Partnership Law

Frequently Asked Questions on Partnership Law

Ans. - History of Law of Partnership Before 1932, the law relating to partnership was contained in Chapter XI of Indian Contract Act, 1872. Law of partnership as contained in Indian Contract Act 1872, was not much elaborate and was primarily based on English case-law & elementary rules of partnership law relating to partnership was in Indian Contract Act 1872. Because it was considered to be one of the branch of contract Act, legislature thought that basic principles of law of condract will apply in partnership transactions, because of this there were many aspects of law of partnership which were not dealt with in Indian Contract Act 1872, therefore with the growth of business & industries, many problems started arising regarding which law on the subject was silent therefore necessity to make comprehensive law on the subject was felt. With this object in view, the Partnership Bill was introduced in the Legislative Assembly during its January Sessions in 1931, and the Bill became law in April, 1932. The Act brings the Law of Partnership up-to-date but it is not an exhaustive code because Section 3 of the Act lays down that the general provisions of the Contract Act continue to apply to the contracts of partnership in so far as they are not inconsistent with the express provisions in this Act. Moreover, expressions used in this Act, but not defined, will have the same meanings as are given to them in the Contract Act. [Section 2(e)]. The Act has no retrospective effect [Section 74(a)] and is applicable to the whole of India except the State of Jammu and Kashmir. [Section 1(2)].

Ans. Partnership Defined. Section 4 of the Indian Partnership Act, 1932 defines "partnership" as under :

"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." Essentials of Partnership: - According to Section 4 the following essentials are necessary to constitute a `partnership':

1. There should be an agreement between the persons who want to be partners.

2. The purpose of creating partnership should be carrying of business.

3. The motive for the creation of partnership should be acquiring and sharing profits.

4. All of them or any of them acting for all, i.e. in mutual agency should carry on the business of the firm.

All these elements must be present before a group of persons can be held to be partners. The first element relates to the voluntary contractual nature of partnership. It emphasizes the fact that partnership can only arise as a result of an agreement, express or implied, between parties and it cannot be the result of status.

The second element in the definition of partnership gives the motive, which leads to the formation of a firm, i.e., sharing of profits. The members of religious or charitable societies or clubs are not partners, as the idea of sharing of profits is not involved in these associations. The sharing of losses is not involved in the definition because an agreement to share losses is not a test of the existence of partnership but is generally implied in a partnership agreement. It may, however, be agreed between the partners that any one of them shall not be liable for losses. [Raghunandan v. Harmusji (1926) 51 Bombay 342]. Distinction between Partnership and Company :

(1) In a partnership the persons who have entered into partnership, are individually called partners and collectively is a firm. A partnership firm, therefore, is merely a collective name of all the partners. A partnership firm does not have a separate legal personality. A company is a legal entity different from its members.

(2) A partnership firm means all the partners put together. If all the partners cease to be partners, e.g. all of them die or become insolvent, the partnership firm gets dissolved. A company being a person different from the members, the members may come and go but the company's life is not affected thereby.

(3) The shareholder of a company can transfer his share to anybody he likes but a partner cannot substitute another person in his place unless all other partners agree to the same. Similarly, on the death of the member of a company his legal representative will step into his shoes for the purpose of the rights in the company, but on the death of a partner his legal representatives do not get substituted in his place in partnership.

(4) The minimum number of members in partnership is two and maximum in case of partnership carrying on banking business is 10 and in case of any other business is 20. In the case of a private company the minimum number is 2 and the maximum is 50 whereas in the case of a public company the minimum of members should be 7 but there is no limit to the maximum and, therefore, any number of members can hold shares in a public company.

(5) The liability on the members of a company is limited but the liability of the partners is unlimited.

Ans. Section 5 of Indian Partnership Act lays down :

"The relation of partnership arises from contract and not from status and in particular, the member of a Hindu undivided family carrying on a family business as such or a Burmese Buddhist husband and wife carrying on business as such are not partners in such business." Section 5 of the Act must be read with Section 4 of Act which define "Partnership" as "a relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all."

So Section 5 of Act emphasises one of the elements in definition of partnership namely that partnership is the result of voluntary agreement express or implied. In view of the fact that in India there exists a large number of non-contractual quasi partnership relations of which the Hindu trading firm is the outstanding example, it became necessary to make an explicit declaration in section 5 that partnership arises from contract and not from status. Such non-contractual relations are founded on special rules of personal law and vastly differ from partnership as defined in the Act. Take the case of a joint Hindu family firm which is a creature of Hindu Law. In this the rights and liabilities of the coparceners are not governed solely by the Partnership Act but regard must be had to the general rules of Hindu Law which regulate the transactions of joint families. For example in a joint Hindu family the death of one of the coparceners does not dissolve the family partnership but the death of a partner does dissolve a partnership created under the Partnership Act unless there is a contract to the contrary [Section 42(c)]. In a trading firm under the Partnership Act a person can become a partner only by a definite agreement but in a joint family business every coparcener gets an interest in it (the family business) by virtue of the status of belonging to the coparcenary.

Therefore partnership is the outcome of an agreement between two or more persons and not of any status.

Ans. Section 4 of Partnership Act defines `Partnership' as "relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all." So following are essential elements of partnership relation:

(i) There should be an agreement between the persons who want to be partners.

(ii) The purpose of creating partnership should be carrying of business.

(iii) The motive for creation of partnership should be sharing profits.

(iv) The business of the firm should be carried on by all of them or any of them acting for all i.e. mutual agency.

It is necessary that the above stated elements must be present to form `partnership'. Then Section 6 of Act says

"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 real relation between the parties as shown by all relevant facts taken together." Explanation 1 to Section 6 makes it clear that "The sharing of profits or of gross returns arising from property by persons holding a joint or common interest in that property does not by itself make such persons partners."

In the case in hand A, B, C and D, different motor owners though agreed to ply their respective motors between Delhi to Agra on fixed fare and to divide the proceeds equally, but are not partners in view of Explanation 1 of Section 6, moreover, they (A, B, C and D) do not possess all elements necessary to create partnership relation, they might have agreed to divide profits equally but they have not apparently agreed to carry business by all or any one of them acting for all. Trade combination thus does not amount to partnership. Therefore, A, B, C and D are not partners.

Ans. The first para of Section 4 of Indian Partnership Act lays down:

"Partnership is the relation between persons who have agreed to share profits of a business carried on by all or any of them acting for all." Thus partnership is a relation which, as Section 5 of Act declares, is a result of a contract and does not arise from status with a special motive of sharing profits from a business which is carried on by all partners or any of them acting as agent for all.

In Helper Girdhar Bhai v. Saiyad Mohd. Misrasaheb Kadri AIR 1987 SC 1782 Supreme Court observed that "Whether there was a partnership or not may in certain cases be a mixed question of law and fact, in the sense that whether ingredients of partnership as embodied in the law of partnership were there or not in a particular case must be judged in the light of principles applicable to partnership. That has to be found in Section 4 of Partnership Act, it says: "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". Section 6 of said Act reiterates that in determining whether a group of persons is or is not a firm or whether a person is or is not partner in a firm regard shall be had to real relation between the parties as shown by all relevant facts taken together. The following important elements must be there in order to establish partnership : (1) There must be an agreement entered into by all parties concerned. (2) Agreement must be to share profits. (3) Business must be carried on by all or any of them acting for all."

The division of profits is an essential condition of the existence of partnership. No one is the partner in a firm unless he shares profits in the firm. But sharing profits is only a prima facie evidence of existence of partnership but not the conclusive test. In Cox v. Hickman (1860) 8 H.C.L. 268 House of Lords held that sharing of profits though one of the evidence to determine partnership but is not the sole test. The conclusive test is that of Mutual Agency.

Explanations 1 and 2 of Section 6 of Partnership Act make it clear. Receipt by a person of a share of profits of a business or of payment contingent upon the earning of profits or varying with the profits earned by a business does not of itself make him partner with the persons carrying on business;

And in particular, the receipt of such share of payment

(A) By a lender of money to persons engaged or about to engage in any business.

(B) By servant or agent as remuneration.

(C) By widow or child of deceased partner as annuity.

(D) By previous owner or part owner of business as consideration for sale of goodwill or share thereof.

does not of itself make the receiver a partner with the persons carrying on the business.

