STUDY MATERIAL ON

PARTNERSHIP ACT, 1932

Nature of Partnership
 It is the result of an agreement, not status
(such as family business, etc.)
 It is organized to carry on a business.
 Partners agree to share the profits of the
business.
 Business to be carried on by all or any of
them acting for all.
 Only persons can become partners. Hindu
Undivided Family is not a person and
cannot be a partner. (Rahiklal & Co. v.
CIT, (1998) 2 SCC 49: AIR 1998 SC 401)
A partnership firm has no existence of its own. It
cannot be recognized as an entity distinct from the
members composing it.
 Employees State Insurance Corpn v. Ramanuja
Match Industries, (1985) 1 SCC 218: AIR 1985
SC 278: A firm not being a corporate entity its
partners are not its employees even if they are
drawing remuneration for their services.
 A formal written agreement (deed of partnership)
is not always necessary to bring a partnership into
existence.
 An agreement to create a partnership may also be
implied by the conduct of the parties.
 K.T. Abdul Badshah Saheb v. Century Wood
Industries (A.S.C.U.), AIR 1954 Mys 33: Two
brothers living together inherited certain
properties on the death of their father.
 They did not divide the properties. Rather, they
sold a garden of theirs and invested the sum in a
separate timber business.
 There was no formal partnership agreement, but
it appeared that they intended to share profits.
 The business failed before any profit could be
made and question of payment of liabilities arose.
 It was held that they must bear the liabilities as
partners.
What does “Business”
mean?
 Smith v. Anderson, (1880) 15 Ch D 247, JAMES
LJ: The term business must be taken in a practical
sense, that is, in a sense in which men of business
would use the term.
 It is taken to refer to any activity which if successful
would result in profit.
 Where certain persons joined in the purchase of
wheat and oil with the intention of dividing and
paying for it equally, it was held that, they not being
interested in profit or loss, were not partners.
[(Gibsan v. Lupton, (1832) 2 LJ CP 4)] [(Coope
v. Eyre, (1788) 2 RR 706)]
 Whether temporary or permanent, the business must
be in existence.
 An agreement to carry on business at a future time
does not result in present partnership.
 Cox v. Hickman, (1860) 8 HLC 268 (the
jurisprudence of Mutual Agency behind
partnership – landmark judgment)
S and S were iron merchants in partnership. They became
financially weak and, therefore, made a compromise with their
creditors.
 Under the compromise the property of the firm was assigned to a
few creditors selected as trustees.
 They were empowered to carry on the business, to divide the net
income among the creditors in a rateable proportion and after the
debts had been discharged, the business was to be returned to S
and S.
 Cox was one of the trustees although he never acted. The other
trustees continued the business.
 They purchased a quantity of coke from the plaintiff, Hickman, and
gave him a bill of exchange for the price. The bill remaining unpaid.
 Hickman brought an action against the trustees, including Cox, for
the price.
 It was held that they were not partners and, therefore, Cox, was not
liable.
 The creditors, instead of taking legal proceedings, came to an
agreement about the way in which their claims should be satisfied.
Judgment in Cox v.
Hickman
 “The liability of one partner for the acts of his co-partner is in
truth the liability of a principal for the acts of his agent.” –
LORD CRANWORTH
 “Where two or more persons are engaged as partners in any
ordinary trade, each of them has an implied authority from
the other to bind all by contracts entered into according to
the usual course of business in that trade.” – LORD
CRANWORTH
 According to this decision, no man is a partner unless he has
the right to share the profits or participate in the profits of the
business.
 But every man who received profits is not necessarily a
partner. Thus, sharing of profits is only a prima facie evidence
of the existence of partnership. The conclusive test is that of
mutual agency.
 The rule doesn’t insist upon sharing of loss. Thus, a provision
for loss sharing is not essential.
