LAW OF PARTNERSHIP

SHRADHA BARANWAL
FACULTY (COLS)
UPES, 2012-2013
• Superseded the earlier law relating to partnership
contained in the Indian Contract Act, 1872
• Governed by General principles of Contract Act.
• Derived from English Partnership Act, 1890

Nature of Partnership
Sec. 2 – definition
2(a) ‘act of firm’ – includes omission/commission, either
by firm, a partner individually
2(b) business – trade, occupation, profession
2(c) prescribed – ‘prescribed under the Act’
2(d) third party – any person other than partner
Why partnership –
• Improvement over sole trade business
• Alternate to company ventures

Sec. 4
Partnership is the relation between person who have
agreed to share the profit of business carried on by all
or any of them acting for all.
Persons who have entered into partnership with one
another are called individually partners and collectively
a firm and the name under which their business is
carried on is called the firm name.
 Section 4 of Partnership Act v. section 239 of
Indian Contract Act (repealed)
239 – Talks about contributing property, skill,
labour + sharing of profit

4 – restricted it to profit only. Thus treats

contribution as subsidiary

239 did not talk about mutual agency whereas

section 4 takes into consideration agency – ‘one
acting for all’
 Essential features of partnership
1. Partnership is the relation between the parties
2. Arises out of agreement
3. Aimed to carry on a business
4. Members agree to share the profit
5. Element of agency

Relation between persons

• Partnership does not arise out of status (Sec. 5)
• requires two persons at least – natural or artificial
• Parties should be competent (Refer section 11 of
ICA)
Partnership firm is not a legal entity and hence not
entitled to enter into a partnership.
One person can be a partner at the same time in
more than one firm.

Agreement
Partnership can only arise out of agreement –
express/implied written/oral or may be inferred
from the conduct of the parties.
Lakshmibai v. Roshan Lal AIR 1972 Raj. 288
Partners in construction work/ by virtue of oral
agreement
• Defendant contended that there is only debtor and
creditor relationship
• Plaintiff contended that he was entitled to profits and
liable to contribute
The Court held,
Mere use of words ‘partner’ or ‘partnership’ in an
agreement does not necessarily show that there is a
partnership

Decision
Held that there is partnership on the basis of
corroborative evidence
Carrying on of business
• Includes trade, profession, occupation – all refers to joint
operation for gain.
• Continuity in the business v. partnership for a single
transaction (Sec. 8)

Present partnership for future transaction –

R.R. Sarna v. Reuben AIR 1946 Oudh 68

• Money was deposited to obtain license for production of
electricity.
• After refusal plaintiff claimed the deposit amount whereas
defendant contended existing partnership in the contract
and hence the use of the amount for other works.
held,
The partnership was not into existence.
Partnership is the carrying on of a business not
an agreement to carry it on.

Sharing of profit
Partnership – to part – to divide
• Receiving profit is not a conclusive proof of
partnership but not receiving profit is a
conclusive proof of no partnership.
• Act does not prescribe, degree, kind, manner of
profit.
Losses
• The Act is silent about sharing of losses – hence
can be determined by contract as well.
• Two partners may agree that only one will bear
the losses.
• Sharing of losses + sharing of profit = an
important incident and hence existence of
partnership almost always been inferred
Mutual Agency
• “A business carried on by all or any of them
acting for all” – existence of agency
• Sleeping partner is also bound by agency.
• Several persons on behalf of one individual.
• Several individuals together in one transaction.
Cox v. Hickman (1860)
• Business handed over to creditors acting as
trustees. Cox was one of the trustees who never
acted.
• Suit against the trustees for unpaid bill including
Cox.
Lord Cranworth –
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. Where two or more
persons are engaged as partners in an ordinary
trade each of them has an implied authority
from the other to bind all by contracts entered
into during the course of business. Every partner
in trade is the agent of his co-partner; all are,
therefore, liable for the ordinary trade contract
of the other.
Consequences of the case –
• Mere sharing of profit does not make one partner. It
is only prima facie test
• Work should have been done by him personally or
on his behalf with his real or ostensible authority.
• Should be in the capacity of partner.
• In the present case there is no relation of partner.

Hirabai v. Bhagirath & Co. AIR 1964 Bom 174

• Managing owner of an agency gave agency to
defendant on temporary basis for 15 years but kept
receiving the profits.
• Held that there is no agency and mere sharing of
profit does not make one partner.
 Determination of partnership
Sec. 6-Real intention to be taken into account
while determining partnership
Explanation 1- sharing or profit, holding joint/
common interest – not a conclusive proof.
Explanation 2- receiving of profit contingent upon
earning profit, varying with profit does not make
one partner, specially in the following cases –
• By a lender of money to persons
• By a servant or agent as remuneration
• By the widow or child of deceased partner
• Payment to previous partner for goodwill
Profits or returns from joint ownership (Exp. 1)
• Instances of partnership –
Birdichand v. Harakchand AIR 1940 Nag 211
• Agreement to purchase cotton together for resale and
division of profits or loss as the case might be, in
circumstances in which neither party could resell his part
independently of the other – constitutes partnership.
• Two tenets in common of a house are dividing rent
between them – no partnership
• A,B,C contributes goods to be shipped together – no
partnership
• Two joint owners of a land agreed to raise a crop and for
this borrowed money for the cultivation and took active
steps in raising the crop – partnership constituted
Case laws to determine existence of partnership
Mollow, March & Co. v Court of wards (1872) LR 4 PC 419
A Hindu raja advanced some loan to a British firm which
later entered into a contract with the plaintiff. Raja was
given the power to control the business and to get
commission on profit till debt is discharged but raja never
exercised control. The plaintiff sued the firm and raja
together for failing to perform the contract as partners.

Raja held not liable as –

• He remained creditor only

• There was no intention to treat him as partner
• He never acted as partner in the business
• Partnership requires community of interest and here the
interest is conflicting.
Pooley v Driver (1876) 5 Ch 458
C advanced 2500 pound to A and B. As per agreement
between them, C was entitled to inspect and take
copies of the partnership book and a part of annual
profit. The agreement further provided for a final
account and repayment at the end of the
partnership unless it should appear that C has
received more than the money C has given. D also
advanced to A and B on the similar terms.