Ans. Section 4 of Indian Partnership Act defines `Partnership' as:

"Partnership is a relation between persons who have agreed to share profits of the business to be carried on by all or any of them acting for all." So from bare perusal of Section 4 it is clear that following elements must exist to form partnership:

(a) There must be an agreement (b) Agreement must be to share profits of the business (c) Business must be carried on by all or any of them acting for all.

So agreement of sharing profits of the business is one of essential element of partnership; sharing profits though not conclusive test but is prima facie evidence of partnership relation. Moreover Section 6 of Partnership Act says

"In determining whether a group of persons is or is not a firm or whether a person is or is not partner in a firm, regard shall be had to real relation between the parties as shown by all relevant facts taken together." Explanation II added to Section 6 makes it clear that receipt by a person of share of profit as remuneration, does not of itself make the receiver a partner in the firm." In the case in hand, `A' has been shown a partner in the partnership deed and `A' manages the business of firm and paid Rs. 2000 P.M. However `A' shall have no share in profits of firm. Evidence taken together shows that when he is not entitled to share profits of the firm, he can not be said to be partner in the firm because sharing profits of the firm is one of the essential condition for partnership relation. `A' at the most can be called Manager of business of the firm taking salary of Rs. 2000/-. Therefore A's plea that he is not partner and as such not liable for losses is sustainable.

Ans. The Indian Contract Act imposes no disability upon members of a Hindu Undivided Family in the matter of entering into a contract inter se or with a stranger. A member of a Hindu Undivided Family has the same liberty of contract as any individual; it is restricted only in the manner and to the extent provided by Indian Contract Act. Partnership is under section 4 of the Partnership Act 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. If such relation exists, it will not be invalid merely because two or more of the persons who have so agreed are members of Hindu Undivided Family.

In Rattan Chand Darbari Lal v. Commr. of Income Tax (1985) 155 ITR 720 Supreme Court observed "It is a well settled proposition applicable to Hindu law that members of the joint family or even coparceners can, without disturbing the status of joint family or the coparcenary, acquire separate property or run independent business for themselves."

In Lachamman Das v. Commr. of Income Tax Punjab (1948) 16 ITR 35 it was held a coparcener in Hindu Undivided Family can enter into contract of partnership with the `Karta' of same Hindu Undivided Family. It was observed ".... It is now firmly established that an individual coparcener, while remaining joint, can possess, enjoy and utilize, in any way he likes, property which was his individual property not acquired with the aid or with any detriment to the joint family property. It follows from this that to be able to utilize this property at his will, he must be accorded the freedom to enter into contractual relation with others including his family."

Now the question arises whether a person instead of bringing cash asset to the partnership, contributes his skill and labour, can become a partner therein. In Chandrakant Manilal Shah and other v. CIT Bombay J.T. (1991) (4) SC 171 Supreme Court held ".... as is wellknown the aim of business is earning of profit, when an individual contributes cash assets to become partner of a partnership firm in consideration of a share in profits of the firm, such contribution helps and at any rate is calculated to help the achievement of the purpose of the firm namely to earn profit. The same purpose is undoubtedly achieved also when an individual in place of cash assets contributes his skill and labour in consideration of a share in the profits of the firm."

Thus in view of above discussion it is clear that in case in hand there is a legal and valid partnership.

Ans. (a) Partnership at will. - Section 7 of the Partnership Act gives the definition of a "partnership at will" as a partnership in which no provision is made by a contract between the parties as regards the term of the partnership or the mode of its determination. Therefore, if in a partnership agreement, there is any provision regarding the duration of determination of partnership, it cannot be said to be partnership at will.

Section 43 of the Act provides that partnership at will may be dissolved by any partner by giving notice in writing to all the 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, and if no date is mentioned in the notice as the date of dissolution, the firm is dissolved as from the date of the communication of the noticed. A "partnership at will" may be dissolved by filing a suit for dissolution and the dissolution dates back from the date of the institution of the suit.

Ans. (b) The important characteristics of a "partnership at will" is that in such a partnership, there is no provision for determination of partnership at will by giving a notice to other partners of his intention to do so. If in a partnership agreement, there is any provision regarding the duration or determination of partnership, it can be said to be partnership at will.

In the problem under consideration, the partnership agreement makes provision for dissolution of partnership. The agreement expressly provides that partnership can be dissolved by mutual arrangements only. Therefore, it cannot be a partnership at will, as no partner can determine it at his will but it can be a mutual arrangement only.

Ans. Particular Partnership :- Section 8 of Indian Partnership Act says :-

"A person may become a partner with another person in particular adventures or undertakings."

Relation of partnership may be permanent and no time limitation is fixed for dissolution, then it is called `partnership at will' as defined under section 7 whereas when partnership is for particular adventure, work or undertaking, it is called `particular partnership' upon the completion of work; undertaking, partnership also dissolve unless partners resolve to extend. So "Partnership" as defined under section 4 of Act may be either "partnership at will" or "Particular partnership".

In Gheru Lal Parakh v. Maha Deo Das, AIR 1959 SC 781, it was held that a partnership between two persons for entering into certain wagering transaction for particular season is a valid particular partnership.

Ans. Duties of Partners Inter Se.

Sections 9 and 10 of Partnership Act incorporate certain duties of partners which are not subject to contract between the partners, whereas certain duties have been provided in Sections 12 to 17 of Act provisions of which are subject to contract between partners.

(1) General Duties of Partners (Section 9) : Section 9 of Act says

"Partners are bound to carry on the business of the firm to the greatest common advantage, 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." Duties as contained in Section 9 of the Act are being discussed below:

(A) Duty to Carry on Business to Greatest Common Advantage : Partnership is based upon mutual confidence and trust. It is therefore necessary that no partner should gain any personal advantage at the cost of other. Section 9 says one of the duties is that partners must carry on business of firm to the greatest common advantage. This provision is to be read with Section 16(a) of the Act, according to which if a partner derives any profit for himself from any transaction of the firm, he shall account for that profit and pay it to the firm.

In Bentley v. Craven (1853) 104 R.R. 373 a firm, which had been established for refining sugar, consisted of four partners. One of the partners, who was considered to be expert in the job, was authorised to purchase sugar for the firm for refining. Instead of purchasing sugar from market, he supplied his own sugar, which he had purchased earlier at much lower price and thus made considerable profit. He did not disclose this fact to other partners. It was held that the firm was entitled to recover the profit thus made by such partner.

(B) Duty To be Just and Faithful : Another duty mentioned in Section 9 of the Act is that partners must be just and faithful to each other. Persons enter into partnership with others on the basis of their mutual confidence and trust. There is mutual agency between the partners and every partner is the agent of copartners and he can bind them to an unlimited extent. Every partner therefore is expected to be just and faithful to his copartners.

(C) Duty to Render True Accounts : Section 9 also says every partner is bound to keep and render true and complete accounts of all partnership money with him. He also must make these accounts available to other partners because every partner has a right under Section 12(d) of Act to have access to and to inspect and to copy any of the books of accounts of firm.

(D) Duty to Render Full Information : Every partner is an agent of the firm. According to law of agency information to agent is deemed to be information to principal. Section 9 therefore makes it incumbent on every partner to pass on full information of all things affecting the firm to his copartners.

(2) Duty to indemnify for loss caused by Fraud : Section 10 of the Act says

"Every partner shall indemnify the firm for any loss caused to it by his fraud in the conduct of the business of the firm." If the partner of firm commits a fraud against third party during the course of business of firm, the third party can make the firm liable for the same. Section 10 entitles the firm to be indemnified by partner guilty of fraud, because of which firm had to suffer the loss.

(3) Duty To Be Diligent : According to Section 12(b) of Act, every partner is bound to attend diligently to his duties in the conduct of the business of firm. If a partner is negligent in the performance of his duties this may cause loss to whole firm therefore Section 13(f) of Act says "if firm suffers any loss by the willful neglect" of a partner, he shall indemnify the firm for the same.

(4) Duty Not To Compete : Section 16(b) makes it the duty of partner not to carry on any business similar to or in competition with the business of firm and if a partner does this, he is bound to pay to the firm all profits made to him in that business.

(5) Duty to Properly Use the Firm's Property : The property of the firm has got to be used exclusively for the purpose of the business of the firm (Section 15). If any partner derives any profit or personal advantage by the use of property of the firm, he has to account for that profit and pay the same to the firm (Section 16(A)). This rule is subject to contract between the partners.

Rights Of The Partners Inter Se.

Rights and duties of the partners contained in Sections 12 to 17 are subject to contract between the partners. Therefore, unless it has been agreed otherwise the following rights as contained in the above mentioned provisions are there.

