THE INDIAN PARTNERSHIP ACT, 1932
Regal Mentor
Introduction
The Indian Partnership Act, 1932, was enacted on April 8, 1932, and came into effect on October 1, 1932,
with the exception of Section 69, which was enforced a year later on October 1, 1933. This Act was
introduced to address inefficiencies in the regulation of partnerships under the Indian Contract Act, 1872.
Background and Legislative Evolution
Replacement of the Indian Contract Act, 1872 Provisions
Prior to 1932, partnerships in India were governed by Chapter XI of the Indian Contract Act, 1872.
However, these provisions were deemed inadequate to address the complexities of modern business
partnerships, necessitating a separate and comprehensive statute.
Influence of Foreign Legislations on the Indian Partnership Act
The Indian Partnership Act, 1932, was significantly influenced by foreign legislations, particularly the
English Partnership Act of 1890 and the Uniform Partnership Act of the United States. These legislations
served as foundational references for structuring partnership laws in India. However, the Indian Act was not
a mere replication of these foreign statutes. Instead, it was carefully adapted to suit the unique legal, social,
and economic conditions of India.
Role of the English Partnership Act, 1890
The English Partnership Act, 1890, was a comprehensive statute that codified principles of common law
relating to partnerships in England. It emphasized the foundational aspects of partnership law, such as:
1. The mutual agency principle, where each partner acts as an agent of the firm.
2. Provisions for profit sharing as the essence of a partnership.
3. Rules governing the liabilities of partners, both jointly and severally, for the acts of the firm.
The Indian lawmakers adopted many of these principles but modified them to address specific challenges in
the Indian business environment, such as:
The prevalence of family-based partnerships.
The need to protect third-party interests in commercial dealings.
Provisions for dissolution tailored to Indian business practices.
Impact of the Uniform Partnership Act (UPA) of the United States
The Uniform Partnership Act (UPA), which was introduced in the United States to harmonize partnership
laws across states, also influenced the drafting of the Indian Partnership Act. Key aspects borrowed include:
Clarity in defining the relationship between partners and the firm.
Provisions related to the distribution of liabilities among partners during insolvency or dissolution.
Rules for property ownership and rights within the partnership.
The Indian Partnership Act, while borrowing structural concepts from the UPA, diverged to account for the
less formalized nature of partnerships prevalent in India at the time.
Role of the Special Committee
To ensure that the Act was not merely a transplantation of foreign laws, a Special Committee was formed to
analyse these foreign legislations thoroughly. The Committee:
Studied judicial precedents from England and the United States.
Identified discrepancies between foreign legal principles and Indian customs.
Suggested modifications to make the Act more contextually relevant to Indian socio-economic
conditions.
The committee paid special attention to the peculiarities of Indian commerce, such as informal partnerships
and joint family businesses, which were not adequately addressed by foreign statutes.
Key Adaptations for Indian Context
Some notable changes made to align with Indian realities include:
1. Definition of Partnership: Unlike the English law, which emphasized contractual relationships, the
Indian Act accommodated informal agreements commonly seen in family-owned businesses.
2. Minor's Role: Indian law allowed a minor to be admitted to the benefits of a partnership, a provision
absent in both the English and U.S. laws.
3. Registration: Although registration was made optional under the Act, unregistered partnerships faced
restrictions in legal enforcement, ensuring compliance without mandating formal registration.
4. Dissolution Provisions: Flexibility was introduced to handle partnership dissolutions without court
intervention, catering to the Indian preference for informal dispute resolution.
Key Features of the Indian Partnership Act, 1932
Definition and Formation of Partnership
The Act defined a partnership as a formal agreement between two or more individuals who agree to share
the profits of a business. These individuals, referred to as partners, collectively form a partnership firm.
Rights and Duties of Partners
The Act codified the mutual rights and duties of partners, ensuring clarity and minimizing disputes. For
instance:
Partners were granted the authority to act in emergencies to protect the interests of the firm.
The Act emphasized the principles of mutual trust and shared responsibilities among partners.
Addressing Defects in the English Partnership Act
Addressing Defects in the English Partnership Act
The Act not only incorporated provisions from the English Partnership Act of 1890 but also sought to rectify
its deficiencies based on the challenges observed between 1890 and 1931.
Significance of the Indian Partnership Act, 1932
Legal Certainty for Partnerships
By separating partnership law from the Indian Contract Act, the 1932 legislation provided a clear and
distinct framework for regulating partnerships.
Facilitation of Business Practices
The Act catered to the needs of India's growing commercial sector by offering a legal structure that was both
flexible and robust, encouraging entrepreneurial ventures.
