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Indian Partnership Act 1932 LAWS – CA Foundation notes

Indian Partnership Act 1932 -BUSINESS LAWS – CA Foundation, CPT notes, PDF

This article is about the Indian Partnership Act 1932 -BUSINESS LAWS for CA foundation CPT students. we also provide PDF file at the end.

Indian Partnership Act 1932

Indian Partnership Act 1932

What we will study in this chapter:

CHAPTERIndian Partnership Act, 1932
3
Unit: 1General Nature of a Partnership

 

INDIAN PARTNERSHIP ACT, 1932

Section 1Short title
Section 2Definitions
Section 3Application of provision of Act, 9 of 1872
Section 4Definition of Partnership
Section 5Partnership not created by status
Section 6Mode of determining existence of partnership
Section 7Partnership at will
Section 8Particular Partnership
Section 9General Duties of Partners
Section 10Duty to indemnify for loss caused by fraud.
Section 11Determination of rights and liabilities
Section 12The conduct of the business
Section 13Mutual rights and liabilities
Section 14The property of the firm
Section 15Application of the property
Section 16Personal profits earned by Partners
Section 17Rights and duties of partners
Section 18Partner to be agent of the firm
Section 19Implied Authority of Partner
Section 20Extension and restriction of Partner’s implied authority
Section 21Partner’s Authority in an emergency
Section 22Mode of doing act to bind firm
Section 23Effect of admission by a partner
Section 24Effect of notice to acting partner
Section 25Liability of a partner for acts of the firm
Section 26Liability of the firm for wrongful acts by a partner
Section 27Liability of firm for misapplication by partners
Section 28Holding out
Section 29Rights of transferee of a partner’s interest
Section 30Minors admitted to the benefits of partnership
Section 31Introduction of a partner

 

Section 32Retirement of a partner
Section 33Expulsion of a partner
Section 34Insolvency of a partner
Section 35Rights of outgoing partner to carry on competing business
Section 36Same
Section 37Rights of outgoing partner in certain cases
Section 38Revocation of continuing guarantee by change in firm
Section 39Dissolution of a firm
Section 40Dissolution by agreement
Section 41Compulsory dissolution
Section 42Dissolution on the happening of certain events
Section 43Dissolution by notice of partnership at will
Section 44Dissolution by Court
Section 45Liability for acts of partners done after dissolution
Section 46Rights of partners to have business wound up after dissolution
Section 47Continuing authority of partners for purpose of winding up
Section 48Mode of settlements of accounts
Section 49Payment of firm debts and separate debts
Section 50Personal profits earned after dissolution
Section 51Return of premium
Section 52Rights where partnership contract is rescinded for fraud or misrepresentation
Section 53Rights to restraint from use of firm name
Section 54Agreements in restraint of trade
Section 55Sale of goodwill after dissolution
Section 56Power to exempt from application of this chapter
Section 57Appointment of registrars
Section 58Application for registration
Section 59Registration
Section 60Recording of alterations in firm name
Section 61Nothing of cfosing and opening of branches
t Section 62Nothing of change in names and addresses of partners
Section 63Recording of changes in and dissolution of a firm
Section 64Rectifications of mistakes

Self Study Questions

Section 65Amendment of registers by older of Court
Section 66Inspection of Register
Section 67Grant of copies
Section 68Rules of evidence
Section 69Effect of non-registration
Section 70Reality for furnishing false particulars
Section 71Power to make rules
Section 72Mode of giving public notice
Section 73Repeals
Section 74Savings.

Q.1: Define ‘Partnership’, ‘Partner’, ‘Firm’and ‘Firm name’as per of the

Indian Partnership Act, 1932?

Answer:

As per Section 4:

  • As per Section 4 “partnership is the relation between person who have agreed to share the profits of a business carried on by all or any of them acting for all”.
  • Person who enters into partnership with one another are individually called partners and collectively called firm.
  • Name under which business is carried on is “Firms Name”.
  • Firm cannot use the words “limited” in its name.

Q.2: How many Elements of Partnership are there?

Answer:

  • It must be a result of an agreement between two or more persons to do a business.

[1] It is voluntary in nature.

  • Agreement must be to share the profits of business.
  • Business must be carried on by all or any of them acting for all.
  • All the above essentials must co-exist before any partnership comes into existence.

What do you understand by Partnership Deed?

Answer:

  • It constitutes the mutual rights and obligations of partners in a written form.
  • It is also known as partnership agreement, constitution of partnership or articles of partnership, etc.
  • It must be drafted and stamped as per the provisions of the Indian Stamp Act.

What are the contents of Partnership?

Answer:

Partnership deed must contain following particulars:

  1. Name of partnership firm
  2. Particulars of partners
  3. Place and nature of business
  4. Date of commencement of partnership
  5. Duration/Terms and conditions
  6. Capital Contribution
  7. Profit shahng ratio
  8. Rules regarding admission, retirement, etc.
  9. Provisions for transactions and settlement of accounts
Extent ofSharing ofLiabilitiesNature ofOthers
participationProfitsBehaviors
– Active– Nominal– Limited– By estoppel– Secret
– Sleeping– Partner in– General– By holding out– Silent
profits only– Incoming

– Outgoing

– Sub partner

Q.9: Describe the Active/Actual/Ostensible/Working Partners.

Answer:

  • He is not only contributing capital but also takes active part in the conduct of firm’s business.
  • He shares its profits and losses
  • He had to give public notice of his retirement if he has to free himself from all liabilities.

Q.10: Describe the Sleeping/Dormant Partners.

Answer:

  • He only contributes capital and shares profit/loss without taking active part in firm’d business.
  • He has unlimited liability
  • He can retire from the firm without giving any public notice.
  • He is entitled to access books and accounts of the firm, even though he performs no duty.

Q.11: Describe the Nominal/Quasi Partners.

Answer:

  • He only lends his name and reputation for the firm’s benefit without sharing any profit/loss.
  • He is known to.outsiders as partner but actually he is not.
  • He is liable to third’ party for all his acts.
  • He is required to give public notice on requirements.

Q.12: Which condition Apply on Partner in profits only?

Answer:

  • He gets a share in profits but does not share any losses of the firm.
  • He has to bear all the liabilities to third party.

Q.13: Describe the Partner by bstoppel.

Answer:

  • He is not a partner of thenrm but conducts himself in such a way which leads third party to believe that he is a partner
  • He is liable for all the debts to such third pal ,

Q.14: Describe the Partner by holding out. I

Answer: ‘ p-

  • He is declared by others as a partner of the contradict it immediately and remains silent.

  • Relation of partnership arises from contract and not from status.
  • Agreement may be expressed or implied.
  • As per Section 2 (b), “Business including every trade, occupation and profession”.
  • Profit means the excess of return over advances.
  • Sharing of profit includes sharing of losses.
  • Sharing of profit is prima facie evidence of the existence of partnership, this is not the conclusive test of the same.

Q.3: What do you understand by True test of Partnership?

Answer:

  • Mutual agency is the basis and most essential thing for partnership.
  • Sharing of profit also involves sharing of losses.
  • Sharing of profits is not a conclusive test of existence of partnership.
  • Even partner is a principal and agent for himself and others.
  • Agency relationship is the most important test of partnership.

Q.4: Briefly explain and distinguish between Partnership V/s Joint

Stock Company?

Answer:

CompanyPartnership Firm
1.It comes into existence when it is incorporated under the Companies Act, 2013.It comes into existence by agreement between the partners.
2.It has its own identity .It has no separate identity.
3.It is managed by directors.It is managed by partners itself.
4.Members are not agent of the company or other members.Every partner is an agent of firm and of the other partners.
s 5Death/insolvency of shareholders do not affect its continuity.It is closed down in case of death of partner.

 

6.Liability of members is limited.Liability of partn\ unlimited. \
7.Shareholders may transfer his shares subject to provisions of contained in Articles.Share of partner cann. transferred without consent of all partners.
8.Incase of Private Company. Minimum member – 2 Maximum member – 200 In case of Public Company Minimum member – 7 Maximum member – No limit.As per Section 464 \ Companies Act, 2013, No. partners in an associate cannot exceed 100. \ As per Companies (Miscellaneous) Rules, 2014] limit is restricted to 50.

Q.5: How many Kinds of Partnership are there?

Answer:

  1. Partnership at will:
  • Here no provision is made in agreement regarding the duration of partnership.
  • Any partner can terminate the agreement anytime by giving the notice.
  • Such type of partnership is usually formed for any particular project.
  1. Partnership for a fixed period:
  • Agreement of partnership contains the provision as to the

duration of the partnership.

  • At the expiry of specified period, partnership comes to an end.
  1. Particular Partnership:
  • Partnership agreement formed to carry out a particulai business or for a particular period.
  • After the completion of business, for which is was constituted, partnership comes to an end.
  1. General Partnership:
  • Partnership constituted with respect to the business in general.
  • He is liable to third prrty who is entering into contracts with firm on belief of he being the partner.
  • Holding out means ‘to reprint’

i It is based on the doctrine of estoppel of Indian Evidence Act.

Q.15: What do you understand by Incoming Partner?

Answer:

  • Person being admitted as a partner in an existing partnership firm.
  • He will not be liable for any act of the firm done before date of admission.

Q.16: Describe the Outgoing Partner.

Answer:

  • Person leaving the partnership firm.
  • He is liable to third party unless he gives a public notice of his retirement sub partner.
  • He is a third person with whom a partner shares his profits.
  • He has no rights and duties towards the firm.

Short Practice Questions

  1. Define Partnership
  2. What is Partnership deed
  3. Differentiate between –

(a) Partnership and Club

(b) Partnership and Co-ownership

  1. Explain briefly kinds of partners.

Objective Questions

Past Year Questions and Answers

1994 – Nov [1] State with reason whether the following statement is correct or incorrect:

(viii) A money lender getting a share in the profits of the firm for the sum lent is a partner in the firm.        (2 marks)

Answer:

Incorrect: Sharing of profits is an important condition of partnership but this is not the only test of partnership. According to the explanation II to Section 6 of the Partnership Act, lenders who are given a share in the profits do not automatically become partners of the debtor firm.

1995 – May [1] State with reason whether the following statement is correct or incorrect:

(viii) Sharing of profits of a business is conclusive evidence of partnership.            (2 marks)

Answer:

Correct: Section 19(2) of the Indian Partnership Act, provides that in the absence of any usage or custom of trade to the contrary, the implied authority of a partner does not empower him to enter into partnership on behalf of the firm.

1996 – May [1] State with reason whether the following statement is correct or incorrect:

(vii) A partner, whether active or dormant, is entitled to have access to any of the books of the firm and take out a copy thereof.                                                                                                            (2 marks)

Answer:

Correct: Section 12(d) of the Indian Partnership Act, 1932 states that every partner has a right to have access to and to inspect and copy any of the books of the firm. This right may be exercised by himself or by his agent and it must be bonafide.

1997 – May [1] State with reason whether the following statement is correct or incorrect:

(ix) Sharing of profits is conclusive evidence of partnership.                      (2 marks) Answer:

Incorrect: Although sharing of profit is a prima facie evidence of establishment of partnership, it is not a conclusive proof. Existence of an agreement, business and mutual agency are also required along with the sharing of profits for the determination of partnership.

1998 – Nov [1] State with reason whether the following statements are correct or incorrect:

(vii) Where two persons jointly run a coach and share the profits derived from running such business constitute partnership business?

(2 marks)

(viii) A partnership may be formed with two partnership firms as partners.

(2 marks)

Answer:

(vii) Incorrect: It is not partnership but co-ownership. The sharing of profits or of gross returns accruing from property by persons holding joint or common interest in a property would not by itself make such persons as partners because there is no mutual agency.

(viii) Incorrect: According to Section 4 of the Indian Partnership Act, the term ‘person’ does not include a firm. This is because a firm is not a separate legal entity. Therefore, two partnership firms cannot enter into partnership.

1999 – Nov [1] State with reason whether the following statement is correct or incorrect:

(ix) The test of existence of partnership is the element of ‘sharing of profits’

rather than ‘mutual agency’.                                                                                       (2 marks)

Answer:

Incorrect: Sharing of profits is an essential element to constitute a partnership. But it is only a prima facie evidence and not conclusive evidence in that regard. Existence of mutual agency, is the cardinal principle of partnership law. Each partner carrying on the business is the principal as well as an agent of other partners. So, the act of one partner done on behalf of the firm binds all the partners (Section 6, Indian Partnership Act, 1932).

2002 – Nov [1] State with reason whether the following statement is correct or incorrect:

(ix) Where two persons jointly run a coach and shares the profits derived from running such business constitute partnership business?

(2 marks)

Answer:

Please refer 1998 – Nov [1] (vil) on page no. 295

Short Notes

1994 – Nov [7] Write short note on:

(d) Sub-partnership.                                                                                                   (4 marks)

Answer:

Sub-partnership:jThis is a partnership within a main partnership. Where one of the members of a firm, agrees to share the profits received by him with a stranger, there arises what is called a ‘sub-partnership’ between such third person and the partner. Such a third party is in no sense a partner in the original firm and has no right of recourse against the it. Also, such partners are not counted for the limits of partners in a firm. His rights and liabilities are only referable to the contract with the main partner. A sub-partner is a transferee within the meaning of Section 29 of the Partnership Act (Venkataraman (v) Venkataram (1944).

1995 – May [7] Write short note on:

(d) Partnership at will.                                                                                                (4 marks)

Answer:

Partnership at will: The definition of partnership at will has been given under Section 7 of the Partnership Act, 1932. It lays down that where no provision is made by contract between the partners for the duration of their partnership, or for the determination of their partnership, the partnership if “Partnership at will”. Accordingly a partnership is deemed to be a partnership at will when:

(i) No fixed period has been agreed upon for the duration of partnership, and

(ii) There is no provision made as to the determination of the partnership in any other way. Such partnership has no fixed date of termination therefore, death or retirement of a partner does not affect the existence of such partnership.

Section 43(1) provides that “where the partnership is at will, the firm may be dissolved by any partner giving notice in writing to all the other partners of his intention to dissolve the firm”. The firm is dissolved from the date of notice or date of communication of the notice.

However, if the freedom to dissolve the firm at will is curtailed by agreement, say, if the agreement provides that the partnership can be dissolved by a mutual consent of all the partners only, it will not constitute a ‘partnership at will’.

1995 – Nov [7] Write short note on:

(d) Doctrine of “Holding Out”.                                                                                     (4 marks)

Answer:

Doctrine of “Holding Out”: The doctrine of ‘holding out’ is based on the principle of ‘estoppel’ which says that where a person by his words or conduct has wilfully led another person to believe that certain set of circumstances or facts exists, and that other person has acted on that belief, then he is estopped from denying the truth of such statements subsequently. The doctrine of holding out also requires certain type of affirmative or positive act on the part of the person being represented.

Thus if a person either by his conduct or statement leads another person to believe that a certain person is his agent, then he is estopped from saying that such a person is not his agent. The idea here is to protect the interests of persons who acted in good faith.

The doctrine of ‘holding out’ is applicable in the case of partnership also. Section 28 of the Indian Partnership Act imposes liability on such person who is not partner but knowingly by statement, whether oral or written or by conduct makes another person to believe that he is a partner and the another person, in good faith and believing on such statement or conduct enters into a contract or transaction with the firm.

