II SEMESTER

(BATCH 2021-26)

SOL, GEHU, DEHRADUN

UNIT 5- INDIAN PARTNERSHIP ACT, 1932

Compiled by: Ms. Avantika Chaudhary

Introduction

Partnership results from a contract and is governed by the Partnership Act 1932. The partnership is
also governed by the general provision of the Indian Contract Act on such matters where the
Partnership Act is silent. It is expressly mentioned that the provision of India Contract Act which is
not repealed will be applicable on Partnership until and unless such provision is in contrary to any
provision of Partnership Act, 1932. The rules of contract regarding the capacity to contract, offer,
acceptance etc will also be applicable to the partnership. But the rules regarding the status of minor
will be governed by the Partnership Act, 1932 since Section 30 of the Act talks about the position of
the mino

Nature of Business

It is a business organization where two or more persons agreed to join together to carry out the
business for the purpose of earning the profits. It is an extension of a sole proprietorship. It is better
than sole proprietorship because in sole proprietorship the business is carried out by the individual
with limited capital and limited skill. Due to the limited resources of a single individual carrying a
sole proprietorship, a larger business requiring more resources and investment than available to the
sole proprietor cannot be thought of such business. On the other hand in partnership, a number of
partners join together with their capital to form an agreement and carry out a business jointly.

Meaning

According to Section 4 of the Partnership Act,1932

“Partnership is the relation between persons who have agreed to share the profits of a business carried
on by all or any one of them acting for all”.

What are the Essential Elements of Partnership?

All the following elements must be present if an association of persons is to be called a

partnership:

1. Association of two or more persons

There must be at least two persons to form a partnership. As far as the maximum number of
partners, in a firm is concerned, the Partnership Act is silent. However, section 464 of the
Companies Act, 2013 lays down that where the firm is carrying any busines s, the number of
partners should not exceed 50 (It can be increased upto 100). If the number of maximum
partners exceeds this limit, the partnership becomes an illegal association of persons.

2. Agreement between persons

According to Section 5 of Partnership Act, the relation of partnership arises from contract
and not from status. Thus, the members of a Hindu Joint Family carrying on a business, or
the co-owners of a business are not ‘partners’ because HUF and co -ownership are created by
operation of law and not by contract. The agreement of partnership may be expressed or
implied.

3. Business

Partnership can be formed only for the purpose of carrying on some business. Section 2(b)
of Partnership Act says that the term ‘business’ includes every trade, occupation or
profession. Thus, an association created primarily for charitable, religious and social
purposes are not regarded as partnership. Similarly, when two or more persons agree to
share the income of a joint property, it does not amount to partnership; such relationship is
termed as co-ownership.

4. Sharing of Profits

The division of profits is an essential condition of the existence of a partnership. The

sharing of profits is only a prima facie evidence of the existence of partnership, and this is
not the conclusive test of it.

5. Business carried on by all or any of them acting for all (Mutual Agency)

The underlying or cardinal principle which governs partnership is the mutual agency
relationship amongst the partners. It means each partner is the agent of the firm as well as of
the other partners. The business of the firm may be carried on by all the partners or by any
of them acting for all. Thus, a partner is both an agent and a principal. He can bind the other
partners by his acts and is also bound by the acts of the other partners. The law of
partnership is regarded as an extension of the general law of agency.

“Partnership arises from contract and not from status”

That partnership is the result of a contract and cannot arise by status is sufficiently
emphasised by section 4 itself by use of the words “partnership is the relation between the
persons who have agreed to share the profits of a business”. It is clear from the definition
that the partnership is of contractual nature. It springs from an agreement. The same point is
further stressed by the opening words of Section 5 that the relation of partnership arises
from contract and not from status.

Thus if on the death of the sole proprietor of a business the legal heirs decide to continue to
carry on the business, they cannot be called as partners because there is no agreement
between them. Similarly members of Joint Hindu Family business carrying on a family
business cannot be treated as partners because a person becomes the member of the
business by birth and not by agreement. Sec.5

On the death of a partner, his legal heirs do not automatically become the partners of the
firm. If the surviving partners agree to admit the legal heirs into partnership, then a fresh
agreement to that effect will have to be made. Thus from the above it is clear that
partnership always arises out of a contract and not from status.

Who may be partners of a firm?

According to the definition of partnership in section 4, a partnership is an agreement. All

those persons who are competent to contract can become partners. As per section 11 of
Contract Act, a person is competent to contract if he is a major, of sound mind and is not
disqualified from contracting by any law. Thus a partner must fulfil the conditions of section
11. However, a minor u/s 30 of the Partnership Act, can be admitted to the benefits of the
partnership firm with the consent of all the partners.