(1) Right to take part in the conduct of the business [Section 12(a)]. According to Section 12(a) every partner has a right to take part in the conduct of the business. Since the business of partnership belongs to all the partners every partner is entitled to take part in the conduct of the business. The partners are free to provide in their agreement that only some of them will take part in the conduct of the business and certain other partners will not. If such a right is wrongfully denied to a partner he can seek the enforcement of the right through a court of law. If the right to manage the business has been conferred on only some of the partners, they alone will be entitled to this right.

(2) Right to express opinion [Section 12(c)]. Section 12(c) contains the following provision with regard to the right of a partner to express the opinion in the partnership matters.

"Any difference arising as to ordinary matters connected with the business may be decided by a majority of the partners, and every partner shall have the 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."

So when the difference of opinion pertains to an ordinary or routine matter connected with the business the same may be resolved by a decision of the majority of the partners. But before the matter is decided every partner must be provided with an opportunity to express his opinion.

When the matter is of fundamental importance consent of all the partners is needed. Admission of a new partner to the firm or a change in the nature of the business are the matters of this nature.

(3) Right to have access to books of the firm. [Section 12(d)].According to Section 12(d) every partner has a right to have access to and to inspect and copy any books of the firm. This right is available to both active and dormant partners. This right is not only in respect of books of accounts but in respect of any books of the firm. A partner could exercise this right either personally or by engaging an agent for the purpose.

(4) Right to share profits. [Section 13 (a) and (b)]. - Every partner has right to share the profits. Generally the partners provide in their agreements as to what will be the proportion in which they will share the profits. For example, in a firm of three partners, it may be agreed that the profit sharing proportion will be 1/2:1/4:1/4. According to Section 13(b), in the absence of any such agreement the partners are to share the profits equally and also to contribute equally to the losses sustained by the firm.

Section 13(a) says that a partner is not entitled to receive remuneration for taking part in the conduct of the business, unless otherwise agreed. Thus, it is only if the partners so agree a partner may be entitled to additional salary, commission etc. for the efforts made by him in running the business of the firm.

(5) Right to interest on capital and advances. [Section 13(c) and (d)]. - Generally no interest on capital subscribed by the partners is to be given because the partners share the profits of the business of the firm. In case the partners agree that interest on capital is to be given, according to section 13(c) such interest shall be payable only out of profits.

Section 13(d) says : In case a partner makes any payment or advance beyond the amount of capital he has agreed to subscribe, he is entitled to interest thereon at the rate of six per cent per annum.

(6) Right to indemnify. [Section 13(e)]. A partner while acting on behalf of the firm may make certain payments and also incur some liabilities. According to Section 13(e) he is entitled to claim indemnity for the same. The indemnity can be claimed for the acts done by a partner in the ordinary and proper conduct of the business and also for doing some act in an emergency for the purpose of protecting the firm from the loss.

Ans. Section 14 of Indian Partnership Act says :-

"Subject to contract between the partners, the property of the firm includes all property and rights and interests in property originally brought into the stock of the firm or acquired by purchase or otherwise, by or for the firm, or for the purposes and in the course of the business of the firm, and includes also the goodwill of the business.

Unless the contrary intention appears, property and rights and interests in property acquired with money belonging to the firm are deemed to have been acquired for the firm".

So Section 14 of Act enumerates the property which is to be deemed as belonging to the firm in the absence of any agreement between the partners showing a contrary intention. In the absence of a contract to the contrary, the property of a firm is deemed to include :

(i) Property originally thrown in. - All property and rights and interests in property originally thrown by the partners into the common stock as their contribution to the common business. A, B and C entered into a partnership and agreed to carry on the business of cotton spinners in a cotton mill belonging to `A'. The value of the mill was ascertained and credit for the same was afforded to A in the books of the firm. It was held that the mill was the property of the firm, vide Robinson v. Aston.

(ii) Prpoerty subsequently acquired. - All property and rights and interests in property acquired subsequently by purchase or otherwise for the firm or the purpose and in the names of the business of the firm.

(iii) Property purchased in frims name. - All property purchased with firm's money is partnership property. The property purchased with firm's money may have been taken in the name of the firm or of one or more of the partners. In the absence of any convincing evidence, property purchased in the name of one partner and paid for out of the funds of the firm will be deemed to belong to the firm.

(iv) `Goodwill' of a business. Good will means every advantage which an old firm has acquired in carrying on the business honestly and it may be connected with premises in which the business was previously carried on or with the name of the late firm or with any other matter carrying with it the benefit of the business. `Goodwill' is an asset of a firm and has got appreciable value and it can be sold like any other property of the firm.

The general rule is that property of a firm is the property of all the partners and therefore, it can be used only for the purposes of the firm's business. If a partner derives any personal benefit from any transaction of the firm or from the use of the property or business connections of the firm, or the use of the firm's name, he is bound to make over that profit to the firm, because it is the duty of a partner to carry on the partnership business to the greatest common advantage. A partner cannot carry on the same business separately as carried on by the firm or any other business of the same nature and competing with that of the firm, in his own name or in some other name and if he does so, he must account for and pay over to the firm all profits made by him in such business.

Ans. Point of determination in the case in hand is whether in the absence of any mention in accounts books of firm, cinema hall of `A' in which films were being exhibited in partnership with `B' is partnership property or not.

Section 14 of Indian Partnership Act is relevant here which lays down "Subject to the contract between partners, the property of the firm includes all property and rights and interests in property originally brought into the stock of the firm or acquired by purchase or otherwise, by or for the firm or for purpose and in the course of the business of the firm and includes also the goodwill of the business.

Unless the contrary intention appears property and right and interest in property acquired with money belonging to the firm are deemed to have been acquired for the firm."

In Sunder Singh v. Income Tax Commissioner AIR 1938 All. 452 , it was observed "Whether any property is personal property of a partner or property of firm will be determined on the basis of facts and circumstances of each case. If there is any agreement between partners in this regard, then it shall be determined on the basis of such agreement of partners and in the absence of any agreement between partners following points will be considered while determining whether a property is a partnership property:

(a) Whether the property was acquired for partnership purposes in the course of the business of the firm

(b) Whether it was purchased with the assets of firm

(c) Whether it was purchased by or for the firm

(d) Whether it was put to the use of the firm and treated as property of firm

(e) Whether it was entered and carried on in the books of the firm as property of firm.

Coming now to case in hand `A' was the owner of Cinema Hall. When `A' entered into partnership with B for business of exhibiting the films, it is evident that at the commencement of film's business, ownership in cinema hall lies in A's name personally and during the course of business of firm said property i.e. cinema hall has never been shown in the account books of firm as partnership property nor it was intention of parties to treat cinema hall as property of the firm. The agreement of partnership between `A' and `B' also does not mention this property to be property of the firm. So cinema hall does not within the meaning of Section 14 of Act, come within purview of partnership property. In view of above discussion A's cinema hall will not be a partnership property and claim of B in this regard is not sustainable.

Ans. Where a partnership is created for a fixed period or for a particular business, it should naturally come to an end on the expiry of such period or on the completion of such business. But what often happens is that the partners continue the firm without any new agreement. Section 17 is enacted to meet such cases. Its essence is that the firm shall continue, as far as applicable, on the same terms and conditions as if no change has some in them.

Section 17 says -

"Subject to contract between the partners :

(a) Rights and duties of partners after a change in the firm. - Where a change occurs in the constitution of a firm, the mutual rights and duties of the partners in the reconstituted firm remain the same as they were immediately before the change, as far as may be;

(b) After the expiry of the term of the firm. - Where a firm constituted for a fixed term continues to carry on business after the expiry of that term, the mutual rights and duties of the partners remain the same as they were before the expiry, so far as they may be consistent with the incident of partnership at will; and

(c) Where additional undertakings are carried out. - Where a firm constituted to carry out one or more adventures or undertakings carries out other adventures or undertakings, the mutual rights and duties of the partners in respect of the other adventures or undertakings are the same as those in respect of the original adventures or undertakings."

So, mutual rights and duties of partners will remain the same after a change in the firm. The following three kinds of changes, as contemplated by Section 17, do not affect mutual rights and duties, unless they are altered by agreement.

1. Change in Constitution. - Where a change occurs in the constitution of the firm, mutual rights and duties remain the same as they were immediately before the change.

2. After Expiry of Term. - Where a firm is constituted for a fixed term, but continues to carry on business after the expiry of the term, mutual rights and duties will remain the same, but only in so far as they are consistent with a partnership at will.

