Partnership LawFrequently Asked Questions on Partnership Law
"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.
(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.
"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.
Q. 6 In a memorandum of partnership among A, B and C, it is provided that A will manage the business and will be paid Rs. 2000 P.M. but shall have no share in profits of the firm. In a suit for dissolution, A declines any liability for losses and asserts that he was not partner in the firm. Determine the validity of plea raised by him.
(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.
Q. 7 Undivided member of Hindu Undivided Family formed a partnership with the karta of same Hindu Undivided Family for carrying on business of mechanical engineering and to divide its profit equally. Contribution of his labour and skill was to be his share in the capital of the firm. State if these facts constitute a valid partnership satisfying the requirement of law in this connection.
(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.
(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.
Q. 12 `A' owner of a cinema hall entered into partnership with `B' for business of exhibiting films. Films of partnership were continuously exhibited in said cinema hall. In the account books the said cinema hall was never shown as property of partnership. In a suit for rendition of accounts `B' claimed the said cinema hall as partnership property, which claim was disputed by `A'. Decide.
(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.
"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.
(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."
Q. 16 `A' executed a promissory note describing himself as `Proprietor, M/s Arora and Sons' in favour of `B'. B filed the suit for recovery of amount on the basis of said promissory note against partnership firm M/s Arora and Sons and its two partners including `A'. Plea was taken that the firm and other partner were not liable to pay the amount. Decide.
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.
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.
(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.
Firstly - New partner in re-constituted firm must have assumed the liability for past debts
Secondly - Creditor should be duly informed of the new arrangementThen a new partner becomes liable to creditors who have expressly or impliedly accepted the new arrangement.
"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.
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 partnerHowever 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.
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.
(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.
(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.
Q. 29 A and B were partners, the latter being the managing partner. The partnership was dissolved and its winding up devolved on B. Part of assets consisted of bales of cotton. `A' requested `B' to sell these bales immediately. B delayed in selling them with the result that they were ultimately sold at much lower price that they would have fetched if sold when `A' desired. `A' contended that the loss sustained by the postponement of sale ought to be borne by B alone. Decide.
Q. 30 In the year 1970 Ram and Shyam entered into a partnership. They agreed that if any one of them died, the firm would not be dissolved but the eldest child of the deceased partner would be taken as partner in the firm. Shyam died in 1975. His son Kumar was taken as the partner. In the year 1976, they applied for registration of firm with Income Tax authorities but I.T.O. refused to register their firm on the ground that on the death of Shyam, firm was dissolved, Ram and Kumar cannot be treated as partners. Ram relied on Sections 42(c) and 31 of Partnership Act. Do these provisions help for registration of firm ?
(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.
Q. 31 A and B were partners in a registered firm. On the death of B his son C was inducted in the firm and this fact was not notified to the Registrar of firms. In a suit filed by the firm against `X' a debtor of the firm, it was contended that the firm was not validly registered. `A' immediately thereupon notified to the Registrar the induction of C in the firm in place of his father B. Is the suit filed by the firm prior to the intimation of change in the constitution of partnership to the Registrar, maintainable ?
(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.
(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.
"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.