The Tests of a True Partnership

According to Sec. 4, there are 4 essential elements of partnership:

1. That it is the result of an agreement, between two or more persons.

2. That it is formed to carry on a business.

3. That the persons concerned agree to share the profits of the business.

4. That the business is to be carried on by all or any of them acting for all.

If there is an express agreement between them to share the profits of a business and the
business is being carried on by all or any of the acting for all there will be no difficulty, in
the light of provisions of sec. 4, in determining the existence or otherwise of partnership.
But the task becomes difficult when either there is no specific agreement or the agreement is
such as does not specifically speak of partnership. I n such a case, for testing the existence or
otherwise of partnership relation, Section 6 has to be referred.

According to Sec. 6 in determining whether a group of persons is or is not a firm or

whether a person is or is not a partner in a firm, regard shal l be had to the real relation
between the parties, as shown by all relevant facts taken together .

If all the relevant facts taken together show that all the four essential elements are present,
the group of persons doing business together will be called a partnership. The tests of a true
partnership were first laid down by the House of Lords in the case
of Cox v. Hickman (1860) 8 II L.C. 268. In that case, a trader entered into arrangement
with creditors to manage his business and to use the profits for pay ing off the creditors. It
was held that the creditors were not partners of the business. Sec. 6 of the Partnership Act is
a comprehensive restatement of the rule laid down in this case.

The relevant factors to be considered for determining whether there is partnership are the
conduct of parties, the mode of doing business, who controls the property, the mode of
keeping accounts, correspondence, the manner of distribution of profits, etc. of the four
elements, the third element, viz., sharing of prof its is important but not conclusive. In the
following cases there is no partnership even though there is sharing profits:

(a) A creditor taking a share of profits in lieu of interest and part -payment of principal.

(b) An employee getting a share of profits as remuneration.

(c) Share of profits given to workers as bonus.

(d) Share of profits given to the widow or children of deceased partners as annuity.

(e) Share of profits given to a previous owner of the business as the consideration for the
sale of the goodwill (Explanation 2 to Section 6).

In all the above cases the fourth essential element of partnership (viz., agency) is absent. A
creditor or any employee, or the widow and children of deceased partners cannot bind the
firm by any act done on behalf of the firm. Only those who have authority to bind the firm
by their actions can be called partners. Thus, the most important test of partnership is
agency and authority. This is the cardinal principle of partnership law. If this element of
mutual agency is absent, then there will be no partnership.
KD Kamath & Co.: It was held by the Supreme Court that the two essential conditions need
to be satisfied in relation to the partnership:

1. There should be an agreement to share the profits as well as the losses of

business, and

2. The business must be carried on by all or any of them acting for all, within
the meaning of the definition of Partnership under section 4.

If the above-said conditions are satisfied and even if the exclusive power and control was
vested in one partner or if the bank account can be operated by only one partner, then also
there will be a partnership between the parties.

Satranjan Das Gupta v. Dasyran Murzamull (SC): It was held that there was no partnership
between the parties because of the following conditions:

1. Parties have not retained any record of terms and conditions of the
partnership.

2. Partnership business has maintained no accounts of its own, which would be

open to inspection by both the parties.

3. No account of the partnership was opened with any bank.

4. No written intimation was conveyed to the Deputy Director of Procurement

with respect to the newly created partnership.

Analysis of judgement COX vs Hickman

What is the mutual agency in The Partnership Act, 1932?

The mutual agency is the partnership's legal relationship, with each member having authorization
rights and the authority to conclude commercial contracts with the partner. This means that every
partner in the partnership is the agent in the company and authority for taking business choices
committing or binding, as a whole, to an agreement between itself and a third party or organization.
 Only partners operating in the usual scope of business activities and transactions have mutual agency.
A retail clothing partner with an agency, for example, would not be allowed to contract other partners
to buy an investment property since it would not be in the usual company operation.

On the other side, one of the retail partners might buy products from a supplier and demand
partnership payment for the products. This transaction is part of the company's usual activity.

Facts of the case

Under the name of B Smith & Son, Benjamin Smith and Josiah Timmis Smith were active as iron and
maize tradespeople. They owed the creditors a lot of money and there was a meeting, including Cox
and Wheatcroft. More than six-sevenths of the number and value of the debtors performed a deed of
arrangement. The trusts have been listed and the rental period is 21 years. The company was to
operate under the name "The Stanton Iron Company." The deed also contains a clause preventing the
Smiths from prosecuting the current debts. After six weeks after which no trustee was appointed, Cox
had never functioned as trustee.

Hickman produced 3 bills of exchange that were accepted but not honored by the firm. The products
were supplied for the business.

The trial was initially brought before Lord Jervis, who ruled for the accused. The action was taken
before the Exchequer Chamber in which three judges wanted the judgment to be upheld and the
remaining three reverted it.

What were the issues?

Whether the merchants who were essentially the creditors of the company are in partnership?

Contentions of the case

The Wheatcroft lawyers argued:

¾ There was no action, as though Hickman had heard that the trustees were Cox and Wheatcroft, that
Cox was never a trustee and Wheatcrofte had resigned. The appellants were never brought to justice.

¾ The Smiths owned and owned the partnership never altered.