Held that there exist a partnership and the money was

not given as loan but towards capital contribution in
the firm.
Walker v Hirsch (1884) 27 Ch D 460
The plaintiff, a clerk in the defendant’s firm entered into an
agreement that for the part taken by him in the business,
he should receive a fixed salary and 1/8th share of the net
profit and also losses. He on the other hand agreed to
advance pound 1,500 to the business. The agreement
could be determined on 4 months notice. Plaintiff
continued his work but was never introduced to the
customers and did not have any voice in the conduct of
business. Defendants being dissatisfied with his work
gave him a notice. Plaintiff claimed dissolution of the firm
and accounts.
Held there exist no partnership as there was no intention to
create partnership. The plaintiff never took part as
partner and no authority of partnership was exercised on
his behalf.
Abdul Latif v Gopeshwar AIR 1933 Cal 204
The plaintiff undertook a contract with a company and
he appointed the defendant to manage the business
who was also authorized to receive advances from
the company and also to extend advances in favour
of the company. Defendant was also liable for all the
losses in case of negligence. The plaintiff sued the
defendant for accounts in the capacity of agency
whereas the defendant claimed that there exist
partnership.
Held, there is no partnership as the business was
exclusively in the name of the plaintiff and the
defendant was only managing the same on sharing
of profit and loss basis.
Krishnamachariar v sankara sah AIR 1921 PC 91
Three persons joined to obtain contract of mending
roads and supply material. Two of them to apply
know how and the third one was to arrange capital.
Later capitalist partner contended that there was
no partnership rather he only availed the services
of the other two persons.
Held,
The final words which provide for the division of
share, the account remaining with the respondent
and the common share of expenses are all proper
partnership and have no application to a service
contract.
Holme v Hammond (1872)
5 persons entered into partnership for 7 years and
agreed to share the profits and losses equally. They
further agreed that if any one of them died before
the expiry of the said period the others would
continue the business and pay the share of profits
of the deceased to his executors. Accordingly the
executors of the deceased were paid 1/5th share of
the profit. The plaintiff sued the partners and
executors as partners in the firm.
Held,
In order to constitute partnership there must be an
agreement express or implied in the absence of it
the executors can not be said to have become
partners.
Pratt v. Strick (1932)
A doctor sold the goodwill of medical practice and
entered into an agreement with the buyer of
the goodwill that he would help such buyer to
introduce patient for 3 months and he would be
entitled to half the share of profits and incur
half the expenses.
Held, doctor was not a partner.
Section 5 Partnership not created by status
Ram Laxman Sugar Mills v CIT (1967) 66 ITR 6113 (SC)
A partnership deed was executed between the manager of JHF
and the second party. Later the JHF ceased to exist by reason
of partition. The appellant firm applied for registration under
the IT Act. The CIT refused to register on the ground that
under the deed the JHF had become a partner and as soon as
the JHF status was severed the partnership deed become
inoperative.

The court held,

HUF is a person within the meaning of IT. It is however not a
juristic person for all purposes and cannot enter into an
agreement of partnership with either another HUF or
individual. It is open to the manager of a JHF as representing
the family to become a partner. The intention in the
partnership deed was to make the manager of JHF a partner
and hence the severance of JHF status would not affect the
partnership agreement.
Bhagat Ram Mohanlal v Commissioner (AIR 1956
SC 374)
It was held that when karta of a Hindu family
becomes a partner in a partnership firm on
behalf of the family and subsequently the other
family members also join the partnership firm it
requires amendment in the constitution of the
firm. Partnership by karta does not make the
other coparceners partner in the firm.
 Duration of partnership
Sec. 7 Partnership at will
• Applicable in the absence of provisions relating to
duration or determination of partnership.

Test to determine partnership at will

• Any partner should have power to bring the
business to an end at any moment.
• There should not be any direct/ indirect reference
to the mode of retirement or dissolution in the
partnership agreement.

Partnership for a limited time period subsequently

turning into partnership at will.
Consequences of partnership at will
• partners can retire at any given time by giving notice
to others (Sec. 32)
• Can dissolve firm by giving notice to Co-partners
(Sec. 43)
• Also dissolves by mutual consent, insolvency or
death of a partner.

Cases –
A and B agreed to enter into partnership which was
subject to termination by mutual consent any time –
whether partnership at will (Moss v Elphick (1910) 1
KB 486) – partnership at will
Agreement between father and 5 sons provided that
the partnership would not come to an end with the
death or retirement of any partner but if any partner
does anything which gives a ground to the court to
determine partnership that person shall be
considered as retired. Held partnership was not at
will (Abott v Abott (1936) 3 All ER 823)

Nissar Ahmed v. Nasima bi (1970) 1 Mad LJ 512

Partnership agreement had a provision that if any
partner was not willing to carry on the business, he
would have to go out receiving a certain sum. The
business would carry on with the remaining partners
and the goodwill and trade mark would then be
vested in them. Held that there was no partnership.
Suresh kumar v. Amrit Kumar (AIR 1982 Del 131)
The terms of the partnership provided that any
partner in case he desires to retire has to give 6
months notice expressing his intention and after
expiry of 6 months he would cease to be a
partner in the firm. In case of retirement or
death of any partner the partnership was to
continue. The court held that there was
intention to carry on the business hence
partnership was not at will.
Substitution and partnership at will
Partnership agreement says that in case B, one of
the partners in the firm dies his nephew would
act in his place. Such is partnership at will.

Sec. 8 Partnership for particular business venture

A person may become a partner with another
person in particular adventure or undertaking.

