LAW OF PARTNERSHIP-1 PRE-MID TERM NOTES – INDIAN PARTNERSHIP ACT, 1932

MODULE 1: INTRODUCTION TO PARTNERSHIP:

Partnership: Partnership is the relation between persons who have agreed to share profits
of a business carried by any of them for all or any of them acting for all.
Earlier, partnership was covered under chapter XI of ICA, 1872. But, now it has been
removed from the ICA due to a number of reasons which include the non-exhaustive nature
of ICA and the expansion of trade and commerce in India and the incomplete nature of the
chapter. Partnership was already codified under English Law in Partnership Act, 1890.
The legislation extends to whole of India. Came into force on Oct 1, 1932 except for Sec 69
which deals with the non-registration of firms under the Act, which came into force on Oct
1, 1933. Reason for postponement was to give time to the firms to get registered before any
disability could be clinched upon them.
Non-exhaustive nature of the Act – Sec 3:
Definitions: Sec 2:
Sec2(a): Act of the firm: Any act or omission by all the partners or a partner or an agent of
the firm which gives a rise to right enforceable by or against the firm. It’s a question of fact
in each case whether an act of partner to be regarded as an act of the firm – held in
Mukund Lal v Purushottam Singh.
Section 2(b) : Business : inclusive definition: work that keeps a man busy, includes every
trade, occupation and profession.
Section 2(c) : Prescribed: prescribed by rules under this Act.
Section 2(d) : Third party: any person who is not a partner in the firm.
Section 2(e) : expressions not defined in the act, but in ICA shall have the same meanings
assigned to them in the act.
Application of contract act- Section 3: ICA provisions still applicable to the firms to the
extent where they are not inconsistent with the provisions of IPA, 1932.

MODULE 2: NATURE OF PARTNERSHIP:

Definitions and Essentials: Section 4: Term ‘partnership’ is defined: Partnership is the
relation between the parties who have agreed to share the profits of a business carried on
by all or by any of them acting for all.
Basically, 4 requirements to constitute a Partnership:
- That the result is from an Agreement
- That it is organised to carry on a Business
 - That the concerned persons have agreed to share the profits
- That the business is to be carried by all or any of them acting for all.
Essentials of a partnership
1. Agreement: Section 5: the relation of a partnership arises out from a contract and
not from status. And, it is to be noted that members of Hindu undivided family in a
Family business or a Burmese buddhist husband and wife carrying on a business are
not to be considered as Partners in such business.
Shri Arun Kumar v. State of Maharashtra and Ors: Important case
Vijaykumar Jaiswal, Arunkumar Jaiswal (appellant) and Dinkarrao Gawande were the
partners of a Firm – Akot wine mart. DG expired in 1994 and VJ left the firm later, so the
appellant becomes the sole proprietor. His name alone was being continued for the wine
shop license ( country and foreign liquor ). Their partnership was ‘ At will’. Clause 10 of the
deed specified that the outgoing partners or legal heirs of the dying partner will not have
any right over the firm and goodwill. Further, clause 11 provided that the name of the
remaining partner is only to be used if any partner leaves the firm or dies. A government
circular of 1994 provided that in case of the death of Original license holder or his disability
to participate, the consent of legal representatives is mandatory for transferring of license if
its in the name of firm. DG’s wife contended for her name inclusion in license in the place of
her husband’s name.
The court was to decide whether the Government circular will have prevalence over the
partnership deed. It was held that there was an agreement to the terms between the
partners. No such right was reserved for the legal heirs to claim the license and hence, the
wife of DG is not entitled to such a right. As a partnership arises from a contract, its
important to note that the legal position or the partnership deed would prevail here over
the Government circular.
Its however, not necessary that a partnership may arise out of a written and formal
agreement. An agreement to create partnership may arise from the conduct of the parties
as well. Held in the case of Abdul Badsha Saheb v Century Industries:
In this case, 2 brothers inherited certain property on the death of father, they sold the
properties and the sum obtained out of the selling was invested in another separate timber
business. There was no formal agreement between them, but it appeared that they
intended to share profits. On failing of business, when the question of payment of liabilities
arose, the court observed that their agreement can be arisen out of a mutual understanding
shown by the course of conduct and need not be an express one. Hence, they are to bear
the liabilities as partners.
Deed of partnership: Partnership agreement when, is in writing, then it is called the
Partnership Deed.
The validity of a partnership firm does not depend upon the contribution of capital by
partners. A person can become the partner even without having any contribution towards
the capital of firm. He may contribute his know-how, IPR’s or the skill and experience to the
firm.
2. Business: Business, being an essential of the partnership, its to be noted that the
definition within Section 2(b) cannot be considered as where every trade maybe a
business, every occupation or profession is not.

3. Sharing of profits: earlier, every man who received the profits out of a business had
to incur the liability as a partner of the firm, but this was changed in the case of Cox
v. Hickman, wherein the court held that sharing of profits is prima facie, evidence of
existence of the partnership

4. Mutual Agency: If a person in a business acts not only for himself, but for all, in a way
that they stand in the positions of principal and agents, they are partners. This is the
principle estd. In Cox v Hickman.

5. Max no. of partners : 100 partners as according to Section 464 of the Companies Act,
2013

Case of Cox v Hickman: Important case

Mr. Smith and his son were carrying on a partnership business. Due to financial difficulties ,
the business was assigned to their creditors on an agreement deed that the business was to
be managed by 5 trustees, and the net income/profit would be distributed among the
trustees. The trustees included Cox and Haywood. After paying off the creditors, the
business was to be returned to Mr. Smith and son. Cox was one of the trustees but he never
acted. Hickman sold few goods to the firm while it was under the control of trustees and
drew a bill of exchange, accepted by Haywood to pay. The bill, remaining unpaid, Hickman
bought an action for the price against the trustees.
It was held that Cox and Haywood were not partners. It can be observed that although the
creditors came to an agreement about how their claims would be satisfied, this does not
make them the partners. It is often said that the test is whether they are entitled to
participate in profits. Also, they did not intend in becoming mutually liable to the firm or
in relation to each other.
Section 6: Mode of determining existence of partnership: here, regards shall be given to real
relation between the parties, as shown by the facts and circumstances of the case, follows
the principle of Cox v Hickman: every partner in trade has an implied authority from the
others and he is the agent of co-partners. So it can be assumed that every partner has an
implied authority from his co-partners to bind the firm in contracts made in ordinary usages
of trade.
EXP 1: The sharing of profits from a property by joint or common interest holders does not
make them partners.
Firm: A collection of partners. As held in Comptroller & Audit General v. Vadilal Mehta, a
firm is not a separate legal entity, distinct from the partners and only a compendious
description of individuals who compose the firm.
Firm name- name in which partners of a firm carry on their business. It should not be
misleading and closely resembling the name of any other firm.
Duration of firm:
Partnership at will: Section 7: where no provision is made by contract between the partners
for the duration of their partnership or for determination of their partnership, the
partnership is said to be a ‘Partnership at will’
Survival of a partnership is dependent, thus, upon the willingness of the partners.
Characteristics:
- A partner of a firm at will can retire anytime by giving to his co-partners, a notice of
his intention to retire – Section 32
- A partner of a firm at will may anytime dissolve the firm by giving to his co-partners,
a notice of intention to dissolve the firm. – Section 43
Karumuthu Thiagarajan v. E.M Muthappa Chettiar: Justice Wanchoo held that Section 7
contemplates two exceptions, the first is where there is a provision in the contract for
duration of the partnership and secondly, when there is a provision in the contract for
determination of the partnership. In either of the case, the partnership is not at will. Where
there is a provision mentioned for the duration of partnership, it is not partnership at will,
but the courts have held that even when there is no express provision for the duration of
partnership, the partnership is not at will if the duration can be implied.
Somewhat same judgment was held in the case of Crawshay v. Maule.
Continuation after expiry of term: where the partnership is constituted for a fixed duration;
on the expiration of that term, if no new agreement is formed and the tacit consent of the
parties prolongs the original contract, then, it is a partnership-at-will.
Partnership in single or brief business venture:
Particular partnership- Section 8: person may become partner with another person in
particular adventures or undertakings.
Karmali abdulla v. Vora Karimji Jiwanji: Karim and Rashid, two merchants entered into a
joint stipulation for the shipping of brown sugar from Mauritius to Hong kong. It was
declared by their preamble that the intention was to do business in partnership. The
purchase was to be made jointly at Mauritius and after consultation, it was to be loaded and
dispatched to Hong Kong via ship. The invoices of the sugar were to be so made that half of
them would be deliverable to either firm and each of the Bombay firms. The first
consignment only was a failure. On bankruptcy of one merchant, it was a question to be
decided whether other merchant could be held liable for the bill drawn on the insolvent
merchant, holding it as an instance of partnership, the court held that the solvent merchant
could be liable for the bill as a partner.