¾ No individual becomes a partner in a qualifying benefit from trade. There is no collaboration here
until the gains are taken.

Cox's lawyer argued that:

 The defendant can only be held responsible if:

¾ He has on the bill his name

¾ Allowed another person to place their name on the bill

¾ The power was held by himself

· He is not responsible for the first and third points. The second point is that until
an agency is proven, the defendant cannot be held accountable.

· The defendant is responsible for demonstrating that the complainant is a partner.

Hickman's lawyer argued that:

¾ A partnership arrangement was concluded to carry out operations for the benefit of creditors

¾ Planed creditors may partake in the company's earnings and become partners in the company

Any partner may bind everyone other by accepting the invoices in the ordinary business process

Test of Partnership[2]

Mode of the existence of a partnership. —The true relationship between the two parties, as evidenced
by all relevant facts taken together, should be considered when deciding whether or not a group of
individuals is an enterprise, or whether or not a person is or is not a company partner.

Explanation 1.These people do not themselves form partners by sharing profits or gross return on the
property by others with a shared or shared interest in that property.

· Example: Two persons are co-owners of a house in a lawsuit. Every month they rented the house
and paid the rent. This does not form a partnership.

Explanation 2. The person who has received a share of the company's profits and a payment
contingent on profit or which vary in terms of profits earned by an enterprise does not make him/her a
partnership with the companies, and in particular, the person who received that share or payment.

¾ A person who has given money to a partner or company engaged in an enterprise may offer a
share in the profit, rather than or in addition to the money he has provided. But owing to such a
percentage of revenues, he will not become a partner.
¾ A business servant/agent may get, in addition, or place of the ordinary pay, a share of the
company's earnings. But that doesn't make him a company partner.

Example: A is an assistant at a broker's company and receives a percentage of its earnings beyond its
wages. Sometimes, on behalf of the company, A also signs certain letters and papers. A is simply an
agent of the enterprise, though, and is not only a partner because he has a stake in the profits. (This is
comparable to Mc Laren Morrison vs. Verschoyle[3])

¾ The widow or offspring of a dead partner often get an annuity share in his profits. The widow or
the descendants of the company are not partners.

¾ A portion of earnings may be provided in return to a shareholder or the former owner of an

enterprise who, along with goodwill, sells its stake. However, such a person is not a partner in the
firm.

Example:A physician is a physician who sold his practice and his will to B. They sign an
arrangement whereby A helps B by referring him to his patients. A will receive a part of earnings, in
turn. A and B aren't partners in this regard. This is comparable to Pratt vs. Strick[4]

Section 6[5] makes explicit that 'the genuine relationship between the parties, as all relevant facts
demonstrate combined, must be taken into consideration when evaluating whether a group of people
is or is not a company, or whether a person is a partner in a company.

A partnership cannot be established based on proclaimed intentions. It was concluded that simple
usage of the word 'partner' in Raghunathan vs. Hormusjee[6] leads to a partnership when there is no
partnership. The actual or true relationship between the so-called partners of the company as a result
of all the essential circumstances determines the existence of a partnership.It depends on the parties'
purpose, as demonstrated by their agreement or behavior, that creates implicit agreement or both. No
one becomes a partner in a mere shared interest. Sharing finance doesn't indicate that two individuals
are partners in the same way.

Cox vs. Hickman[7] concluded that the sharing of profits is a vital and not conclusive criterion of all
the fundamental elements of a partnership. Mutual agency is the real test for establishing partnerships.
If one partner can bind the other partners and the company by its acts and is, in turn, linked with other
partners' activities, a partnership may only be stated.

Highlights of Cox v. Hickman

¾ No partner is only sharing the profit. It's only the first test

¾ Work with his real or ostensible authority should have been done personally or on behalf of him.

¾ The partners should be able.

¾ No partner relationship exists in this scenario. (the 'real relationship' term in Section 6 of the Act)

Judgment

The act provided the creditors with extraordinary authority. The majority of them had the option of
continuing trade or not, and of creating norms and regulations for the exercise of trade which are the
powers of partners.

However, if they could, the creditors did not do the business, they let the trustees go on with it. They
did not become commercial partners by this act of theirs. If they had done business, none of the
trustees would have taken the bill of exchange as the directors.

This is just a contract between creditors and Smiths for the repayment of current and future earnings
by the creditors. This link between the creditors and debtors is not sufficient for the principle to have a
connection with the agency. The Trustees are responsible since they are contract agents, yet the
trustees' creditors are not the directors.

The House of Lords Held did not agree and Cox did not take responsibility.

Lord Cranworth argued that profit participation is not a crucial partner test. The real test is whether
the partners are 'mutual agencies.'

Lord Cranworth - "A partner's responsibility for his co-partners conduct is indeed a principal's
responsibility for his agent's activities. If two or more individuals are involved in an ordinary
business, they each have an implicit authority from another person to bind them all through contracts
entered into in the course of business. Each trading partner is his co-agent; partner's everyone is
consequently accountable for the other's regular commercial contract."