3. Where additional undertakings are carried out. - Where a firm constituted for one or more adventures or undertakings, caries out other adventures or undertakings, the mutual rights and duties will remain the same.

Ans. Section 18 of the Partnership Act provides that "subject to the provisions of this Act, a partner is the agent of the firm for the purposes of the business of the firm." Partners when they carry on the business of the firm are agent as well as principal. Section 19(1) of Partnership Act provides:

"Subject to the provisions of Section 22 the act of a partner which is done to carry on, in the usual way, business of the kind carried on by the firm, binds the firm. The authority of a partner to bind the firm conferred by this section is called his implied authority." So the scope of implied authority of partner in a firm is linked with nature of business and usual manner of carrying it on. As every partner in contemplation of law is the general and accredited agent of partnership, he binds all the other partners by his acts in all matters which are within the scope and object of the partnership. This authority of a partner to bind all the partners by an act done to carry on, in the usual way, business of the kind carried on by the firm is called the `implied authority' of a partner. The implied authority does not come into existence unless the act is done in the conduct of the business of the kind carried on by the firm name or in a way usual in such a business. [Section 19(1)]. It is also necessary that the act must have been done in the firm name or in any other manner expressing or implying an intention to bind the firm. (Section 22).

In Raghavaveera Sons v. Padmavathi AIR 1978 Mad. 81 it was observed "In law each partner in a merchantile firm of ordinary trading partnership is liable upon bill drawn by a partner in recognised trading name of the firm for a transaction incidental to business of firm although his name does not appear on the face of instrument or he may be a sleeping partner."

Sub-section (2) of Section 19 of Act then provide statutory restrictions as in the absence of any usage or custom of trade to the contrary, the implied authority of a partner does not empower him to do the following acts:

(i) To submit a dispute relating to the business of the firm to arbitration, because it is no part of the ordinary business of partnership to refer disputed matters to arbitration.

(ii) To open a banking account on behalf of the firm in his own name, because section 22 lays down that no act of a single partner binds the firm unless it is done on behalf of the firm and in the firm's name.

(iii) To compromise or relinquish any claim or portion of a claim by the firm unless the claim is fully satisfied or all the partners assent to the compromise or relinquishment.

(iv) To withdraw a suit or proceeding filed on behalf of the firm. But it has nothing to do with the power of a partner to institute a suit or to defend a suit on behalf of the firm.

(v) To admit any liability in a suit or proceeding against the firm. In other words a partner cannot consent to a judgment against the firm.

(vi) To acquire immovable property on behalf of the firm. A partner, therefore, has no implied authority to take a lease of immovable property on behalf of the firm.

(vii) To transfer immovable property belonging to the firm. Therefore a partner in the exercise of his implied authority cannot mortgage or lease immovable property belonging to the firm.

(viii) To enter into partnership with other person on behalf of the firm.

Section 20 of the Act then provide "The partners in a firm may by contract between the partners extend or restrict the implied authority of any partner.

Notwithstanding any such restriction, any act done by a partner on behalf of firm which falls within his implied authority binds the firm, unless the person with whom he is dealing knows of restriction or does not know or believe that partner to be partner."

Ans. Section 18 of Indian Partnership Act says, "Subject to the provisions of this Act, partner is the agent of the firm for the purpose of business of the firm."

So partners when they carry on the business of firm are agent as well as principal. A partner carries on business for himself as principal and also as an agent for other partners. While carrying on the business of firm each partner of firm has implied authority to bind the other partner for his acts. Section 19 of Act says "(1) subject to the provisions of Section 22, the act of a partner which is done to carry on, in the usual way, business of the kind carried on by the firm, binds the firm."

The authority of partner to bind the firm conferred to by this section is called his "implied authority."

So when a partner does an act, which having regard to the nature of business of firm is usual, in carrying on such business, such act of partner will bind the firm.

Section 22 of Act says "In order to bind a firm, an act or instrument done or executed by a partner or other person on behalf of the firm shall be done or executed in the firm name or in any other manner expressing or implying an intention to bind the firm."

In Raghavaveera Sons v. Padmavathi, AIR 1978 Mad. 81, while discussing the provisions of Sections 19(1) and 22 of Act, it was observed "In law every one of the partners in a mercantile firm of ordinary trading partnership is liable upon a bill drawn by a partner in the recognized trading name of firm for a transaction incidental to the business of firm, although his name does not appear on the face of instrument and although he be not a sleeping partner."

In the case in hand, X and Y are partners in a firm whose business is trading and it is also clear that during the course of business of firm X took loan of Rs. 9000 and executed a pronote in the name of firm. Though loan money of Rs. 9000 has not been used for business of firm but `X' spent it for purchasing plot in his own name, but firm as a whole is liable for this loan, and act of `X' shall also bind the `Y' in view of provisions of Sections 19 and 22 of Act.

Ans. Act of a partner done during the course of business of the firm can bind the firm. Each partner has implied authority to bind the firm from his acts. Section 19(1) of Indian Partnership Act provides "Subject to the provision of Section 22, the act of a partner, which is done to carry on, in the usual way, business of the kind, carried on by the firm, binds the firm."

So implied authority of a partner to bind the whole firm is subject to the provision of Section 22 of Act which provides "In order to bind the firm act or instrument done or executed by a partner or other person on behalf of firm shall be in the name of firm or in any manner expressing or implying an intention to bind the firm.

In Raghavaveera Sons v. Padmavathi AIR 1978 Mad. 81 it was observed "In law every one of the partner in a mercantile firm of ordinary trading partnership, is liable upon a bill drawn by a partner in the recognised trading name of firm for a transaction incidental to the business of firm, although his name does not appear on the face of instrument and although he be not a sleeping or secret partner."

In the case in hand it is evident that `A' executed the promissory note to `B' describing himself to be `Proprietor'. There is nothing in the document to show that intention was to bind the whole firm with the liability of promissory note, as is the requirement of Section 22 of Act. In view of this, partnership firm shall not be liable on promissory note and `A' individually can be liable.

Ans. Section 25 of Indian Partnership Act declares a general rule that "Every partner is liable jointly with all other partners and also severally for all acts of the firm done while he is partner."

So far all acts of firm, every partner is liable jointly and severally. Sections 19, 20 and 22 of Act lay down about the implied authority of each partner in firm and its extent. If act is done within implied authority of a partner, it is an act of firm and thus firm shall be liable for it.

However Indian Partnership Act has specifically provided about the consequences of certain Acts.

(a) Admission By a Partner - Section 23 of Indian Partnership Act says :-

An admission or representation made by a partner concerning the affairs of the firm is evidence against the firm, if it is made in the ordinary course of business.

An "admission" is a statement by which a person acknowledges the existence of a fact against his interest. If a partner makes a statement in the ordinary course of the business of the firm by which he admits a fact or liability, that is an admission against the firm.

Representation or misrepresentations made by a partner in the course of the business of the firm are binding upon the firm. But representations by a partner as to the scope of his implied authority do not bind the firm because that authority depends upon the usual manner of carrying on the business and not upon a partner's representations. If this were not so partnership firms would be at the mercy of unscrupulous partners.

(b) Liability For Tort and Other Wrongs - Section 26 of the Act provides in this regard as :-

"Where, by wrongful act or omission of a partner acting in the ordinary course of business of a firm or with the authority of his partners, loss or injury is caused to any third party or any penalty is incurred, the firm is liable therefor to the same extent as the partner."

In order to bring a case within the purview of Section 26, it is necessary to show that the act complained of was authorised by the co-partners or that the partner doing the act was acting in the ordinary course of the business of the firm. The real test is, was it within the scope of the authority of a partner to do the act by legitimate means? If so, it would be within the scope of his authority to do it by wrongful or even illegal means and the partners will be bound by it.

Example. - In a case, it was in the course of the business of a firm to obtain by legitimate means certain information from competing firms, but a partner of the firm obtained such information by illegitimate means (by bribing the clerk). It was held that all the partners were liable in damages to the competing firm Hamlyn v. Huston Co. [(1903) O.K.B. 81]. But a fraud committed by a partner while acting on his own separate account was held not imputable to the firm vide Munshi Basiruddin v. Surja Kumar, (1908) 12 C.W.N. 716.