Adaptability to Indian Context
The integration of English legal principles with modifications for Indian conditions made the Act both
practical and comprehensive, addressing the specific requirements of the Indian business environment.
Thus the Indian Partnership Act, 1932, marked a significant step in the evolution of business law in India.
By replacing the outdated provisions of the Indian Contract Act, it established a modern and effective
framework for partnerships. Drawing from international statutes while tailoring its provisions to Indian
needs, the Act has remained a cornerstone of partnership law in the country.
Definition of “Partnership”, “Firm”, and “Firm Name” (Section 4)
Section 4 of the Act defines Partnership as 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. 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”.
ESSENTIALS OF PARTNERSHIP
(a) AGREEMENT
There must be an agreement among all the partners. Minors are incompetent, but may be admitted to
the benefits of partnership (Section 30). An agreement of partnership may be express or implied. It need not
essentially be written though generally a partnership deed will be drafted.
(b) BUSINESS CARRIED ON BY ALL
An agreement to carry on business at future time does not result in present partnership. Further the
business must be lawful and must not be opposed to public policy.
(c) MUTUAL AGENCY
Every partner acts as an agent and binds the other partners by his actions done in the ordinary course
of business.
(d) UNLIMITED LIABILITY
The liability of the partners are unlimited, joint and several. Every Partner is liable jointly with other
partners and also severally.
(e) NO SEPARATE LEGAL EXISTENCE
Unlike a company a firm is not a legal entity and therefore, there cannot be a partnership of firms. It
does not have a existence distinct from its partners. The Court observed that a partnership firm has no
independent entity of its own and all the liabilities against the firm or all acts done by any one of its partners
for and on behalf of the firm shall bind all the other partners as well
1
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(f) NUMBER OF PARTNERS
Essentially there must be two or more persons to constitute a partnership. The maximum is limited
by companies Act. The number shall not in exceed 10 in banking business and 20 in any other business.
(d) SHARING OF PROFIT
Section 6 of the Act clearly says that mode of determining existence of partnership is existence of
‘profit sharing’. The agreement entered into by the partners must be to share the profits of a business. The
profits contemplated by the Act are ‘net profits’ i.e., the returns obtained after deducting the cost of
obtaining it.
The earlier view was that a person who has a share in the profits of business is to be treated as a
partner. This principle was laid down in Waugh v. Carver (1793). This rule was over ruled by the House of
Lords in Cox v Hickman (1860). In the above case Lord Cranworth held that participation in profits is not
the decisive test of a partnership. The true test is whether there is mutual agency among the members of the
association.
In Cox v Hickman (1860), S & S were iron merchants. Being in financial crisis they made
compromise with their creditors. Under the compromise the property of S& S were to be held by creditors
as trustees. But the creditors never acted as the trustees under the agreement. The firm purchased a quantity
of coke from the plaintiff, Hickman. He was given a bill of exchange for the price. The bill remaining
1
State Bank of India Vs M/s.Simko Engineering Works2005(1) Civil Court Cases 319 (P&H)
unpaid, Hickman brought an action against the trustees including Cox. They were held not Liable as
partners.
Section 6 of the Indian Partnership Act also follows the ruling in Cox v Hickman. Accordingly,
Sharing of profit does not itself make such person as partners. According Explanation 2 the receipt by a
person of a share of the profits of a business, or of a payment contingent upon the earning of profits or
varying with the profits earned by a business, does not of itself make him a partner with the persons carrying
on the business;
Explanation 2 to section 6 gives a list of four persons who are entitled to receive share of profit and
at the same time they are not partners.
1. A Creditor to the firm- A lender of money to persons engaged or about to engage in any business,
2. a servant or agent or remuneration,
3. the widow or child of a deceased partner, as annuity, or
4. a previous owner or part owner of the business, as consideration for the sale of goodwill or share
thereof, does not of itself make the receiver a partner with the person’s carrying on the business.
PARTNERSHIP AND COMPANY
Partnership though very much similar in its activities defers from a limited Company as pointed out
below.___________________________________________________________________________
Partner ship Limited Company
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1. An unincorporated body of persons It is an incorporated body with specific legal
A firm is only short form of referring entity.
to all the partners together collectively.
2.No Juristic personality A company is Juristic person.
3.Each member jointly and severally Liability of the members limiter to share
Liable for all the debts value.
4.Each partner is entitled to participate The share holders have no such right
in the management
5.Every partner is an agent of the firm No share holder is considered an agent of the
and also of the other partners. other members.
6. A partner cannot assign his share to a As a general rule a shareholder can a valid
stranger without the consent of other assignment of his shares to any one
members.