Brief summary-
Sr. no. Partnership Firm

A partnership is formed by mutual agreement of all the partners. Registration is

1. Formation
not compulsory.

A partnership is collection of individuals. It does not have a separate legal

2. Legal Status
entity.

(i) The minimum number of persons required to form a partnership is 2.

3. Number of
Members (ii) As per Companies Act, 2013 the number of partners in a partnership firm
carrying on any business should not exceed 50 persons.

4. Liability of
The liability of partners is unlimited.
Members

5. Agency of Every partner is the agent of the firm and his partners for the purposes of the
Members business of the firm.

6. Transfer of No partner can transfer his share or interest in the firm without the consent of
shares his co-partners.

7. Stability A partnership comes to an end on the death and insolvency of its partners.

8. Management A partnership firm is managed by partners themselves.

Sr. no. Partnership Firm

The partnership agreement (deed) regulates the mutual rights and duties of
9. Powers
partners only.

10. Statutory
A partnership firm is not required to comply with any such statutory obligation.
Obligations

11. Interest A partner has an interest in assets of the partnership.

Partnership Deed

Now a partnership is when two persons form an association to carry out a business with the motive to
earn profits. They share the profits from such a business. Such an association will be voluntarily entered
into by the partners based on an agreement between them.

Such an agreement between partners can be written or can even be oral. However, it is strongly advised
for legal and practical purposes that such an agreement or contract be in the written form. And this
written agreement between partners to form a partnership firm is what we call a Partnership Deed.

Procedure of Registration

According to the India Partnership Act 1932, there is no time limit as such for the registration of a firm.
The firm can be registered on the date when it is incorporated or any such date after so. The requisite fees
and fines must be paid. The procedure for such a registration is as follows,

1] Application to the Registrar of Firms in the prescribed form (Form A). Nowadays this facility is even
available online. Such an application must contain certain basic details about the firm such as,

• Name of the Partnership Firm

• Name and address of all partners

 • Place of business (address of main and branch offices)

• Duration of the partnership

• Date of joining of partners

• Date of commencement of business

2] The duly signed copy of the Partnership Deed (which contains all the terms and conditions) must be
filled with the registrar

3] Deposit/pay the necessary fees and stamp duties

4] Once the registrar approves the application, the firm will be entered into the records. And the registrar
will also issue a certificate of incorporation.

And this is how the process of registration will be completed and the firm will attain legal recognition.
Rights and Duties of Partners Inter Se under Indian Partnership Act, 1932

Duties of Partners

1. Duty to act in good faith

The partners must act in good faith for the greater common advantage. The partner must work
for more profit for the company. The partner should not receive secret profits at cost. A
partner must provide real accounts and complete information on all matters affecting the
company to any partner or his legal representative. This is an absolute condition, and it is not
possible for any partner to contract himself even by an agreement with other partners. Destiny
continued even after the partnership ceased. The partners are indebted to the ex-partner along
with the legal representatives of the partner.

Bentley v. Craven [ii]

In this case, there has a partnership in a sugar refining company. One of the partners
specializes in buying and selling sugar. Therefore, he was entrusted with the task of buying
and selling sugar. However, the partner sold the sugar from his own stock and thereby made a
profit. When the partners discovered this fact, they took action to recoup the profits the
partner had earned. The court held that the partner could not make any secret profits and
company is entitled to recover the secret profits earned by that partner.

2. Duty to Render true accounts

According to this act, the partners are committed to disclosing and providing complete
information about matters affecting the organization to any partner or his or her legal
representatives. The partner should not hide things from other co-partners regarding the
business of the company. Each partner can access the accounts of the company.

Law v. Law [iv]

In this case, the court held that if a partner had any additional information, he would be
obligated to provide it to the co-partners. If the partner enters into an agreement with the other
co-partners, such agreement shall not be made unless the details of the material known to him
are given to his partners.
3. Duty to Indemnify for fraud

If there is any loss in the business of the company due to the action of the partner, he must
pay compensation to his partner for such loss. The reason for this duty is to make partners to
deal with costumers honestly and fairly. Conversely, the liability to indemnify for fraud is not
excluded by entering a contract. Because entering any such agreement is against public
policy. This provision is absolute. This is not subject to terms of contract between partners.
The provision in the partnership deed that exempts a particular partner from liability for
damages caused by his fraud is invalid and will not be enforced.

For Example:
A, B, C, D entered into a partnership for the manufacturing business. A committed fraud of
Rs.1 Lakh. Consequently, all co-partners i.e., B, C and D are responsible. Here, Company A
must pay compensation for damage caused to the company due to fraud.

4. Duty not to compete

This act states that if a partner makes a profit by participating in an equivalent or competing
business with the company, the partner must account such profits. However, the partner can
pursue any business outside the business scope of the company. The duty can be changed by
the deed of partnership. Partners can enter into an agreement that allows the partner to pursue
a business that competes with the business or restricts the partner from conducting business
other than the company. (Section 11 of Indian Contract Act). If a person violates such
agreement and conducts a personal business that does not compete with the business of the
company, such partner is not liable to calculate profits, but his co-partners may apply to
terminate the partnership.