Business under section 4 v. business under section 8

K. Jaggaiah v. K. Venkatasatyanarayana (AIR 1984
A.P. 149)
The plaintiff and two defendants joined together
and obtained a contract for the maintenance of
the road.
Regarding liability the court held,
The definition of business as given in sec. 2 is not
exhaustive. Any commercial activity or
adventure amounts to business or any activity
which if successful would result into
profit….however the rights and liabilities of
partners in these cases are limited, as compared
to cases of general partnership.
Salaried partner
• Section 6 talks about profit sharing without
partnership e.g. agent and principal relationship.

• The question arises whether there can be a

partner without sharing of profit i.e. partner on
salary basis or remuneration basis?

• Being not a corporate entity the partners in the

firm are not its employees.
Regional Director E.S.I.C. v Ramanuja Match Industries (AIR
1985 SC 278)
The Apex Court observed,
The position of a partner qua the firm is not that of a
master and a servant or employer employee, which
concept involves an element of subordination and not that
of equality. The partnership business belongs to the
partners and each one of them is an owner of the
business.

Ellice v Joseph Ellice & Co (1905) 1 KB 324

Held, a true partner who in addition is paid a fixed wage
for doing specific work does not thereby become a
workman for the purpose of Workmen’s Compensation
Act, for he could not for that purpose be both master and
servant.`
Ross v Parkyns (1875)
The defendant Parkyns agreed with the plaintiff that
accounts are to be carried in defendant’s name.
subscription, policies are also to be signed by him or
by the plaintiff as his agent. The plaintiff was
supposed to maintain the account of the firm and in
return he was to get a fixed sum as salary and 1/5th
part of the profit. The loss was to be borne by the
defendant. Further, in any year after division of
profit if an unexpected claim is made, the plaintiff
was supposed to pay his share of the same but that
would not exceed in any circumstances from the
money he has received as his share of profit.

Held, there was no mutual agency hence no

partnership.
R.N. Kothare v Hormasjee (AIR 1927 Bom 127)
A and B entered into an agreement, which
described them as ‘partners’. Towards profit B
was to receive Rs. 500 p.m. and he was not
responsible for any losses. Later when the
dispute arose between the parties B contended
that he was not the partner in the firm and was
drawing only salary.
Held, partners can agree to share the profit in any
way they like. This also covers agreement to
share fixed salary. Held that both A and B are
partners in the firm.
 Partnership firm not a separate legal entity
Persons who have entered into partnership are
individually called partners and collectively called
firm. Thus firm is only a collective name and not
a separate entity unlike company. A suit against
firm means a suit against the partners.
Dulichand Laxminarayan v. Commissioner of IT
(1956) 29 ITR 535
Held, the general concept of partnership, firmly
established in both systems of law, still is that a
firm is not an entity or person in law but is
merely an association of individuals who
constitute the firm.
 Partnership v. Joint Hindu Family (JHF)
Basis of partnership is Relationship in JHF is on the basis
contract of status
Introduction of new partner No consent is needed. The fact of
requires unanimous consent birth decides place in the family
of all the partners
Mutual agency among No mutual agency among family
partners members. Karta can act on behalf
of all the members in the family
Liability is joint and severe The liability of coparceners are
limited to the extent of their share
in the property, assets of the
family
Partnership is dissolved by This does not happen in the case
death or insolvency of JHF
 Partnership v. Company
Partners are individually called Company has separate identity
partners and collectively firm which is distinct from the
hence no separate identity members
Without partners firm does not Company can exist even if
exist members come and go
Partners cannot transfer their In company shares can be
profit or substitute themselves transferred freely to strangers
without permission of others
Requires minimum two For a private co. 2 members
members for partnership and max 50
Banking business – max 10 no. For public co. 7 no. max – no
Others – max 20 limit
Liability is joint and several Liability is limited to shares of
towards the third party members in the company
 Partnership v. Co-ownership

Partnership can arise only Co-ownership of property

out of contract can arise otherwise also
Purpose of partnership is Purpose of co-ownership is
carrying on business not necessarily for business

Mutual agency No mutual agency

Partners cannot transfer their Co-owner can transfer his

interest freely without part of share in favour of
consent of other partners third party
Partition cannot be done Partition is possible
 RELATION OF PARTNERS TO ONE ANOTHER
Chapter III- Section 9-17
Section 11. determination of rights and duties by
contract.
– Partnership as branch of agency
– Partnership as branch of contract
• Mutual rights and liabilities are to be decided by
contract whether implied or expressed.
• Consent may be expressed or implied by the
course of dealing
• Section 27 of the ICA v. right to restrict partners
from doing any other business.
• Freedom to decide mutual rights and obligations
are subject to Partnership Act.

• Contradiction the contractual obligations and

Law of Partnership – Partnership Act to prevail

Duties of the Partners

• Section 9-10 mandatory duties
• Section 12-17 duties subject to contract between
the parties
1. Duty of absolute good faith (Sec.9)
2. Duty to carry on business to the greatest
common advantage (Sec. 9)
3. Duty to render true accounts and full
information of all things affecting the firm (Sec.
9)
4. Duty to indemnity for fraud (Sec. 10)
5. Duty to be diligent (Sec. 12(b) and 13 (f))
6. Duty to properly use the firm’s property (Sec.
15)
7. Duty not to earn personal profits/ not to
compete (Sec. 16)
Duty of absolute good faith
Uberrima fidei

Partners enter into partnership on the basis of

mutual confidence and trust. This duty continues
even after the partners have ceased to be
partners.

Duty to carry on business to greatest common

advantage
Partners are not to obtain personal advantage at
the cost of firm.
Dunne v. English (1874) LR 18 Eq 524
The plaintiff and the defendant bought a mine
jointly with a view to reselling it at a profit of
pound 10,000. Defendant resold the same to a
company in which he had interest at the much
higher price. Whether plaintiff is entitled to half
the profit amount or only of 10,000 pound.
Court held that the defendant was duty bound to
disclose the real facts to the plaintiff. The other
partners are not deprived of their right to share
the actual sale proceed.
Duty to render true accounts and full information
includes duty not the mix his money with the firm’s account,
communication regarding a/c, duty not the misappropriate
– gives right to damage/ repudiation
Waiver of right to repudiate the contract in case of
concealment of facts.