7.Death insolvency or retirement In such cases the company will continue
of a partner dissolves the firm
8.Registration of a partnership is not A company formed only on incorporation
compulsory and registration.
9.Minimum number is 2 and maximum
is 20 (10 in banking business the maximum is 50. In a public company the minimum is 7 but no limit for
maximum.
PARTNERSHIP AND JOINT HINDU FAMILY BUSINESS
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PARTNERSHIP JOINT HINDU FAMILY BUSINESS
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1. partnership is the result of an It is the result of a status
agreement between the partners.
2. Partners should consent to admit a new Membership is always fluctuating by births
partner and deaths.
3. The business is carried on by all or any The management of a joint family business
of them acting for all is generally by the Kartha the senior male member of the family.
4. Death of a partner dissolves the Death of coparcener does not dissolve the partnership
family business.
5. A partner has the right to Claim the No such right is available to a member
accounts
6. Mutual agency is put in application The junior members of the family cannot
and each partner is an agent of the firm represent the family to outsiders
7. Each partner is jointly and severally The junior members are liable for the family
liable for the partnership debts. debts to the extent of their interest in the family property
8. Insolvency of a partner terminates Insolvency of a member will not affect his
his membership position in the family
9. Minor can be admitted to benefits of a Here a minor become entitled to the benefits
partnership with the consent of the partners of a trading family solely by reason of his
birth in the family.
10 A partnership continues till dissolves filing a suit for partition is sufficient for
by act of parties or decree of court disruption of a joint family.
11.Registration though not compulsory Registration is not necessary
an unregistered firm suffers from
a number of disabilities and therefore
registration is usually done.
DIFFERENT TYPES OF PARTNERSHIP
1. PARTNERSHIP AT WILL (Section 7)
According to Section 7 where no provision is made by contract between the partners for the duration
of their partnership, or for the determination of their partnership, the partnership is “partnership-at-will”.
Thus if the partnership agreement makes no provision regarding the duration of the partnership, it is a
‘Partnership at will.
In Talak Chand V.Keshav Lal (1973), the Calcutta High Court held that a provision to give six
months notice was not inconsistent with a partnership being one at will.
In Thyagaraja Chettiyar v. Muthappa Chettiyar (1961), the Supreme Court held that in order to
determine the nature of a partnership at will the court should examine whether under facts of the case an
implied term could be inferred as to the duration or determination of partnership.
2. PARTICULAR PARTNERSHIP (Section 8)
According to Section 8 of the partnership Act, A person may become a partner with another person
in particular adventures or undertakings. Thus Where persons agree to carry jointly a particular adventure or
undertaking the relation so created may be called a particular partnership. Where two or more persons agree
together for the purchase of a particular thing in an action sale with a view of make a re-sales jointly for
getting profit, the position of the parties will be deemed to deemed to be that of partners.
SPECIFIC RIGHTS AND DUTIES OF PARTNERS
Section 17 lays down the specific duties and rights of the partners in certain circumstances. By virtue
of this section, subject to contract between the partners,
(a) 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 and---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 incidents of partnership-at-
will; and
(c) Where additional undertakings are carried ---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.
Thus from the Analysis of Part III of the Act the Rights and Duties of the Partners may be summed
up as follows.
RIGHTS OF THE PARTNERS
1. Right to Take Part in Business (S.12(a)
2. Majority Rights (S. 12(c)
3. Access to Books (S.12(d)
4. Right to be indemnified by the firm (S. 13(e)
5. Right to equal share the profits
6. Right to interest on capital (S. 15(c)
7. Right to 6% interest per annum on advance (S 13 (d)
8. Right to use the partnership property (S.15)
9. Right to act as agent of the firm (S.18)
10. Right to object to the admission of a new partner (S .13(c)
11. Right to retire (S .32 (1)
12. Right not to be expelled
DUTIES OF A PARTNER
1. To carry on business for common advantage
2. To observe good faith
3. To render accounts
4. Duty to indemnity fraud
5. Every partner is bound to attend diligently t his duties in the conduct of the business of the firm, and to
use his knowledge and skill to the common advantage of all the partners’( S. 12 (b).
6. To indemnity willful neglect (S. 13 (f)
7. Not to claim remuneration
8. Share Losses
9. To account for personal profits
10. Duty not to carry on any other business
11. To act within authority (S. 19 (1)
LIBILITY OF THE PARTNER FOR ACTS OF THE FIRM
By virtue of Section 25 every partner is liable jointly with all the other partners and also severally,
for all acts of the firm while he is a partner.