Pullin Bihari Roy v. Mahendra Chandra Ghosal [vii]

In this case, there is a partnership for buying and selling salt. One of the partners, when
buying salt in the company, made a profit by buying some salt for himself and then selling it
in his personal account. He is accountable to his associates for the profits he makes.

5. Duty to be Diligent

A partner must be diligent in his duties. For mere errors of judgment or acts done in good
faith, a partner cannot be made liable.
 Cragg v. Ford [ix]
There is a partnership between the plaintiff and the defendant. The defendant is the managing
director of the company and, therefore, the conduct of the termination is left to him. Plaintiff
advised the defendant to dispose of some bales of cotton. However, the respondent said that
the same would happen after the cancellation. Meanwhile, cotton prices fell, and a much
lower amount was realized by selling cotton.

Action for indemnity may be brought only on behalf of the company or partners. The partner
cannot take an action for indemnity in his personal capacity.

6. Duty to properly use the property of the firm

This act states that the property of the company should be owned and used by the company
only for the business of the company. If a partner does not use the property for his personal
benefit and does so, he is liable to all co-partners. May make him liable for damages caused
by such use. This duty can be avoided by entering an agreement to the contrary.

7. Duty to account for personal profits

If a partner uses the company's property and makes a profit from it, he must account for the
property. This duty arises due to the fiduciary relationship between the partners.

For Example: A, B and C are partners in an organization. Goods were delivered to one
person D. D paid some extra commission to A for using his influence to deliver the goods.
Here, A has the responsibility to account the commission towards the co-partners.

Example 2: A, B, C partners in the bottle sales business. B began to pursue the same business
and began to influence customers to buy the bottle from him rather than from the company.
Here, B is responsible to account the profits earned from the business.

Rights of Partners

Partners may exercise the following rights under the Act if the partnership deed does not
specify:
The conduct of Business

1. Right to take part in the conduct of Business

All the partners of a partner company have the right to participate in the business conducted
by the company, because the partnership business is the business of the partners, and their
management powers are generally coexisting. If the management power of a particular partner
interferes and the person is wrongly excluded from participation, the court may intervene in
such circumstances. The court may restrain the other partner from doing so by prohibition.

Other remedies include a suit for termination, a suit for accounts without termination and a
partner who mistakenly loses the right to participate in management. The previously
mentioned provisions of the law apply if there is no existing agreement contrary to the
partners. It is common to find a term in partnership agreements that gives only a limited
power of management to a particular partner or partnership control with one or more partners
to exclude others.

In such a case, the court is generally reluctant to interfere with the management of such a
partner (s) unless there is evidence that something was done illegally or breached trust in the
partners.

In Suresh Kumar Sanghi v. Amit Kumar Sanghi case, in order to undermine the position
of the managing partner, A partner wrote a letter to the principals asking not to supply the
company's motor vehicles and banker not to honour the company's cheques. The High Court
of Delhi issued a restraining order against the partner, saying the partner's action was to
damage the company's business.

2. Right to be consulted

When any kind of difference arises between the partners of the company with respect to the
business of the firm, it is determined by the majority views of the partners. Every partner in
the organization has the right to express his or her opinion before deciding. However, there
can be no such changes as the business of the organization without the consent of all the
partners involved. As a rule, the opinion of most partners is prevalent. However, the majority
rule does not apply when there is a change as an organization. In such cases, the unanimous
consent of the partners is required.
 For Example: If a minor must be included as a beneficiary, then the consent of all the
partners is required.

3. Right of Access to books

Each partner of the organization, regardless of active or sleep partner, has access to any books
of the partner company. The Partner reserves the right to examine and obtain a copy thereof if
necessary. However, this right must be exercised by Bonafide.

For Example: If a dormant partner wants to sell his shares to a partner and hires an expert to
examine the account and his stake in the company, the partners will not object the same.
Partners must provide reasonable grounds such as trade protection to object.

Mutual Rights

1. Right to Remuneration

No partner is entitled to receive any pay in addition to his partner among the profits of the
company for participating in the business of the company. But this rule will always be there.
Express may vary by agreement or by transaction, in which case the partner will be eligible
for reward. Therefore, the partner can get paid even in the absence of a contract, such a
reward is paid for the continued use of the company. In other words, where it is customary for
a partner to pay a wage for running the business of a company that he can do for himself
claim it even when there is no agreement for the same payment. It is common for partners to
agree that the managing partner will receive more than his or her share, salary, or commission
for the difficulties he encounters while running the company’s business.

For Example: There is an organization with active and dormant partners. In such a case, the
partners may enter into an agreement with the active partners entitling the active partners to
receive a certain amount as salary.

