds of Dissolution
 Dissolution by the Court (Sec. 44): At the suit of a partner, the court may
dissolve a firm on any one of the following grounds –
a) Insanity: If a partner has become of unsound mind, the suit for dissolution in
this case can be filed by the next friend of the insane partner or by any other
partner.
b) Permanent Incapacity: If a partner becomes permanently incapable of
performing his duties as a partner. Permanent incapacity may arise from an
incurable illness like paralysis. The suit for dissolution in this case must be
brought by a partner other than the person who has become incapable.
c) Transfer of Whole Interest: If a partner has transferred the whole of his
interest in the firm to an outsider. Transfer of partner’s interest does not by
itself dissolve the firm. But other partners may ask the court to dissolve the
firm if such a transfer occurs.
 Grounds of Dissolution
d) Persistent Breach of Agreement: If a partner willfully
and persistently commits breach of the partnership
agreement regarding management or otherwise
conducts himself in such a way that it is not reasonably
practicable for the other partners to carry on business in
partnership with him.
e) Just and Equitable Clause: If the court considers it
just and equitable to dissolve the firm. This clause gives
a discretionary power to the court to dissolve a firm.
END OF CHAPTER SEVEN

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