1996 – May [7] Write short note on:

(e) Sub-partnership.                                                                                                    (4 marks)

Answer:

Please refer 1994 – Nov [7] (d) on page no. 296 1996 – Nov [7] Write short note on:

(e) Particular partnership.                                                                                          (5 marks)

Answer:

Particular partnership: According to Section 8 of the Indian Partnership Act, 1932, a person may became a partner with another person in particular adventures or undertakings. Thus, where persons enter into an agreement constituting a partnership limited to joint trading adventure, and goods are purchased, ostensibly by an individual adventurer but truly and substantially for the purpose of the joint adventure, the adventurers are liable as partners, but there is no such responsibility for goods purchased before the partnership agreement upon the credit of an individual adventurer, though they are afterwards borough into stock as his contribution to the joint adventure. It need hardly be stated that all the requisites of a partnership must be present before a transaction between two persons limited to a single adventure is held to be a partnership. In this case even a single adventure may constitute a business, as defined under Section 2(b) for the purpose a partnership business.

Where an adventure becomes illegal, such partnership must be dissolved. [Section 42(b)].

1998 – May [7] Write short note on:

(e) Partnership at will.                                                                                                (5 marks)

Answer:

Partnership at will: The definition of partnership at will has been given under Section 7 of the Partnership Act, 1932. It lays down that where no provision is made by contract between the partners for the duration of their partnership, or for the determination of their partnership, the partnership if “Partnership at will”. Accordingly a partnership is deemed to be a partnership at will when:

(i) No fixed period has been agreed upon for the duration of partnership, and

(ii) There is no provision made as to the determination of the partnership in any other way. Such partnership has no fixed date of termination therefore, death or retirement of a partner does not affect the existence of such partnership.

Section 43(1) provides that “where the partnership is at will, the firm may be dissolved by any partner giving notice in writing to all the other partners of his intention to dissolve the firm”. The firm is dissolved from the date of notice or date of communication of the notice.

However, if the freedom to dissolve the firm at will is curtailed by agreement, say, if the agreement provides that the partnership can be dissolved by a mutual consent of all the partners only, it will not constitute a ‘partnership at

will’.

1999 – May [7] Write short note on:

(d) Actual partner and sub-partner.                                                                            (5 marks)

Answer:

Actual partner and sub-partner: A person who becomes a partner, by an agreement and is actively engaged in the conduct of the business of the partnership is known as the actual partner. He is the agent of the other partner in the ordinary course of the business of-fhe firm. He binds himself * and the other partners, so far as third parties are fconcerned, for all the acts which he does in the ordinary course of the business and in the name of the firm. Whereas when a partner agrees to share his profits derived from the firm with a third person, that third person is known as a sub-partner. A subpartner is in no way connected with the firm and cannot represent himself as a partner of the firm. He has no rights against the firm nor is he liable for the acts of the firm.

2001 – May [7] Write short note on:

(d) Partnership at Will.                                                                                               (5 marks)

Answer:

Please refer 1995 – May [7] (d) on page no. 296

2001 – Nov [7] Write short note on:

(e) Partner by estoppel.                                                                                              (5 marks)

Answer:

Partner by estoppel: Under Section 28 of the Indian Partnership Act, 1932, when a person represents himself or knowingly permits himself to be represented as a partner in a firm (when in fact he is not) he is liable, like a partner in the firm to any one who on the faith of such representation has given credit to the firm.

It may be noted that where a retiring partner does not give a public notice of his retirement and the continuing partners still use his name as a partner on letter-heads and bills etc., he will be personally liable, on the ground of holding out, to third parties who give credit to the firm on the faith that he is still a partner.

Distinguish Between

1994 – Nov [6] (b) (ii) Briefly explain the difference between Partnership and

a Firm.                                                                                                                        (5 marks)

Answer:

Difference between Partnership and a Firm: Section 4 of the Indian Partnership Act states “persons who have entered into partnership with one another are called individually “partners’ and collectively ‘a firm’ and the name under which their business is carried on is called the ‘firm name’”. Thus, a firm is collection of partners while partnership merely an abstract legal relation between the partners. The two apparently seem to be one and the same, but are different in the following sense:

  1. Partnership is a relationship which subsists between persons but a firm is a short of entity. So the same relation of partnership exists in all the partnership firms.
  2. Partnership is an invisible tie which binds the partners together and the firm is the visible form of those partners who are thus bound together.

1995 – Nov [6] (b) (i) Briefly explain the difference between Partnership and

Joint Stock Company. x                                                                                              (5 marks)

Answer:

Partnership and Joint Stock Company:

(a) Personality: A firm is not legal entity whereas a company is a juridical person distinct from its members.

(b) Agency: In the case of a firm, every partner is an agent of other partners as well as of the firm but in case of company, members are not agents of the company.

(c) Profits: Profits of a firm is distributed among the partners according to deed of partnership. But in the case of company, distribution of profit is optional as’ the company may or may not declare dividends.

(d) Liability: In firm, the liability of partners is unlimited but in a company, liability is always limited to the amount of shares or guarantee.

(e) Property: Property of firm is joint estate of all the partners whereas in a company, property belongs to company and not of shareholders.

(f) Transfer of share: In the case of partnership transfer of a partner’s fight is not possible without the consent of all the partners, though his interest can be assigned to a third party who has a right to share in profits but has no other rights, but in the case of a public company, share are transferable and quoted on stock exchange.

(g) Management: In partnership management is by partners, but in a company, Board of Directors do the management, shareholders only attend in .general meetings to vote.

(h) Number of members in partnership is minimum two and maximum 20 (in banking it is 10) but the case of a private company the minimum is two and maximum 50 excluding past and present employees. And in the case of a public company, it is 7 and no restriction on the maximum.

1996 – May [6] (b) (i) Briefly explain the difference between Partnership and

Co-ownership.                                                                                                            (5 marks)

Answer:

Partnership and Co-ownership:

  1. Mode of creation: Partnership is the result of an agreement. Co- ownership may or may not arise from agreement; and it may also a rise by status.
  2. Business: Necessary for partnership. Co-ownership can exist without business.
  3. Nature of Interest: Partnership involves community of interest whereas co-ownership may not necessarily involve any such interest.
  4. Transfer of interest: A partner cannot transfer his share to a stranger without the consent of the other partners. A co-owner can.
  5. Number of Members: In partnership, the number of partners cannot exceed the statutory limit. In co-ownership there is no limit on maximum number.
  6. Authority of Members: A partner is the agent of his co-partners. A coowner is not the agent of the other co-owners.
  7. Partition of Property: A partner can not sue for the partition of partnership property in specific but he can sue his co-partners for the dissolution of the firm and accounts. A coowner can sue for the partition of the property.
  8. Lien for expenses: A partner has a lien on the partnership property for expenses incurred by him on such property on behalf of the firm; a coowner has no such lien.

1996 – Nov [6] (b) (ii) Briefly explain the difference between Partnership and

Club.                                                                                                                           (5 marks)

Answer:

A partnership and a Club: The two can be distinguished as below:

  1. Definition/Meaning: A club is an association of persons formed with the object not to earn profit, but to promote some beneficial purposes such as improvement of health or providing recreation for the member etc. A partnership on the other hand is an association of persons also, but formed for earning profits from a business carried on by all or any one of them acting for all. These persons share the profit so earned as per their agreement.
  2. Relationship: Persons forming a club are called members, while persons forming a partnership are called partners. Members of a club are not an agent for the other member’s while a partner is an agent for other partners.
  3. Interest in the property: A member of a club has no interest in the property of the club in the manner a partner has in the property of the firm.
  4. Dissolution: A member leaving a club shall not affect the existence of the club, while retirement of a partner from the firm does effect the existence of the firm.

1997 – May [6] (b) (ii) Briefly explain the difference between Partnership and an Association. (5 marks)

Answer:

Distinction between a Partnership and an Association: The two terms can be distinguished on the following basis:

(i) Meaning: Partnership means and involves setting up relation of agency between two or more persons who have entered into a business for gains, with the intention to share the profits of such a business.

An association is a body of persons who have come together for . mutual benefit such as resident’s association of a particular area or for rendering service to the society such as a charitable or religious society say a dispensary or a temple etc.

(ii) Sharing of profits: A partnership is set up to share the profits of a business, while an association is not set up for sharing the profits. The intention of the association is not to carry on a business by the members of the association for earning profits.

(iii) Mutual Agency Trust: A partnership is based on mutual trust and is carried on by mutual agency, which is not so in the case of an association.

(iv) Dissolution: Retirement or death of a particular may dissolve a firm but retirement or death of a member of an association does not dissolved the association.

1997 – Nov [6] (b) (ii) Briefly explain the difference between Partnership and Joint Stock Company.          (5 marks)

Answer:

Please refer 1995 – Nov [6] (b) (i) on page no. 300

1998 – May [6] (b) (ii) Briefly explain the difference between Partnership and Hindu undivided family.        (5 marks)

Answer:

Following are the differences between Partnership and Joint Hindu Family:

  1. Creation: The relation of partnership is created necessarily by an agreement, whereas Joint Hindu Family is established by law. A person

/ becomes a member of a Joint Hindu Family by birth.

  1. Death: Death of a partner brings about dissolution of partnership. But the death of a member of a Joint Hindu Family dpes not give rise to dissolution of the family business.
  2. Management: In a Joint Hindu Family, only karta has the right to manage the business. In partnership, all the partners have the right to take the part in the management of the firm.
  3. Liability: The liability of partners in a partnership concern is unlimited, joint and several. The liability of members of a Joint Hindu Family except the Karta is limited only to the extent of their share in the business of the family.
  4. Calling for accounts: On the partition of joint Hindu Family a member is not entitled to ask for the accounts of the family business. But a partner can bring a suit against the firm for accounts on the acquisition of the firm.
  5. Governing Law: A partnership is governed by the Indian Partnership Act, 1932, while Joint Hindu Family is governed by Hindu Law.
  6. Minor’s Position: A minor can be a member of a Hindu Joint Family, but a minor can not be a partner in a firm. However, he can be admitted to the benefits of partnership with the consent of all the partners.

1998 – Nov [6] (b) (ii) Briefly explain the difference between Sleeping partner and nominal partner.            (5 marks)

Answer:

Sleeping Partner and Nominal Partner: A sleeping partner is one who is

neither an active partner nor known to outsiders. In reality Tie is a partner in the firm. He contributes his share of capital and gets his share of profits, but he does not take active part in the conduct of the business of the firm. He is liable to the third parties for all the acts of the firm, whether his existence is known to the third parties at the time of making the contract.

A Nominal Partner is one who has no real interest in the business of the firm. He is not entitled to share the profits and also dose not contribute any capital. He also does not take part in the conduct of the business off the firm. He lends his name only and his name is used in the firm like an actual partner and is liable for all acts of the firm.

Descriptive Questions

1995 – Nov [2] (d) Sharing in the profits is not conclusive evidence in the creation of partnership.  (5 marks)

Answer:

Evidence of Partnership: Partnership, generally, is an agreement (contract) between two or more competent persons to carry on some business and distribute/share the profits of such business.

Section 6 of the Indian Partnership Act prescribes the test to determine the existence of partnership. To determine whether a group of persons is a firm and its members are partners or not, their real relation must be determined on the basis of relevant facts. [Moore v. Daris (1879) 11 Ch. D. 261 ]. The parties to a partnership contract do not become partners simply on the basis that they have been described, in the deed, as partners. [Abdulla v. Alladia (1927) 8 Lahore, 310].

Sharing in the profits of the firm is a prima facie evidence of establishment of partnership but it is not a conclusive proof. As per the provision of Section 4 of the Indian Partnership Act, sharing of profits is not the sole determining fact. Other tests are also required to be applied. [Cox v. Hicman], A person may, in many ways share in the profits of a business without being a partner. A creditor sharing in the profits does not ipso facto become a partner. Explanation II of Section 6 of the Indian Partnership Act also makes it clear that a creditor is not a partner. Similarly a servant, an agent, widow or child of the deceased partner, may receive a share in the profits. But they do not become partner. Thus, the real thing to be seen in such cases is whether they are participating in the business of the firm in the capacity of partners and represent each other in the said capacity. [Malomach & Co. v. Court of Wards (1872) LR 2 CP 419],

1998 – Nov [2] (d) Law of partnership is an extension of law of agency.

(5 marks)

Answer:

Law of partnership is an extension of law of agency: The concluding portion of the definition of partnership as given in Section 4 of the Act is very important for this quotation as it says that the business may be carried on “by all or any of them for all”. Thus, it is clear that the Act does require that the business should be carried on by all or it may be carried on by any of them on behalf of all of them. This clearly establishes the implied agency, the partner who is conducting the affairs of the business is considered as agent of the remaining partners. The relationship between partners is governed by the law of agency.

Section 18 of the Partnership Act provided, “Subject to the provisions of this Act, a partner is the agent of the firm for the purposes of the business of the firm”.

In carrying on the business of the firm, partners act as agents as well as principals. While the relation between the partners inter se is that of principals, they are agents of one another in relation to third parties for purposes of business-of the firm.

Every partner has a two-fold character, he is an agent of the other partners (because other partners are bound by his acts) and also he himself is the principal (because he is bound by the acts of other partners). The liability of one partner for the acts of his co-partners is in truth the liability of a principal for the acts of his agent. This concept of mutual agency is, in fact, the true test of the existence of partnership. This relationship of principal and agent distinguishes a partnership business from co-ownership, Joint Hindu family business as well as an agreement to share profits of the business.

From the above we can conclude that the law of partnership is an extension of the law of principal and agent.

1998 – Nov [5] (d) Who may be partner of a firm ?                                                     (5 marks)

Answer:

Section 4 of the Indian Partnership Act, defines partnership. This definition lays stress on an agreement between persons. These persons should be those, who are competent to contract as per provisions of S. No. 11 of the Indian Contract Act i.e., these persons must have capacity to contract, meaning by they are capable of entering into a valid contract.

Section 11 defines capacity to contract as follows:

“Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind, and is not disqualified from contracting by any law to which he is subject.” Those who do not have capacity to contract can not 6a a partner. However, a minor under Section 30 of the Indian Partnership Act can be admitted to the benefits of the partnership firm with the consent of dll the partners*

Thus to be a partner, a person must be (1) a major, (2) of sound mind, and (3) should not be disqualified from contracting by any law.

1999 – May [2] (d) True test of partnership is mutual agency.                                    (5 marks)

Answer:

According to Section 4 of the Indian Partnership Act, 1932, three elements of the firm appear from the definition of the partnership. They are – (i) there must be an agreement entered into by all the persons concerned (ii) the agreement must be to share the profits of a business; and (iii) the business must be carried on by all or any of the person concerned, acting for all, All these elements must be present before a group of persons can be held to be partners.

The third element shows that the business must be carried on by the partners or some of them acting for all. This element very clearly brings out the fundamental principle that partners when carrying on the business of the firm are agents as well as principals; an implied agency flows from their relationship with the result that every partner who conducts the business of the firm is in doing so deemed in law to be the agent of all the partners. The essence of a partnership is that each of the partners is the agent of the others for the purpose of carrying on the partnership business. This test is known as the test of mutual agency and is the most distinctive test of partnership. Failure by one partner to take part in the management of the business does not have the result that he is not carrying on business as an partner.