2. Right to share profits

Partners are entitled to share equally all the profits earned in the business. Similarly, the risks
to the partner company also contribute equally. The partner must confirm the amount of the
 share by inquiring whether there is an agreement on that behalf among the partners. If there is
no agreement, the burden of proving that the share of the profit is equal, and the shares are
unequal may be assumed to fall on the party making the same allegations. There is no
correlation between the ratio in which the partners share the profits and the percentage they
contribute to the capital of the partner company.

Mansha Ram v. Tej Bhan [xix]

In this case, there is no satisfactory evidence to show what proportion the partners are in to
divide the wage. The Haryana and Punjab High Courts are entitled to share equally benefits
even if the partners are paid separately and do unequal work.

o However, the right to share profits equally can be changed by concluding an

agreement against the partners. Therefore, the partners can settle the share of the
profits or agree to pay through the salary rather than the profits.

3. Interest Rights

Interest on Capital
Generally, a partner is not entitled to claim the interest on capital. He/ She can entitle the
interest on money (capital) only when the following conditions are satisfied:

o Express Agreement thereto effect, or the practice of specific partnership or

o any commercial practice to that effect; Or

o a legal provision that qualifies for such interest.

Interest on Advances:

Suppose a partner gives an advance to the company in addition to the amount of

capital he owes, in which case the partner is entitled to receive interest at the rate of
6% per annum.
 Note: It should be noted that interest on the capital ceases after the liquidation of the
company, but interest remains on the advance until it is paid. Therefore, the
termination of a company has no effect on the interest on the advance.

For example: If a person invests Rs.1 lakh in his partnership firm and deposits Rs.
1,20,000 as advance he will receive interests of profit on Rs.1 lakh and 6% interest on
Rs.1,20,000 per year.

4. Right to Indemnity

Indemnity means promise to make good the loss.

Right to Indemnified:

Each partner has the appropriate claim compensation from the company (or the company is seeking
compensation). This right is available for the management of the business and against payments made
in emergencies to protect the company from losses. A partner can be compensated for the payment he
made in normal and proper business behavior for things that a normal and prudent person does in
times of emergency.

The Company reserves the right to pay compensation to each partner in respect of payments and
obligations made by an individual in an emergency to protect the Company in addition to the normal
and proper conduct of the Company's business. If the prudent person has such payments, liability and
action, in such circumstances, in his own case, any loss incurred or incurred.

Right to indemnify the firm:

A partner must intentionally pay compensation to the company for any loss due to willful negligence
in the business conduct of the company.

For Example:
A company took a debt of Rs.5 lakhs from the bank. A, B, C and D are partners of the company. D
paid the debt of Rs.5 lakhs (company’s debt) to the bank. Now, D can entitle to indemnified from his
partners A, B and C.
Thomas vs. Atherton [xxiii]
In this case, there is a dispute between the two companies over their boundaries. A partner of a
company who trespasses the border by violating rules, was asked to pay compensation. He paid
compensation and asked for indemnity from the company for the compensation paid. The court held
that the plaintiff (partner) was not entitled to indemnity because trespass is not connected with the
business.
Types Of Partners[2]
There are many different kinds of partners in a partnership of a business or a firm according to how
they work (participation) and their role. Some of these kinds of partners are:

1. Active or Managing Partner:

He is the key partner who takes active role in all the business and conduct of the firm. He
actively involves himself in all the matters and even sometimes act on behalf of the other
partners. He if retires, has to compulsory give a general public notice of his retirement for he
is most known of as a partner or otherwise he will continue to be held liable for the
acts/conducts/transactions/deals of the firm made by the other partners.

2. Dormant or the Sleeping Partner:

He is the most inactive partner of the firm. He never takes interest in the works of the firm
and hence is even not known to the customers or clients that he too is a partner of the firm. He
has just made the investment in the firm and shares the profits and losses of the firm and
agrees and is bounded by the activities of the other active partners. Such a partner if has
remain such a dormant partner for a long time then after his retirement a public notice is not
necessary to prevent him from the liability by holding out as he himself by his acts is
absolved. But if his existence and participation was known to some customers or suppliers for
that matter, a notice must be given to them or he will be liable by holding out to such persons
who believed him to be a partner.

3. Nominal or Ostensible Partner:

Such a partner is neither an active partner nor a dormant partner but a partner who does not
shares capital or profits with the firm but lends his name to be used with the firm�s name.
He does not have active interests and does not take active part in the decisions but is liable to
the outsiders as an actual partner only. He too if wants to retire must give a public notice or
could be liable for the later acts of the other partners.

4. Partner by Estoppel or Holding out:

If a person by his act or omission gives an image to the third party that he is a partner to the
 firm he is a partner by estoppel. He is a partner by holding out if the company represents him
as its partner and the person knows it and the third party believing on the fact acts in good
faith upon the belief. Such partners are liable to the third party are Section 28 of the
Partnership Act, 1932.

5. Partner in profits only:

A person if agrees and deals with the partners/ firm that he will share only the profits of the
firm and not the losses then he is a partner in profits only.