Duty to indemnify for fraud

Sec. 10 – Every partner shall indemnify the firm for any loss
caused to it by his fraud in the conduct of the business of
the firm.

Considering Public Policy Waiver cannot apply in duty to

indemnify for fraud i.e. there cannot be any contradictory
contract or rectification of fraudulent act etc.
Duty to be diligent Sec 12(b)/ Duty to indemnity
for willful neglect Sec. 13 (f)
12(b) “every partner is bound to attend diligently
to his duties in the conduct of business.”
13(f) “a partner shall indemnify the firm for any
loss caused to it by his willful neglect in the
conduct of the business of the firm”

Excludes mere inadvertent or an accident which is

not deliberate or willful, intention or purposeful
commission or omission of an act.
Cragg v Ford (1842)
A partner was given the charge to wind up the firm.
He delayed disposal of some bales of cotton even
after suggestion of a fellow partner. Subsequently
the price of bales of cotton fell considerably.
Whether liable for willful neglect?
Not a willful neglect only error of judgment.

S.K. Bandopadhya v Man Gobinda AIR 1919 Pat 386

A partner failed to sue certain firms and consequently
one claim became time barred and another lost
due to debtor’s insolvency. The partner was held
liable for the former but not for the latter as he
learned very late about the insolvency.
Waiver applies in duty to indemnify for willful neglect
Duty to properly use the firm’s property (Sec. 15)
Subject to contract between the partners, the property
of the firm shall be held and used by the partners
exclusively for the purpose of the business.

Duty not the earn personal profits/ not to compete

(Sec. 16)

Subject to contract between the partners –

a. If a partner derives any profit for himself from any
transaction of the firm, or from the use of the
property or business connection of the firm or the
firm name, he shall account for that profit and pay
it to the firm.
b. If a partner carries on any business of the same
nature as and competing with that of the firm, he
shall account for and pay to the firm all profits
made by him in that business.
Ramnath Gagoi v. Pitambar Deb ILR (1915) 43 Cal 733
A took a lease from the government for the purpose
of catching elephants. He took B as a partner in the
venture and B was authorized to manage the
business. If was agreed between them that the sale
of elephants would take place in the presence of the
representative of A. In one such sale in the presence
of A’s representative B bought some elephants.
The court held,

The duty is that of honest, fair and open dealing

and not that to total restraint of buying
partnership property. A partner is entitled to
purchase partnership property provided there is
full disclosure and the parties are at arm’s
length. It is only where the real truth is
concealed and the facts are not disclosed that
one partner has a legitimate grievance against
the other as provided in section 16(a)
Duty not the compete sec. 16(b)
• A partner is supposed to devote himself
completely to the partnership business and not
to carry his own competing business.
• In case competing business is carried the partner
becomes liable to render the accounts to other
partners in the firm.
• In case profit is derived from any transaction of
the firm or from the use of the property or
business connection of the firm or the from the
use of the property or business connection of the
firm or the firm name, he shall account for that
profit and pay it to the firm.
Read with section 215 and 216 of the ICA –
A partner being an agent, a fiduciary character
arises and if he, as agent, makes a profit out of the
concern of the his principal, and while acting for
him, he must disclose it to his principal, he cannot
make a profit out of his principal’s business for
himself.
Pulin v. Mahindra (AIR 1921 Cal 722)
Partnership for importing and selling of salt – one
partner bought some quantity himself and sold on
his personal account. Held liable for accounts
towards the other partners.
The Court observed,
It is a fundamental rule in the law of partnership
that a partner cannot, without the consent of
his co-partner lawfully carry on his own business
(openly or secretly) competing with that of firm
(16 (b)). The rule is not applicable on different
business.
 Section 14. Partnership Property
Subject to contract between the partners, the
property of the firm includes all property and rights
and interest in the property originally brought into
the stock of the firm or acquired, by purchase or
otherwise, by or for the firm, or for the purpose and
in the course of the business of the firm, and
includes also the goodwill of the business.

Lachhman Das v. Gulab Devi AIR 1936 All 270

Partition in the JHF-members agreed to continue
business in the same assets as partners – one
partner died – his heir instituted a suit for partition
of the property treating the same as JHF property.
Issue: whether partnership property or JHF property?
The court held,
Mere use of property for partnership would
not make is partnership property. The fact that
the share in the property were not varied but
the share in the business were itself is an
evidence that the property was treated as JHF
property and not as partnership property.

Ganpat Rai v. Abnash Chander (AIR 1973 J&K 74)

Whether tenancy rights of a partner in the premises
where the business is carried on would become the
property of the firm?
In this case the partners agreed to carry on the
business in the rented premises of A and by
agreement they decided that the tenancy
would be kept within the right of partnership
firm. The rent was also paid from the
proceeds of partnership firm.

Held,
The facts constitute tenancy under the right of
partnership firm by virtue of agreement
between the partners.
 Rights of the partners
Rights of the partners are contained under section 12 and
13 which are subject to contract between the partners.

Sec. 12 The Conduct of the Business

Subject to the contract between the partners,
(a) Every partner has a right to take part in the conduct of
business
(c) Any difference arising as to ordinary matters connected
with the business may be decided by a majority of the
partners, and every person 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; and
(d) Every partner has a right to have access to and to inspect
and copy any of the books of the firm.
Mutual rights and liabilities Sec. 13
Subject to contract -
A partner is not entitled to receive remuneration for taking
part in the conduct of the business; rather shares profit
The partners are entitled to share equally in the profits
earned, and shall contribute equally to the firm’s losses;
Where a partner is entitled to interest on the capital
subscribed by him, such interest shall be payable only out
of profit;
A partner making, for the business purposes, any payment or
advances beyond the amount of capital he has agreed to
subscribe, is entitled to interest thereon at the rate of 6%
per annum;
The firm shall indemnify a partner in respect of
payments made and liabilities incurred by him –
(i) in the ordinary and proper conduct of the
business, and
(ii) In protecting the firm from loss in some
emergency, as would be done by a person of
ordinary prudence in his own case and under
similar circumstances.
 Relations of partners to third party
Chapter IV Section 18-30

• Nature and extent of liability of firm for the acts of

a partner (Sec. 18-27)

• Doctrine of Holding out, Creating liability of a non-

partner (Sec. 28)

• Rights of transferee of a partner’s interest (Sec. 29)

• Position of Minor admitted to the benefit of

Partnership (Sec. 30)
Nature and extent of liability of firm for the acts of a
partner (Sec. 18-27)
Sec. 18 partners to be agent of the firm – subject to
the provisions of this Act, a partner is the agent of
the firm for the purpose of the business of the firm.