MODULE 3: RELATIONS OF PARTNERS TO ONE ANOTHER:

Mutual relations : Section 11
Sec 11(1): subject to the provisions of this act, the mutual rights and duties of the partners
of a firm maybe implied by the contract between the partners. The contract maybe express
or implied, and maybe varied by consent of all the partners.
Sec 11(2): notwithstanding anything contained in Sec 27 of ICA, 1872, this provision provides
that a partner shall not carry any business other than that of which he is a partner.
Duties of partners:
A)Duty of good faith [Section 9]: partners are bound to each other by the principle of utmost
good faith.
Bentley v. Craven: a partner in a firm of sugar industries, who had a great skill of buying
sugar at the right time, was entrusted to buy some sugar for the purposes of the firm. The
price was high, so the partner supplied sugar from his personal stock, which he had bought
earlier at a lower price, but he charged the firm for the same at the prevailing market price.
When the co-partners came to know about this, an action was initiated against the partner
for profit. Observing that a partner should not make secret profit for himself at the expense
of the firm, the court held the firm entitled to that profit.
B)Duty not to compete [Section 16(b)]: if a partner carries on any business of the same
matter as competing with that of the firm, he shall account for and pay to the firm, all the
profits obtained by him in that business.
Dean v MacDowell: A partner is not to derive any exclusive advantage by engaging in
transactions in rivalry with the firm. A partner is not allowed in transacting the partnership
affairs to carry on for his own benefit, any separate business or trade, which would have not
been possible if not in the connection of the partnership.
Pulin v. Mahendra: the partnership was constituted for importing salt from other countries
and to resell it in Chittagong. One of the partners, while buying salt for the firm, bought
some quantity for himself and sold on his personal account. The co-partners were entitled
to the profit made by the partner; as this opportunity came to him for the reason of him
being in the business of the firm.
Aas v. Benham: a partner may carry on any personal work, which is outside the scope of his
business. A partner of a ship-broker firm helped a formation of the company for building
ships. He acquired some knowledge as a member of the firm and he used the same for
helping the ship building company. He received remuneration for his services and
subsequently, joined the company as a director on salary. When sued for the account of
those earnings, he was held not liable as the business of ship building and formation of the
company were completely beyond the scope of the partnership.
C)Due diligence [Section 12(b) and 13(f)]: partner bound to attend diligently to his duties in
the course of business. Also, partner shall indemnify firm for any loss caused due to wilful
neglect in the conduct of business of the firm.
Cragg v. Ford: plaintiff and defendant were in a partnership business, the business was at
dissolution. The defendant, being the managing partner, the conduct of dissolution was left
on him. The plaintiff advised him to dispose off immediately, the bales of cotton, which
constituted huge part of the firm’s assets. Def said that these are to be done at the end of
dissolution. By that time, the prices of cotton went down and the realization was at much
lesser price as it would have been if done at an earlier stage. The question arose that this
loss was due to the ‘wilful neglect’ of the defendant. The court held that it was not.
Defendant had no reason to anticipate the fall in prices.
D)Duty to indemnify for fraud: [Section 10]: every partner to indemnify for the loss caused
to it by fraud in his conduct of the business of the firm.
Campbell vs Campbell: one of the partners of a distillery, who did not take active part in the
affairs of business, had to pay out penalties which were levied on the firm as a consequence
of purchases of illicit whisky, these purchases were affected by the managing partners and
the plaintiff partner had no knowledge about the same. The managing partners were held
jointly and severally liable to indemnify the plaintiff and pay him the amount so paid along
with the interest. It was immaterial that the loss was caused by the illegal nature acts ,
where the plaintiff had no knowledge and had not taken any part in them, nor he had done
anything which could be regarded as knowledge or consent.
E)Duty to render true accounts: [Section 9]: partners are bound to render true accounts and
full info of all things affecting the firm to any partner or his legal representative.
Law v. Law: if a partner is in possession of more information about the affairs and assets of
the firm, he should not conceal that information from his co-partners and if enters into any
contract without the furnishing of info to co-partners, then, the contract is voidable.
Herein, a partner sold his share of the assets to his co-partner and discovered that material
information has been concealed from him. After the sale, he found out that he wasn’t
disclosed to all partnership assets and the actual worth of the assets was more than the
amount for which he sold his share of assets. He would have been entitled to set aside the
sale, but for the fact of knowledge of concealment and no insisting for full disclosure, he
entered into an agreement to modify the original bargain. So, he has to continue with the
sale.
F)Proper use of property [Section 15]: subject to contract between partners, property of
firm to be used exclusively for the purposes of business by the partners.
Velji Raghavji v. State of Maharashtra: The failure of a partner to submit his accounts in
reference with the use of property of the firm may make him liable for an action, but not for
criminal misappropriation of property.
Appellant was a working partner in the firm, it was agreed between the partners that he
would be responsible for working and realisation of dues of the partnership. On the
allegations of misappropriation of funds and that he failed to deposit some sums in the
bank, he was convicted for Criminal Breach of Trust under Sec 409 IPC. Supreme Court later
acquitted him on the ground that: a failure to deposit sums in the bank or collecting of dues
would not constitute the offence as the appellant was authorised by the other partners for
the spending of money for business of the partnership. He can also not be held guilty of
dishonest misappropriation of property under Section 403, as he, along with the other
partners had undefined ownership over the assests of the partnership firm and it depends
upon him that in whatever way he uses that property, he cannot be held liable for
misappropriation. This also does not define that however be the use of partnership
property, he cannot be held liable for misappropriation of property, where the ingredients
of the offence are satisfied, there maybe penal consequences not withstanding that he is a
partner and the property concerned was that of the firm.
G)Duty to account for personal profits [Section 16]:
Sec 16a) if partner derives any profit from the transaction of the firm or business connection
of the firm or the firm-name, he must account for that profit and pay it to the firm.
Sec 16b) if partner carries on business of same nature competing with that of the firm, he
shall account for and pay to the firm all profits obtained by that business.
Gardener v M’Cutcheon: if a partner uses the joint property of the business for personal
purpose, then, he must account for the profits obtained by that use and pay it to the firm
and secondly, he must compensate the firm for any damage or depreciation to the property
done by such use. In this case, a ship was co-owned by the captain and his co-partner, the
captain made certain profits by certain contracts, while the ship was operating under
charter parties. He was held liable to account for such profit.
Aas v. Benham: if the partner is using the knowledge and information acquired by the
business in order to compete with the partnership business, then, he may be held liable to
account for the benefits and profits derived by carrying on such business. But, if the partner
is engaged in a business which is outside the scope of the partnership firm and not
competing with the same, he cannot be held liable to account for any such profit derived by
carrying out that business.
Rights of partners:
A)Right to take part in business [Section 12(a)]: every partner has a right to take part in the