Partnership v. Co-
ownership
Partnership
Arises only by agreement
Business is necessary for its
existence
Partners are mutual agents
Partner cannot sell his share
without the consent of other
partners
Partner can sue his co-
partners for dissolution and
accounts
Co-ownership
May arise in any other way
It can exist without business
Co-owners are not
Co-owner can do so without
the consent of the other co-
owner
Co-owner can sue for partition
of the joint estate
Partnership v. Joint Family
Partnership
It cannot arise in absence of
a contract
A new partner cannot be
admitted into a partnership
except with the consent of
all the partners
Partners are mutual agents
Every partner has an
unlimited capacity to bind
his co-partners into liability
for trade obligations
Liability of a partner is
personal as well as joint
Joint Family
It always arises by operation
of law and not by contract
A person becomes the
member of the joint family
and gets an equal share in
assets and profits by mere
fact of birth
Family members are not;
karta of a Hindu Undivided
Family family is the only
representative of the family
Members of a family do not
have this power
A member is not personally
liable for business
Partnership v. Company
Partnership
It is a collection or an
aggregate of the partners
Liability of partners is
unlimited
Partners cannot transfer their
shares without the consent of
all the partners
Registration is optional
Company
It is legal person; a distinct
entity from its members
Liability of members is limited
to their investment in the
company
Shares of a company are
freely transferable
Registration is compulsory for
incorporation
DUTIES OF PARTNERS (All duties emerge from a
common principle of utmost good faith)

Duty of Good Faith [Sec. 9]

Duty not to Compete [Sec. 16(b)]
Due Diligence [Sec. 12(b) & Sec.
13(f)]
Duty to render True Accounts
[Sec. 9]
Duty to Indemnify for Fraud [Sec.
10]
Proper use of Property [Sec. 15]
Duty to account for Personal
 Bentley v. Craven, (1853) 18 Beav 75: 104
RR 373: A partner in a firm of sugar refiners,
who had great skill in buying sugar at the right
time, was entrusted to buy sugar for the firm.
 He supplied sugar from his personal stock, which
he had bought earlier when the prices were low.
 He charged the prevailing market price and thus
made a considerable profit.
 When his co-partners discovered this, they
brought an action for an account of the profit.
 The firm was held entitled to that profit.
 Pulin v. Mahendra, (1921) 34 Cal LJ 405: A
partnership was founded between certain
persons for importing salt from foreign
countries and to resell the same in Chittagong.
 One of the partners, while operating to buy
salt for the firm, bought some quantity for
himself and resold on his personal account.
 He was held liable to account for this profit to
his co-partners, as the opportunity make such
profit came his way while he was on the
business of the firm.
 A partner, may, however, carry on any
personal work which is outside the scope of
the partnership business.
Ifa partner is guilty of negligence
which is of a degree of “wilful” or
“culpable” negligence and
consequently the firm suffers a
loss, he would be bound to
indemnify the firm for the same.
RIGHTS OF THE PARTNERS
Right to take part in Business [Sec.
12(a)]
Right to express Opinion in matters
relating to Business 12(c)]
Access to Books [Sec. 12(d)]
Right to Remuneration [Sec. 13(a)]
Right to Profits [Sec. 13(b)]
Right to Indemnity [Sec. 13(e)]
Right to Interest [Sec. 13(c) and Sec.
13(d)]
 DIFFERENCES AMONG PARTNERS
 Ifthe partners are divided over an ordinary
matter (such as introduction of
partner’s son into the business)
connected with the business, the same may
be settled by a majority of the partners.
 Where the difference of opinion related to a
fundamental matter (changing the
nature of business of the firm) then the
consent of all partners become necessary.
However, the partnership deed may provide
for majority in fundamental matters as well.
PARTNERSHIP PROPERTY (Sec.
14)
A partnership, not being a legal person, is not
capable of owning any property and the so-called
property of the firm is nothing but the joint estate of
all the partners.
 However, none of the partners can claim any
personal ownership over any item.
 Broadway Centre v. Gopaldas Bagri, AIR 2002
Cal 78: A partner purchased a property at a court
sale and brought into the stock of partnership in
terms of the registered partnership agreement.
 He and his other partners contributed the necessary
amount for paying off the price.
 The court said that the property had become a
property of the firm.