(c) Liability for Misappropriation [Section 27] - In the course of the business of the firm, money or property belonging to third parties, is likely to be received by the firm or its partners. If a partner misappropriate the same, the question at once arises whether the firm is liable. Section 27 provides the answer. It lays down two rules -

(1) Where a partner acting within his apparent authority receives money or property from a third party and misapplies it, or

(2) Where a firm in the course of its business receives money or property from a third party, and the same is misapplied by any of the partners, the firm is liable to make good the loss.

Section 27 deals with the case of the misapplication of money or property received for, or in the custody of the firm. It is only a particular application for the general principle of the liability of a firm for the torts of any of its partners. Every partner is the general and accredited agent of partnership and every act done by him in the ordinary course of the partnership business is binding on the firm, whether it be receipt of money or any thing else. Therefore, it is within the apparent scope of the authority of a partner to receive money and if he receives the same and misapplies it, the firm is liable for that money. If, on the other hand, it is not within the apparent scope of the authority of a partner to receive money, then the firm is not liable, if the partner receives money and misapplies it unless the money received comes under the control of the firm.

Ans. Doctrine of Holding Out The doctrine of `Holding out' is enunciated in Section 28 of Indian Partnership Act and is a branch of the doctrine of Estoppel. The rule in substance is that a person may not really be a partner in a firm but will be treated as a partner qua third person if he by words spoken or written or by conduct represents himself or knowingly permits himself, to be represented to be partner to those who have on the faith of any such representation given credit to the firm whether he does or does not know that the representation has reached the person so giving credit."

Section 28(1) of Act lays down "Any one who by words spoken or 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 any one who has on the faith of any such representation given credit to the firm, whether the person representing himself or represented to be partner does or does not know that the representation has reached the person so giving credit.

Sub-section (2) to Section 28 says "Where after a partner's death the business is continued in old firm name, the continued use of that name or of deceased partner's name as a part thereof shall not by itself make his legal representatives or his estate liable for any act of the firm done after his death."

In Oriental Bank of Commerce v. M/s S.R. Kishore and Co., AIR 1992 Delhi, 174, a person not only represented himself to be a partner, but he signed the partnership deed, actively participated in various transactions of the firm, and signed various partnership documents from time to time. It was held that he was liable for the acts of the firm on the basis of principle of `holding out'.

The conditions of liability of holding out are as follows:

1. Representation: The person sought to be charged with liability for holding out must have represented himself to be a partner in the firm. Representation may be made either by words written or spoken or by conduct.

2. Knowledge Of Representation : The person seeking to hold another liable by holding out, must show that he had knowledge of representation and acted on the faith of it.

When a partner retires from the firm without giving public notice to this effect can be held liable by holding out to those customers of firm who transacted with the firm without knowledge of retirement. However principle of holding out on retirement without giving public notice does not apply in following cases:

(i) Deceased Partner: Legal representative or estate of a deceased partner is not liable for any act of firm done after his death even if business is continued by surviving partners in same name and with using name of deceased partner.

(ii) Insolvent Partner: A person ceases to be a partner from the date of insolvency and his estate is no more liable for any act of firm done after his insolvency whether notice has been given or not.

(iii) Principle of holding out is not applicable to cases of torts.

Any partner who has retired thus can avoid the liability of act of firm done after his retirement by holding out, by giving public notice as envisaged by Section 72(2) of Indian Partnership Act.

Ans. Rights of transferee of a partner's interest. - The general rule is that no person shall be introduced as a partner into a firm without the consent of all the existing partners. [Section 31]. It follows, therefore, that no partner can make another person a partner in his place with co- partners by transferring his own interest to him unless all the co-partners agree to accept that person as a partner. But there is nothing in the Partnership Act to prevent a partner from transferring his interest to an outsider. Section 29(1) provides for the rights of a transferee while the business of the firm is a going concern. A partner is entitled to receive the share of profits of the transferring partner, but he cannot, during the continuance of the business, do the following:

(i) to interfere in the conduct of the business of the firm, or

(ii) to require accounts, or

(iii) to inspect books of the firm; or

(iv) to challenge the account agreed to by the partners.

If the firm is dissolved or if the transferring partner ceases to be a partner, the transferee is entitled as against the remaining partners to receive the share of the assets of the firm to which the transferring partner was entitled. The transferee is entitled to call for the accounts of the firm from the date of dissolution in order to ascertain the share of the transferring partner.

An assignee may, however, acquire the rights of a partner :

(1) by recognition, as such, by the other partners, and

(2) if the partnership is so constituted that the assignment of a share places the assignee in the position of the transferor.

Ans. Minor admitted to the benefits of partnership : In India under Section 11 of the Indian Contract Act a minor cannot enter into contract as the contract of a minor is void [vide Mohori Bibi v. Dharmodas Ghosh (1903) 30 Cal. 539]. Partnership is the result of a contract (Section 4), therefore a minor cannot be a partner in the real meaning of the term. Section 30(1) of the Act, however, lays down that a minor may not be a partner in a firm but he can certainly be admitted to the benefits of partnership with the consent of all the existing partners. Sub-section (5) further provides that on attaining majority, a minor, who has been admitted to the benefits of partnership, may elect to become or not to become a partner in the firm and give a public notice of his choice. But if he fails to give such a notice within six months of his attaining majority, or of his obtaining the knowledge that he had been admitted to the benefits of partnership (whichever date is later), he ipso facto becomes a partner in the firm. The rights and liabilities of a minor admitted to the benefits of partnership are

(1) Rights. (i) He is entitled to such share of the property and of the profits of the firm as may be agreed upon between the adult partners at the time of his admission.

(ii) He has a right to have access to and inspect and copy out the accounts of the firm. (Sub-section 2).

(iii) He cannot sue the partners for the account or payment of his share of the property or profits of the firm except when he wishes to sever his connection with the firm and in such a case his share will be determined in accordance with the rule laid down in section 48.

(2) Liabilities. - He is not personally liable for any act of the firm nor his separate property is liable. His liability extends only to the extent of his share in the property and profits of the firm (Sub-section 3). But if a minor on attaining majority elects to become a partner or allows six months to elapse without giving a public notice that he has elected not to become partner, he becomes personally liable for all acts of firm done since he was admitted to benefits of the firm (Sub-Section 7). If on the other hand, he on attaining majority elects not to become a partner then his rights and liabilities shall continue to be those of minor upto the date on which he gives a public notice of his election not to become partner and his share of the property and of profits in the firm shall not be liable for acts of firm done after the date of notice (Sub-section 8).

Ans. Introduction of a partner. - Partnership is a contractual relation and is based on mutual trust and confidence. Section 31 of the Act lays down that no person shall be introduced as a partner into a firm without the consent of all the existing partners unless there is an agreement between the partners that one or more of them shall have the right to introduce a new partner at any time without consulting others. Therefore, a new partner can be introduced either with the consent of all the partners or by a previous agreement between the partners to that effect. An exception has, however, been made in the case of a minor admitted to the benefits of partnership who elects to become a partner on attaining majority because the other partners have previously consented to his admission to such benefits. (Section 30).

Liability of an incoming partner. - Generally speaking, an incoming partner is liable only for those acts of the firm which are done subsequent to his becoming a partner and he is not liable for acts done prior to his admission as a partner.

Sub-section (2) of Section 31 of Act says - "Subject to provisions of Section 30 a person who is introduced as a partner into a firm does not thereby become liable for any act of firm done before he became a partner."

So a partner newly inducted in a firm is not liable for any act of firm done before his joining in the firm as partner however new partner may agree with his partners to be liable for debts of firm incurred up to the date of admission for this a complete novation is to be carried out and firm will be re-constituted. Two thins are required to be then proved :-

Firstly - New partner in re-constituted firm must have assumed the liability for past debts

Secondly - Creditor should be duly informed of the new arrangement

Then a new partner becomes liable to creditors who have expressly or impliedly accepted the new arrangement.

Ans. Section 25 of Indian Partnership Act gives a general rule that "Every partner is liable jointly and severally for all acts of the firm done, while he is a partner."

So every partner of the firm remains liable for all acts of the firm done while he was partner and when a partner retires from the firm, he shall be liable for all acts of firm done before his retirement. However Section 32(2) of Act provide a mode by which retiring partner may be discharged from any liability to third party for acts of firm done before his retirement. Section 32(2) of Act provides:

"A retiring partner may be discharged from any liability to third party for acts of firm done before his retirement by an agreement made by him with such third party and partners of reconstituted firm and such agreement may be implied by course of dealings between such third party and the reconstituted firm after he had knowledge of the retirement."