• All the laws applicable to agent would apply on

partners as well.
• agency extended only to the business and does not
cover works in the individual capacity.
• The agency operates against sleeping or dormant
partners as well, they too are liable for the acts of
acting or ostensible partners.
Nature of liability
Liability is joint and several (Refer Sec. 25)

• All the partners are liable jointly and severally

and the plea that they have limited their liability
cannot be taken by any partner. Though in case a
partner pays more than his share he can claim
the same from others.

• Liability subsists only till the time a partner

remains in the firm. After retirement no liability
arises.

• Requirement of public notice

Sec. 19 Implied authority of the partners as agent
of the firm
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 as enumerated under section 19 is
implied authority.
– The firm will be bound by implied authority of the
firm and the partners.
Reason: third party may not always know or have
excess to the scope of authority partners do
exercise.
 Test to determine the scope of implied authority
1. The act should be done in relation to the partnership
business and,
2. The act should be done in usual way, in relation to the
business of the kind carried on by the firm.
- Nature of the business is thus a relevant factor

Distinction between trading and non-trading firms as made

by the Courts
A firm would be a trading firm if the business consists in
buying and selling of goods. There is an implied power to
borrow in a trading firm. Whereas in businesses which
are not commercial rather professional in nature, no
partner can borrow or pledge the partnership property
so as to bind the co-partners.
Case laws
Mercantile Credit Co. Ltd. v Garrod (1962) 2 All ER
1103
Sale and purchase of second hand cars could be
impliedly considered to be the business of the firm
which deals with letting lock up garage repairing of
cars.
Higgins v Beauchamp (1914) 3 KB 1192
The partners were the proprietors of the business of
cinematographic theatre. There was absolute
prohibition on unilateral borrowing by one partner.
One partner borrowed money and misappropriated
it.
Held that, Firm is not that of trading firm and hence
no implied authority of borrowing hence the firm
would not be bound by the transaction.
Mode of exercising authority
Sec. 22 In order to bind the firm, an act or
instrument done or executed by a partner of
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.
Section 19 is subject to section 22 hence implied
authority would be applicable only when-
1. Done in the name of the firm or,
2. In the manner expressing or implying an intention to
bind the firm
Limitation of implied authority
19(2) in the absence of any usage or custom of trade
to the contrary, the implied authority of a partner
does not empower him to –
1. Submit a dispute relating to the business of the
firm to arbitration;
2. Open a banking account on behalf of the firm in his
own name;
3. Compromise or relinquish any claim or portion of a
claim by the firm;
4. Withdraw a suit or proceeding filed on firm’s
behalf;
5. Admit any liability in a suit or proceeding against
the firm;
6. Acquire immovable property on firm’s behalf;
7. Transfer immovable property belonging to the firm;
8. Enters into partnership on behalf of the firm.
• The above acts can be done by the partner only after he
has been expressly authorized or there is a custom.
• Subsequent ratification is permissible.

Sec. 20 extension and restriction of partner’s implied

authority –
The partners in a firm may, by contract between the
partners, extend or restrict the implied authority of any
partner.
Notwithstanding such restriction, any act done by a partner
on behalf of the firm which falls within his implied
authority binds the firm unless the person with whom
he is dealing knows of the restriction or does not know
or believe that partner to be a partner.
Thus restriction under section 19 is statutory whereas
restriction under section 20 is contractual.

Sec. 21 partners right in emergency –

Partners can take any action to mitigate the losses of
the firm as would be taken up by a prudent person.
The authority here is similar to section 189 of the
ICA.
Sec. 23 Admissions made by a partner –
An admission or representation made by a partner
concerning the affairs of the firm is an evidence
against the firm if it is made in the ordinary course
of business.
Sec. 24 effect of notice to an active partner
Notice to a partner who habitually acts in the
business of the firm of any matters relating to
the affairs of the firm operates as notice to the
firm, except in the case of a fraud on the firm
committed by or with the consent of that
partner.
• Excludes sleeping or dormant partner.
• Excludes fraudulent acts of a partner.
• Excludes fraudulent acts with the consent of
partner.
 Doctrine of Holding out
Sec. 28 Holding out –
1. Anyone who by words, spoken or written, or by conduct
represent 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 a partner does or does not know that the
representation has reached the person so giving credit
2. Where after a partner’s death the business is continued
in the old firm name, the continued use of that name or
of the deceased partner’s name as a part thereof shall
not of itself make his LRs of his estate liable for any act
of the firm done after his death.
Holding out is a branch of law of estoppel.