business. The privilege of business participation to be used for promoting the interest of
firm and not damaging it.
B)Majority rights [Section 12(c)]: any differences of ordinary matters connected with the
business maybe resolved by majority of the partners and every partner shall have the right
to express opinion before the matter is decided and no change maybe made in nature of
business without the consent of all partners.
Blisset v. Daniel: Plaintiff was working in partnership with certain persons. One of the
partners proposed to appoint his son as a co-manager of the firm. The plaintiff objected for
the same; so the aggrieved father in absence of the plaintiff persuaded other partners to
sign and serve upon plaintiff, a notice of expulsion. This was done considering the authority
and power of majority of partners to expel any partner without giving any reason. The
plaintiff contested the validity of expulsion and the court held that the powers are given to
the partners, so that in case of any need, they may exercise them in good faith, it is no
doubt for the partners to decide what is in interest of the firm, but this must be done in
good faith. Majority rights cannot be used for unworthy purposes or merely to injure a co-
partner.
C)Access to books [Section 12(d)]: every partner has a right to access and inspect and copy
any of the books of the firm.
D)Right to indemnity [Section 13(e)]: subject to contract between the partners, the firm
shall indemnify a partner in respect of payments made and liabilities incurred by him.
E)Right to profits [Section 13(b)]: subject to contract between the partners, partners are to
share profits equally and contribute equally for the losses incurred by the firm.
Robinson v. Anderson: it was held that they were entitled to share the remuneration
equally irrespective of the unequal work done by 2 solicitors.
F)Right to interest [Section 13(c) and 13(d)]: unless otherwise agreed, the partner not
entitled to interest on contribution of the capital. Even when given a right to interest on
subscribed capital, then, such interest shall be payable only out of profits.
G)Right to remuneration [Section 13(a)]: subject to contract between partners, a partner is
not entitled to receive remuneration for taking part in the conduct of business.
Continuance of partnership –
Section 17: the essence of the section is that the firm shall continue, as far as applicable on
the same terms and conditions if no change has come in them.
Section 17(a): subject to contract between the partners, where the firm is reconstituted, the
mutual rights and liabilities of a partner remain the same as they were immediately before
the change.
Section 17(b): where a firm constituted for a fixed term continues to carry on the business
on expiry of that term, the mutual rights and duties of the partners remain the same as they
were before the expiry and maybe consistent with the incidents of partnership at will.
Section 17(c): 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 remain the same as they were in respect to the original adventures or
undertakings.
Partnership property: -
Morris v. Barrett: partnership, not being a legal person, is not capable of owning any
property and the so-called property of the firm is nothing, but the joint estate of all the
partners, yet for all the joint purposes, the property is regarded as so much separate from
the partners that none of them can claim their personal ownership over any item of it.
Narayanappa v. Bhaskara Krishnappa: the relation in which a partner stands to the joint
estate was explained by Mudholkar J of the SC in this case.
The whole purpose of partnership or is to embark upon a joint venture and for that purpose
bring in some capital and property that includes immovable property. Once, this is done, the
property or the capital brought would cease to be the personal property and would be used
as a trading asset for the purposes of the partnership firm, where all partners would have
interest in proportion to their share in the profits of the firm. The person who bought in the
property would not able to claim any exclusive right or interest over the property and he
would not be able to exercise his right even to the extent of his share in partnership. His
right during the subsistence of partnership are to obtain share of the profits as agreed
between the partners and after the dissolution of partnership, his share in the value of net
partnership assets as on the date of dissolution or retirement after a deduction of liabilities
and other prior charges.
Partnership Property - Section 14 – Essentials: -
Section 14: Subject to contract between the partners, the property of the firm includes all
property, rights and interests in the property, originally brought into the stock of firm or
acquired or brought by or for the firm, or for the purposes of the firm and it includes
goodwill of the business.
1.Property originally brought in: property thrown in common stock at the commencement
of the partnership business.
Broadway centre v. Gopaldas Bagri: a property was claimed to be the property of the
partnership firm on a registered partnership deed. The defendant pleaded that the
document was a sham because the original document was tempered by the interpolations.
He had not challenged the doc by seeking the plea of cancellation and his plea was held to
be not tenable. Another question was whether a property originally belonging to the firm
has become the property of the firm or not. A partner bought the property under a court
sale in hotchpotch of the partnership in terms of regd. Partnership deed. The co-partners
contributed necessary amount in order to make their respective contributions to the share
capital of the firm. The court held that the property in question had become the property of
the firm.
Goodwill and other IPR to be regarded as the property of the firm.
2. Property subsequently acquired: where a property is purchased with the money of the
firm, the presumption is that it belongs to the partnership firm.
If acquired in breach of duty of good faith, then, it will be considered to be acquired for the
benefits of all the partners, and has to be accounted for the firm.
Mohan Lal Bahri v. K.L.Bahri: where a chief working partner purchased a certain property in
his own name, but with the funds of the firm, it was considered to be brought for the
purposes of the partnership firm, even though he had not taken the consent of other
partners according to Partnership deed. Also, it was immaterial that the property was not
included in the list of firm’s assets for income tax purposes for showing that the property
purchase was not for the benefit of the firm because the partner in question was
responsible for accounts and returns.
3. Partner’s property in firm’s use: when the personal property of the partner is being used
in the business, it is a question of fact to be determined by reference to parties intention
whether it had become the property of the firm.
Property belonging to individual and used as property of the firm to be determined with the
terms of the agreement. [ Arm group enterprises v. Waldorf restaurant ]
Robinson v. Ashton: the owner of a cotton mill entered into partnership with two others,
the business was carried on at his mill, the amount of assets of the mill was credited to his
capital account and was allowed interest on it. The mill was enlarged and new buildings
were erected on the land acquired by the firm. Held that the mill had become the property
of the firm.
Jai Narayan Misra v. Hashmathunissa Begum: a mere use of partner’s property by the firm
does not make it the property of the firm.
Herein, one partner contributed his land and the other constructed a cinema hall on it
keeping with the agreement to run the cinema hall in partnership. There was no clause in
the agreement to show the intention of the parties in treating it as a property of the firm.
The question of distribution of property arose on the dissolution of the firm. The court held
that the land is to be given to the lady-owner of the land and removables on the land to be
distributed to the other.
Ved Gupta v. Apsara Theatres: Partner’s personal license : where a license to run a cinema
hall was issued in the name of a partner, it was held by Supreme Court that it would not give
the automatic right to other partner to work the license. A stipulation in the partnership
deed that the licensed premises including the cinematograph and the right to operate the
license would be the property of the firm, could not make it a property of the firm, although
such a provision may enable the partners to share profits in the licensed business.