Thus sharing the profits of a business though an essential element, would not be in itself sufficient to constitute partnership, Besides sharing the profits of a business it is also necessary to show that the business was conducted on his behalf. Therefore, the true test of partnership is mutual agency rather than sharing profits. If this element is lacking there will be no partnership.

1999 – Nov [6] (b) (ii) Explain Partnership by holding out.                                          (5 marks)

Answer:

Partnership by holding out (Section 28 Indian Partnership Act, 1932):

When a person represents himself or knowingly permits himself to be represented as a partner in a firm when in fact he is not, he is liable like a partner in the firm to anyone who on the faith of such representation has given credit to the firm. In the case of partnership by holding out some affirmative conduct by the principal is necessary.

2000 – May [2] (iv) The true test of partnership is “mutual” agency between

the partners.                                                                                                               (5 marks)

Answer:

The true test of partnership is mutual agency rather than sharing of profits. If this element of mutual agency is absent then there will be no partnership. The prima facie evidence of partnership is mutual agency. Every partner carrying on the business is the principal as well as an agent of other partners. So, the act of one partner done on behalf of firm, binds all the partners. Section 4 of the Indian Partnership Act, 1932 says is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Thus an implied agency flows from their relationship as partners with the result that every person who conducts the business of the firm is in doing so, deemed in law to be the agent of all the partners. (Section 18).

2001 – Nov [2] (e) Partnership is an association of persons, who have

agreed to share the profits of a business carried on by all or any one of them acting for all. (5 marks)

Answer:

This statement deals with the definition of partnership as laid down by Section 4 of the Indian Partnership Act, 1932. The definition lays down the essential elements which must be fulfilled for making a partnership. Accordingly,

  1. there must be an agreement between the persons associating to form a firm.
  2. the agreement must be to carry on a business i.e. there must be a business.
  3. The agreement must be to share the profits of the business, equally or in agreed proportion.

However, sharing of profits is only a prima facie test of partnership since there may be persons who share profits and yet may not be termed as partners e.g. a widow of a deceased partner or a loan creditor getting a share of profits over and above the interest charged by him.

  1. The business must be carried in by all or it may be carried by one of them on behalf of all. This element establishes a relationship of mutual agency between the persons known to be partners of the business firm. It is the agency relationship which binds all the partners to each other. Partnership is primarily an extension of the law of agency.

2002 – May [2] (e) True test of partnership is the existence of mutual agency

among the partners and not the sharing of profits.                                                    (5 marks)

Answer:

True Test of Partnership: In order to determine whether there exists a partnership among the partners, the definition given in Section 4 of the Indian Partnership Act, 1932 is used as a test, i.e. one must look to the agreement between them. If the agreement is to share the profits of a business, and the business is carried on by all or any of them acting for all, there is partnership, otherwise not. In determining whether a group ef persons is or is not a firm or whether a person is or is not a partner in a firm, regard shall be had to the real relation between the parties, as shown by all relevant facts taken together.

The difficulty arises when there is no specific agreement constituting partnership among the partners, or the agreement is such as does not specifically speak of partnership. In such a case one has to determine the real relation between the partners as shown by all relevant facts taken together (Section 6) such as written or verbal agreement, real intimation and conduct of the partners, other surrounding circumstances, etc.

The sharing of profits is prima facie a powerful evidence of partnership but the fact that there is sharing of profit between some persons will not automatically make them partners. Therefore, receipt by a person of a share of the profits of a business or of a payment contingent upon the earning of profits or varying with the profits earned by a business, does not of itself make him a partner with the persons carrying on the business. Thus there is no partnership on the basis of sharing of profits only.

The true test of partnership as laid down in the leading case of Cox vs. Hickman is mutual agency. Each partner carrying on the business is the principal as well as agent of other partners, so the out of one partner done on behalf of the firm binds all the partners. If the element of mutual agency relationship exists between the parties constituting a group formed with a view to earn profits by running a business, it can be said that there is partnership.

2002 – Nov [7] (e) Partner by Holding out.                                                                 (5 marks)

Answer:

Partner by Holding out: Section 28 of the Indian Partnership Act, 1932 provides for the meaning of the term, ‘Partner by Holding Out’. It states:

  1. Any one who by words spoken or written or by conduct represents himself, or knowingly permits himself to be represented, to a partner in a firm, is liable as a partner in that firm, to any one who has on the faith of any such representation given credit,to the firm, whether the person representing himself or represented to be a partner does or does not know that the representation has reached the person so giving credit.

2 Where after a partner’s death the business is continued in the old firm name, the continued use of that name or of the deceased partner’s name as a part thereof shall not of itself make his legal representative or his estate liable for any act of the firm done after his death.

Thus, holding out means holding responsible a person who is not a partner in the real sense in a firm, but has represented himself as a partner, or has knowingly permitted himself to be represented, is to be treated to a partner of the firm to any one, who on the faith of such representation has given credit to the firm. He shall also be liable to such creditors for payment.

The representation referred above may be express or implied. It may be written or may be even by conduct. Form of representation is immaterial for such purpose.

2018 – May [6] (b) What is the conclusive evidence of partnership? State the circumstances when partnership is not considered between two or more parties.                                                        (4 marks)

Answer:

The business must be carried on by all the partners or by anyone or more of the partner acting for all. This is the cardinal principle of the partnership law. An act of one partner in the course of the business of the firm is in fact an act of all partners. It may be noted that the true test of partnership is mutual -agency ratfier than sharing of profits. If the element of mutual agency is absent, then there will be no partnership.

Sharing of profits is an essential element to constitute a partnership, but it is only a prima facie evidence and not conclusive evidence. Conclusive evidence of existence of partnership is only mutual agency.

The receipt of profit share by one person of a business, does not itself make him a partner with the persons carrying on the business. Such cases are:

  1. by a servant or agent as remuneration.
  2. by a widow or child of a deceased partner, as annuity.
  3. by a lender of money to persons engaged or about to engage in any business.
  4. by a previous owner or part owner of the business.

2019 -June [3] (b)“Whether a group of persons is or is not a firm, or whether a person is or not a partner in a firm.” Explain the mode of determining existence of partnership as per The Indian Partnership Act 1932?

(4 marks)

Answer:

Mode of Determining Existence of Partnership:

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 shall be had to the real relation

between the parties, as shown by all relevant facts taken together.

For determining the existence of partnership, it must be proved:

  1. There was an agreement between all the persons concerned.
  2. The agreement was to share the profits of a business, and
  3. The business was carried on by all or any of them acting for all.
  4. Agreement: Partnership is created by agreement and not by status.
  5. Sharing of Profits: Sharing of profit is an essential element to constitute a partnership. But, it is only a prima-facie evidence and not conclusive evidence. Although the right to participate in profits is a strong test of partnership, yet the relationship is there or not, depends upon the whole contract between the parties.
  6. Agency: Existence of mutual agency is the cardinal principal of partnership law, and is very much helpful in reaching a conclusion in this regard. Each partner carrying on the business is the principal as well as agent of other partners. So, the act of one partner done on behalf of the firm, binds all the partner.

If the elements of mutual agency relationship exist between the parties constituting a group formed with a view to earn profits by running a business, a partnership may be deemed to exist.

 

 

 

CHAPTERThe Indian Partnership Act, 1932
3
Unit: 2 Relations of Partners

Self Study Questions

Q.1: What are the Relation of Partners to one another?

Answer:

  • It arises through an agreement which provides’for the rights and duties of partners.
  • If articles are silent, rights and duties are governed by the Act.

Q.2: How many Rights of Partners are there?

Answer:

  • To take part in management
  • To express opinion
  • To inspect and to take out copies of Books of Accounts
  • To share profits equally
  • To have interest in capital
  • To have interest on advances
  • Right to be indemnified
  • To prevent the introduction of ne.j« partner
  • Implied Authority
  • Right to dissolve
  • Profits after retirement or death.

Q.3: What are the Duties and Liabilities of partners?

Answer:

  • To carry on the business of the firm to the greatest common

advantage ‘

  • Being diligent and honest
  • Being just and faithful
  • To render accounts and information
  • To indemnity the firm (Section 10)
  • Not to make any secret profits
  • Not to hold and use property of the firm.
  • Not to start business in competition with the firm.
  • Not to receive any remuneration
  • Not to transfer his interest
  • To act within the scope of his authority
  • To share losses.

Q.4: Describe the Partnership Property.

Answer:

As per Section 14:

  • It is also known as “property of the firm”, “Partnership assets”, “Joint stock”, “Joint estate”.
  • It represents the property to which all partners and entitled collectively.

Q.5: What conditions are include in Partnership Property?

Answer:

(i) All property, rights and interests which partners may have brought into the common stock as their contribution.

(ii) All property, rights and interests which are acquired or purchased by the firm in the course of business.

(iii) Goodwill of the business.

  • Every partner is a joint owner of partnership property.
  • Every partner is entitled to hold and apply the same exclusively for business purpose.
  • A partner’s property being used for firm’s business, does not automatically makes it a firm’s property.

Q.6: Write short note on Goodwill.

Answer:

  • Goodwill is defined as the value of the reputation of a business house in respect of profits expected in future over and above the normal profits.
  • It is a partnership property.
  • In case of dissolution of firm, every partner has a right according to the deed in the absence of any agreement, to have a share in the goodwill on it being sold.
  • It can be sold separately or along with other properties of the firm. •

Q.7: Which condition Applies in Case of Personal Profit Earned by Partners.

Answer:

As per Section 16:

If a partner derives any profits for himself from any business transaction of the firm or from use of the property of the firm or carries on a competing business, he must account for and pay all the profits made by him to the firm.

Q.8: Describe the Relation of partners to third parties.

Answer:

  • Every partner in the agent of the firm for the propose of business of the firm.
  • Every partner is both the principal and agent
  • The law of partnership is regarded as the breach of law of agency. Act of every partner binds the firm and other partners unless:

(i) Acting partner has no authority to act for the firm in such matter

(ii) Person with whom he is dealing knows that he has no authority

(iii) Believes such person to be a partner.

Q.9: Which Conditions Apply for implied authority?

Answer:

(i) Act must relate to normal business of the firm.

(ii) Act must be done in the usual way of carrying on the firm’s business.

(iii) Act must be done in the firm’s name.

Q.18: Which Acts Apply within implied authority?

Answer:

  • To buy, sell and pledge goods on behalf of firm.
  • To raise loan on security of such assets.
  • To receive payments of debts due to the firm.
  • To accept, make and issue bill of exchange, etc on firm’s behalf.
  • To engage servants for the firm’s business.
  • To take on lease a premises on firm’s behalf.

Q.11: Which Acts Apply beyond the implied Authority?

Answer:

As per Section 19(2):

  • Submission of dispute relating to business of firm to arbitration.
  • Opening a bank account on firm’s behalf in his own name.
  • Comprising or relinquishing any claim or portion of claim against third party by firm.
  • Withdrawing a suit or proceedings filed on behalf of firm.
  • Admitting any liability in a suit or proceedings against the firm.
  • Transferring immovable property of the firm.
  • Entering into partnership on firm’s behalf.

Q.12: What are the Extensions and Restrictions of Partners on Implied Authority?

Answer:

As per Section 20:

  • The partners may either extend or restrict the implied authority of any partner by contract between them.
  • Third party is not effected by a secret limitation of a partner’s implied authority unless he had actual notice of it.
  • All partner’s consent is required for it.

Q.13: Describe the Partner’s authority in an Emergency.

Answer:

As per Section 21:

Subject to provisions of section 20, each partner binds the firm by all acts done in the case of emergency, with a view to protect the firm from any loss provided, As he has acted as a man of ordinary prudence.

Q.14: Describe the Liability to third parties.

Answer:

As per Sections 25 to 27:

Section 25: Contractual liability:

Every partner is liable jointly and severally for all acts or omissions binding the firm while he is a partner.

Q.15: What are the Section 26: Liabilities for fort or wrongful Act?

Answer:

(Generally other partners are not liable for one partners fort but where fort is committed by authority of other partners then partners are liable)

The firm is liable to the same extent as the partner for any loss or injury caused to the third party by wrongful act of partner, if they are done by partner acting:

(i) in ordinary course of business

(ii) with partner’s authority.

Q.16: Which Liabilities arise for misappropriation by a partner?

Answer:

(i) When a partner, acting within his apparent authority, receives money or other property from a third person and mis-applies it, or.

(ii) where a firm, in business course, received money or property from third party and is misapplied by a partner, while it is in firm’s custody in liable to make good the loss.

Q.17: What are the Rights of Transferee of a partner’s interest?

Answer:

As per Section 29:

  • During the continuance of partnership if a partner transfers his interest, the transferee will not be entitled to

(i) Interfere with the conduct of business

(ii) require account, or

(iii) inspect books of the firm.

He will only be entitled to share of profits and he is bound to accept the same without challenging the accounts.

  • At the time of dissolution or retirement, transferee is entitled, against other remaining partners :

(i) to receive the share of assets of the firm to which the transferring partner was entitled, and.

(ii) for the purpose of ascertaining the share, he in entitled to an account as from the date of dissolution.

Q.18: What are the benefits which arise on admission of a minor partner in a Partnership Firm?

Answer:

As per Section 30:

  • Minor is a person who has not completed 18 years of age, thus, cannot become a partner as he is not competent to contract.
  • As per section 30, he can however, by admitted to the benefits of partnership with the mutual consent of all partners.

No partnership firm can be formed only with minors.

  • A minor’s agreement in altogether void
  • If a minor has to be admitted into the benefits of partnership, there must be atleast 2 major partners.

Q.19: What are the Rights of Minor?

Answer:

  • Section 30(2): Share profits of the firm
  • Section 30(2): Inspect and copy the book of accounts of the firm.
  • Section 30(4): Can file a suit for accounts and his share in the firm but only when severing his connection with the firm.
  • Section 30 (5): On attaining majority he may within 6 months either
 

Elect ot become a partner.

 

 

Not to become a partner.

 

Then he is entitled to the share as earlier.

He is not liable (or any acts of the firm after that pror.ded public notice is served.

Q.20: What are the Liabilities of a Minor ?

Answer:

  • Section 30(3): His liability ie limited to the extant of his share in the firm.
  • Section 30(3): He is liable for all acts of the firm but he is not personally liable.

(i) Within 6 months of his attaining majority or

(ii) On his obtaining knowledge of had been admitted to the benefits of partnership, whichever is later, he may give a public notice of not electing to become a partner.

If he sellects not to become a parnter.

*

If he fails to give such notice, he becomes partner after expiry of 6 months.If he may become partner on his willingness.

 

1.Until he gives a public notice, 1. his rights and liabilities continue like that of minor.Becomes personally liable for all the firm’s act to third party since he was admitted to benefits.
2.After notice, he shall not be 2. liable for any acts of firm.His share in property and profits remains same.
3.Entitled to sue partners for his share in property and profits.
4.After attaining majority, the minor becomes personally liable to the third parties.

Q.21: What are the Liabilities of an Incoming Partner?

Answer:

As per Sectipn 31 (2):

  • Liability of’new partner ordinarily commences from the date of his admission.
  • He can also agree to be liable for obligations incurred prior to that date by the firm.
  • New firm constituted, may agree to assume liability from existing debts of old firm.
  • Creditors may agree to accept the new firm as their debtor and discharge the old partners.
  • Creditors consent is necessary.