Partner’s Property in
Firm’s Use
 Where the personal property of a partner is being
used in the business of the firm, it is a question of
fact to be determined by reference to the parties’
intention whether it has become the property of the
firm.
 Robinson v. Ashton, (1875) 20 Eq 25: 44 LJ
(Ch) 542: The owner of the cotton mill entered into
a partnership with two others.
 The business was carried on at his mill. The value of
the assets of the mill was credited to his capital
account and he was allowed interest on it.
 The mill was enlarged and improved by the firm and
also new buildings were erected on land acquired by
the firm.
 It was held that the mill had become the property of
the firm.
LIABILITY OF PARTNERS FOR ACTS
OF THE FIRM (MUTUAL AGENCY)
Joint and Several Liability – for every act of
the firm a partner can be sued individually
and also jointly with other partners.
The liability of partners in respect of firm’s
contracts and firm’s torts is joint and
several.
Bagel v. Miller, (1903) 2 KB 212: Goods
ordered by a firm were actually supplied
when one of the partners had died.
The estate of the deceased partners was
not held liable because no liability had
been incurred while he was a partner.
DOCTRINE OF IMPLIED
AUTHORITY (Sec. 18)
A partner is the agent of the firm for the
purposes of the business of the firm.
 Act of a partner done by him as an
agent in the usual course of business is
an anct of the firm.
 Scope of Implied authority (Sec.
19): Act of a partner which is done to
carry on the business of the firm, binds
the firm.
 Section 19(2) deals with limitations
of implied authority of a partner –
refer to the section - important
LIABILITY FOR TORTS (Sec.
26)
 A firm is liable for torts committed by a
partner in the course of business.
 Rapp v. Latham. 2 B & A 795: (1819)
21 RR 495: A firm of two partners was
retained by the plaintiff to buy and sell wine
for him on commission.
 The plaintiff left the money with the firm for
the purpose. The active partner rendered
false accounts of purchase and sale to the
plaintiff and misappropriated the money.
 The firm was held liable.
 T.N. Waterworks Co v. Jones, (1903) 2 Ch
615: J and G were two partners in a firm. G
was appointed, with the approval of the firm,
as a secretary to the plaintiff company.
 The company purchased property and for its
own convenience had it transferred to G in G’s
name and also left the title deed with him.
 G fraudulently mortgaged the property for his
personal debt.
 The other partner was not held liable for this
fraud.
 If he had misconducted himself as secretary
and caused loss to the company, the firm
would have been held liable.
 LIABILITY FOR
MISAPPROPRIATION (Sec. 27)
 The liability of the firm arises when the money or
property is received by a partner within his “apparent
authority” or by the firm “in the course of business”.
 Rhodes v. Moules, (1895) 1 Ch 236 (CA): The plaintiff
applied to R, a partner of a firm of solicitors, requesting
him to raise a loan on the mortgage of his freehold
estate.
 R obtained the loan, but falsely told the plaintiff that the
lender required some additional security.
 The plaintiff accordingly deposited with R certain share
warrants payable to the bearer/holder of those warrants.
 R promptly sold the warrants, misappropriated the
proceeds and absconded.
 R’s co-partners were held liable for the plaintiff’s loss.
 “It was certainly within the scope of solicitor’s business to
receive securities for loan, whatever be their nature.” –
LINDLEY LJ
Doctrine of Holding-Out (Sec. 28)
 Where A introduced B to C as his partner
when in fact he was not a partner.
 The fact that B stood silently made him
liable under this doctrine because by
standing silently B had held himself out as
A’s partner to C[Martyn v. Gray, (1863) 14
CB NS 824].
 Refer Section 28(1) for essence of this
doctrine.
 The doctrine doesn’t apply in case of death
of a partner. [Sec. 28(2)]
 Other exceptions to this doctrine are
insolvency and retirement of a partner.
MINOR AS PARTNER (Sec.
30)
 Partnership is a relationship that arises from
contract. A minor is incompetent to contract.
Therefore, a contract of partnership cannot be
entered into with a minor.
 The only concession Section 30 gives is that a
minor may be admitted to the benefits of an
existing firm.
 This can be done only with the consent of all the
partners.