Waugh v. Carver (1793)

“Now a case may be stated in which it is the
clear sense of the parties that they shall not be
partners, that A is to contribute neither labour
nor money and not to receive any profits. But if
he will lend his name as a partner, he becomes
against all the rest of the world a partner, not
upon the ground of real transaction between
them, but upon principle of general policy, to
prevent the frauds to which creditors would be
liable.”
1. Includes self representation or should have
permitted representation by someone else.
2. Knowledge of representation and acting in good
faith

Snow White Food Products (P) Ltd. v. Sohan Lal Bagla

AIR 1964 Cal 239
The clerk of the firm of carriers entered into
transaction with the plaintiff company. Negotiations
were carried out by him only. Later the goods were
not delivered but were disposed off and converted
to the use of Sohan Lal. In an action against the firm
Sohan Lal denied his status of partner in the firm.
Court held him liable on the basis of holding out.
Effect of Holding out
• No partnership with other members
• No agency with other members
• No right against the firm or its members
• Real partners are not liable unless the holding
out has been done by them or with their
connivance.
No holding out in certain cases
• Deceased partner
• Insolvent partner
• Sleeping or dormant partner
Rights of transferee of partner’s interest (Sec. 29)
• Introduction of a new partner-resulting into
change in the nature of firm hence consent of all
is mandatory.
• Failure to obtain consent – ground for demand of
dissolution
• Interest in partnership firm may be transferred.
Interest includes profit, assets of the firm.

Ways of transferring interest

Creation of charge, mortgage, benefit transfer etc.
Rights of transferee 29(1)
• Only receives the shares as per the profit declared
by the partners.
• No right to conduct business, accounts, inspection of
books etc.

Sec. 29(2) in case of dissolution of the firm transferee is

entitled to the assets of the original partner and for
that also to the accounts.

• 29(1) deals with business in continuation

• 29(2) deals with the business when it comes to an
end
Sub partnership
When partner of a firm agrees with another to share
his part of profit of the business.

Minor Admitted to the Benefit of Partnership (Sec.

30)
• Minor’s contract – not valid
• Minor not competent to contract – partnership is a
contract
Pre-requisites of admission
Sec. 30(1) A minor may not be a partner in a firm, but
with consent of all the partners for the time being,
he may be admitted to the benefits of partnership.
• Existence of partnership firm
• Consent of the partners to admit minor in the firm

Dharam Vir v. Jagan Nath (AIR 1968 Punj 84)

At the time of execution of partnership deed plaintiff
was minor. After dissolution he brought a suit for
rendition of account like any other partner. There
was no difference made in his status and other
partners and he was also entitled to receive profit
and share the losses.
Held,
A deed which makes a minor at par with competent
partners would not be workable and the document
cannot be enforced even vis-à-vis other partners.
CIT v Shah Mohandas AIR 1966 SC 15
Partnership deed was executed by two persons one
of them also signed on behalf of two minors. All
were entitled to equal share and capital
contribution to the firm. Commissioner of IT
refused to treat the same as valid.
Held,
Agreement entered into with incompetent persons
are not necessarily void. Where the minor has
been admitted only to the benefit of the
partnership the question of invalidity does not
arise.
Minor’s position during minority
Sec. 30(2) right to profit and access to any of the
firm’s accounts and inspection of copies thereof.
Limitation
• Cannot inspect other papers, books etc.
• Before suing the firm for accounts or to recover his
share of property or profit, minor must sever his
connection with the firm (Sec. 30(4))

Option on attaining majority

Sec. 30(5) with Public notice within 6 months of
attaining majority or,
Within 6 moths of acquiring knowledge Minor can
decide to continue or discontinue in partnership.
• Failure to give notice would result into full fledged.
• Up to six months grace period liability and
entitlements remain the same as during minority.

Shivagouda v. Chandrakant AIR 1965 SC 212

A partnership firm in which minor was admitted to the
benefits, was dealing with the appellants and
became indebted to them. Afterwards the
partnership firm dissolved. Minor attained majority
subsequently but did not exercise option available
under section 30(5). Appellants raised a claim
against him too on the presumption that by not
exercising the right under 30(5) the minor became
partner in the firm.
Held, post dissolution no such requirement is
there and hence there is no need to exercise
option under sec. 30(5)

Burden of proof – lies on the minor.

Rights and liabilities of Minor if he becomes

partner/ Sec. 30(7)
• Liabilities are retrospective and there is
automatic ratification.
• Consent of all the partners for admitting such
minor is not required.
Rights and liabilities of a Minor if he does not
become partner/ Sec. 30(8)
• Liable for the acts carried on till the date public
notice was given;
• Entitled to sue the partners for his share of the
property and profits.

Holding out on attaining majority

Sec. 30(9) provides that,
sub sections (7) and (8) of section 30 shall not affect
section 28.
Thus in spite of notice if minor acts he would be
liable.
Liability of firm for wrongful acts of a partner
Sec. 26 where, by the wrongful act or omission of
a partner acting in the ordinary course of the
business of a firm, or with the authority of his
partners, loss of injury is caused to any third
party, or any penalty is incurred, the firm is
liable therefore to the same extent as the
partner.

Wrongful acts include-

Tort, fraud, negligence, misrepresentation,
misappropriation, defamation or crime.
Llyod v Grace, Smith & Co. (1912) AC 716
Plaintiff hired the services of defendant solicitor’s
firm for seeking advice on increasing the profit
on two cottages. The managing clerk of the
company advised her to sell the cottage and
asked her to sign two documents said to be sale
deeds. Thus managing clerk got the documents
as gift and disposed it off and misappropriated
the money.
The firm was held liable as the act was done within
implied authority.
Liability of firm for misapplication by partners
Sec. 27
(a) A partner receives money within his apparent
authority and misapplies it
(b) Firm receives money and property is
misapplied by any of the partners while it is in
custody of the firm.
• Apparent authority
• Misapplication by the receiving Partner
• Misapplication by any partner in the Firm
 Incoming and outgoing of partners
Sec. 31-38
Changes are done without resorting to dissolution
of the firm.
31 (1)
subject to contract and section 30 without
unanimous consent no person shall be
introduced as partner.
31(2)
subject to provision of section 30 no person is to
become liable for any act done before his
partnership in the firm.
Though nothing prevents him to take up liability if
he wants to take for previous actions.