Q.22: What are the Agreements which arise between partner’s in case

or Novation?

Answer:

Novation refers to a tripartite agreement between:

(i) Firm’s creditor

(ii) Partner existing at the time when debt was incurred.

(iii) Incoming partner.

Q.23: What are the Liabilities of outgoing or retiring partner?

Answer:

As per Section 32:.

  • Liability of such partner continues until a public notice of his retirement has been given.
  • He remains liable for the firm’s acts done before his retirement, unless there is an agreement made.
  • He may be discharged by novation.

Q.24: What do you mean by Insolvency of partner?

Answer:

As per Section 34:

  • Such a partner cases to be a partner on the date of the order of adjudication.
  • His estate cases to be liable for any act of the firm done after that date of order.
  • Firm is also not liable for any act of such a partner after such date.

Q.25: Write short note on Death cf Partner.

Answer:

As per Section 35:

If the firm is not dissolved, the estate of deceased partner is not liable for act of the firm after his death.

Q.26: What are the Rights of Outgoing Partner to Carry on Competing Business?

Answer:

As per Section 36:

  • An outgoing partner may carry on business competing with that of the firm and he may advertise such business, but subject to contract to the contrary, he may not:

(a) use the firm name

(b) represent himself as carrying on business of firm or

(c) solicit the custom of persons who were dealing with the firm before he ceased to be a partner.

  • Partner may agree to not to carry on similar business within a specified time period or specific local limits and any such agreement will be treated as valid if refractions of restrain are reasonable.

Q.27: What are the Rights of Outgoing Partner in Certain Cases to share subsequent profits?

Answer:

As per Section 37:

The representatives of the deceased partner would be entitled, at their discretion to interest (<i 3% p.a. on amount due from the date of death to the date of payment or to that portion of profit which is earned by the firm with the amount due to the deceased partner.

Q.28: What do you understand by Revocation of Continuing guaranty by change in firm?

Answer:

As per Section 38:

  • A continuing guarantee given to a firm or to third party:
  • In respect of transaction of the firm in the absence of any contrary agreement, “revoked as to future transactions from the date of any change in the constitution of the firm.

Short Practice Questions

  1. What do you understand by the term goodwill?
  2. Explain partnership Property.
  3. Write Short on relation of partners to outsides.
  4. Mention the acts of partners which are beyond the Implied Authority.
  5. Can minor be admitted to partnership business?

Objective Questions

Past Year Questions and Answers \ •

1994 – Nov [1] State with reason whither the following statement is Correct or Incorrect.

(vii) A person can be admitted to a partnership firm with the consent of majority of partners only.  (2 marks)

Answer:

Incorrect: A partner can be admitted in a firm only by the consentpf-all the existing partners. Consent only of the majority of partners would not be sufficient. This is, however, subject to an agreement to the contrary, [Sec. 31 (1)].

1995 – May [1] State with reason whither the following statement is Correct or Incorrect.

(vii) Implied authority of partner does not include entering into partnership on behalf of the firm.   (2 marks)

Answer:

Incorrect : The sharing of profits is prima facie a powerful evidence of partnership but the face that there is sharing of profits between some persons will not automatically make them partners.

1995 – Nov [1] State with reason whither the following statement is Correct or Incorrect.

(vii) A major and a minor can create a partnership.                                                  (2 marks)

Answer:

Incorrect: According to section 5 read with Section 30 of the Indian Partnership Act, 1932, a minor can be entered into benefits of partnership with unanimous consent of all the partners but he is not competent for creation of partnership. Also, according to Section 11 of the Indian Contract Act, an agreement by or with a minor is void.

1996 – May [1] State with reason whither the following statement is Correct or Incorrect.

<viii) A partner in a firm has right to receive interest on advances given by him to the firm @ 12% per annum. ■,                                                                                                                                (2 marks)

Answer: v

Incorrect: Section 13 (d) of the Indian Partnership Act, 1932 allows a partner to receive interest on advances given by him to the firm, but the rate of interest on such advances is 6% per annum and not 12% per annum.

1996 – Nov [1 ] State with reason whither the following statement are Correct or Incorrect.

(vii) The invalid expulsion of a partner does not give him a right to claim damages.

(viii) A partnership contract providing that no partner shall carry on any business other than that of the firm while he is a partner, is ypid.

(2 marks each)

Answer:

(vii) Correct: The invalid expulsion of a partner, give the aggrieved partner a right to be re-instated but not to claim any damages [Wood Vs. Wood (1874) I.R.I. Ex. 190.] [Section 33 of the Indian Partnership Act, 1932]

(viii) Incorrect: Section 11 Clause (2) of the Indian Partnership Act says that “Notwithstanding anything contained in Section 27 of the Indian Contract Act, 1872, such contracts may provide that a partner shall not carry on any business other than that of the firm while he is a partner”. In view of this the contract in question is valid and the statement is incorrect.

1997 ■ May [1] State with reason whither the following statement is Correct or Incorrect.

(x) A partner is not entitled to claim remuneration.                                                    (2 marks)

Answer:

Correct: The Indian Partnership Act does not allow any remuneration to any partner, unless and until agreed upon by all the partners of the firm. (Section 13(a) Indian Partnership Act).

1997 -flov [1 ] State with reason whither the following statement are Correct or Incorrect.

(ix) A*new partner may be introduced in the firm even by any existing partner of the firm.

(x) The implied authority of a partner empowers him to acquire immovable

property on behalf of the firm.                                                                           (2 marks each)

Answer:

(ix) Incorrect: Section 31(1) of the Indian Partnership Act lays down that subject to a contract between the partners and to the provisions regarding minor in a firm, no new partner can be introduced without the consent of all the existing partners.

(x) Incorrect: According to Section 19(2)(f), if there is no usage or custom of trade to the contrary, the implied authority of the partner does not empower him to acquire immovable property on behalf of the firm.

1998 – May [1] State with reason whither the following statement is Correct or Incorrect.

(ix) A transferee of a partner’s interest in a firm accepts a loan on behalf of the firm, for which the other partner was authorised to do so, invest it in the non-partnership business, without the consent of all the partners. The transferee is empowered to accept the loan.

N                                                                                                                                  (2 marks)

Answer:

Incorrect: Section 29 of the Partnership Act, 1932 lays down that a transferee of a partner’s interest is not entitled, during the continuance of the Partnership to interfere in the conduct of business. Therefore, the acceptance of loan on behalf of the firm by the transferee of a partner’s interest is not in his purview and he has no right to do so unless the other partners unanimously, agree thereto.

1999 – May [1] State with reason whither the following statements are Correct or Incorrect.

(vii) A partner who has purchased the goodwill of the firm on the dissolution of partnership firm has right to make use of the firm’s name for earning profits.

(viii) All partners are not joint- owners of the property of the firm, unless

otherwise provided in the agreement.                                                               (2 marks each)

Answer:

(vii) Correct: As per the provisions of the Indian Partnership Act, 1932 as contained in Section 50, where any partner has bought the goodwill of the firm on its dissolution, he has the right to use the firm name and earn profits by its use.

(viii) Incorrect: Section 14 of the Indian Partnership Act, 1932, states that unless a contrary intention appears, all partners are joint owners of the property of the firm because property acquired with money belonging to the firm are deemed to have been acquired for the firm. If personal property of the partner is used by the firm the partner must show an intention to make it so.

2000 – May [1] State with reason whither the following statement is Correct or Incorrect.

(ix) A partner may acquire immovable property on behalf of the firm, in the exercise of his implied authority.                                                                                                                                    (2 marks)

Answer:

Incorrect. Section 19 of the Indian Partnership Act, 1932 says it there is no usage or custom of trade to the contrary, the implied authority of the partner does qot empower him to acquire immovable property on behalf of the firm.

2000 – Nov [1] State with reason whither the following statements are Correct or Incorrect.

(ix) A partner is not an agent of other partners in a partnership firm.

(x) A minor can be a partner in a partnership firm.                                           (2 marks each)

Answer:

(ix) incorrect: The basis of the partnership is mutual agency, hence a partner is an agent of all other partners.

(x) A minor does not have capacity to contract, he can not be a partner in a firm. However, he can be admitted to the benefits of the partnership with consent of all the partners.

2001 – May [1] State with reason whither the following statements are Correct or Incorrect.

(ix) The transferee of a partner’s interest is entitled to inspect the books of the firm during the continuance of the firm.

(x) Goodwill of the firm cannot be regarded as an asset of the firm.

(2 marks each)

Answer:

(ix) Incorrect: A transfer by a partner of his interest in the firm does not entitle the transferee, during the continuance of the firm to interfere in the conduct of the business, or to require accounts, or to inspect the books of accounts of the firm [Section 29 (1) of the Indian partnership Act, 1932].

(x) Correct: Section 25 of the Indian Partnership Act, 1932 declares that “every partner is liable, jointly with all the partners and also severally, for the acts of the firm done while he is a partner. Liability of the partner is dependent on two things (1) It should be an act of the firm and (2). The act should have been done by the firm while he was a partner.

2001 – Nov [1] State with reason whither the following statements are

Correct or Incorrect.

(ix) In a partnership firm where a partner is entitled to get interest on the capital subscribed by him, such interest can be paid to him out of capital of the firm.

(x) A partner carrying on a business, which is similar in nature and

competing with that of the firm is bound to pay to the firm, all the profits earned by him, even when there is no such agreement amongst the partners.                                                            (2 marks each)

Answer:

(ix) Incorrect: In a partnership firm where a partner is entitled to get interest on his capital subscribed by him in terms of partnership agreement, he can be paid such interest only out of profits of the firm and not out of capital of the firm. (Section 13(c): Indian Partnership Act, 1932).

(x) Correct: According to Section 16(b) of the Indian Partnership Act, 1932, subject to a contract between the partners if a partner carries on any business of the same nature as and competing with that of the firm, he shall account for and pay to the firm, all profits made by him in that business.

2002 – May [1] State with reason whither the following statement is Correct or Incorrect.

(x) A partner making advance of money to the firm, beyond the amouf.t of his agreed capital is entitled to interest on such advanced money.

  • (2 marks)

Answer:

Correct: The general rule is that partners are not considered as debtor and creditor among themselves and hence advance made to the firm by a partner cannot be regarded as loan. 8ut clause (d) of Section 13 of the Indian Partnership Act, 1932 lays down that a partner who makes any payment or advance of money to the firm beyond the amount of his greed.capital, is entitled to interest thereon at the rate of six percent per annum, subject to contract between the partners.

Short Notes

1997 – May [7] Write short note on the following:

(e) Liability of an incoming partner.                                                                            (5 marks)

Answer:

An incoming partner is not liable for any act of the firm done prior to his admission as a partner. This is because the old partners were not the agents of the new partners at the time when they acted. By a mutual agreement, the new partners may agree with the old partners to be liable for the past liabilities of the firm. However, the creditors of the firm cannot sue the new partners for their past debts because there is no privity of contract between the creditors and the new partner. Similarly, the acts of the old partner can not be ratified by the new partner because he was not in existence as a principal at the time when acts were done. He is liable for the acts of the old firm only if the new firm assumes the liabilities of the old firm and the creditors accept the new firm as their debtor and discharge the old firm from his liability.

1998 – Nov [7] Write short note on the following:

(d) Right to remuneration of a partner                                                                        (5 marks)

Answer:

Right to remuneration of partner:

The general rule is: [No partner is entitled to receive any remuneration in addition to his share in the profits of the firm for taking part in the business of the firm. But this rule can always the varied by an express agreement, or by a cause of dealings, in which event the partner will be entitled to remuneration. Thus a partner can claim remuneration even in the absence of a contract, when such remuneration is payable under the contained usage of the firm. Similarly, a partner on whom the whole conduct of the business has been cast by reason of the other partner’s wilful neglect of the business to which the latter ought to attend, can claim compensation for the undue labor and trouble being imposed upon him] (Krishnamachriar vs. Sankara saha 91920).

1999 – Nov [7] Write short note on the following:

(v) Minor in partnership.                                                                                             (5 marks)

Answer:

Minor in Partnership: A minor cannot become a partner, as he is not competent to contract. But if all the partners agree, he can be admitted to the benefits of partnership. Such minor has a right to his agreed share of the profits; he cannot take part in management, and he can have access to inspect and copy the accounts of a firm but not to book of the firm. On attaining majority, he has to elect whether he wants to continue as a partner or not within a period of 6 months of his attaining majority. He fails to give such notice he shall become a partner in the firm on the expiry of the said six months. If the minor becomes a partner of his own willingness, his position is as follows:

(a) his rights and liabilities as a minor will continue upto the date on which he becomes a partner.

(b) he becomes personally liable to third parties for all acts of the firm done since he was admitted to benefits of partnership.

(c) his share in the property and profits of the firm remains the same as to which he was entitled as a miner.

2000 – May [7] Write short note on the following:

(v) Explain the duties of a Partner in Partnership.                                                     (5 marks)

Answer:

Duties of Partner [Indian Partnership Act, 1932]:

  1. To work for the greatest common advantage. [Section 9]
  2. To be just and faithful [Section 9]
  3. To render true accounts. [Section 9]
  4. To give full information. [Section 9]
  5. To indemnity for frauds [Section 10]
  6. To indemnity for wilful neglect. [Section 13 (f)]
  7. To share losses. [Section 13 (b)]
  8. To attend diligently without remuneration. [Sections 12 (b) and 13 (a)]
  9. To hold and use property of the firm exclusively for the purpose of business. [Section 15]
  10. To account for private profits from transactions of firm etc. and from competing business [Section 16]
  11. To act within authority.
  12. Not to assign his rights [Section 29]
  13. To be liable jointly and severally. [Section 25]

Descriptive Questions

1994 – Nov [5] Answer of the following:

(e) When can a partner be expelled?                                                                         (5 marks)

Answer:

According to the provisions of Section 33 of Indian Partnership Act a partner can not be expelled from a firm by any majority of the partners. As such the law as a central rule gives no power to partners to expel a partner. This rule is subject to certain exceptions.

Exceptions:

(i) Where it is provided in the Partnership Act.

(ii) Where it is by an order of the Court, for misconduct etc.

(iii) Where it is warranted by dissolution of the firm.

However, the expulsion is subject to the following conditions;

(a) The right to expel a partner is available by an express agreement between the partners.

(b) The power must have been exercised by a majority of partners in good faith.

(c) The expelled partner was given reasonable notice and opportunity to explain his position and to remove the cause of his expulsion. (Carmichael vs. Evans 1904).

The position of the expelled partner is same as that of a retiring partner.

1995 – May [2] Comment on the following:

(d) A partner is an agent of the firm as well as of all the other partners.

(5 marks)

Answer:

A partner is an agent of the firm as well as of all the other partners : The

concluding portion of the definition of partnership as given in Section 4 of the Partnership Act says that the business may be carried on by all or any of them acting for all. This clearly establishes the implied agency, the partner who is conducting the affairs of business is considered as the agent of the remaining partners.

In carrying on the business of the firm, partners act as agents as well as principals. While the relation between the partners interest is that of principals, they are agents of one another in relation to third parties for the purpose of the business of the firm.