So what Section 32(2) of Act says that when a partner retires from the firm, such retiring partner can be discharged from liability to third party for acts of firm done before his retirement by an agreement made by him with such third party and continuing partners in the firm. Such agreement may be expressed or implied by course dealing between such third party and partners of reconstituted firm after the knowledge of retirement of a partner. So agreement as contemplated by Section 32(2) must be with third party as well as with continuing partners. If there is an agreement only with continuing partners, then still third party (or any creditor) who do not have notice of retirement, can enforce the liability against retired partner along with partners of reconstituted firm.

To obtain the release from creditors for any liability incurred before retirement also a complete novation is to be proved which involves (i) Continuing partners must have agreed with retiring partner to release or discharge him from existing debts and liabilities and (ii) Creditors should be informed of the retirement of partner and of new arrangement.

Coming now to case in hand, `C' on his retirement from the firm, might have an agreement with continuing partners (A and B) but no notice of such retirement and also of agreement of C with A and B was given to creditor `D', therefore even if C has retired is liable with A and B for the liability incurred by all partners A, B and C qua D before retirement of C and thus C is liable.

Ans. Modes of Retirement :-

A partner may retire from a firm in any of following ways.

1. By Consent. (Section 32) A partner may retire at any time with consent of all his partners.

2. By Agreement. (Section 32) Where there is an agreement between the partners about retirement, a partner may retire in accordance with terms of that agreement.

3. By Notice. Where a partnership is at will as defined under section 7 of Act, a partner may retire by giving to his partners a notice of his intention to retire.

4. By Expulsion Section 33 of Indian partnership Act says -

Expulsion of a partner. - (1) A partner may not be expelled from a firm by any majority of the partners, save in the exercise in good faith of powers conferred by contract between the partners.

(2) The provisions of sub-sections (2), (3) and (4) of Section 32 shall apply to an expelled partner as if he were a retired partner.

So ordinarily a partner cannot be expelled from firm by any majority of partners unless act of expulsion of partner is done in exercise of power, in good faith by contract between partners. When a partner is expelled he shall be treated as retiring partner so far as provisions of section 32(2), (3) and (4).

5. By Death [Section 35]. - A partner ceases to be a partner on his death.

6. By Insolvency [Section 34]. - When a partner is declared insolvent he ceases to be a partner from the date of his insolvency, whether the firm is dissolved or not.

Liability of Retired Partner 1. Liability for Acts done before Retirement [Section 32(2)]. - A retired partner remains liable to the creditors for the acts of the firm done before and up to the date of his retirement. However, Section 32(2) suggests a way out.

Section 32(2) "A retiring partner may be discharged from any liability to any third party for acts of the firm done before his retirement by an agreement made by him with such third party and the partners of the reconstituted firm, and such agreement may be implied by course of dealing between such third party and the reconstituted firm after he had knowledge of the retirement."

In Jayantilal v. Narandas and Sons, AIR 1983 Bom 226 it was observed that to obtain a release from the creditors also, a complete notation has to be proved and this requires two things : Firstly, the remaining partners must have agreed with the retired partner to release him from the existing debts and liabilities, and secondly, the creditors should be informed of the retirement and the new arrangement and then the retired partner will be discharged from his liability to a creditor who has expressly or impliedly agreed to release the retired partner and to accept the reconstituted firm as his debtor.

2. Liability for Acts done after Retirement [Section 32(3)]. - A public notice of retirement should be given. The notice may be given either by the retired partner or by any partner of the reconstituted firm. It is in the interest of both. The consequences of default in giving public notice are two-fold, namely, holding out of the retired partner and estoppel against the firm.

(3) Notwithstanding the retirement of a partner from a firm, he and the partners continue to be liable as partners to third parties for any act done by any of them which would have been an act of the firm if done before the retirement, until public notice is given of the retirement :

Provided that a retired partner is not liable to any third party who deals with firm without knowing that he was a partner.

No public notice is however required in case of death of partner, insolvent partner and retirement of dormant partner

Rights of Outgoing Partner A retiring partner has following right :-

1. Right To Compete (Section 36) - A retired partner has right to carry on a business competing with that of firm. However, a retired partner can not :-

(a) Use the name of firm

(b) Represent himself as carrying on business of firm

(c) Solicit the customers of firm before he ceased to be a partner

However Sub-section (2) to Section 36 provides that partners in a firm may make an agreement with retiring partner that on ceasing to be a partner he will not carry on any business competing with that of firm, notwithstanding anything contained in Section 27 of Indian Contract Act such agreement is valid.

2. Right To Share Subsequent Profits - Section 37 of Indian Partnership Act says :-

37. Right of outgoing partner in certain cases to share subsequent profits. - Where any member of a firm has died or otherwise ceased to be a partner, and the surviving or continuing partners carry on the business of the firm with the property of the firm without any final settlement of accounts as between them and the outgoing partners or his estate, then, in the absence of a contract to the contrary, the outgoing partner or his estate is entitled at the option of himself or his representatives to such share of the profits made since he ceased to be a partner as may be attributable to the use of his share of the property of the firm or to interest at the rate of six per cent per annum on the amount of his share in the property of the firm :

Provided that where by contract an option is given to surviving or continuing partners to purchase the interest of a deceased or outgoing partner, and that option is duly exercised, the estate of the deceased partner, or the outgoing partner or his estate, as the case may be, is not entitled to any of the option does not in all material respects comply with the terms thereof, he is liable to account under the foregoing provisions of this section.

Ans. Sub-section (3) of Section 32 of Indian Partnership Act says "Notwithstanding the Retirement of a partner from a firm, he and the partners continue to be liable as partner to third parties for any act done by any of them which would have been an act of the firm if done before retirement until public notice is given of the retirement.

Provided that a retired partner is not liable to any third party who deals with the firm without knowing that he was a partner."

So the effect of Section 32(3) of Act is that when a partner retires from firm, a public notice of retirement of such partner is necessary in order to avoid liability by holding out for any act of continuing or remaining partners which would have been the act of firm if done before retirement. However public notice need not to be given in case of sleeping or dormant partner.

Therefore in case in hand, C was a sleeping partner of A and B, therefore retirement of C from the firm without public notice will not make C liable for debts incurred by A and B subsequent to C's retirement in view of proviso to Section 32(3) of Act.

Ans. MODES OF DISSOLUTION OF PARTNERSHIP: A firm may be dissolved in the following ways:

(1) By Agreement (Section 40)

(2) By Compulsory dissolution (Section 41)

(3) On happening of Certain Contingencies (Section 42)

(4) By Notice (Section 43)

(5) By Court (Section 44)

1. Dissolution by agreement (Section 40) : A firm may be dissolved either:

(i) With the consent of all the partners, or

(ii) In accordance with a contract between the partners.

As partners can create partnership by making a contract as between themselves, they are also similarly free to end this relationship and thereby dissolve the firm by their mutual consent. When all the partners so agree they may dissolve the firm at any time they like.

2. Compulsory dissolution (Section 41) : Section 41 mentions certain events on the happening of which there is compulsory dissolution of the firm.

According to Section 41, Compulsory dissolution occurs under following circumstances:

(i) When all the partners or all except one are adjudicated insolvent, the firm is compulsorily dissolved.

(ii) If the business of the firm though lawful when the firm came into existence, subsequently becomes unlawful there has to be dissolution of the firm.

If the firm was carrying on more than one adventures or undertakings the illegality of one or more of them shall not of itself result in the dissolution of the firm in respect of those adventures or undertakings which are still lawful.

There is also compulsory dissolution of the firm if some event happens because of which it becomes unlawful for the partners to continue as partners with each other.

3. Dissolution on happening of certain contingencies (Section 42) : Section 42 mentions certain contingencies on the happening of which the firm is dissolved unless there is a contract to the contrary. Unlike the dissolution under Section 41, which is compulsory, the dissolution contemplated under Section 42 is not compulsory. Even on the happening of the contingencies mentioned in Section 42, partners may agree that the firm will not be dissolved but the business of the firm will be continued as before. The contingencies mentioned in the section are:

(i) Expiration of the partnership term,

(ii) Completion of the adventure,

(iii) Death of a partner and;

(iv) Insolvency of a partner.

4. Dissolution by notice in partnership at will (Section 43) : When the partnership is at will as defined in Section 7, the partners are not bound to remain as partners or continue the partnership for any fixed period. According to Section 43 such a firm may be dissolved by any partner giving notice in writing to all the other partners of his intention to dissolve the firm. The notice must clearly and in unambiguous terms indicate the intention of the partner giving notice to dissolve the firm. Dissolution by a notice under this section will be valid even though one of the partners to whom the notice is given is insane. (Melleresh v. Keen, 1859 27 Beav. 236).