LIBILITY OF THE FIRM FOR WRONGFUL ACTS OF A PARTNER
By virtue of Section 26 if 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 or injury is caused to any third party, or any
penalty is incurred, the firm is liable therefore to the same extent as the partner.
LIBILITY OF FIRM FOR MISAPPLICATION BY PARTNERS
Section 27 deals with liability of the firm for misapplication of money by partners. By virtue of
Section 27 if a partner acting within his apparent authority receives money or property from a third party and
misapplies it, or A firm in the course of its business receives money or property from a third-party, and the
money or property is misapplied by any of the partners while it is in the custody of the firm, the firm is
liable to make good the loss.
Thus the Firm is Liable only if
1. if a partner acting within his apparent authority misapplies the money or
2. A firm in the course of its business receives money or property from a third-party, and the money or
property is misapplied by any of the partners while it is in the custody of the firm
RIGHTS AND LIABILITIES OF A MINOR ADMITTED TO THE BENEFITS OF A
PARTNERSHIP (Section 30) A minor having no contractual capacity cannot be a partner at the
formation of partnership. Once a partnership is created by others, however it is possible to admit a minor to
the benefits of such partnership. By virtue of Section 30 (1) a person who is a minor according to the law to
which he is subject may not be a partner in a firm, but, with the consent of all the partners for the time being,
he may be admitted to the benefits of partnership.
Rights of minor partners as explained in Section 30 (2)
By virtue of Section 30 (2) a minor has a right to such share of the property and of the profits of
the firm as may be agreed upon, and he may have access to and inspect and copy any of the accounts of the
firm.
Thus rights of minor partners are as follows,
1. Minor has a right to get a share in the property,
2. Minor has a right to get a share of the profits of the firm as agreed,
3. Minor is entitled to have access to inspect and get copies of the accounts of the firm. (Section 30 (2)
But he is not entitled to have access to all the ‘books’ kept by the firm as they might contain secret
information restricted to the partners alone.
Liabilities of a Minor Partner
By virtue of Section 30 (3) a minor’s share is liable for the acts of the firm, but the minor is not
personally liable for any such act. Thus his agreed share in the property and profits of the firm is liable for
the acts of the firm but the minor is not personally liable for the acts of the firm but the minor is not
personally liable for any such act. So also his personal property will not be liable for debts of the
partnership.
By virtue of Section 30 (4) a minor may not sue the partners for an account or payment of his share
of the property or profits of the firm, save when severing his connection with the firm, and in such case the
amount of his share shall be determined by a valuation made as far as possible in accordance with the rules
contained in Sec. 48: Provided that all the partners acting together or any partner entitled to dissolve the firm
upon notice to other partners may elect in such suit to dissolve the firm, and there upon the Court shall
proceed with the suit as one for dissolution and for settling accounts between the partners, and the amount of
the share of the minor shall be determined along with the shares of the partners.
To be precise as long as he continues to get the benefits he cannot sue the other partners. If he wants
to sever his connection from the firm he can file a suit for accounts and for getting his due share.
OPTION OF MINOR
The minor is entitled to exercise an option, on becoming a major, to continue his membership or to
repudiate it. He should make his election within six months of attaining majority.
By virtue of Section 30 (5) At any time within six months of his attaining majority, or of his
obtaining knowledge that he had been admitted to the benefits of partnership, whichever date is later, such
person may give public notice that he has elected to become or that he has elected not to become a partner in
the firm; and such notice shall determine his position as regards the firm. Provided that, if he fails to give
such notice, he shall become a partner in the firm on the expiry of the said six months.
By virtue of Section 30 (6) where any person has been admitted as a minor to the benefit of
partnership in a firm, the burden of proving the fact that such person had no knowledge of such admission
until a particular date after the expiry of six months of his attaining majority shall lie on the persons
asserting that fact.
Thus if he did not know within that period that he had been admitted to the benefits of the
partnership, he can make his election within six months of his obtaining such knowledge. The burden of
proof that he did not have knowledge of his admission to the firm till a particular date is upon him. If he
fails to give such notice within the prescribed period, he shall be deemed to have elected to become a
partner. Public notice under the Act means a notice to the Registrar in the case of a registered firm and a
notice in the official gazette and in at least one local newspaper (Section 72).
EFFECT OF ELECTION IN FAVOUR OF BECOMING A PARTNER
Under Section 30(7) when the minor admitted to the benefits elects to become a member his rights
and liabilities are as following:
(a) His rights and liabilities as a minor continue up to the date on which he becomes a partner, but he
also becomes personally liable to third parties for all acts of the firm done since he was admitted to
the benefits of partnership, and.