Section 19(1) of the Partnership Act provides that “ the act of a partner

which is done to carry on, in the usual way, business of the kind carried on by the firm, binds the firm.” From this it is clear .that every partner has the implied authority to bind the firm provided they relate to the business of the firm and are done by him in the name of the firm and in the usual course of the business of the firm.

In partnership every partner has a two-fold character, he is an agent of the other partners (because other partners are bound by his acts) and also he himself is the principal (because he is bound by the acts of other partners). The liability of one partner for the acts of his co-partners is in fact the liability of a principal for the acts of his agent. This concept of mutual agency is, in fact, the true test of existence of partnership.

1995 – May [3] (b) Discuss the rights of a partner in a firm. (10 marks)

Answer:

The mutual rights and duties of the partners of a firm may be determined by contract between the partners, and such contract may be expressed or implied by a course of dealing. In the absence of any express agreement among partners, their rights and duties are governed by the Partnership Act.

Rights of the partners in partnership firm are discussed hereunder:

(i) Participation in management [(Section 12 (a)]: Every partner has a right to take part in the conduct of the business.

(ii) Right to be consulted: Any difference arising in connection with the business may be decided by a majority of the partners and every partner has a right to express his opinion before the matter is decided.

(iii) Access to books [(Section 12 (d)]: A partner has a right to have access to and inspect and copy any of the books of the firm.

(iv) Sharing of profits [(Section 13 (b)]: Partners are entitled to share equally in the profit earned.

(v) Interest on capital [(Section 13 (c)]: A partner is entitled to interest on advance made by him over and above his capital at the rate of 6% per annum. However, where the partnership agreement provides for the payment of interest at a certain rate such interest shall be payable only out of profits if any, earned by the firm.

(vi) Making use of Partnership property [(Section 15)]: Every partner is entitled to use the property of the firm exclusively for the purpose of the business of the firm.

(vii) Indemnification [(Section 13 (c)]: A partner is entitled to be indemnified by the firm in respect of payments made and liabilities incurred by him under certain circumstances.

(viii) Agent of the firm [(Sections 18 and 19)]: Because of the agency relationship every partner has implied authority to bind the firm by his own act in the conduct of the business of the firm.

(ix) Dissolution of the firm [(Section 43, 44 and 46)]: A partner is entitled to dissolve the firm under certain conditions. A partner has a right to have the business wound up after dissolution.

(x) Authority in emergency [(Section 21)]: A partner has authority in an emergency to do all such acts as required for the purpose of protecting the firm from loss.

(xi) Retirement [(Section 32)]: Every partner has a right to retire from the partnership firm subject to the nature of partnership.

(xii) Not to be expelled [(Section 33 (1)]: Every partner has a right to continuance in the partnership. No partner can be expelled except in good faith.

(xiii) No new partner to be introduced [(Section 31 (1)]: Every partner has a right to prevent admission of a new partner to the firm.

(xiv) Carrying on competing business [(Section 36)]: Unless otherwise agreed, an outgoing partner may carry on a business competing with that of the firm and may advertise such business. But he can not use the name and representation of the firm.

(xv) Sharing profits by outgoing partner [(Section 37)]: An outgoing partner can claim subsequent profits or interest at the rate of 6% p.a. If final accounts have not been settled.

(xvi) Share in the partnership property: On the dissolution of the firm every partner or his representative has a right to have the property applied in the payment of debts and liabilities of the firm and to have surplus distributed among the partners.

1995 – Nov [3] (b) Point out the circumstances where a partner cannot exercise his implied authority. (10 marks)

Answer:

Limitation on Implied Powers of Partners : A partner is deemed to be an agent of the firm so far as the business of the firm is concerned (Section 18 of the Indian Partnership Act). In view of this, acts of a partner which are done for the purpose of running the business in usual way, bind the firm and the authority of a partner to do such acts is known as implied authority [Higins v. Beucamp (1914) All E.R. 937], This implied authority is available to every partner of the firm and need not be reduced to writing in the deed of partnership.

The exercise of implied authority must be in accordance with the provisions of Section 19. Section 19 points out that implied authority can be exercised only in relation to those acts which have a direct relation with the business of the firm. Further, the manner in which the authority is exercised must be similar to that which is required for the business to be carried on by the firm.

Further, Sections 19(2) and 20 of the Indian Partnership Act impose certain limitations on the implied authority of a partner. In view of these provisions, a partner cannot exercise his implied authority in relation to the following acts:

  1. Reference of firm’s disputes to arbitration
  2. Opening bank account for the firm in his own name
  3. To compromise fully or partly in a suit or to abandon any claim
  4. To withdrawn proceedings, or part thereof, instituted in the Court on the part of the firm
  5. To admit any liability in a proceedings against the firm
  6. To acquire immovable property for th6 firm
  7. To transfer immovable property of the firm
  8. To participate in any partnership for the firm.

A partner can do any of the above acts provided he is expressly authorised to do that or the usage or custom of the trade permits them. For example, a partner may open a bank account on behalf of the firm in his own name if he is expressly authorised to do so by all the partners of the firm.

Section 20 provides that the implied authoiity of partner may be decreased or increased through contract. But if such restrictions are imposed on the implied authority of a partner by mutual agreement they will not be trinding on third parties dealing with the firm unless they have knowledge of the restrictions.

1995 – Nov [5] Answer the following:

(e) When is the firm liable for the acts of a partner.                                                   (5 marks)

Answer:

Liability of the firm: Apart from the liability of the partners in the firm sometimes a firm may also be held liable in the following ways:

(i) where, by the wrongful act or omission of a partner acting in the ordinary course of the business of a firm, or with the authority of his partners, loss or injury is caused to any third party, or any penalty is incurred, the firm is liable therefore to the extent as the partner (Section 26).

(ii) where a partner acting within his apparent authority receives money or property from a third party and misapplies it, or [Section 27 (1)].

(iii) where a firm in the cause of its business receives money or property from a third party, and the money or property is misapplied by any of the partners while it is in the custody of the firm, the firm is liable to make good the loss [Section 27(2)].

1996 – May [3] (b) What are the rights and duties of a minor in relation to partnership business ? (10 marks)

Answer:

Rights and Duties of a minor in relation to partnership:

A minor in real terms is not a partner in a partnership firm. His minority is a disqualification tor him to become a partner, since an agreement with a minor is void ab-initio. But Section 30 of the Indian Partnership Act provides that though a minor cannot be a partner in a firm, he with the consent of all the partners for the time being, may be admitted to the benefits of partnership by an agreement executed by his guardian on his behalf with the other partners. Section 30 states that rules, which govern the rights and liabilities of a minor admitted to the benefits of partnership.

These ara:

  1. A minor has a right to his agreed share of the profits and share of the property of the firm.
  2. He has a right to have access to, inspect and copy the accounts of the firm. *
  3. He can sue the partners for accounts or for payment of his share. But he can exercise ihis right only when he severs his connection with the firm and not otherwise. The amount of his share in such a case shall be determined as upon a dissolution.
  4. The minor is not liable personally to third parties for the debts of the firm, but his liability is limited only upon his share in the partnership assets and profits.
  5. The minor is not entitled to take part in the conduct of the business as he has no representative capacity to bind the firm.
  6. On attaining majority or on knowing that he had been admitted to the benefits of partnership, whichever date be later, the minor must decide within six months whether he would or would not like to become a partner in the firm. He has to give public notice of his decision. If he dees not give public notice, to this effect, he is treated to be a partner in the firm.
  7. When a minor elects to remain as a partner, or fails to give public notice of not remaining as a partner in the firm, he comes personally liable to the third parties for all the debts and obligations of the firm with retrospective effect i.e. from the date of his being admitted to the benefits of partnership.
  8. Where the minor elects not to be a partner in the firm, his rights and liabilities continue to be those a minor upto to the date of his giving public notice and shall not be liable for any acts of the firm done after the date of the public notice.
  9. If after attaining majority but before electing to become a partner the minor represents or knowingly permits himself to be represented as a partner in the firm, he will be personally liable to the person who has on the faith of such representation granted credit to the firm on the ground of ‘holding out’.

1996 – May [5] Answer the following:

(d) Explain the rights of an outgoing partner.                                                             (5 marks)

Answer:

Rights of an Outgoing partner: Under Sections 36 and 37 of the

Partnership Act, an outgoing partner enjoys the following rights:

  1. An outgoing partner may carry on business competing with that of the firm and he may advertise such business but subject to a contract to the contrary, he cannot use the name of the firm or represent himself as carrying on the business of the firm or solicit customers of the firm he has left. [Section 36 (1)]. However, the partner may agree with his partners that on his ceasing Jo be so, he will not carry on a business similar to that of the firm within a specified period or within a specified local limit.
  2. On the retirement of a partner he has the right to receive his share of the property of the firm, including goodwill.
  3. An out going partner, whe^e the continuing partners carry on the business of the firm with the property of the firm without any final settlement of account, with him, is entitled to claim from the firm such shares of the profits made by the firm, since he ceased to be a partner as attributable to the use of his shares of the property of the firm. In the alternative, he can claim interest at the rate of 6% per annum on the amount of his share in firm’s property (Section 37).
  4. If by a contract between the partners, an option has been given to the surviving partners to purchase the interest of the out going partner and the option is duly exercised, the out going partner will not be entitled to any further share or the profits.

1996 – Nov [2] Comment on the following:

(e) Implied authority of a partner can be extended or restricted.                               (5 marks)

Answer:

Implied authority of partner can be extended or restricted: Section 20 of the Indian Partnership Act authorises the partners of a firm to extend or restrict the implied authority but only by a contract between them. In spite of such restriction if a partner does, on firm’s behalf, any act which falls within his implied authority, the firm will be bound unless the person with whom he is dealing is aware of the restriction or does not know or believe the partner to be a partner. Thus, a third party is not affected by such a limitation of a partner’s implied authority unless he has actual notice of it. To take an example, A is a partner of a firm. He borrows from B ? 1,000 in the name of the firm but in excess of his authority and utilises the same in paying off the debts of the firm. Hera, the fact that the firm has contracted debts suggests that it is a trading firm and as such it is within the implied authority of A to borrow money for the business of the firm. This implied authority may be restricted by a agreement between him and other partners. Now if B.’ the lender is unaware of this restriction imposed on A, the firm will be liable to pay the money to B: On the contrary, if B is aware of this restriction, the firm will be absolved of its liability to reply the amount to B.

One important point in this connection is that the restriction or extension of implied authority must be done with the consent of all the partners. Any one partner, or even a majority of the partners, cannot restrict or extend the implied authority.

1996 – Nov [3] (b) What are the rights of transferee of a Partner’s Share?

(10 marks)

Answer:

Rights of transferee of a Partner’s Share: No person can be introduced as a partner in a firm without the consent of all the partners. Therefore, a partner cannot by transferring his own interest make anyone else a partner in his stead with his co-partners if they do not agree. According to Section 29 of the Partnership Act, 1932, a share in a partnership is transferable like any other property, but as the partnership relationship is based on mutual confidence, the assignee of a partner’s interest by sale, mortgage or otherwise cannot enjoy the same rights and privileges as the original partner. The rights of a transferee are:

  1. During the continuance of partnership: He is entitled to receive the share of the profits of the transferring partner and he is bound to accept the profits as agreed to by the partners i.e. he cannot challenge the accounts.
  2. (a) On dissolution of the firm or on retirement of the transferring partner

he is entitled to receive the share of the assets of the firm to which the transferring partner was entitled and

(b) for the purpose of ascertaining the share to an account as from the date of dissolution.

The Supreme Court has held that the assignee will enjoy only the rights to receive the share of the profits of the assignor and account of profits agreed to by other partners [Narayanappa Vs. Krishnappa (1966) 2 M.L.J. S.C. 60],

1997 – May [2] Comment on the following:

(e) “The relationship of arises from an agreement and not from status.”

(5 marks)

Answer:

A partnership is the result of a contract and cannot arise by status is sufficiently emphasised by Section 4 of the Indian Partnership Act itself by use of word “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.

Unlike in the case of sole proprietorship and joint Hindu Family business, the legal heirs do not automatically become partners on the death of a partner. A fresh agreement will have to be made.

Thus from the above it is clear that partnership always arises out of a contract and not from status.

1997 – May [5] Answer in brief the following:

(d) What is meant by the term, ‘property of a partnership firm’?                                (5 marks)

Answer:

Normally, the partners by an agreement are free to determine as to what shall be the property of the firm and what shall be treated as a separate property of one or more of the partners. But when there is no such agreement and in order to know whether a certain property is the property of the firm or not it has to be ascertained from the source from which the property has been acquired the purpose for which it was acquired, and the manner in which it has been dealt with. According to Section 14 of the Partnership Act, when there is no contract to the contrary, the property of the firm includes:

(i) All properties, rights and interests originally bring to the stock of the firm.

(ii) The property acquired by purchase or otherwise by or for the firm.

(iii) The property acquired with the money belonging to the firm.

(iv) The goodwill of the business of the firm.

However, if a partner’s property is used for the purchase of the business of the firm, it does not automatically becadse the property of the firm. It can become to property of the firm if the partners have an intention to manage it so. For example, a piece of land which has bought in the name of one partner but is paid for any the firm shall be deemed to be the property of the firm unless there is an intention to the contrary.

1997 – Nov [2] Comment on the following:

(e) Notice to an acting partner is the notice to the firm.                                             (5 marks)

Answer:

Notice to an acting partner:

Section 24 of the Partnership Act, 1932 lays down that the 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 notice to the firm, except in the case of a fraud on the firm committed by or with the consent of that partner.

The rule embodied in this section is an instance of the application of the general principals of agency to partnership. Accordingly, the notice to one is equivalent to the notice to the rest of the partners of the firm, just as a notice and not to an agent is notice to his principal. This notice must be actual and not constructive. It must be received by a working partner and not by a dormant or sleeping partner. It must further relate to the firm’s business. Only then it would constitute a notice to the firm. Notice to a clerk or agent of the firm operates as notice to the firm.

But the provisions of this section would not lie in the case of fraud, whether active or tacit. Thus the knowledge of a partner as to a particular defect in the goods which he is buying for the firm will be knowledge of the firm, although the other partners are, in fact, not aware of the defect. The only exception is in the case of fraud. If, therefore, the purchasing partner, in collusion with seller, has conspired to conceal the existence of the defect from the other partners, the rule will not operate and the other partners would be entitled on the defect being discovered by them, to reject the goods.

1997 – Nov [5] Answer the following:

(e) What are the rights and duties of a partner after a change in the constitution of the firm? (5 marks)

Answer:

Rights and duties of a partners after a change in the constitution of the firm (Section 17):

A change in the constitution of the firm may be in one of the four ways, namely:

(i) Where a new partner or partners come in;

(ii) Where one partner or partners go out;

(iii) Where the partnership concerned carries on business other than the business of the firm;

(iv) Where the partnership business is carried on after the expiry of the term fixed for the purpose.

This section lays down the following provisions as regards to rights and duties after the change in the constitution of the firm:

(a) Change in the constitution of the firm: Where a change occurs in the constitution of a firm, the mutual rights and duties of the partners in the reconstituted firm remain the same as they were immediately before the change, as far as may be.