6. Minor as a Partner:

A minor cannot make an agreement and hence cannot become a partner like a major before he
attains the age of 18 but he can be �admitted to the benefits of the partnership.�[3] He will
share all the profits of the firm and can have access to the accounts of the firm for inspection
but cannot sue the partners for the profits while remaining in the firm. He will have limited
liability based on his shares in the firm and his personal property or sources could not be
accredited with the firm. But once he attains the age of 18, he has 6 months to decide whether
he wants to remain the partner or wants to discontinue the same. If he accepts then he will
become a partner like all others and will also be liable like al others and if not, he must issue a
general public notice of discontinuing or he would be assumed to be a partner and hence
could be held liable for the conducts of the firm.

7. Other Partners:
There are various other partners in partnerships. A secret Partner: someone who does not
wants his relationship of being a partner to be disclosed to the public but when if it happens,
he becomes liable for the acts of firm to the public. Outgoing Partner: who voluntarily retires
from the firm without dissolving it but is still liable for the deals/acts of firm that were signed
before his retirement. Limited Partner: who is liable only up to a limit that is set according to
the shares he has invested but such a partner is found only in a limited partnership and not in
general partnerships.
Liability of Holding Out

Section 28 of the Partnership Act, 1932 is as:

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
anyone 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.[4]

2. Where after partner's death the business 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 legal
representative or his estate liable for any act of the firm done after his death.[5]

Doctrine of holding out basically refers to an act or omission of the act which led others to believe
that the person is a partner of the company and has authority and hence in this faith they made an
agreement while in actual he does not have. Hence in such cases section 28 states that if a person has
represented himself as a partner of the business and the other party had made some transaction in this
faith, he cannot now go back and hence is estopped to be liable as a member as he presented himself.

This partner by holding out is therefore liable to compensate and make good the loss the third party,
whom he induced by being misrepresenting himself as partner, has suffered due to him but does not
by anyway gets a right of being a real -partner in the firm.

Example:
A introduced B as his partner to C. And B even after knowing that he is not a partner let A
misrepresent him and C believing on this fact make a deal or transaction with A. B now hence cannot
get back and will be liable in the capacity of being a partner (though he is not) by estoppel and will be
liable by holding out to C.

How Is Liability Of Holding Out Different From Law Of Estoppel In Partnership

A partner by estoppel is almost similar to a partner by holding out though sometimes it is

differentiated on a small point. A partner by estoppel by his action represents himself as the partner of
the business or the firm and hence they cannot latter escape from the liability as a partner to the
person who acted on their representation.[6]
In case of liability by holding out it is the firm or business that allows and lets the person to
misrepresent himself as the partner and the third party to believe on the fact.[7] But this by no means,
means that the person can be a partner of the firm or business but will only be liable as a partner for
his misrepresentation for the transaction that resulted because of his act/omission. Moreover, the
doctrine of liability of holding out has three exceptions to it whereas there lies nothing such in a
partner by estoppel.

Essentials Of Holding Out

There are two main essential ingredients or elements that are required to hold a person liable as a
partner by doctrine of holding out. These main requirements are interpreted or understood from the
Section 28 of Partnership Act, 1932. The two essentials are:

1. There Must Be A Representation

There must be an express or implied representation by the person to the third party which
makes the third party believe that he is a partner of the firm/ business. The representation can
be oral or written or implied by the conduct. The representation can be made by the person
himself showing him expressly as a partner or by letting the firm/business to represent him a
partner by omitting himself from stating the true facts.

Porter V. Incell[8]

The defendant in this case was held liable by holding out as his conduct represented that he
was a partner in the business. The defendant gave a loan of some large amount to the other
defendants for establishing a farm. He used his personal influence to reduce the rate of
interest and showed deep interest in the business. Moreover, he was mostly found on the land
and received the parties and looked into the business. The plaintiff supplied building material
of the farm to the defendants under the impression that he too was a partner and hence sued
him. The court held the defendant liable by holding out as he by conduct represented himself
a partner.

In the case of Martyn v. Gray[9], the defendant was held liable by holding out as he let the
third party believe that he was a partner by remaining silent when the business/firm itself
 misrepresented the defendant as a partner.

2. Knowledge Of Representation And Acting On It In Good Faith

The second important essential requirement is knowledge of the representation (basically

misrepresentation) to the plaintiff. The plaintiff who is making the defendant liable must have
knowledge of the representation and has acted on it (to make the deal or the transaction)
believing on the fact.

To make the defendant liable it must be proved that either he himself represented himself as a partner
of the firm to the plaintiff or otherwise has made such public representation by act or conduct that
makes a person think that he too is a partner in the business.

If the plaintiff has believed on the representation and fact and has acted on it in good faith, it is
immaterial whether the defendant knows it or not, he can be charged and is liable to the plaintiff by
holding out as a partner. But if the plaintiff has not heard about any such representation or if heard
and did not believe it to be true or real or did not act as a result of this representation then he cannot
charge the person and he cannot be held liable.