(b) His share in the property and profits of the firm shall be the share to which he was entitled as a
minor.
EFFECT OF ELECTION NOT TO BECOME A PARTNER
The rights and liabilities as between the partners shall continue the same as before till to notice is
given. By virtue of Section 30 (8) where such person elects not to become a partner, -
(a) His rights and liabilities shall continue to be those of a minor under this section up to the date on
which he gives public notice;
(b) His share shall not be liable for any acts of the firm done after the date of the notice, and
(c) He shall be entitled to sue the partners for his share of the property and profits in accordance with
sub-section (4).
In Shivagouda v Chandrakant (1965) the defendant was one admitted to the benefits of the
partnership and continued to be a minor at the time of dissolution. Even after attaining majority he did not
exercise the option not to become a partner. The plaintiff sought to declare the three parties as insolvent.
The Supreme Court held that the defendant could not be declared insolvent together with the two other
partners as he was still a minor at the time of dissolution of the firm. His share in the profits and property of
the firm shall be same as he was entitled to as a minor.
DISSOLUTION OF A FIRM
Chapter 6 (Ss. 39-55) of the Act contains the provisions regarding the dissolution of a firm.
DEFINITION OF DISSOLUTION
If there is a breakdown or severance of partnership relation between a few partners that amounts to
dissolution of partnership between the firm and the partners. By virtue of Section 39 the dissolution of a
partnership between all the partners of a firm is called the “Dissolution of the firm”.
E.g. A, B, C, and D are partner in a firm. D retires from the partnership. This is dissolution of
partnership by D with other partners and A, B and C will continue as partners of the reconstituted firm.
MODES OF DISSOLUTION
Modes of Dissolution of partnership may be studied under two heads
1.Dissolution without intervention of court
2. Dissolution by the order court
WITHOUT INTERVENTION BY THE ORDER COURT
OF COURT
1. By agreement 1. Insanity
2. Compulsory dissolution 2. Permanent incapacity
( i ) Insolvency
( ii ) Illegality 3. Misconduct
3. On happening of certain 4. Breach of agreement
contingencies
( i ) Expiry of term 6. Loss
( ii ) Completion of the object 7. Just and equitable grounds
( iii ) Death
( iv ) Insolvency
4. By notice
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DISSOLUTION WITHOUT INTERVENTION OF COURT
1. DISSOLUTION BY AGREEMENT
By Virtue of Section 40 a firm may be dissolved with the consent of all the partners or in accordance
with a contract between the partners.
2. COMPULSORY DISSOLUTION
By virtue of Section 41 a firm is dissolved-
(a) By the adjudication of all the partners or of all the partners but one as insolvent, or
(b) By the happening of any event which makes it unlawful for the business of the firm to be carried on
or of the partners to carry it on in partnership
However, where the firm carries on more than one separate adventure or undertaking, the illegality of one or
more shall not of itself cause the dissolution of the firm in respect of its lawful adventures and undertakings.
3. DISSOLUTION ON THE HAPPENING OF CERTAIN CONTINGENCIES
By virtue of Section 42 Subject to contract between the partners a firm is dissolved-
(a) If constituted for a fixed term, by the expiry of that term; -
(b) If constituted to carry out one or more adventures or undertakings, by the completion thereof,
(c) By the death of partner and
(d) By the adjudication of a partner as an insolvent.
4. DISSOLUTION BY NOTICE OF PARTNERSHIP-AT-WILL
By virtue of Section 43 (1) where the partnership is at will, the firm may be dissolved by any partner
giving notice in writing to all the other partners of his intention to dissolve the firm.
By virtue of Section 43 (2) the firm is dissolved as from the date mentioned in the notice as the
date of dissolution of the notice.
DISSOLUTION BY THE COURT
By virtue of Section 44 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, willfully or persistently commits breach of agreements
relating to the management of the affairs of the fin-n or the conduct of its business, or otherwise so conducts
himself in matters relating to the business that it is riot 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 Civil Procedure, 1908 (5 of 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.
LIABILITY FOR ACTS OF PARTNERS DONE AFTER DISSOLUTION-
By virtue of Section 45 (1) notwithstanding the dissolution of a firm, the partners continue to be
liable as such to third parties for any act done by any of them, which would have been an act of the firm if
done before the dissolution, until public notice is given of the dissolution:
However the estate of a partner who dies, or who is adjudicated an insolvent, or of a partner who, not
having been known to the person dealing with the firm to be a partner, retires from the firm, is not liable
under this section for acts done after the date on which he ceases to be a partner.