(b) Business continued after expiration of the term: Where a firm constituted for a fixed term continues to carry on business after the expiry of that term, the mutual rights and duties of the partners remain the same as they were before the expiry, so far as they may be consistent with the incidents of Partnership at will; and

(c) In case of additional undertaking: Where a firm constituted to carry out one or more adventures or undertakings carries out other adventures or undertakings the mutual rights and duties of the partners in respect of the other adventures or undertakings are the same as those in respect of the original adventures or undertakings. But the above provisions are however subject to the contract between the partners.

1998 – May [2] Comment on the following;

(e) “The power to expel partner must be exercised in good faith”.

(2 marks)

Answer:

The power to expel partner must be exercised in good faith: A partner may not be expelled from a firm by a majority of partners except in exercise, in good faith, of powers conferred by the contract between the partners. It is thus, essential that:

(i) the power of expulsion must have existed in a contract between the partners:

(ii) the power has been exercised by a majority of the partners; and

(iii) it has been exercised in good faith.

If all these considerations are not present, the expulsion is not deemed to be in bonafide interest of the business of the firm.

The test of good faith as required under section 33(1) includes three things:

(a) that the expulsion must be in the interest of the partnership.

(b) that the partner to be expelled is served with a notice.

(c) that he is given an opportunity of being heard. If a partner is otherwise expelled, the expulsion is null and void. The only remedy, when a partner misconducts in the business of the firm is to seek judicial dissolution.

The provisions of Section 32 regarding retirement of a partner are also apply to an expelled partner as if he was a retired partner [Section 22(2)].

1998 – May [4] (a) What are the mutual duties of partners in a partnership firm to regulate the relations between the partners ? (10 marks)

Answer:

Duties of Partners: Following duties should be observed by the partners to regulate the relations between the partners:

(i) To observe good faith: A partnership contract :s a contract of absolute good faith and therefore Section 3 of the Partnership Act, 1932 lays down that partners are bound (a) to carry on the business of the firm too the greatest common advantage; (b) to be just and faithful to each other and (c) to render to any partner or his legal representative a time account and full information of all things affecting the firm.

(ii) Toattendtohis duties diligently [Sections 12(b) and 13(a)]: Every partner is bound to attend diligently to his duties in conducting the business of the firm. He has no right to receive Jhy remuneration for taking part in the conduct of the business.

(iii) To indemnify for fraud (Section 10): A partner shall be held liable to make good any loss caused to the firm by his fraud in the conduct of the business. It is an absolute provision and is not subject to the terms of the contract between the partners. A clause in the deed of partnership exempting a particular partner from liability to the firm for loss caused by his fraud shall be invalid and unenforceable.

(iv) To indemnify for willful Neglect [Section 13 (f)]: Every partner is liable to the firm for any loss caused to it by his wilful neglect in the conduct of the business. The partners can contract themselves out of this liability except in case of fraud.

(v) To share losses [Section 13(b)]: Each partner is liable to contribute for firm’s losses equally in the absence of any contract to the contrary.

(vi) To hold and use property for the firm (Section 13): The property of the firm is the property of all the partners, and therefore, each partner should hold and use property of the firm exclusively for the purposes of the firm.

(vii) To account for private profits [Section 16 (a)]: A partner shall be liable to account for and pay to the firm any private profits derived from the transactions of the firm or from the use of the property or goodwill of the firm.

(viii) To account for the profits of a competing business [Section 16 (b)]: If a partner carries on business of the same nature as and competing with that of the firm, then he must account for and pay to the firm all profits-made by him in the business. The firm will not be liable for any loss.

(ix) To act within authority: A partner is bound to act within the scope of his actual or apparent authority. In case, he exceeds his authority and the other partners do not ratify his unauthorised acts, he will be liable to the other partners for the loss that they may suffer on account of his such acts.

(x) Not to assign his rights (Section 29): A partner cannot assign his rights or interest in a partnership firm to an outsider, so as to make the outsider a partner in the firm’s business without the consent of other partners. In case such an assignment has been made the assignee cannot during the continuance of the firm, interface in the conduct of the business, or require accounts or inspect the books of the firm. The transferee will be only entitled to receive the share of profits of the transferring partner, and the transferee shall accept the accounts of profits agreed to by the partners.

(xi) To the liable jointly and severally (Section 25): Every partner is liable, jointly with all the other partners and also severally for all the acts of the firm done while he is a partner. A retire partner continues to be liable for the debts of the firm incurred till he gives public notice of his retirement.

(xii) Duties after a change in the firm (Section 17): Rights and duties of the partners of a firm, unless.otherwise agreed upon shall remain the same as they were in the beginning even after a change in the constitution of the firm or on the expiry of the term of the firm or even when ihe firm has taken up additional ventures after the complete of the work for which the firm was constituted.

1999 – May [4] (a) Explain clearly the meaning of implied authority of a partner in a partnership firm. State the matters for which a partner does not have implied authority.. (10 marks)

Answer:

Meaning of Implied Authority of a Partner: The authority of a partner means the capacity of a partner to bind the firm by his act. This authority may be express or implied. Where the authority to a partner to act is expressly conferred by an agreement, it is called express authority. But where there is no partnership agreement or where the agreement is silent, ‘the act of a partner which is done to carry on, in the usual way, business of the kind carried on by the firm, bind the firm’. [Section 19(1) Indian Partnership Act, 1932],

The authority of a partner to bind the firm by his acts is called implied authority. It is subject to the following conditions:

  1. The act done by the partner must relate to the normal business of the firm.
  2. The act must be such as is done within the scope of the business of the firm in the usual way.
  3. The act must be done in the name of the firm, or in any other manner expressing or implying an intention to bind the firm (Section 22).

Matters for which no Implied Authority is available to a Partner:

  1. to submit a dispute relating to the business of the firm to arbitration.
  2. to open a bank account on behalf of the firm in his own name.
  3. compromise or relinquish any claim or portion of a claim by the firm.
  4. withdraw a suit or proceeding filed on behalf of the firm.
  5. admit any liability in a audit or proceeding against the firm.
  6. acquire immovable property on behalf of the firm.
  7. transfer immovable property belonging to the firm, or
  8. enter into partnership on behalf on the firm (Section 19(2)).

1999 – May [5] Answer the following:

(d) Describe the position of a minor, who has been admitted to the benefits of partnership, on attaining majority.                                                                                                                                    (5 marks)

Answer:

Position of a Minor in Partnership: Under Section 11 of the Indian Contract Act, 1872, a minor’s agreement is void. In view of this a minor and a major cannot enter into an agreement of partnership. Thus, a person who is minor may not be a partner in a firm but under Section 30 of the Indian Partnership Act, 1932, he may be admitted to the benefits of partnership with the consent of all the partners for the time being.

Section 30 of the Indian Partnership Act provides that the minor who has been admitted to the benefits of partnership, has to decide whether he shall remain a partner or shall leave the firm and this decision is to be taken by him within six months of his attaining majority, or his obtaining knowledge that he had been admitted to the benefits of partnership, whichever date is later. If he decides to sever his connection with the firm, he must give a public notice of his such intention. If he does not give such public notice, it must be presumed that he has opted to become a partner in the firm.

If the minor becomes a partner of his own willingness or by his failure to give the public notice within specified time, his rights and liabilities are as follows:

  1. he becomes personally liable to third parties for all acts of the firm done from the date when he was admitted to the benefits of the firm.
  2. his share in the property and the profits of the firm remains the same to which he was entitled as a minor.

If the minor decides to sever his connection with the firm, his rights and liabilities shall be as follows:

(i) his rights and liabilities continue to those of a minor up to the date of giving public notice.

(ii) his share shall not be liable for any acts of the firm done after the date of the notice.

(iii) – he shall be entitled to sue the partners for his share of the property

and profits.

2000 – May [5] Explain the following:

(iv) Explain the position of a person who had be^n admitted to the benefits of partnership as a minor, after attaining majority.                                                                                                       (5 marks)

Answer:

Position of a minor in partnership after attaining majority: Partnership is a relation resulting from a contract, and a minor’s agreement is altogether void. A minor, being incompetent to contract, cannot become a partner. But he can be admitted to the benefits of an already existing partnership, if all the partners agree to admit him. Such a minor is not personally liable nor his separate property and profits will be liable.

Within six months of his attaining majority or when he comes to know of his being so admitted, whichever date is later, he has to elect whether he wants to continue his relation and become a full fledged partner or sever his connection with the firm. He may give a public notice of his election to continue or discontinue, but if he fails to give any public notice within this period, he will be deemed to have elected to become a partner in the firm. A minor who thus becomes a partner, will become personally liable for all debts and obligations of the firm incurred since the date of his admission to the benefits of the partnership.

2000 – Nov [2] Briefly answer of the following:

(e) Transferee of a partner’s interest cannot exercise the rights of the transferring partner. \ (5 marks)

Answer:

Section 29 the Indian Partnership Act, 1932, states the rights of transferee of a partner’s share. A share in a partnership is transferable like any other property, but as the partnership relation is based upon mutual confidence, the assignee of a partner’s interest by sale, mortgage or otherwise cannot enjoy the same rights and privileges as the original partner. The Supreme Court in Narayanappa v. Krishnappa has held that the assignee will enjoy only the rights to receive the share of the profits of the assignor and account of profits agreed to by other partners.

The rights of such a transferee are:

  1. During the continuance of partnership, such transferee is not entitled to:

(a) interfere with the conduct of the business;

(b) require accounts or

(c) inspect books of the firm.

He is only entitled to receive the share of the profits of the transferring partner and he is bound to accept the profits as agreed to by the partners, i.e. he cannot challenge the accounts.

  1. On the dissolution of the firm or on the retirement of the transferring partner, the transferee will be entitled, against the remaining partners:

(a) to receive the share of the assets of the firm to which the transferring partner was entitled, and

(b) for the purpose of ascertaining the share, to an account as from the date of the dissolution.

Thus, transferee of a partner’s interest cannot exercise the rights of the transferring partner.

2000 – Nov [3] (b) Discuss the rights of a Partner in a Partnership Firm.

(10 marks)

Answer:

Discuss the rights of a Partner in a Partnership Firm:

Where there is no specific agreement or where the agreement is silent on a certain, the relations of partners to one another as regards their rights are governed by the provisions of the Indian Partnership Act, 1932 as contained in Sections 9 to 17.

These are:

  1. Right to take part in business: Subject to any contract between the partners, every partner has right to take part in conduct of the business of the firm. [Section 12 (a)]
  2. Right to be consulted: Every partner has an inherent right to be consulted in all matters affecting the business of the partnership before any decision is taken by the partners. Where there is any difference of opinion among the partners as to ordinary matters connected with the business, it may be settled, subject to contract between the partners, by a majority of the partners. [Section 12 (c)]
  3. Right of access to account: Subject to contract between the partners, every partner has a right to have access to and inspect and copy any of the books of the firm. [Section 12 (d)].
  4. Right to share in profit: In the absence of any agreement, the partners are entitled to share equally in the profits earned and are liable to contribute equally to the losses sustained by the firm. [Section 13 (b)]
  5. Right to interest on capital: The partnership may contain a clause as to the right of the partners to claim interest on capital at a certain rate. Such interest, subject to contract between the partners, is payable only out of profits, if any, earned by the firm. [Section 13 (c)]
  6. Right to interest on advances: Where a partners makes, for the purposes of the business of the firm any advance beyond the amount of capital, he is entitled to interest on each advance at the rate of 6 percent per annum. [Section 13 (d)]
  7. Right to be indemnified: Where a partner incurs any liability in the ordinary course of the partnership business, or in an emergency, for the purpose of protecting the firm from loss, the firm must indemnify such partner. [Sections 13 (e) and 21]
  8. Right to the use of partnership property: Subject to contract between the partners, the property of the firm must be held and used by the partners exclusively for the purposes of the business of the firm. No partner has s right to treat it as his individual property. [Section 15]
  9. Right of partner as agent of the firm: Every partner for the purposes of the business of the firm is the agent of the firm. And subject to the provisions of the Indian Partnership Act, the act of a partner which is done toxarry on, in the usual way, business of the kind carried on by the firm, binds the firm. [Sections 18 and 19]
  10. No new partner to be introduced: Every partner has a right to prevent the introduction of new partner unless the consents to that or unless there is an expression them in the contract permitted such introduction [Section 31 (1)]
  11. No liability before joining: A person who is introduced as a partner into the firm is not liable for any act of the firm done before he became a

‘ partner [Section 31 (2)]

  1. Right to retire: A partner has a right to retire with the consent of all the other partners, or in accordance with an expression agreement between the partners, or where the partnership is at will, by giving notice to all the other partners of his intention to retire. [Section 32 (1)].
  2. Right not to be expelled: A partner has a right not to be expelled from the firm by any majority of the partners, save in the exercise; in good faith of powers conferred by the contract between the partners. [Section 33 (1)]
  3. An outgoing partner can claim subsequent profits or interest @6% per annum till final accounts are settled.

2000 – Nov [5] Briefly answer of the following:

(e) What are the liabilities of an outgoing Partners ?                                                 (5 marks)

Answer:

An outgoing partner or a retiring partner continues to be liable to third party for acts of the firm after his retirement until public notice of his retirement has been given either by himself or by any other partner. But the retired partner will not be liable to any third party if the letter deals with the firm without knowing that the former was a partner. [Sections 32 (3) and (4) Indian^’ Partnership Act, 1932]. A

The liability of a retired/outgoing partner to the third parties continues until a public notice of his retirement has been given. Regarding nis liability for the acts of the firm done before his retirement, he remains lialj)Ble‘fir, the same, unless there is an agreement made by him with the/lhird pa?f^ concerned and the partners of the reconstituted firm. Such ay.\ agreement** may be implied by course of dealings between the third; party and the reconstituted firm after he had knowledge of the retirement [Section 32(2)]

2001 – May [2] Briefly answer of the following: I

(e) Relationship in a partnership firm arises from contract and not from status. { ‘   (5 marks)

Answer:

Please refer 1997 – May [2] (e) on page no. 339 2001 – May [5] Briefly answer of the following:

(e) What are the legal provisions relating to expulsion of a partner under the Indian Partnership Act ?      (5 marks)

Answer:

According to Section 33 of the Indian Partnership Act, 1932 a partner may be expelled from partnership subject to the following three conditions:

(i) the power of expulsion of a partner should be conferred by the contract between the partners.

(ii) the power should be exercised by a majority of the partners.

(iii) the power should be exercised in good faith.

If all these conditions are not present, the expulsion is not deemed to be in the bonafide interest of the business of the firm.

The test of good faith is:

(a) that the expulsion must be in the interest the partnership.

(b) that the partner to be expelled is served with a notice.

(c) that he is given an opportunity of being herd.

Irregular expulsion: Where the expulsion of a partner takes place without the satisfaction of the conditions given above, the expulsion is irregular. The expelled partner may in such a case either (i) claim reimbursement as a partner or (ii) sue for the refund of his share of capital and profits in the firm. An irregular expulsion is wholly ineffectual and inoperative. The expelled Ladner, in such a case, does not cease to be a partner.

Regular expulsion: Where a partner is expelled subject to the satisfaction of the conditions as above, his expulsion would be regular.

The right and liabilities of an expelled partner are the same as those of a partner [Section 33 (2)].

2001 – Nov [5] Answer the following:

(e) What constitutes Partnership property or Property of the firm?