MODULE 4: RELATIONS OF PARTNERS TO THIRD PARTIES:

Liability of a partner for the acts of the firm:
Indian Law – Section 25: Every partner is liable jointly and severally for the acts of the firm
done while he is a partner.
Exception – Section 28: Holding-out
Section 9 of Partnership Act, 1890 r/w Section 3 of Civil Liability (Contribution) Act, 1978:
partners’ liability towards the firm’s contracts is joint and a judgment recovered against a
liable person in respect of any debt should not be a bar to an action against any other
person who is jointly liable with him in respect of the same debt or damage.
Doctrine of Implied Authority:
Section 2(a): Defines Act of Firm: an act or omission by all the partners or any partner or
agent of the firm which gives a rise to a right enforceable by or against the firm.
Section 18- Partner to be an agent of the firm: subject to provisions of this act, a partner is
the agent for purposes of the business of the firm. He can be a principal as well as an agent
for the purposes of the firm.
Section 19- Scope of implied authority: Sub to provisions of Sec 22, the act of the partner,
which is done to carry on, in the usual way, the business of that kind, binds the firm.
The authority of partner to bind the firm conferred by this section is called his “implied
authority”. Whether a given act was done by the partner in carrying on the business in usual
way is a question to be determined by the nature of business and by the practices of
persons engaged in it.
Higgins v. Beaucamp: B and M were in partnership business of cinematographic theatre
proprietorship. B was the sleeping partner and M was managing partner. The deed provided
that no one would borrow money except with the consent of the other partner or in the
usual course of business. M borrowed two sums of money from H on representation that
the money is to be used for the business. He misappropriated the sums. On the action
bought by lender H against the other partner B, the court held that B was not liable as there
was not actual authority to borrow for the business. So, it had to be proved that authority
was implied from the nature of the business. The court observed that it was a non-trading
business and hence, there was no implied authority.
Joint venture – Sec 19(2)(h): engagement in a partnership is different than engaging of a
firm in a single transaction with another person with a view of sharing its profits. This was
pointed out in Mann v. D’arcy
Mann v. D’arcy: defendants were doing the business of buying and selling potatoes. The
active partner entered into an arrangement with the plaintiff to enter into a joint venture
for a part of cargo of potatoes in order to share the profits of the venture. It was held to be
within the scope of his authority and it was observed by the court that this arrangement
was merely a mode of buying and selling of what he was authorised to buy and sell on the
behalf of the partnership.
Legal proceedings – Section 19(2)(a): although a partner is not empowered to submit a
dispute relating to the firm to arbitration, it is within the scope of the partner’s authority to
defend an action against the firm and engage a lawyer for the purpose.
Tomlinson v. Broadsmith: the managing partner of the firm, having bought the goods on
credit, was sued, he thus, engaged a solicitor and defended the action, but in vain. The
other partner had no knowledge of the transaction or the action until the decree of the
court came out. He was then also, held liable. The court held that it is an idle thing to say
that the managing partner was to carry on the business and yet that, he was not to move
into any such matter, in which the welfare of the partnership was concerned.
Sec 19 and 20 – Restrictions on implied authority: when a partner is prohibited from doing
an act which is otherwise within the scope of his implied authority, it is said that the implied
authority of the partner has been restricted.
2 types of restrictions –
- Statutory restrictions : Sec 19(2): effective against all the world whether the
particular person contracting has the knowledge or not.

- Restrictions imposed by partnership agreement: firm is bound by the acts of partner