• Admission with unanimous consent

• Admission through nomination – depends on the
contract between the parties – nomination can
be done by majority as well.
• Admission of minor to the benefit of partnership
with the option to become a full fledged partner
at a later stage.
Outgoing partners
1. Retirement (Sec. 32)
2. Insolvency (Sec. 34)
3. Expulsion (Sec. 33)
4. Death (Sec. 35)

The firm is not necessarily dissolved and

partnership may continue with the existing
partners.
Retirement
32(1)
1. With the consent of all the partners
2. As per agreement
3. By giving notice in partnership at will

Liability for acts done before retirement

• Liable for all the acts done before retirement.
Thus a partner can retire from the firm but not
from the subsisting liability.
• Even if he has been discharged by the partners
the liability subsists towards the third person.
Sec. 32(2) A retiring partner may be discharged
from the liability to any third party for firm’s
acts done before his retirement by any
agreement made by him with such third party
and the partners of the reconstituted firm, and
such agreements may be implied by a course of
dealing between such third party and the
reconstituted firm after he had knowledge of
the retirement.

This procedure is more in the nature of novation.

Liability for acts done after retirement
Sec. 32 (3) –
• Retiring partner continues to be liable for the acts
done after retirement as well till the time public
notice has been given.
• retiring partner is not liable to any third party who
deals with the firm without knowing that he was a
partner.
• Notice may be given by the retiring partner or any
other partner of the reconstituted firm. 32(4)
• In case of registered firm – official gazette,
vernacular newspapers at the place of business.
(Sec. 72)
• Holding out applies in case of retiring partner as
well.
• Continuation of liability would not include
liability for wrongful acts or insolvency
committed by the continuing partners, after his
retirement.
When public notice is not necessary
Not necessary in the cases where partner is –
Dead
Insolvent
Dormant
Public notice is not required in all the cases where
third party was not aware of the partner at the
very first place.

Expulsion of the partner (Sec. 33)

33(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 parties.
33 (2) the provisions of sub sections (2)(3) and (4)
of section 32 shall apply to an expelled partner as
well if he were a retired partner.
Expulsion is possible only when provided under the
agreement between the partners. Partnership Act
does not provide for Expulsion.
Other elements of expulsion
• Good faith
• Rarely used due to strict nature
• Construed strictly
Instances of expulsion
• Expulsion against appointment of son of a partner
as manager along with father;
• Misapplication of client’s money;
• Professional misconduct;
• Adultery, dishonesty, fraud etc.
Insolvency of a partner (Sec. 34)
34(1) a partner ceases to be a partner on the date
on which the order of adjudication is made.
whether or not the firm has been dissolved.
34(2) where the firm has not been dissolved the
estate of the insolvent partner is not liable for
any act of the firm and the firm is not liable for
any act of the insolvent done after the date on
which the order of adjudication is made.

No public notice is required in case of insolvency

Death of a partner (Sec. 35)
Where under a contract between the partners the
firm is not dissolved by the death of a partner, the
estate of a deceased partner is not liable for any act
of the firm done after his death.

Rights of outgoing partners

Sec. 36 right to carry on competing business
subject to –
• Use of the firm’s name
• Representing himself as carrying on the business of
firm or;
• Solicit the customers of the firm
Sec. 36 (2) Restriction on competing business
Restriction on carrying the business within
specified limits up to sometime can be included
in the agreement.
Same is not violation of section 27 of the ICA.

Sec. 37 right to share subsequent profit

Subject to contract –
1. Claim over profit proportionate to the share, or;
2. Interest @ 6% per annum.
 Dissolution of firm
Sec. 39 Dissolution of partnership between all the partners of
the firm is called as dissolution of the firm.

Changes in the constitution of firm v. dissolution of the firm

Modes of dissolution (Sec. 40-44)

Dissolution by agreement (Sec. 40)
Compulsory Dissolution (Sec. 41)
Contingent Dissolution or dissolution by operation of law (Sec.
42)
Dissolution by notice (Sec. 43)
Dissolution by Court (Sec. 44)
Dissolution by agreement
Sec. 40 A firm may be dissolved with the consent of all the
partners or in accordance with a contract between the
partners.

• Depends on the contract

• Dissolution can be inferred also from the circumstances such
as –
o Closure of the business
o Final accounts

Sec. 41 Compulsory dissolution

• All the partners have been adjudged insolvent but one
• Happening of event – making partnership business unlawful
or partnership unlawful.
Subsequent unlawfulness in part – doctrine of severance.

Sec. 42 Subject to contract between the partners a firm is

dissolved –
• If constituted for a term by expiry of the term;
• If constituted for one or more adventure by the completion
of that adventure;
• By the death of partner; unless contrary contract
• By the adjudication of a partner as an insolvent. Unless
contrary contract

Section 42 deals with the contingent situations.

• Expiry of term and continued business
• Pending venture and death of a partner
Sec. 43 Dissolution by notice in partnership at will
43(1) Any partner can communicate his intention
for dissolution of the firm
43(2) The effective date of dissolution is the date
which is mentioned and if no date is given the
effective date would be the date of
communication.

Read with section 7 of the Partnership Act.

Requirements for notice under section 43

a. It must clearly state the intention of the partner
giving the notice to dissolve the firm;
b. It must be given in writing to all the other
partners in the firm.
c. A notice given for dissolution cannot be
withdrawn unless agreed by all other partners.
d. Filing of suit for final account in partnership at
will is sufficient notice for dissolution of the
firm.
e. Insolvency is yet another fact of notice for
dissolution of partnership at will.
Dissolution by retirement of all but one
This contingency is not provided under any
provision yet such situation would make
dissolution inevitable.

Abbasbhai v. R.G. Shah AIR 1988 Bom 187

In this case the agreement between the partners
provided that in case of retirement of all the
partners the remaining one partner may
continue the business by taking new partners in
the firm.
Critical view.
Dissolution by the Court (Sec. 44)
• Partner becomes of unsound mind, 44(a)
• Permanent incapacity, 44(b)
• Guilty of conduct which affects carrying on the
business, 44(c)
• Willfully or persistently commits breach of
agreements, 44(d)
• Transfer of whole of his interest in the firm to
the third party, 44(e)
• Loss in the business 44(f)
• Any other ground which makes dissolution just
and equitable. 44(g)
Sec. 44
• Not subject to contract
• Court may decide dissolution and hence there is
no mandatory obligation.