(5 marks)

Answer:

Partnership property consists of the following:

  1. All property and rig hts and interests in property originally brought into the stock of the firm or acquired by purchase or otherwise, by or for the firm, or for the purpose and in the course of the business of the firm; and includes also the goodwill of the business. (Section 14).
  2. The property and rights and interests on property acquired with many belonging to the firm and deemed to have been acquired for the firm. (Section 14).
  3. The property of the firm held and used by the partners exclusively for the purpose of the firm’s business. (Section 15 Indian Partnership Act, 1832).

2002 – May [4] (a) Explain clearly the meaning of the term “Authority of a partner”. State the acts which fall within the ‘Implied Authority’ of a partner.

(10 marks)

Answer:

Meaning: The Authority of a partner means the capacity of a partner to bind the firm by his acts. This authority may be express or implied. Where the authority to a partner to act is expressly conferred by an agreement, it is called express authority.

But where there is no partnership agreement or where the agreement is silent, the authority conferred on a partner by the provision is silent, the authority conferred on a partner by the provisions of Section 19 of the Indian Partnership Act is called implied authority.

Implied authority covers those acts of partners which fulfill the following conditions:

  1. The act doe by the partner must relate to the normal business of the firm. [Section 19(i)]
  2. The act must be such as is done within the scope of the business of the firm in the usual way.
  3. The act must be done in the name of the firm, or in any other manner expressing or implying an intention to bind the firm. (Section 22).

Acts falling within the implied authority of a partner: In a trading firm, i.e., a firm which donds for its existence on the buying and selling of goods, the implied authority of a partner has been held to include.

  1. Purchasing goods, on behalf of the firm, in which the firm deals or which are employed in the firm’s business.
  2. Selling goods of the firm.
  3. Receiving payment of the debt due to the firm and giving receipts for them,
  4. Settling accounts with the persons dealing with the firm.
  5. Engaging servants for the partnership’business.
  6. Borrowing money on the credit of the firm.
  7. Drawing, accepting, indorsing bills and other negotiable instruments in the name of the firm.
  8. Pledging any goods of the firm for the purpose of borrowing money.
  9. Employing a solicitor to defend an action against the firm for goods supplied.

2002 – May [5] Briefly answer the following:

(e) What is the position of a minor in a partnership firm before his attaining the age of majority.     (5 marks)

Answer:

The position of a minor in a partnership before attaining the age of majority (Indian Partnership Act, 1932):

Rights:

  1. A minor has a right to such share of the property and of profits of the firm as may have been agreed upon.
  2. He has a right to have access to and inspect and copy any of the accounts, but not books of the firm. (Section 30(2)).
  3. When he is not given his due share of profit, he has a right to file a suit for his share of the property of the firm. But he can do so only if he wants to sever his connection with the firm. (Section 30(4)).

Liabilities:

  1. The liability of a minor partner is confined only to the extent of his share . in the profits and property of the firm. Over and above this, he either personally liable nor his private estate liable. [Section 30(3)].
  2. A minor cannot be declared insolvent, but if the firm is declared Insolvent his share in the firm vests in the Officials Receiver or Official Assignee.

2002 – Nov [2] Briefly answer of the following:

(d) The liability of a retired partner to third parties continuing after his retirement.   (5 marks)

Answer:

Goods forming subject matter of the contract of sale may be classified as under:

  1. Existing Goods

(a) specific goods

(b) unascertained goods.

(c) ascertained goods.

  1. Future Goods

III. Contingent Goods.

Existing Goods are those goods which are in actual existence at the time of contract of sale.

The seller is the owner of goods or he has the possession of such goods. Existing goods may be of the following three types:

(i) Specific goods: Goods which have either been identified and agreed by the parties at the time of contract of sale.

(ii) Unascertained goods: are those not specifically identified at the time of contract of sale. They are described by the description or sample only.

(iii) Ascertained goods: are those identified only after the formation of a contract of sale. When unascertained goods are identified and agreed upon by the parties, the goods are called Ascertained goods.

(iv) Future goods: are those in existence at the time of contract of sale. These goods are to be acquired or produced by the seller after the contract of sale is made. It is an agreement to sell and not sale.

(v) Contingent goods are like future goods. The acquisition of the goods by the seller depends upon the uncertain contingencies which may or may not happen, e.g. goods will be supplied if ship arrives.

2002 – Nov [6] (b) Subject to an agreement between the Partnership, state the rights of Partners. (10 marks)

Answer:

Please refer 1995 – May [3] (b) on page no. 332

2018 – Nov [3] (a) “Though a minor cannot be a partner in a firm, he can nonetheless be admitted to the benefits of partnership.”

(I) Referring to the provisions of the Indian Partnership Act, 1932, state the rights which can be enjoyed by a minor partner.                                                                                                             (4 marks)

(II) A. State the liabilities of a minor partner both:

(i) Before attaining majority and

(ii) After attaining majority.                                                                                         (2 marks)

OR

  1. State the legal position of a minor partner after attaining majority:

(i) When he opts to become a partner of the same firm.

(ii) When he decide not to become a partner.                                                           (2 marks)

Answer:

(I) The rights enjoyed by a minor partner are:

(i) A minor partner has a right to his agreed share of the profits and of the firm.

(ii) He can have access to, inspect and copy the accounts of the firm.

(iii) He can sue the partners for accounts or for payment of his share but only when severing his connection with the firm and not otherwise.

(iv) On attaining majority he may within 6 months elect become a partner or not to become a partner. If he elects to become a partner, then he is entitled to the share to which he was entitled as a minor. If he does not, then his share is not liable for any acts of the firm after the date of the public notice served to that effect.

  1. HI) The liabilities of a minor partner:

\ (i) Before attaining majority:

(a) The liability of the minor is confined only to the extent of his share in the profits and the property of the firm.

(b) Minor has no personal liability for the debts of the firm incurred during his minority.

(c) Minor cannot be declared insolvent but if the firm is declared insolvent his share in the firm vests in the official Receiver/Assignee.

(ii) After attaining majority:

Within 6 months of his attaining majority or on his obtaining knowledge that he had been admitted to the benefits of partnership whichever date is later, the minor partner has to decide whether he shall remain a partner or leave the firm.

OR

(II) The legal position of a minor partner after attaining majority:

(i) When he opts to become a partner of the same firm. If the minor becomes a partner on his own willingness or by his failure to give the public notice within specified time, his rights and liabilities as given in section 30(7) are as follows:

(i) He becomes personally liable to third parties for all acts of the firm done since he was admitted to the benefits of partnership.

(ii) His share in the property and the profits of the firm remains the same to which he was entitled as a minor.

(ii) When he does not become a partner:

(i) His rights and liabilities continue to be those of a minor upto the date of giving public notice.

(ii) His share shall not be liable for any acts of the firm done after the date of the notice.

(iii) He shall be entitled to sue the partners for his share of the property and profits. It may be noted that such minor shall give notice to the registrar that he has or has not become a partner.

2019 – June [3] (a) (i) What is the provision related to the effect of notice to an acting partner of the firm as per Indian Partnership Act 1932?                                                                                     (2 marks)

Answer:

The notice to a partner, who habitually acts in business of the firm, on matters relating to the affairs of the firm, operates as a notice to the firm except in the case of a fraud on the firm committed by or with the consent of that partner. Thus, the notice to one is equivalent to the notice to the rest of the partner’s of the firm, just as a notice to an agent is notice to his principal. The notice must be actual and not constructive. It must be received by working partner and not by sleeping partner. It must further relate to the firm’s business. Only then it would constitute a notice to the firm.

2019 – June [3] (Or) (a) (ii) Discuss the provisions regarding personal profits earned by a partner under the Indian Partnership Act 1932? .                                                                                   (2 marks)

Answer:

According to the Indian Partnership Act, 1932, subject to contract between the partner:

(a) If a partner derives any profit for himself from any transaction of the firm, or from the sue of the property or business connection of the firm or the firm name, he shall account for that profit and pay it to the firm.

(b) If a partner carries on any business of the same nature as and competing with that of the firm, he shall account for and pay to the firm all profits made by him in that business.

Practical Questions

2018 – May [4] (b) X, Y and Z are partners in a Partnership Firm. They were carrying their business successfully for the past several years. Spouses of X and Y fought in ladies club on their personal issue and X’s wife was hurt badly. X got angry on the incident and he convinced Z to expel Y from their partnership firm. Y was expelled from partnership without any notice from X and Z. Considering the provisions of the Indian Partnership Act, 1932, state whether they can expel a partner from the firm. What are the criteria for test of good faith in such circumstances?                                                                                                          (6 marks)

Answer:

A partner may not be expelled from a firm by any majority of the partners, except in exercise of good faith of power conferred by contract between the partners. If all these conditions are not present, the expulsion is not deemed to be in bonafide interest of the business of the firm.

The test of good faith as required includes three things:

(a) The expulsion must be in the interest of the partnership.

(b) The partner to be expelled is served with a notice.

(c) He is given an opportunity of being heard.

If a partner is otherwise expelled, the expulsion is null and void.

Having regard to above we can say that expulsion of partner ‘Y’ by X & Z is not in accordance with the provision of Indian Contract Act and thus not valid.

2018 – Nov [4] (b) (i) Mr. A, Mr. B and Mr. C were partners in a partnership firm M/s ABC & Co., which is engaged in the business of trading of branded furniture. The name of the partners was clearly written along with the firm name in front of the head office of the firm as well as on letter-head of the firm. On 1st October, 2018, Mr. C passed away. His name was neither removed from the list of partners as stated in front of the head office nor from the letter-heads of the firm. As per the terms of partnership, the firm continued its operations with Mr. A and Mr. B as partners. The accounts of the firm were settled and the amount due to the legal heirs of Mr. C was also determined on 10,h October, 2018. But the same was not paid to the legal heirs of Mr. C. On 16th October, 2018, Mr. X, a supplier supplied furniture worth ? 20,00,000 to M/s ABC & Co. M/s ABC & Co. could not repay the amount due to heavy losses. Mr. X wants to recover the amount not only from M/s ABC & Co., but also from the legal heirs of Mr. C.

Analyse the above situation in terms of the provisions of the Indian Partnership Act, 1932 and decide whether the legal heirs of Mr. C can also be held liable for the dues towards Mr. X.             (3 marks)

Answer:

According to the facts of this case the situation existent clearly indicates the application of Section 37 of the Indian Partnership Act, 1932 according to which where any member of a firm has died or otherwise ceased to be partner and the surviving or continuing partners carry on the business of the firm without any final settlement of the accounts as between them and the outgoing partner of his estate, then in the absence of a contract to the contrary, the outgoing partner or his estate is entitled atthe option of himself or his representatives to such share of the profits made since he ceased to be a partner as may be attributable to the use of his share of the property of the firm or to interest at the rate of six percent per annum on the amount of his share in the property of the firm.

In this case since there has been no decisive settlement of accounts between the heirs of Mr. C and Mr. A & Mr. B so it’s pretty clear that the interest of the heirs of Mr. C is still existent in the profits and property of the firm and Mr. X wants to recover the amount not only from M/s ABC & Co. but also from the legal heirs of Mr. C he is justified in claiming such a recovery and his claim is legal and just according to the provisions of Section 37.

2018 – Nov [4] (b) (ii) Mr. M, Mr. N and Mr. P were partners in a firm, which was dealing in refrigerators. On 1sl October, 2018, Mr. P retired from partnership, but failed to give public notice of his retirement.

After his retirement, Mr. M, Mr. N and Mr. P visited a trade fair and enquired about some refrigerators with latest techniques. Mr. X, who was exhibiting his refrigerators with the new techniques was impressed with the interactions of Mr. P and requested for the visiting card of the firm. The visiting card also included the name of Mr. P as a partner even though he had already retired. Mr. X supplied some refrigerators to the firm and could not recover his dues from the firm. Now, Mr. X wants to recover the dues not only from the firm, but also from Mr. P.

Analyse the above case in terms of the provisions of the Indian Partnership Act, 1932 and decide whether Mr. P is liable in this situation.                                                                                          (3 marks)

Answer:

According to the facts of this case it can be easily concluded that the contention of Mr. X for recovery of his dues from all the partners including Mr. P is quite justified and legal on ground of the provision under Section 32 of the Indian Partnership Act that states a retiring partner continues to be liable to third party for acts of the firm after his retirement until public notice of his retirement has been given. In this case no such notice has been given by Mr. P of his retirement and so he cannot escape the liability incurred by the firm in its business dealing with Mr. X.

 

 

 

CHAPTERThe Indian Partnership Act, 1932
3
Unit: 3 Registration and Dissolution of Firm

Self Study Questions

Q.1: What are the Steps Adopt on Registration of Firm?

Answer:

  • Registration of firm is effected:

(i) by sending post, or

(ii) by delivering a statement in prescribed form to the registrar of the area, in which any place of business of firm is situated or proposed to be situated.

  • Statement must include:

(i) Firm’s name

(ii) Principal Place of Business

(iii) Other Places of Business

(iv) Date of joining of each partner

(v) Partner’s full name and addresses

(vi) Firm’s duration.

  • Statement should be signed by all the partners
  • Registrar on being satisfied, shall record this entry in his register of firms and shall file the statement
  • Registrar then issues a certificate of Registration
  • An unregistered firm is not an illegal association.

Q.2: How Many Consequences of Non-Registration?

Answer:

As per Section 69:

  • Indian Partnership Act does not make registration of Partnership compulsory nor does it impose any penalty.
  • However, non-registration give rise to certain disabilities such as:

(i) Firm or any person on its behalf cannot bring action against third party for breach of contract, unless firm is registered and persons seeing are shown in register of firms.

(ii) Neither firm nor any partner can claim set off if any suit is brought by third party against the firm.

(iii) Partner of unregistered firm cannot bring any action against the firm or any partner of such firm.

(iv) Unregistered firm however can bring a suit for enforcing the right arising otherwise than out of contract.

Q.3: How to Suits allowed by Act?

Answer:

  • Dissolution of a firm
  • Rendering accounts of a dissolved firm
  • Realisation of property of a dissolved firm
  • Set off values not exceeding ? 100
  • Proceeding arising incidentally of value not exceeding ? 100
  • Firm not having business place in territories to which this act extends
  • Realisation of property of insolvent partner
  • Firm having business place in areas exempted from the application of Chapter VIII of the Indian Partnership Act, 1932.

Q.4: What are the Condition Apply on Dissolution of Firm?

Answer:

As per Section 39-47

  • It takes place when relationship between all the partners of the firm is so broken so as to close the business of the firm.
  • As a result, firm’s assets are sold and its liabilities are paid off.

Q.5: Distinguish between Dissolution of firm and Dissolution of partnership.

Answer:

Dissolution of PartnershipDissolution of Firm
1.It occurs when new partner is admitted or an old partner retires or dies.It occurs by the mutual consent of partners or by court.
2.It does not effect the business continuation.It involves dis-continuation of the business in partnership.

 

3.It may or may not be involved in the dissolution of the firm.It necessarily involves dissolution of partnership.

 

Q.6: How Many Modes of Dissolution of Firm ?