done in the scope of implied authority unless : A) the person contracting with the
partner had knowledge of the restriction or B) did not know or believe the partner to
be a partner.
Mercantile Credit Co Ltd v. Garod: P and G were in a partnership business of lockup garages
and repairing cars. G was the sleeping partner. A clause in their partnership deed prohibited
the partners from buying and selling of cars on behalf of the firm. P sold a car to plaintiff, to
which the firm had no title for a price. When the buyer found that there was no title of firm
in the car sold, he bought an action of price against G. G was held liable for the price. Garage
owners usually sell second-hand cars and thus, the act was within the scope of implied
authority and the plaintiff did not know of any restriction in the deed and did not have the
knowledge of P dealing within the scope of his unusual authority.
Authority in emergency – Section 21: authority of the partner to do all such acts for the
protection of firm from loss as would be done by person in ordinary prudence.
Mode of exercising authority – Section 22: in order to bind a firm, an act or instrument done
or executed by a partner or 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.
Sitaram Krishna v. Chimandas Fatehchand: a bill of exchange signed in following name:
(Sd.) “G.V.A., Managing Proprietor, G. & B. Friends, Bombay”
Held that this mode of signature did not express or imply the intention to bind the firm. The
words following the signature were only written in order to reveal the status of the partner
and not any intention to bind the firm.
R.S Rajendran v. Shankar Sundaram: advance of fifty lakh rupees was arranged to be taken
from the plaintiff by a person who was not a partner in the firm. The cheque was made in
the name of the firm and promissory note was executed by the partners. SC Held that in this
case, liability of the firm cannot be ignored and the plaintiff could enfore the claim against
the firm and also against the partners.
Admission by partner: Section 23: an admission or representation made by a partner
concerning the affairs of the firm is evidence against the firm, if made in the ordinary course
of business.
Agace Ex Parte: herein, a partner gave partnership bills in payment of his personal debts.
On being asked whether co-partners had agreed to this, he falsely told that they had.
Herein, it was held that the bills could not be enforced against the firm.
Effect of notice to partner- Section 24: notice to a partner who habitually acts in the
business of the firm of any matter relating to the affairs of the firm operates as a notice to
the firm; except in the cases of fraud committed on the firm by or with the consent of the
partner.
Bignold v. Waterhouse: a firm of stage coach proprietors carried certain parcels for the
plaintiff free of expense, but subject to the condition that the firm would not be
accountable for parcels above the value of a price, unless paid for. Parcels above this value
were often carried by a working partner for a consideration, personal to himself, but never
bought this to the notice of other partners. Accordingly, they were held not liable for the
loss of those packages as the notice of their value was deliberately kept from them.
Liability for torts and other wrongs – Section 26: where a loss or injury is caused to a third
party or a penalty is incurred due to the wrongful act or omission of a partner, acting in
ordinary course of business, then, the liability of the firm is to the same extent as that of a
partner.
Hamlyn v. John Houston & Co.: the plaintiff and def were two grain merchants. Defendant
firm consisted of Houston and Strong. The conduct of business was left to Houston. He
bribed a clerk of the plaintiff firmand induced him to give secret information about the
prices and customers of the plaintiff firm; consequently, the business of plaintiff firm ran
into loss of huge amount. The defendant firm was held liable. It is usual in that kind of
business to obtain information about the business of competitors, thus, it was within the
scope of authority of the acting partner. But, the partnership is liable if such information is
obtained by unlawful means and not lawful means. It must now be conceded that a tort, or
even a crime is not outside the scope of authority of the partner or agent.
Hurruck Chand v. Gobind Lal Khetry: the plaintiff and def were the merchant firms dealing
in piece goods. Baij nath was an active partner of the def firm. The plaintiff sent a cartload of
dhoties and shirtings to the railway station to be consigned to the customers, but these got
stolen en route to the railway station. These were then recovered from BaijNath, who was
dealing with them in the name of the firm, the other partner of his firm was not aware
about this theft. The firm was held liable. It was within the authority of Baij Nath to sell
piece goods for the firm, the goods that he sold were belonging to the plaintiff and this is
conversion of property, for which the firm is liable.
Tendring Hundred Waterworks Co. v Jones: where the misconduct of the partner has
nothing to do with the business of the firm, the firm is not liable. In this case, J and G were
two partners in a firm, G was appointed as a secretary with the approval of the firm. The
company purchased certain property and for own convenience transferred it in the name of
G. G fraudulently mortgaged it for his personal debt. The other partner was held not liable
because the fraudulently mortgaging of G had not caused any loss to the company, it was
for his own personal debt and not in the capacity of secretary of the company. The company
had by its own conduct enabled the secretary to commit fraud by placing him in a position,
which was not in the scope of business for him to accept.
Liability for Misappropriation – Section 27: liability of the firm to make the loss good
where: a) a partner in the apparent authority receives money or property from a third party
and misapplies it ; or b) a firm in the course of business receives money or property from a
third party and its misapplied by any of the partners while in the custody of the firm.
Rhodes v. Moules: Plaintiff applies to R, a member of firm of solicitors for raising a loan on
his freehold estate. R obtained the loan, but falsely told the plaintiff that the lender required
some additional securities for raising the loan. The plaintiff accordingly deposited some
share warrants, which were payable to a bearer. R sold the warrants, misappropriated the
proceeds and then absconded. The co-partners of R were held liable as it was held by the
court that it was within the scope of authority of R to receive securities for loan and what
could be arrived in the conclusion is that the documents or securities of plaintiff came into
R’ s hands, when acting within the scope of his apparent authority.
Holding Out – Section 28:
Section 28(1): anyone who by words written or spoken, or by his conduct represents himself
or permits himself to be represented as a partner in the firm shall be liable as a partner in
the firm to anyone, who has on the faith of such representation given credit to the firm,
whether the person representing himself or being represented as a partner does or does
not know that the representation has reached the person so giving credit.
Section 28(2): where after the death of a partner, the business is continued in the old firm
name, the continued use of the name of the deceased partner or the old firm name shall not
make his legal representatives or his estate liable for the acts of the firm done after his
death.
1)Representation: it maybe express or implied, written or oral.
Kirkwood v. Cheetham & Smith – Express representation : a butter dealer appointed his
servant Smith to take a warehouse and start a business in the name of Smith & co. certain
goods were supplied to the firm. When the question of liabilities towards the goods arose, it
was held that the defendants were jointly liable by way of Smith holding himself out as a
partner and Cheetham as his principal.
Colonel A.R Porter v. W.Incell – Representation by conduct: the defendant gave loan to a
person for starting a cattle farm. He took such deep interest in the business and used his
personal influence to obtain lease for the premises of cattle firm and receive the parties and
their demands. The plaintiff supplied building material to the firm under the impression that
def is a partner of the firm. The defendant was accordingly held liable as a partner by the
way of Holding out.
Tower Cabinet co. v Ingram- Knowingly permits or suffers himself to be represented as a
partner. C and I carried on business as household furnishers. I retired and C continued the
business in the same name. The plaintiff company supplied certain material to the firm, for
which the price was never paid. Finding that I’s name appeared on the papers on which the
contract was made, they sought to enforce a judgment against him. I had not permitted his
name to be used on the papers, but had not destroyed them on leaving the firm. It was held
that I was not liable. It was laid down that the plaintiffs are to prove that I knowingly
suffered himself to be represented as a partner, the only evidence was the notepaper given
by C , which contained the name of I; but this representation was made by C without I’s
knowledge and authority, thus, it was impossible to say that I knowingly suffered himself to
be represented as a partner in the firm.
2)Knowledge of representation: the person holding other person liable must show that he
had knowledge of the representation and acted on it.
Retirement of partners: when a partner retires and the public notice of retirement is not
given, the retired partner remains liable by the way of holding out to those people whom he
has given the credit without knowledge of the retirement. The customer can sue the old
firm or the reconstituted firm.
Scarf v. Jardine: there was a partnership firm, which consisted of Scarf and Rodgers. Scarf
retired and Beach joined in place of him. The business was carried in the same name and no
notice of change was given to the customers of the firm. Jardine, a supplier, sent certain
materials to the firm, knowing nothing of the change, for which he was not paid. He then
bought an action for price, he came to know about the change and preferred to sue the new
firm, the firm went bankrupt, he then sued the retired partner. It was held that he has lost
the rights to proceeds against the retired partner. He could have sued the old partner as he
was entitled to assume that no change has taken place due to the absence of a notice to the
contrary or he could have sued the new partner, because the goods were supplied when he
was a partner in the firm. But he could not sue both. By proceeding against the new firm, he
had accepted the change and could not afterwards turn his face towards the old partner.
Deceased partners: estate or legal representatives of the deceased partner not to be held
liable for any acts of the firm done after his death even if the business continues in the same
style and if his name appears in the name and affairs of the firm; Death is a notice by itself –
Section 28(2) and Section 35
Insolvent partner: partner ceases to be partner from the date of insolvency and his estate is
not to be held liable for the acts of firm done after his insolvency whether the notice has
been given or not – Section 34
Dormant Partner: partner whose existence as a partner is never reflected by the name of
the firm or otherwise. He is not known to the customers of the firm. As long as he is a
partner, liab is same as that of an acting partner. But the notice of retirement on retirement
is not a requisite to terminate his liability. Where his presence was known to some
customers, notice must be given to them – Section 28 and proviso to Sec 32(3)
Transferee of Partner’s interest – Section 29
Transferee does not become partner by itself.
2 rights to transferee by the provision:
- During the continuance of firm, he is entitled to receive share of profits of the
transferring partner. He has to accept the accounts as given by partners as he has no
right to inspect the accounts; and
- On dissolution of firm or when transferring partner ceases to be a partner, he is
entitled to transferring partner’s share in the assets of the firm. He is entitled to an
account as from the date of dissolution.
Minor as a partner – Section 30
Section 30(5) shall not be applicable to a minor partner who was not a partner at the time
of his attaining the majority.
State of Kerala & Ors. V Laxmi Vasanth & Ors: respondents inducted as partners of the
firm, M/s Malabar cashew nuts and Allied products when they were minors. 1976-
reconstitution of firm and these were removed as partners. 1984 and 1987 – respondents
attained majority. For the ascertainment of tax between the period of 1970-71 and 1995-
96, contention that the partners failed to give the notice as per Sec 30(5) and that is why,
they are liable to pay the dues of the firm. Deciding in favour of respondents, court held
that Sec 30(5) shall not be applicable in this case. This is only applicable where minor was
inducted as a partner and on attainment of majority, continues to be the partner. If such a
person does not give a notice as per section 30(5), he will be deemed to have been
continued or treated to be continued as a partner of the firm and the liabilities as per
section 30(7) shall follow.

MODULE 5: INCOMING AND OUTGOING PARTNERS:

INCOMING PARTNER:
Mode of Admission – Section 31:
A new partner can be admitted in the firm with the consent of all the partners. The liability
of the new partner commences from the date of admission and he is not liable for the pre-
existing debts.
In order to make the new partner liable to the debts prior to his admission, a complete
novation must be proved and this requires two things: a) new partner or the new firm as
constituted after his admission should have assumed liability for the past debts and b) the
creditors are to be informed of the new arrangement and then the new partner becomes
liable to those of the creditors, who expressly or impliedly accept the new arrangement.
B.M Devaiah v. Canara Bank- Implied Acceptance by creditors: the documents on record
showed that the new partner has acknowledged the pre-existing liability and was trying to
clear the existing dues of the firm. The bank, which was informed of the newly constituted
firm, did not withdraw the cash-credit facilities of the new firm. The court stated that a new
partner can only be held liable if he has assumed the liability and the creditors have
accepted him as a debtor. Applying this principle, the court said that the conduct of the
bank in maintaining dealings with the firm, even after the notice of entry of new partner,
was enough to show that they accepted the liability of the newly constituted firm and the
new partner. Thus, new partner became accordingly liable to pay for the pre-existing debts.
The fact that the new partnership deed did not provide for the assumption of liability by the
new partner because the other documents showed the intention of the partners.
British Home Assurance corporation v. Paterson – Implied Rejection of new arrangement:
this happens when the creditor, after the knowledge of admission, continues to deal with
the old partner alone.
Herein, the plaintiff corporation appointed B, their solicitor and instructed him to act for
them in a mortgage transaction. While the business was pending, B took the defendant P
into partnership and gave the notice to plaintiffs in writing. The plaintiffs paid no attention
to the notice and continued to correspond with B alone. They sent the money to advance on
the mortgage by cheque made payable to his order and accepted his receipt in his own
name. B paid the money into his own account and misappropriated it. The plaintiffs sued
the new partner. It was held that the new partner cannot be held liable as the plaintiffs, by
their conduct declined to accept the liability of the new partner. They elected to deal with
the old partner alone and afterwards, the new partner cannot be held liable.
OUTGOING PARTNER
Retirement of a partner:
1)By consent – Section 32(1)(a): partner may retire with the consent of all the other
partners.
2)By agreement- Section 32(1)(b): a partner may retire in accordance with an express
agreement by the partners.
Vishnu Chandra v. Chandrika Prasad Agarwal: agreement permitting the retirement of
partner by one month’s notice was held valid by the court.
3)By notice – Section 32(1)(c): applies in case of partnership at will. The partner may retire
by giving notice in writing to all other partners of his intention to retire.
Retirement is active from the date of notice and in absence of such date, its effective from
the date of service.
Talakchand Kanji Vora v. Keshavlal: a clause held that a partner who wants to retire should
give six months’ notice will prevent the firm from being regarded as a partnership at will,
particularly where the firm has only two partners and the retirement of one partner may
mean inevitable dissolution.
4)By insolvency – Section 34: 34(1)-where a partner in the firm is adjudicated insolvent he
ceases to be a partner on that date of order, whether or not the firm is dissolved. 34(2) –
the estate of insolvent partner cannot be held liable for any act of the firm and the firm is
not liable for any act of the insolvent, after the date on which the order of adjudication was
made.
There is no need of public notice as the adjudication of insolvency of an individual is itself a
public notice.
5)By death – Section 35: estate of the deceased not liable for any act of the firm after his
death. No public notice needed as death itself is a public notice.
Bagel v. Miller: estate of the deceased was not held liable for the action of price of goods
sold and delivered, where the order of the goods was given during his lifetime, but the
delivery was not made till after his death.
6)By expulsion – Section 33: expulsion is justifiable only when it is authorized by an
agreement between the partners.
Shivraj Reddy & Bros v. S.Raghurao Reddy: expulsion of a partner was held invalid where
there was no power to that effect in partnership deed between the partners.
Blisset v. Daniel: although not mandated by the law, a notice and an opportunity of being
heard should be given to the affected partner.
Liability of retired partner:
1)Liability for acts done before retirement – Section 32(2): although a retired partner is
liable for the acts of the firm done before and upto the date of retirement, however Sec
32(2) provides that the liability maybe discharged by him making an agreement with the
third party and partners of the reconstituted firm, and such agreement maybe implied by a
course of dealings between such third party and the reconstituted firm after he had the
knowledge of retirement.
2)Liability for acts done after retirement – Section 32(3): liability continues until the public
notice is given of the retirement. Also, sec 32(4) provides that the notice maybe given by the
retired partner or any partner of the reconstituted firm.
Mode of notice – Section 72: by giving notice to Registrar of Firms and publication in the
Official Gazette and in at least one vernacular newspaper which circulated in the district of
place of the firm or the principal place of business.
Rights of outgoing partner:
1)Right to compete – Section 36: outgoing partner may carry on business competing with
that of the firm and may advertise such business, but, sub to contract to the contrary, he
may not- a) use the firm name , b) represent himself as carrying on the business of the firm
or c) solicit the custom of persons who were dealing with the firm before he ceased to be a
partner.
Restrictions imposed in the retired partner’s trade or liberty for specified period or specified
local limits are to be reasonable and the reasonability depends upon the nature and extent
of the business.
2)Right to subsequent profit – Section 37: in the absence of contract to the contrary and
without any final settlement of accounts between the surviving partners and the estate or
legal representatives of the deceased, the outgoing partner or the estate of deceased has
the option where they are entitled to profits made since he ceased to be a partner as
attributable to the use of his share of property of the firm OR 6% interest per annum on
amount of his share in the property of the firm.
Sandhu v. Gill: share of partnership assets means the outgoing partner’s share in the
proprietary ownership in the assets of partnership firm. It is the partner’s interest in the net
partnership assets or surplus of partnership assets after satisfying the partnership liablities.
Amount of profit attributable to the use of such share belongs to the outgoing partner.
Revocation of continuing guarantee – Section 38