Case Laws
Whitwell v. Arthur (1865)
Dissolution sought on the ground of paralytic
attack suffered by one partner making him
permanently disable.
Abbott v Crump (1870)
Adultery by one with another partner’s wife.
Suraj Bahadur v. Mahadeo AIR 1963 Raj 241
Partnership firm formed for 20 years was
continuously suffering losses. One partner
withdrew after sometime other two
continued. Subsequently one partner filed a
suit for dissolution.
Held,
Continuous loss can be a ground for dissolution.
V. Venkataswami v. Venkataswami AIR 1954 Mad 9
Refusal to render account as ground for dissolution
Watney v Wells (1861)
Refusal to meet on matters of business, continued
quarrelling with no hope of mutual co-operation.
Reconstitution after dissolution
CIT v M/s Pigot Champan & Co. AIR 1982 SC 1085
Partnership was for 6 years after that the same was
stated to have dissolved by mutual consent and
thereafter the said business with its assets and
goodwill shall belong to and carried by the
continuing partners.
Whether there has been a dissolution of the firm or
only reconstitution of the same?
Held,

Dissolution and reconstitution are two different legal

terms. A dissolution brings the partnership to an end
while the reconstitution means the continuation of
the partnership under altered circumstances.
Held in the present case the firm was dissolved after
expiry of 6 years. Also the firm was dissolved by
mutual consent. The old firm stood dissolved and
was taken over by the two continuing partners. Thus
the new firm succeeded to the business of the old
firm and, therefore, it was entitled to relief under IT
Act.
Liability for acts done after dissolution (Sec. 45)
(1) Until public notice for dissolution has been given
the partners and the firm continues to be liable
towards the third party.
Provides – estate of a deceased partner, partner not
known, partner retired etc. would not be liable.
(1) Notice is given by any partner.

Right to have business wound up after dissolution

(Sec. 46)
Right to clear of the debts and appropriate the
surplus among partners or their representatives.
Continuing authority of partners for the purpose
of winding up (Sec. 47)
N.B. Singh v. C.I. of Stamps (AIR 1972 All 1)
Held,
A mere dissolution does not bring about a
complete extinction of the firm, which
continues and till the liability of the firm are
not paid, no partner can claim any particular
property or his share in assets.
Mode of settlement of accounts between
partners (Sec. 48)
48 (a)
• Payment first by profit
• Capital
• Personal assets in proportion to share
48(b)
• Third party entitlement
• Partner entitlement apart from share
contribution
• Towards entitlement as per capital of the
partners
• The residue is to be divided among the partners.
Payment of firm debts and of separate debts – sec.
49
Property of the firm – firm debt
Surplus – share of each partner
Separate debt of partner – separate property
Surplus – firm debt

Personal profits earned after dissolution sec. 50

Obligation to account for profit after dissolution
but before winding up
Return of premium on premature dissolution Sec.
51
Rights when partnership firm is dissolved for fraud
or misrepresentation Sec. 52
Person entitled to dissolve the firm is also entitled
to -
• Right to lien
• Treated as creditor
• Right to be indemnified by the partner guilty of
fraud
Sec. 53 right to restrain from use of firm name or
firm property
Sec. 54 agreement in restraint of trade
Sec. 55 Sale of goodwill after dissolution
 Registration of Firm (Sec. 55-71)
Statement (Sec. 58)

Content of the statement (58(1))

• Firm name
• Place of business
• Name of place where business carried on
• Date when partners joined the firm
• Full name + address
• Duration of partnership
Firm name not to include (58 (3))
Crown, emperor, empress, empire, imperial,
king, queen, royal or any other word referring
to sanction, approval or patronage of the
Government.

South India Textile v. Govt. of A.P. (AIR 1988 AP

55)
Whether the name ‘South India’ is covered
under sec. 58 (3).

Period of limitation for firms

Substantial Compliance v. Mistakes
Rectification (sec. 64)
Rectification application to be signed by all.

Registration when complete

Compliance [58]

Recording of statement in register [59]

Certificate of registration
CIT v. Jayalakshmi Rice & Oil Mills (AIR 1971 SC 1015)
Registration is complete only when the
requirements under section 59 has complied with.

Subsequent changes and alteration (Sec. 60-65)

Notice to the registrar – in the absence of notice
liability continues as per the original registration.

Register of firms is a public document and hence

open for inspection (sec. 66)

Register of firms is a conclusive proof (sec. 68)

 Effect of Non Registration
No right to sue the partner or firm (69(1))
No right to sue the third party (69(2))
Also applicable to claim up to 100 Rs.

Does not affect right regarding final accounts,

dissolution of the firm.

S. Ahmed Khan v. Turup Mohd. Hayat (AIR 1953 Mys.

4)
Partnership was constituted to plying a car. Defendant
returned the car to the seller. Hence present suit for
recovery of the capital contribution by the plaintiff.
Held,
Plaintiff can sue as the claim is not based on
partnership between the parties.

Registration immediately before filing of the suit

Permissible
Practical difficulties

Suit between firm and third party

Non registration excludes only contractual
matters.
M/s Virendra Dresses v. M/s Virendra Garments
(AIR 1982 Del 486)
Suit for passing off was held maintainable.

M/s Shankar Housing Corp. v. Mohan Devi (AIR

1978 Del 255)
Firm was registered in the name of original partners
who were subsequently replaced by their sons.
Whether non recording would render the firm
disable?
Held, non recording of the partners would render
the suit incompetent.

Shreeram Finance Corp. v. Yasin Khan AIR 1989 SC

1769 (similar facts and decision as above)
Subsequent registration after filing of the suit

CIT v. Jayalakshmi Rice & Oil Mills (AIR 1971 SC

1015)
Subsequent registration after filing of the suit
cannot be done. In such cases the option is to
file a suit a fresh after registration.
Thus res judicata does not apply.