Thus, such a representor is liable to anyone whom he represented himself as a partner and they gave
credit to the firm/business after believing him.

Smith V. Bailey[10]

It was held by the court in this case that the defendant is liable as a partner by estoppel or holding out
only on account of credit given to the firm or the transaction made by the plaintiff (third party) in the
faith of representation and does not extends for any other tort or civil wrong committed by or on
behalf of the firm.

Exceptions To The Rule Of Holding Out

Section 28 of the Partnership Act,1932 provides for the Liability of Holding out to sue the partner
(who is not be a actual partner of the firm/business) but the doctrine is not absolute and there are some
exceptions to it. The two essentials of representation and knowledge of representation and act on it in
good faith may be directly or indirectly assumed to be fulfilled but there are still some exceptions
where the principle or the rule cannot be applied and hence such a represented partner cannot be held
liable.

The main three exceptions are:

1. Deceased Partner:

The doctrine of liability by holding out is not applicable to a person who is no longer alive or
is dead. This because a death is in itself a notification that the person no longer exists and
hence no longer a partner and so cannot be sued.

Venkatasubbamma v. Subba Rao[16]: In this case this principle was reaffirmed that a dead
person/ partner cannot be held liable for the acts or transaction/ deal done by the other
partners. The heirs of the deceased too cannot be made liable for the contracts signed by the
other partners after the death of the deceased but may be for the already made contracts.

2. Insolvent Partner:

Insolvency of a partner too is a notice by itself. A partner ceases to be a partner of the

business/ firm from the date he is declared an insolvent and hence is no longer liable for any
of the contracts or transactions made by other partners after the insolvency of the particular
partner. Insolvency is itself a public notice and no separate public notice is needed to show
the dissolution of the partner from the business to prevent him from any further liabilities by
holding out.

3. Dormant Partner:

A dormant or sleeping partner is a partner who does not actively participates in the business
or deals and can be inferred that he has not taken part in the conduct of the firms and neither
the customers or the clients are aware of his role or participation as a partner. He has just
made the investment in the firm and shares the profits and losses of the firm and agrees and is
bounded by the activities of the other active partners.

Such a partner if has remain such a dormant partner for a long time then after his retirement a
public notice is not necessary to prevent him from the liability by holding out as he himself by
his acts is absolved. But if his existence and participation was known to some customers or
suppliers for that matter, a notice must be given to them, or he will be liable by holding out to
such persons who believed him to be a partner.
A person when represents himself as the partner of the firm or the business to the third party and the
third party believes on the fact is a partner by estoppel or holding out. A person can become such a
partner even when the company/firm represents him as their partner and the person has knowledge but
does not deny to it to the third party.

Such a person becomes the partner by estoppel or holding out though not a real partner (has no rights
with the firm) but becomes liable for the acts of the firm as a partner to the third party who acted in
faith of the misrepresentation. This doctrine is the essence of principle of estoppel and prevents a
person from going back.

Dissolution of a Partnership

Before the dissolution of the partnership, let us understand the difference between the ‘dissolution of
the partnership’ and the ‘dissolution of the partnership firm’. Dissolution of partnership means the end
of the partnership business and dissolution of partnership firm means the end of partnership business
along with the firm.

The dissolution of a partnership firm means termination of every contractual relationship between the
partners and that all the operations which are being performed in a company are suspended and all the
assets and liabilities are settled and disposed off.

Now the question arises when the partnership is going to be dissolved? There can be different reasons
for the dissolution of a partnership as when a new partner is added or when a partner is dead or leaves
the partnership, etc and the remaining partners can continue their business. And when there is a
change in the partners so the prior partnership comes to an end and the new partnership takes place
with the liability and assets of the old one.

The partnership may be dissolved due to the following reasons:

1. Due to the death of the partner.

2. Due to the admission of a new partner.

3. Due to the retirement of a partner.

4. Due to the bankruptcy of a partner.

 5. Due to the expiry of the partnership period, if the partnership is for a particular period.

Modes of Dissolution

There are some modes by which a partnership can be dissolved and those are:

1. By an act of partners: when a partner agrees to dissolve a partnership at a particular time.

Partners can come into an agreement regarding a particular time period maybe five years.
In which partners can end the agreement at the end of the five years. Sometimes partners
can dissolve it in the middle of the time period under specific conditions.

2. By operation of law: a partnership is the consequence of an agreement which is governed

by law. Therefore if any unlawful activity is performed so it will be dissolved. You can
make a valid partnership for illegal work.

3. By the court’s decree: a partnership can be dissolved by the court and the court will only
allow under these conditions:

a. If the partner is incapable to work;

b. If the partner is mentally unstable;

c. If the partner misbehaves which creates a bad impact on the partnership;

d. If there is a breach of the agreement by a partner.

4. Statement of dissolution: dissolution can be done by filing the statement to the state’s
secretary. The form must contain the information regarding the partnership name, date and
reason of dissolution.