5. Dissolution by the Court : Section 44 mentions certain grounds on which a suit can be filed for the dissolution of a firm. The provision is as follows:

At the suit of a partner, the Court may dissolve a firm on any of the following grounds namely

(a) That a partner has become of unsound mind in which case the suit may be brought as well by the next friend of the partner who has become of unsound mind as by any other partner;

(b) that a partner, other than the partner suing, has become in any way permanently incapable of performing his duties as partner;

(c) that a partner, other than the partner suing, is guilty of conduct which is likely to affect prejudicially the carrying on of the business, regard being had to the nature of the business;

(d) That a partner, other than the partner suing, wilfully or persistently commits breach of agreement relating to the management of the affairs of the firm or the conduct of its business, or otherwise so conducts himself in matters relating to the business that it is not reasonably practicable for the other partners to carry on the business in partnership with him;

(e) That a partner, other than the partner suing, has in any way transferred the whole of his interest in the firm to a third party, or has allowed his share to be charged under the provisions of Rule 49 of Order XXI of the First Schedule to the Code of the Civil Procedure, 1908 or has allowed it to be sold in the recovery of arrears of land revenue or of any dues recoverable as arrears of land revenue due by the partner;

(f) that the business of the firm cannot be carried on save at a loss, or

(g) on any other ground which renders it just and equitable that the firm should be dissolved.

Ans. Section 39 of Indian Partnership Act provides that "the dissolution of partnership between all the partners of a firm is called the "dissolution of the firm."

So dissolution of partnership means complete breakdown of relation of partnership between all the partners. It means severance of relation which law of partnership had created for them. However dissolution does not immediately end partnership.

Section 45 of Act says notwithstanding the dissolution of firm the partners continue to be liable as such to third parties for act done by any of them which would have been the act of firm if done before the dissolution until public notice of dissolution is given. However this principle does not apply to the case of deceased partner, insolvent partner or in case of sleeping partner or dormant partner.

Then Section 47 of Act further provides that notwithstanding the dissolution of firm, the authority of partners to bind the firm and other mutual rights and obligations of partners continue, so far as may be necessary to wind up the affairs of the firm and to complete unfinished transactions. So the authority of each partner to bind the firm by acts done in course of winding up the business extends to the pledging the assets of firm to secure the debts or to pay cash in hand for payment of pending bills and to satisfy the claims of creditors, even after dissolution of firm.

In the case of Saligram Ruplal Khanna v. Kanwar Rajnath, A.I.R. 1974 S.C. 1094 there was a partnership dated 30th August, 1952 constituted for a period of 5 years. The firm got dissolved and was subsisting after August 30, 1957 which was the date on which the period of 5 years for which the partnership had been formed came to an end. But there was a transaction of arbitration proceedings, which had been begun but remained unfinished at the time of dissolution. One of the partners gave his consent on behalf of the firm after the date of dissolution to the award given by the arbitrator against the firm. Held that the partner could do so, as it was a necessary step in connection with the adjudication of a dispute to which the firm before its dissolution was a party.

So in view of provisions of Sections 45 and 47 of Act, dissolution of firm does not end the partnership immediately.

Ans. Where any partner of a firm is adjudged as an insolvent or bankrupt, the partnership firm stands dissolved from the date of insolvency or bankruptcy of a partner. Section 42(d) of Partnership Act says, "subject to contract between the partners a firm is dissolved by the adjudication of a partner as an insolvent."

Section 45 of Act then provide "Notwithstanding the dissolution of a firm, the partners continue to be liable as such to third parties for any act done by them which would have been an act of the firm if done before the dissolution until public notice is given of the dissolution. However proviso to Section 45 of Act says estate of insolvent partner shall not be liable under Section 45 for acts done after the date on which he ceases to be partner. Then Section 47 of Act provides as to continuing authority of partners for the purpose of winding up. Section 47 says that notwithstanding the dissolution of a firm, the authority of each partner to bind the firm and other mutual rights and obligations of the partners continue so far as may be necessary to wind up the affairs of the firm and to complete unfinished transactions." So dissolution of firm causes dissolution of partnership between all partners and mutual rights and obligations of partners come to end. However Section 47 of Act makes it clear that dissolution by itself does not cease each partner's authority to bind the firm but it continues even after dissolution. However such authority to act for the firm and to bind the firm will be confined only for purpose of winding up the affairs of firm and to complete transactions begun but not finished at the time of dissolution. So the authority of every partner to bind the firm by acts done in course of winding up the business also extends to the pledging the assets of firm to secure debts or to pay the cash in hand for payment of pending bills or to satisfy the claims of creditors. All such acts shall bind the each partner.

The proviso to Section 47 provides that the firm in dissolution would not be liable for the acts of any partner who has been adjudicated insolvent. But proviso does not affect the liability of any person who represents or knowingly permits himself to be partner of the insolvent. In the case in hand, the firm stood dissolved upon the bankruptcy of A. B had continued to carry on the business of firm apparently with a view to wind up the affairs of firm. During such subsequent conduct the liability was incurred to meet the current bills of firm. The bank is entitled to claim money against the receiver in bankruptcy. See Fox v. Hanubury (1776) Cowp. 445.

Ans. Section 51 of Partnership Act provides

"Where a partner has paid a premium on entering into partnership for a fixed term, and the firm is dissolved before the expiration of that term otherwise than by the death of a partners, he shall be entitled to repayment of premium or of such part thereof as may be reasonable, regard being had to the terms upon which he became a partner and to length of time during which he was a partner unless:

(a) Dissolution is mainly due to his own misconduct.

(b) Dissolution is in pursuance of an agreement containing no provision for return of the premium or any part of it."

Sometime a person, on his admission in an established firm as a partner, is required to pay a sum of money to old partners as a premium for admission. So premium ordinarily means consideration. It is a price, which a new incoming partner pays as a kind of compensation to old partners for goodwill they have created and of which new partner will enjoy benefits. A new partner pays it in the hope that the term shall continue to exist and he shall enjoy fruits of its goodwill. But if firm is prematurely dissolved, the question of refund of premium arises. As Lindley has observed "The consideration for premium is not only the creation of partnership but also the continuance of that partnership."

So Section 51 of Act says where partner has paid premium for entering into already established firm for fixed firm but firm is dissolved (otherwise than by death) before expiration of that term then such premium or part thereof shall be refunded and refundable amount is calculated by taking into account the period for which firm was constituted and period for which it remained in existence after the admission of such new partner. However Section 51 of Act says no refund is possible:

(A) Where firm is not constituted for fixed period.

(B) Where firm is dissolved due to death of a partner.

(C) Where dissolution of firm is due to misconduct of such new partner.

(D) Where dissolution is in pursuance of an agreement which contains no provision for return of premium or any part of it.

In case in hand A and B entered into partnership for period of 15 years and B paid premium of Rs. 16000. Long before expiration of 15 years, firm stand dissolved due to bankruptcy of A. Therefore B is entitled to refund proportionate amount of premium.

Ans. Section 13 of Partnership Act provide general duties of partner inter se and lays down "Subject to the contract between partners, a partner shall indemnify the firm for any loss caused to it by his wilful neglect in the conduct of the business of firm."

In the case in hand, partnership firm was dissolved and B was winding up the affairs of firm. Although at the dissolution of firm mutual rights and obligations of partners inter se cease but partner's authority to act for the firm and to bind the firm and copartners continues even after dissolution for winding up the affairs of firm and to finish unfinished transactions. Section 47 of Act provide in this regard as "After the dissolution of firm the authority of each partner to bind the firm and the other mutual rights and obligations of the partners continue, notwithstanding the dissolution, so far as may be necessary to wind up the affairs of the firm and to complete transactions begun but unfinished at the time of dissolution but not otherwise."

In case in hand B was winding up the affairs of firm after dissolution. `B' was in view of Section 47 of Act bound to indemnify the firm for loss sustained by it because of his negligence in winding up the affairs of firm. Therefore loss sustained by firm due to postponement of sale of bales of cotton at lower price will be borne by `B'.

Ans. Section 42(c) of Partnership Act provides "Subject to contract between the partners a firm is dissolved:

(c) by death of a partner...."