MODULE 6: DISSOLUTION:
When a firm is put to end as between all the partners, that is known as Dissolution.
Section 39: Dissolution of firm – Dissolution of a partnership between all the partners of the
firm.
MODES OF DISSOLUTION:
1)By consent – Section 40: a firm maybe dissolved with the consent of all the partners or in
accordance with a contract between them.
Harish Kumar v. Bachan Lal: dissolution was held to have taken place in the case of
partnership at will when the partners decided not to carry on the business of the firm from
the agreed date.
2)By Agreement – Section 40: the contract providing for dissolution may be contained in the
partnership deed itself or a separate agreement.
Consent for dissolution can be given irrespective of the previous agreements
But, in the case of dissolution by contract, the subsisting agreement needs to be followed
irrespective of whether the partners give consent or not.
Dissolution and reconstitution are two different concepts ; dissolution brings the
partnership to an end while Reconstitution means continuation of the same business under
altered circumstances.
K.P.A Vellayappa Nadar v. Bhagirathi Ammal: one of the three partner retired from the
firm foregoing his right to share in the goodwill of the firm. Remaining two partners
constituted a new firm with their sons and continued the same business at the same place.
A partner died. The other partner filed a suit for dissolution and rendition of accounts
against the retired partner. The court held that the old partnership was dissolved by a
mutual agreement and the retired partner is not a partner of the new firm. Also, he was not
being paid by the new firm in whatsoever manner, thus, he cannot be sued for the rendition
of the accounts.
3)Compulsory Dissolution: Section 41:
Section 41(a) earlier dealt with compulsory dissolution or insolvency of all partners but one.
This has now been repealed owing to Section 245 read with the First Schedule of Insolvency
and Bankruptcy Code, 2016.
Now there is only one condition as mentioned by Section 41(b): Illegality of the business-
business becoming unlawful for being carried on or for unlawful for being carried on in
partnership.
Proviso to Section 41(b): deals with a partnership carrying more than one business, if at
least one type of activity remains lawful, the partnership escaped compulsory dissolution.
The partnership survives for the business, which remains lawful and the other businesses
which have now become unlawful, have to be abandoned.
4)Contingent Dissolution – Section 42: subject to contract between the partners, firm is
dissolved – a) expiry of term:
Saligram Ruplal Khanna v. Kanwar Rajnath: the term of agreement expired without any
agreement to the contrary. Subsequently, the partners consented to refer the matters into
arbitration. On the question of survival of the firm, the court held that, in the absence of
contract to the contrary, there was no question of survival of the firm and the fact that the
partners referred this method to arbitration, cannot be contended as an agreement to the
contrary.
b) Completion of business
Ramnarayan v. Kashinath: a partnership firm was working a salt license and when the
control on salt was lifted and the salt license became inoperative by the government, the
question arose whether the firm came into being for working the license or to carry on salt
business with or without control and license, the court held that it is manifest that the
object of the partnership was to exploit the salt license and the salt agency and that the salt
agency was the substratum of the partnership business. It was justified that their intention
was to continue the salt business only till the salt agency continued or the partners have
obtained agencies in their respective names. Following this interpretation, it was observed
that by going with the rule of Section 42(b), there was a dissolution of the partnership at the
moment when the salt control was lifted and the agency and license granted to the firm
came to an end.
c) Death of Partner:
Rakesh Kumar v. Umesh Kumar: a firm was running at will and did not have any clause
regarding the continuation of business inspite of the partner’s death. It was held that the
firm was dissolved on death of one of the partners in 2000. The accounts were settled till 31
March, 2000. The suit for the enforcement of settlement filed in 2007 was held to be time
barred.
d) Insolvency of partner: insolvency even of a single partner is a dissolution. This being
subject to an agreement to the contrary, partners can agree that the insolvency of a partner
will not have the dissolving effect.
5) By Notice – Section 43:
Sec 43(1): in case of partnership at will, the firm maybe dissolved by giving notice to any of
the partners of his intention to dissolve the firm.
Sec 43(2): firm dissolved on the date of dissolution mentioned in the notice and in absence
of such mention, from the date of communication of the notice.
Tilokram Ghosh v. Gita Rani Sadhukhan: a letter addressed by the partner to his own
lawyer appointing him as the arbitrator in a dispute between him and the other partners
and asking him to consider the matter of dissolution of the firm. It was held that this was
not a notice and it did not have any effect of dissolving the firm.
Walters v. Bingham: when a partner gives a notice at the moment where he has an
advantage over the other partners, the court may hold him in the firm at least till the
pending transactions are completed.
Herein, a partner was guilty of fraud and the other partners expelled him. He contended
that he had given a notice of dissolution even before that and the other partners had no
power to expel him as the firm was dissolved by the notice. It was held that as he served a
notice of dissolution to conceal his own fraud, the notice was invalid and the other partners
were entitled to expel him.
6) Dissolution by court – Section 44: the court may dissolve a firm on any of the foll.
Grounds:
a) A partner becoming of unsound mind: necessary to protect the interests of the partner of
unsound mind and of the firm (with other partners)
b) Permanent incapacity: the incapacity can be due to illness mental or physical, but it
should be permanent in nature.
Whitewell v. Arthur: a partner suffered an attack of paralysis. It was held that this could
have been a good ground for dissolution, but according to mental evidences, the paralysis
was only temporary in nature and was already in the recovery stage.
c) Misconduct: where a partner, other than the partner suing, is guilty of conduct, which is
likely to affect the business of the firm, the court may order dissolution.
Snow v. Milford: herein, a partner of a firm of bankers committed adultery with several
women in the city, where the business was carried on and his wife had left him. The other
partners applied for dissolution on this ground. The court rejected the action.
d) persistent breach of agreement: where the partner persistently commits breach of
agreements relating to the management of the firm or conducts himself in business matters
such that the other partners do not consider it reasonably practicable to carry on business
partnership with him, the court may order dissolution.
Anderson v. Anderson: father’s treatment towards his partner-sonof opening his private
letters and not considering his son as a grown up man was held to justify a dissolution.
e) Transfer of interest: transfer of interest of a partner wholly towards a third party or has
allowed it to be sold in the recovery of arrears of the land revenue, then the court may
order dissolution.
f) perpetual losses: the business of the firm cannot be carried on save at a loss
g) Just and equitable ground: this gives the court, a very wide discretionary power, which is
not to be fettered by any rules, to order dissolution in the cases, wherever the
circumstances may seem desirable.
Consequences of Dissolution:
1)Public Notice and liability for acts done after dissolution – Sec 45:
Sec 45(1): partners continue to be liable for the acts towards third party until public notice
of dissolution is given
Proviso to 45(1): a public notice is not required to be given in the case of deceased,
insolvent or a dormant partner.
Glorious Plastics Ltd. v Laghate Enterprises: a firm was dissolved and reconstituted by
dropping out one of the partner and no public notice was given. After 3 years, when the firm
incurred liability towards a third party, who never knew about the ecistence of the retired
partner, the retired partner was held not liable.
Ketineni Chandrashekhar Rao v. Boppanna Seshagiri Rao: a development agreement was
entered into by the partners of the firm after dissolution, when one of the partners
disowned the agreement , the court held that he is legally bound by the agreement until he
gives a public notice of dissolution. The agreement was entered into by the managing
partner by a majority resolution and it remain binding on all whether they had a knowledge
to the fact or not. Plaintiff was one of the partners, he did not plead that the agreement was
vitiated by fraud and failed to prove that the agreement was likely to cause irreparable
injury or loss to his interests. Thus, he was not allowed to any relief of injunction against the
agreement.
2)Authority of partners in winding up – Sec 47: the authority of the partners continue even
after dissolution, so far as its necessary to wind up the affairs of the firm and it also
continues to complete the transactions begun, but not finished at the time of dissolution.
Bourne v. Bourne: a partnership having been dissolved by the death of a partner, the
surviving partner deposited firm’s title deeds with a bank to secure an overdraft. This was
held to be binding upon the representative of deceased partner. It was held by the court
that prima facie, its not only a right, but the duty of surviving partner to conduct relaisation
of partnership property and for the purpose of such realization, carry on business if
necessary for a reasonable realization of the property.
3)Liability to share personal profits – Sec 50: when a firm is dissolved due to death of a
partner and before its winding up, if any transaction is undertaken by the surviving partner
and if this brings an advantage at the expense of the firm, he is bound to share it with other
partners of the firm.
Manley v. Sartori: a partner died and the business was continued by the surviving partners
without giving the deceased partner’s interest. It was held that the representatives of the
deceased are entitled to the interest subject to deduction of an allowance by the managing
partners.
Pathirana v. Pathirana: a partner terminated the partnership by notice, but before that,
obtained the renewal of the petrol agency in his own name and continued with it; the other
partner was entitled to recover his share of profits.
4)Winding up – Sec 46: after dissolution, every partner or representatives, entitled to
application of partnership property in the payment of debts of the firm and having surplus
distributed among the partners or representatives according to their rights.
Mere execution of deed of dissolution does not put an end to the rights and liabilities of the
partners. It happens only after winding up and distribution of properties. – Shreedhar
Govind Kamerkar v. Yeshwant Govind Kamerkar.
By provisions of Sec 46 and 48, there can only be a pro rata division of the residue, if any
left after taking into account the liabilities of the firm.
Popat v. Shonchhatra: herein, the partners started a business with fixtures, fittings and
goodwill. One of the partners contributed most of the capital. The non-contributing partner
determined the partnership. The business was being run by the capitalizing partner and he
subsequently acquired the freehold of premises. He then sold the premises, along with the
goodwill, fixtures and fittings at a profit. The other partner claimed his share of profits in the
post-dissolution capital profits arising out of freehold sale. The court allowed his action, it
was observed that once the assets have been brought into business of the firm, they have
become a partnership property and are exclusive to the purposes of the firm. There was no
entitlement to any specific assets. And in the absence of an implied or express agreement
between the partners, on dissolution, the capital revenue profits realized after the
dissolution were to be shared equally and not in the ratio of partnership profits sharing as
on the date of dissolution.
Order in which the property is to be applied – Sec 49: in case where there are joint debts
due from the firm and separate debts due from any partner, the property of firm in first
instance, to be applied in payment of debts of the firm and if any surplus, then the share of
each partner should be applied in payment of separate debts or paid to him.
5) Mode of settlement of accounts – Sec 48: this covers payment of losses and application of
assets after the dissolution of firm.
Sec 48(a) : losses , deficiencies to be firstly paid out of profits and if lastly, necessary, then,
out of the partners individually in the ratio of their share of profits.
Sec 48(b): assets of firm and any sums contributed by partners to make up deficiency of
capital would be applied in the given manner-
1. Paying debts of firm to third parties
2. Paying to partner rateably what is due to him from the firm
3. Paying to partner rateably what is due to him on account of capital
4. Residue , if any shall be divided by partners in the proportions of the profit shares.
Manohar das v. Board of revenue: in the view of Sec 46 and 48, whatever actual method of
distribution is adopted by the partners, there can be only a pro rata division, of the residue,
after taking into account, the liabilities of the firm.
In case of partner becoming a creditor of the firm, he occupies a middle position in settling
as to settling of accounts between the outside creditors and claims of partners on account
of capital. He will come after payment of liabilities, but before refund of capital.
Rosher v. crannis: wherein sums were brought voluntarily in the firm by the two partners,
on dissolution of the firm, the sums so advanced were found to be still due. It was held that
these were loans by the individual partners and are to be paid off by the partnership assets
in priority.
6) Refund of premium – Sec 51 and 52
Sec 51: return of premium on account of premature dissolution
Sec 52: rights when a partnership contract rescinded for fraud and misrepresentation.
7) agreements in restraint of trade – Sec 53 and 54
Sec 53: right to refrain from use of firm name or property
Sec 54: agreement in restraint of trade
8) sale of goodwill – Sec 55:
Sec 55(1): sale of goodwill after dissolution - in settling the accounts after dissolution,
goodwill shall be sold separately or along with the other property of the firm
Sec 55(2): rights of buyer and seller of goodwill – when goodwill is sold after dissolution, a
partner may carry on the business with the that of the buyer and he may advertise such
business but subject to contract b/w partners, he may not:-
a) Use the firm name
b) Represent himself as carrying on the business of firm
c) Solicit the customs of persons who were dealing with it before dissolution.
Sec 55(3): agreement in restraint of trade
Jennings v. Jennings: when goodwill is not separated from assets, it remains a part of those
asstes. Herein, on dissolution of firm and no stipulation as to goodwill in agreement, it was
decided that the partner retaining the assets will be taking the goodwill
Trego v Hunt: trego a manufacturer, took into partnership with him Hunt on the condition
that goodwill will be the sole property of Trego. On death of trego, his wife joined the firm
on the same condition. When partnership was coming to an end, Hunt was preparing a list
of customers. It was held that she was entitled to an injunction restraining Hunt, his
partners or servants from soliciting the customers of the firm to deal with him or not deal
with Mrs. Trego after the dissolution of the firm.