 A partnership deed that attempts to make a
minor a full-fledged partner is invalid to that
extent. [CIT v. Shah Mohandas Sundhuram,
AIR 1966 SC 15]
 RIGHTS AND LIABILITIES OF A
MINOR
 He has the right to receive his agreed share
of the property and of profits of the firm.
 For the purpose of finding out his share, and
even otherwise, he may have access to copy
of any accounts (not books) of the firm.
 As long as he remains in the firm, he does
not have any right to sue the partners for his
share or profits.
 Minor’s share in the property and profits is
liable for the acts of the firm.
 On attaining majority he has to decide within
six months whether he shall remain in the
firm or leave it by way of a public notice.
 MODES OF RETIREMENT OF A
PARTNER
By consent [refer Sec. 31]
By agreement [refer Sec. 32]
By notice [refer Sec. 32]
By Insolvency [refer Sec. 34]
By Death [refer Sec. 35]
By Expulsion [refer Sec. 33]
RIGHTS OF OUTGOING PARTNER
 Right to Compete [refer Sec. 36]
 Right to share subsequent Profits [refer
Se. 37]
 The retiring partner does not acquire any
independent interest in the property of
the firm till the firm is dissolved and
accounts settled.
 He has right to demand settlement but no
right to interfere in matters of business.
[Rajnikant Hansmukhlal Golwala v.
Natraj Theatre, AIR 2000 Guj 80]
 DISSOLUTION OF A FIRM
 Dissolution by Agreement [Refer Sec. 40]
 Compulsory Dissolution [Refer Sec. 41]
 Contingent Dissolution [Ref Sec. 42]
 Dissolution at Will by notice [Refer Sec. 43]
 Dissolution by Court [Refer Sec. 44]
 Shreedhar Govind Kamerkar v. Yesahwant
Govind Kamerkar, (2006) 13 SCC 481:
Mere execution of a deed of dissolution does
not put an end to matters of rights and
liabilities of partners.
 That happens only when the firm is finally
wound up and its properties are distributed.
Incapacity or Illness
Whitwell v. Arthur, (1865) 35
Beav 140: (1865) 147 RR 73:
A partner suffered from an attack
of paralysis and that would have
been a good ground for
dissolution.
However, the medical evidence
showed that the attack was only
temporary in nature and he was
already improving. The firm
didn’t get dissolved.
Misconduct by Partners
 Conviction for travelling without ticket or breach of trust is
sufficient to constitute partner’s misconduct for the purpose of
dissolution under Section 44. But, misconduct in personal life may
not be so.
 Snow v. Milford, (1868) 18 LT 142: A partner of a firm of
bankers committed adultery with several women in the city where
the business was carried on and his wife had left him. The other
partners applied for dissolution on this ground.
 “However much the may reprove the conduct of a man who
is guilty of adultery, that is no reason for turning him out
of common trading partnership.” – LORD ROMILLY
 “....there are no doubt various cases in which a moral
conduct of a man would affect business, as where a
medical man had entered into a partnership with another
and it was found that his conduct was very immoral
towards some of his patients, of course, this is a ground
for putting an end to the partnership. But in the case of
bankers, how can the court say that a man’s money is less
safe because one of the partners commits adultery.”
AUTHORITY IN WINDING UP [Sec.
47]
The commence of dissolution
does not at once terminate the
authority of the partners.
The authority continues for two
purposes:
(1) So far as the authority is
necessary to wind up the affairs
of the firm; and
(2) To complete transactions begun
but not finished at the time of
AGREEMENT IN RESTRAIN OF TRADE
[Sec. 54] – Exception to Sec. 27 of
the Indian Contract Act, 1872
 Partners, may, upon or in anticipation of
dissolution, make an agreement that
some or all of them will not carry on a
business similar to that of the firm.
 The agreement shall be valid if:

(1) It specifies the period or local limits of

restraint; and
(2) The restriction imposed is reasonable
 Sale of Goodwill as any other asset of
the firm [Refer Sec. 55]
 Effects of Non-registration – very
important – [Refer Sec. 69]