Section 31 of Act deal with introduction of a partner and lays down -

(1) subject to contract between the partners and to the provisions of Section 30, no person shall be introduced as partner into a firm without the consent of all existing partners.

(2) subject to the provisions of Section 30, a person who is introduced as partner into a firm does not thereby become liable for any act of the firm done before he become a partner."

So what Clause (c) of Section 42 of Act says that death of a partner in a firm, is a ground for dissolution of firm, however this rule is subject to any contract to contrary between partners. That means if partners have decided earlier in their deed or contract that death of a partner will not result in dissolution of firm. But Section 42(c) of Act has no application in case of firm, which consists of two partners. In that case, death of one partner will dissolve the firm despite an agreement to contrary. So when there is a firm in which there are more than two partners, then death of one partner may not dissolve the firm if there was a contract between partners that death of a partner will not dissolve partnership.

Problem in hand also came before Apex Court in Commission of I.T. v. Seth Govindhan Sugar Mills AIR 1996 SC 24. Supreme Court held "Partnership under Section 4 of Act is a relation between persons who have agreed to share profits of business carried on by all or any of them acting for all. Section 5 of Act says that relation of partnership arises from contract and not from status. Fundamental principle of partnership therefore is that partnership relation arises out of contract and not from status. Section 42(c) of Act can appropriately be applied to partnership where there are more than two partners, if one of them dies, firm is dissolved but if there is contract to contrary then surviving partners will continue with the firm, on the other hand if one out of two partners of firm dies, firm automatically comes to an end and therefore there is no partnership so as to introduce any partner, therefore Sections 42(c) and 31 are not applicable.

In view of the above discussion, Income Tax Authority was justified in the case in hand to refuse registration of firm.

Ans. Section 63 of Indian Partnership Act says:

(1) When a change occurs in the constitution of a Registered firm, any incoming, continuing or outgoing partner and when a registered firm is dissolved, any person who was a partner immediately before the dissolution or the agent of any such partner or person specially authorised in this behalf may give notice to the Registrar of such change or dissolution, specifying the date thereof and the Registrar shall make a record of notice in the entry relating to the firm in the Register of firms and shall file the notice along with statement relating to the firm filed under Section 59."

Sub-section (2) of Section 63 then provides regarding entry of notice given by a minor who was admitted to benefits of firm, on his attaining majority as to his choice to become or not to become partner in firm.

So what Section 63 provide is that whenever there is any change in the constitution of a registered firm, then such change must be notified to Registrar so that he may make entry to that effect in statement which was filed under Section 59 for Registration of firm.

Section 69 of Act, deals with effect of non-registration of a firm. Sub-section (2) of Section 69 says "No suit to enforce a right arising from a contract shall be instituted in any court by or on behalf of a firm against any third party unless the firm is registered and the persons suing are or have been shown in the Register of Firms as partners in the firm." So Section 69(2) of Act requires that for filing suit to enforce any right arising from a contract against third party it is necessary that (A) Firm should be registered and (B) Person suing should be shown as partner in register of firms. Section 69 of Act does not require that if firm which is registered already if has changed its constitution or for example a new partner has been inducted in a registered firm, then fresh registration is necessary. Although requirement of Section 63 of Act has to be complied with but if a firm is already registered and one of its partners dies and son of such deceased partner is inducted into the firm that does not mean that firm has become unregistered and a fresh registration is necessary, only requirement is to comply with provisions of Section 63 of Act and notify any such changes in the constitution of firm to Registrar of firm.

Therefore in case in hand suit by firm against `X' is maintainable.

Ans. The Indian Partnership Act does not make registration of a firm compulsory nor does it impose any penalty for non-registration. It is left entirely to the option of firm and partners to get themselves registered. But by providing certain disabilities Section 69 renders the registration of partnership necessary.

Legal consequences of Non-Registration of a firm. Section 69 of the Partnership Act, mentions the consequences of non-registration of a firm as follows:

(1) No suit to enforce a right arising from a contract by this Act, shall be instituted in any court by or on behalf of any person suing as a partner in a firm against the firm or any person alleged to be or to have been a partner in the unless the firm is registered and the persons suing are or have been shown in the Register of Firms as partners in the firm.

(2) The provisions of sub-sections (1) and (2) shall apply also to a claim of setoff or other proceedings to enforce a right arising from a contract, but shall not affect :

(a) The enforcement of any right to sue for the dissolution of a firm or for accounts of a dissolved firm or any right or power to realize the property of a dissolved firm, or

(b) the powers of an official assignee, receiver or Court under the Presidency Towns Insolvency Act, 1919, or the Provincial Insolvency Act 1920, to realize the property of an insolvent partner.

(3) This section shall not apply :

(a) to firms or to partners in firms which have no place of business in the territories to which this Act extends or whose places of business in the said territories are situated in areas, to which by notification, under section 56, this Chapter does not apply, or

(b) to any suit or claim of setoff not exceeding one hundred rupees in value which, in the Presidency towns is not of a kind specified in Section 19 of the Presidency Small Causes Courts Act, 1882, or outside the Presidency towns, is not of a kind specified in the Second Schedule of the Provincial Small Cause Courts Act, 1887 or to any proceeding in execution or other proceeding incidental to or arising any such suit or claim.

InRam Adhar v. R.K. Tiwari, AIR 1981 All. 405 it was held Registration of firm though not compulsory and nor there is any penalty for non-registration of a firm yet Section 69 of Act cut short the capacity of unregistered firm and its partner to sue. This disability is too great compelling force to bring the firm to registration.

Ans. Section 69 of Indian Partnership Act deals with consequences of non-registration of Partnership Firm. Sub-section (1) of Section 69 of the Act provides no person who is partner of an unregistered firm can institute a suit in court to enforce any right arising from a contract or conferred by the Act against the Firm or any person alleged to be or have been partner in the firm unless the firm is registered or person suing is or has been shown in register of firm as partner in the firm. "Sub-section (2) of Section 69 of Act then says no suit to enforce any right arising out of contract can be instituted against any third party by or on behalf of firm unless the firm is registered and the person suing is or has been shown to be partner in register of firms."

Section 69(3) of Act then lays down:

"Provisions of sub-sections (1) and (2) shall apply also to a claim of set off or other proceedings to enforce a right arising from a contract but shall not affect:

(a) the enforcement of any right to sue for dissolution of firm or for accounts of a dissolved firm or any rights or powers to realize the property of a dissolved firm.

(b) ..."

So it is clear that bar as contained in sub-sections (1) and (2) of Section 69 does affect the suit for dissolution of firm or suit for accounts or to enforce any right or power to realize the property of dissolved firm.

In Vanshi Lal v. Jamuna Prasad AIR 1981 All. 325 the partnership firm was unregistered, after having done the business for few years, firm was dissolved. Plaintiff being partner filed suit for realization of capital and for share in profit, after the dissolution. It was contended that firm was unregistered, therefore suit can not be maintained, it was held that suit was accounts for dissolved firm and thus maintainable.

In Kanji Lal Jetha Mal Gandhi v. Ghanshyam Ratilal Vyas AIR 1994 Gujarat 56 it was held bar under section 69(1) and (2) does not operate against suit for recovery of debt due and payable to an unregistered dissolved firm.

So disabilities as contained in Section 69(1) and (2) of Act in respect of unregistered firm shall not affect the right to:

(A) Sue for dissolution of firm.

(B) Sue for accounts of dissolved firm.

(C) Sue for right and power to realize the property of dissolved firm.

Expression "Property of Dissolved Firm" thus includes price of goods supplied before dissolution. Therefore suit in case in hand is maintainable.

Ans. Section 69 of Indian Partnership Act deals with the consequences of non- registration of a partnership firm. Sub-section (1) of Section 69 of Act says "No suit to enforce a right arising from a contract or conferred by this Act shall be instituted in any court by or on behalf of any person suing as a partner in a firm against the firm or any person alleged to be or have been a partner in the firm unless the firm is registered and the person suing is or has been shown in the register of firm as a partner in the firm."

In the case in hand `A', `B' and `C' are partners in an unregistered firm, therefore in suit for declaration that he has been wrongly expelled from the firm and that he continues to be partner in firm is not maintainable in view of Section 69(1) of Act. However clause (a) of sub-section (3) to Section 69 of Act provides that provisions of Section 69(1) shall not affect the enforcement of any right to sue for dissolution of firm or for accounts of dissolved firm. Therefore only remedy available for A is to sue for dissolution of firm and for accounts of dissolved firm even if the firm is unregistered.