MODULE 7: REGISTRATION OF FIRMS:

Registration of firms:
Chapter VII
Sec 56 – power to exempt from application of this chapter: the state government shall by
notification, in the Official Gazette that this particular chapter will not apply to that
particular state or any part thereof specified in the notification.
Sec 57 – Registrar of firms: appointed and authorized by the State government for the
registration of partnership firms. Every state shall appoint a registrar of firms. He will be
deemed to be a public servant u/s 21 IPC, 1860.
Procedure of registration:
Sec 58(1): registration is obtained by filing an application with the Registrar. This application
should be of a prescribed form along with a true copy of the partnership deed. It needs to
state foll. Particulars:-
a) Name of the firm
b) Principal place of business of the firm
c) Names of places where the business is carried on by the firm
d) Date when each partner joined the firm
 e) Name in each and full addresses of the partners
f) Duration of the firm
Application should be signed by all the partners
Sec 58(2): verification of statement as prescribed
Section 59: when the registrar of the firm is satisfied that requirements have been complied
with, Registrar registers the firm and enters its name in the Register of firms.
Change in particulars:
Change in the following particulars are required to be known to the Registrar of Firms:
- Firm name and place of business (Sec 60)
- Discontinuance of business in one place or extension to a new place (Sec 61)
- Partner’s name or permanent address (Sec 62)
- Dissolution of firm (Sec 63)
- Retirement or admittance of new partner or a minor being admitted into the firm
(Sec 63)
No time limit for prescribing the particulars. The failure to inform will not amount to
deregistration of the firm, however it maybe subjected to penalty (Sec 69A)
Sharad vasant kotak v ramniklal Mohanlal Chawda: registrar of firms was not duly
informed about the admission of new partner. SC that it would not amount to re-
registration of firm, this failure may only attract penalties. This status of partnership firm
does not cease to exist.
Gwalior oil mills v Supreme Industries: a registered firm was reconstituted and an
application was filed with the Registrar for recording the changes. The new firm entered into
a contract with 3rd party, this resulted in dispute. The suit for breach of contract was filed by
one of the partners who remained a partner in his individual capacity and then in the
reconstituted firm he remained similar to a karta of HUF. The registrar recorded the changes
wef from the date of reconstitution. It was held that the suit was maintainable and the firm
never ceased to be a registered firm.
Optional nature of registration:
Registration is not mandatory and there is no penalty for non-registration of firms
Yet registration becomes necessary at one point of time because Sec 69 cut shorts the
capacity of an unregistered firm and the partners to sue.
Effects on non-registration:
1.Suits between partners and firm – Sec 69(1): in case of an unregistered firm, no suit shall
be instituted in any court by the partner of a firm against the firm or any person alleged to
be the partner to enforce contractual and statutory rights, where the statutory rights are
limited to Ind Partnership Act, 1932. It means that any rights arising out of contract or IPA,
1932 cannot be enforced.
Ashish verma v Neeraj Vyas: plaintiff claimed from the partner firm his share of profits in
the business and also the right to participate in business partnership. The rights claimed
were arising out from the contract and IPA, 1932. The firm being unregistered, the suit was
not allowed.
Declaratory suits- the position on declaratory suits is unsettled.
2. Suits between firm and 3rd parties – Sec 69(2): no suit shall be initiated by an
unregistered firm against any third party for enforcing of rights arising out of a contract.
Raptakos Brett & co ltd v Ganesh Property: the right to evict a tenant was not a right arising
out of a contract, but it was a statutory right under TPA, 1882 and therefore, the proceeding
was not barred.
Haldiram Bhujiawala v Anand Kumar Deepak Kumar: where the defendants were passing
off his goods as those of plaintiffs and by using plaintiff’s trademark, the court said that
passing off (a common law right) and infringement of trademark (based on Trademarks Act,
1999) both rights were arising out of a statute and not any contract, hence not barred by
Sec 69(2). So the proceeding of unregistered firm cannot be said to be for a right ‘arising out
of a contract’
Registration after filing of suit – law is not settled on this issue.
3. Set off and other proceedings – Sec 69(3): the provision of (1) and (2) shall apply also to a
claim of set-off or another proceeding to enforce a right arising out from a contract.
Claim of set off is the reciprocal claim, i.e. where an unregistered firm is sued by a 3 rd party
for money, then the firm cannot say that the money owing by that 3 rd party should be set off
against the claim.
Jagdish Chandra Gupta v Kajaria Traders (India) Ltd: Inclusion if enforcement of
arbitration clause in ‘other proceedings’: a clause of partnership deed provided that in case
of a dispute, matter should be referred to arbitration. One partner appointed the arbitrator
to which the other gave no response. An action was commenced in order to enfore the
arbitration clause in the agreement. The other partner contended that the firm was not
registered and thus, the suit was to be dismissed. SC held the suit to be not maintainable as
it observed that right to proceed to arbitration is one of the rights, founded on the
agreement between the parties.
Kamal pushp enterprises v. DR Construction co: inclusion of enforcement of arbitral award
in ‘other proceedings’ : when the dispute between an unregistered firm and other party was
referred to arbitration and arbitral award went in the favour of the firm, the question arose
whether this award can be converted into a court decree and enforced by the firm, the
enforcement of arbitral award was allowed. The court held that Sec 69(3) was not attracted.
The summary of both the cases is that it is arbitral award which was sought to be enforced
and not an arbitral clause in the agreement.
Exceptions to application of Section 69:
1.Action for dissolution and accounts – Sec 69(3)(a):
S ahmed Khan v Turup Mohd Hayat: A and B purchased a taxi to be plied in partnership,
after an year, A disposed off the taxi and B claimed for his share of profits in the sale
proceeds. A contended that the firm was not registered. The court held that on closing of
business due to the sale of taxi, the suit was for realization of property of dissolved firm and
therefore, it was maintainable.
Ramesh kumar bhalotia v Lalit Kumar Bhalotia: a partner of unreg firm filed a suit for
declaration of shares and rendition of accounts , it was dismissed under Sec 69(1). A
different suit was filed by the same partner for dissolution of firm and this was held to be
maintainable. Doctrine of res judicata was not applicable because cause of action was
different in both the suits.
2. Recovery of insolvent’s share – Sec 69(3)(b)
3. Value of suit not exceeding Rs 100: (applies to value of suit exceeding Rs 100) – Sec
69(4)(b)
4. Statutory or non-contractual rights
5. Exclusion of application of Chapter VII by way of Sec 56 – Sec 69(4)(a)
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