Answer:

Section 40– Result of an agreement between all partners.
Section 41 (a)– By adjudication of all partners, or declaration
of all partners as insolvent except one.
Section 41 (b)– By firm’s business becoming unlawful.
Subject to agreement between parties, on happening of certain contingent events.
Section 42 (a)– By expiry of fixed term for which the
partnership was formed.
Section 42 (b)– By completion of venture.
Section 42 (c)– By death of partner.
Section 42 (d)– By insolvency of ajDartner.
Section 42 (e)– By retirement of a partner.
Section 43– In case of partnership at will, by a partner
giving notice of his intention to dissolve the firm. Firm dissolves from the date mentioned in the notice. If no date is mentioned, then from date of communication of notice.
  • Section 44 – By court intervention is case of:

(i) A partner becoming unsound mind.

(ii) Permanent in capacity of partners to perform his duties.

(iii) Misconduct of partners effecting the business.

(iv) Willful or persistent breach of agreement by a partner.

(v) Transfer or sale of whole interest of a partner.

(vi) Improbability of business being carried on except at a loss.

(vii) Court being satisfied on other just and equitable grounds.

Q.7: What do you mean by Consequences of Dissolution?

Answer:

As per Section 45 – 55:

  • Continuing liability until public notice:

Partners continue to be liable for any act done by them, done on behalf of firm until public notice of dissolution is given.

  • Right to enforce winding up:

Partner or his representative have a right against others, on ■ dissolution:

(i) Apply firm’s property in payment of firm’s debt.

(ii) Distribute surplus amongst all partners.

  • Continuing authority of partners:

Authority of partner continue:

(i) So far as necessary to wind up the firm,

(ii) To complete the pending transactions till the dissolution date.

  • Settlement of partnership accounts:

(i) Losses including capital deficiencies:

  • Are first paid out of profits
  • Then out of capital
  • Lastly by partners in their profit sharing ratio.

(ii) Assets including partner’s contribution are applied in the following order:

  • In paying debts of third parties.
  • In paying advances of each partner.
  • In paying capital of each partner.
  • The residue is distributed among partners in their profit sharing ratio.
  • If the assets are not sufficient, the partners have to bear the loss in equal shares.
  • Personal Profits earned after dissolution:

If surviving partners along with the representatives of deceased partner carry on firm’s business and earn some personal profits, it must be accounted for by them to other partners.

  • Return of premium on premature dissolution:

On dissolution of partnership earlier than fixed period in all cases except

(i) Death of a partner.

(ii) Misconduct of partner paying premium.

(iii) Subject to agreement containing no provision for return of premium, the partner paying premium is entitled for the return of a reasonable part of premium.

  • Rights where partnership contract is rescinded for fraud

– or misrepresentation:

  • Party is entitled to:

(i) to a lien on the surplus or assets of firm remaining after the debts of firm are paid by him for the purchase of a share in firm and for any capital contributed by him.

(ii) to rank as a creditor of the firm in respect of any payment made by him towards the debts of the firm, and

(iii) to an indemnity for the partners guilty of fraud or misrepresentation against all the debts of the firm.

  • Sale of goodwill after dissolution: It can be sold separately or along with other properties of the firm.

Q.8: Describe the Buyer Rights include.

Answer:

(i) Representing himself in business continuation.

(ii) Maintaining his exclusive rights of business continuation.

(iii) Soliciting former customers and restraining the seller from it.

Q.9: Describe the Seller’s right.

Answer:

Vendors can enter into competition with purchaser unless there is an agreement of valid restrictions.

Q.10: How many Mode of Giving Public Notice ?

Answer:

As per Section 72:

  • Notice to Registrar of firms u/s 63
  • Publication in official gazette.
  • Publication in one vernacular newspaper circulating in the district of principal place of business.

Short Practice Questions

  1. What is dissolution ? What are its consequences ?
  2. List out the consequences of non-registration of firm.
  3. Differentiate between Partnership and Dissolution of Partnership firm.

Objective Questions

Past Year Questions and Answers

1995 – Nov [1] State with reason whether the following statement is correct or incorrect. (2 marks)

(viii) An unregistered firm can file a suit for set-off.

Answer:

Incorrect: An unregistered firm or any partner thereof cannot file a suit for set-off (except a claim for set off upto ? 100 only) until the registration is effected. [Section 69 (3), (4) (b)].

1998 – May [1] State with reasons whether the following statement is ‘Correct’ or ‘Incorrect’:

(x) A third party cannot exercise any right against a non-registered firm.

(2 marks)

Answer:

Incorrect: Non-registration of a firm does not affect the right of third parties against the firm or its partners or the power of an official assignee or Receiver of the court. Therefore, non-registration of a firm will not make the partnership agreement or any transaction between the partners and third parties void (Section 69 of the Partnership Act, 1932).

1999 – Nov [1] State with reasons in brief whether the following is ‘Correct’ or ‘Incorrect’.

(x) A partner making advance of money to the firm, beyond the amount of his agreed capital is entitled to interest on such advanced money.

(2 marks)

Answer:

Correct: The general rule is that partners are not considered as debtor and creditor among themselves and hence advance made to the firm by a partner cannot be regarded as loan. But clause (d) of Section 13 of the Indian Partnership Act, 1932 lays down that a partner who makes any payment or advance of money to the firm beyond the amount of his greed capital, is entitled to interest thereon at the rate of six per cent per annum, subject to pontract between the partners.

2002 – May [1] State with reasons in brief whether the following is ‘Correct’ or ‘Incorrect’.

(ix) An unregistered firm may institute a suit if the value of the suit does not exceed ? 100. (2 marks)

Answer:

Correct Though registration of firm is not compulsory yet unregistration creates certain disabilities. The general principle under Section 69 of the Indian Partnership Act,1932 is that an unregistered firm cannot file a suit against a third party to enforce a right arising from a contract. But it is an exception to the general rule that an unregistered firm may institute a suit or claim of set off if the value of the suit does not exceed ? 100.

2002 – Nov [1] State with reasons in brief whether the following is ‘Correct’ or ‘Incorrect’.

(x) A partner of unregistered firm can sue for the dissolution of a firm.

(2 marks)

Answer:

Correct: According to Section 69(3) (a) of the Indian Partnership Act,-1932, a partner of unregistered firm can sue for the dissolution of the firm.

Distinguish Between

2000 – May [7] (iv) Distinguish between Partnership and Joint Stock

Company.                                                                                                                   (5 marks)

Answer:

Partnership and Joint Stock Company:

(a) Personality: A firm is not legal entity whereas a company is a juridical person distinct from its members.

(b) Agency: In the case of a firm, every partner is an agent of other partners as well as of the firm but in case of company, members are not agents of the company.

(c) Profits: Profits of a firm is distributed among the partners according to deed of partnership. But in the case of company, distribution of profit is optional as the company may or may not declare dividends.

(d) Liability: In firm, the liability of partners is unlimited but in a company, liability is always limited to the amount of shares or guarantee.

(e) Property: Property of firm is joint estate of all the partners whereas in a company, property belongs to company and not of shareholders.

(f) Transfer of share: In the case of partnership transfer of a partner’s right is not possible without the consent of all the partners, though his interest can be assigned to a third party who has a right to share in profits but has no other right, but in the case of a public company, share are transferable and quoted on stock exchange.

(g) Management: In partnership management is by partners, but in a company, Board of Directors do the management, shareholders only attend in general meeting to vote.

(h) Number of members in partnership is minimum 2 and maximum 20(in banking it is 10) but the case of a private company the minimum is 2 and maximum 50 excluding past and present employees. And in the case of a public company, it is 7 and no restriction on the maximum.

2002 – Nov [5] (e) Distinguish between ‘Dissolution of firm’-and ‘Dissolution of partnership’. (4 marks)

Answer:

Dissolution of firm Vs. Dissolution of Partnership:

s.

No.

Dissolution FirmDissolution of Partnership
1.It necessarily involves dissolution of partnership.It may or may not involve dissolution of firm.
2.Involves final closure of books of firm.Does not involve final closure of the books.
.3.Firm may be dissolved by order of Court.Dissolution of partnership is not ordered by Court.
4.It involves winding up of the firm.It involves reconstitution of the firm.

2018 – May [3] (a) Distinguish between dissolution of firm and dissolution of partnership. (2 marks)

Answer:

Please refer2002 – Nov [5] (e) on page no. 369

Descriptive Questions

1994 – Nov [2] Comment on

(e) A retiring partner is required to give a public notice under the Partnership Law. (5 marks)

Answer:

A retiring partner is required to give a public notice under the partnership law: The law imposes a duty on the retiring partner to give public notice of his retirement. Public notice of this kind raises a presumption that those dealing with the firm including past and present customers have come to known that a particular partner has retired.

Sec. 32(4) provides that notice of retirement can be given either by the retired partner himself or by any partner of the continuing firm or by the firm itself. In the case of a registered firm, the notice must be given to three places, namely, the Registrar of Firms, the Official Gazette and at least one vernacular newspaper circulating in the district where the firm has its place or principal place of business. Where the firm is not registered, it is enough that the matter is announced in at least one vernacular newspaper circulating in the district where the firm has its place or principal place of business.

If the retiring partner fails to give such a notice then he continues to be liable for the acts of the acts of the firm even after his retirement and similarly, the firm will be bound by the acts of the retired partner done after retirement. This is based on the principle of holding out.

A retired partner will not be liable to any third party who deals with the firm without knowing that he was a partner. It is for this reason that no public notice need be given when a dormant of sleeping partner retires.

1994 – Nov [3] (b) State briefly the consequences of non-registration of a partnership firm. (10 marks)

Answer:

Consequences of Non-Registration of the Firm: Partnership is the result of an agreement between two or more persons. It need not necessarily be registered. Registration is optional and there is no penalty for nonregistration of the firm. Yet

Section 69 of the Partnership Act imposes certain limitations on an unregistered firm, and these impediments compel a firm to get itself registered. Following consequences will result from the non-registration of the firm:

(i) No suit by Partners: A partner of an unregistered firm can not sue the firm or any.of his present or past co-partners for the enforcement of any right arising from a contract conferred by the partnership act.

(ii) No suit by a Firm: A firm can not sue a third party for the enforcement of any right arising from a contract (Puranmal Ganga Ram Vs. Central Bank of India, 1993).

(iii) No right of set off: An unregistered firm or any partner thereof cannot claim a set off in a proceeding instituted against the firm by a third party of enforce a right arising from a contract. This right of set-off, however, is not affected if the claim of set-off is for less than M 00 in value.

Exceptions: Non-registration of a firm does not, however, affect the following rights, namely:

(a) The right of third parties to sue the firm or any partner.

(b) The right of partners to sue for the dissolution of the firm or for the form or for the accounts of a dissolved firm or for the realisation of the property of a dissolved firm.

(c) An Official Receiver or Assignee of a Court acting for an insolvent partner of an unregistered firm may bring a suit for the realisation of the property of an insolvent partner.

(d) The right of firm or partners of firm having no place of business in India.

(e) The right to sue or claim a set-off if the value of suit does not exceed MOO.

(f) Non-registration will not affect the enforcement of rights arising otherwise than out of a contract, e.g., for an injunction against wrongful infringement of a trade mark, trade name or patent of the firm.

(g) A partner can bring a suit for damages for misconduct against another partner.

1995 – May [2] Comment on following:

(e) Dissolution of a partnership is different from the dissolution of a firm.

(5 marks)

Answer:

Dissolution of partnership is different from the dissolution of a firm:

According to Indian Partnership Act there is a firm distinction between dissolution of firm and dissolution of partnership. Dissolution of the firm may not necessarily mean dissolution of a partnership as in the case of dissolution of a partnership the firm may continue with some of the remaining partners. According to Section 39, the dissolution of partnership between all the partners of a firm is called the “dissolution of the firm”. The words “between all the partners” as stated in this Section are very important. This means that the firm is said to be dissolved only when each and every member of the firm ceases to carry on the business in partnership. Thus, where one or more partners cease to be partners in the firm while other remain, as in the case of retirement or expulsion of a partner, the partnership is dissolved but the firm may not be dissolved, the remaining partners may continue to carry on the business of the firm.

The follows that the dissolution of a firm necessarily involves the dissolution of partnership whereas dissolution of partnership does not necessarily involve the dissolution of a firm.

1995 – May [5] Answer the following

(d) When shall a retired partner be discharged from his liabilities for the acts of the firm before retirement?

(5 marks)

Answer:

Liability of a retiring partner: The retiring partner remains liable to the creditors for the acts of the firm done before and up to the date of his retirement. The retiring partner is also liable to third parties for all transactions of the firm begun but unfinished at the time of his retirement. On retirement of a partner, his co-partners may agree to release him from such debts as were existing up to the date of his retirement. But even then the retiring partner continues to be liable to creditors. A retiring partner can be released only if (a) the remaining partners agree to release him and a due notice about his retirement is given; (b) the creditor has expressly or impliedly agreed to release the retiring partner and to accept the reconstituted firm as his debtor.

Example: A, B and C are partners and D is their creditor, B retires. A and C agrees to release B from the liability. D also agrees with B and the reconstituted firm of A and C to release B. B is discharged from liability to D. The law imposes a duty on the retiring partner to give public notice of his retirement. If the retiring partner fails to give such a notice then he continues to be liable for the acts of the firm even after his retirement and similarly, the firm will be bound by the acts of the retired partner done after retirement. This is based on the principle of holding out.

A retired partner will not be liable to any third party who deals with the firm without knowing that he was a partner. It is for this reason that no public notice need be given when a dormant or sleeping partner retires.

1996 – May [2] Comment on the following:

(e) Non-registration of partnership creates disabilities.                                             (5 marks)

Answer:

Non-registration of partnership: The Indian Partnership Act does not make the registration of firm compulsory nor does it impose any penalty for nonregistration. Section 69 of the Partnership Act, however, gives rise to certain disabilities on the ground of non-registration which are as follows:

  1. The firm or any other person on its behalf cannot bring an action against the third party for the breach of contract entered into by the firm, unless the firm is registered and the persons suing are or have been shown in the register of firms as partners in the firm.
  2. If an action is brought against the firm by a third party, then neither the firm not the partner can claim any set-off, if the suit be valued for more than ? 100 or pursue other proceedings to enforce the rights arising from any conduct.
  3. A partner of an unregistered firm is precluded from bringing legal action against the firm or any person alleged to be or to have been a partner in the firm. But such a person may sue for dissolution of the firm or for accounts and realisation of his share in the firm’s property where the firm is dissolved.

Non-registration of a firm does not affect the right of third parties against the firm or its partners or the power of an official assignee, Receiver of Court under the Presidency Towns Insolvency Act, 1920 to realise the property of an insolvent partner.

1996 – Nov [5] Answer the following:

(d) What is the procedure of giving public notice of any matter in respect of Partnership Firms?    (5 marks)

Answer:

Procedure of public notice: In every case where the public notice of any matter in respect of partnership firms is required to the given under the Partnership Act, 1932, it must be given by publication in the official gazette and in at least one vernacular newspaper circulating in the district where the firm of which it relates has its place or principal place of business.

In the case of registered firm, apart from the aforesaid notification, a notice is also required to be served on the Registrar of firms under Section 63 where the matters relate to (a) the retirement or expulsion of a partner, or (b) dissolution of the firm, or (c) the election, on attaining majority, to be or not to be a partner, by a person who as a minor was admitted to the benefit of partnership.

If notice of retirement is published only in local newspaper but not given to Registrar of firms and in Government Gazette, it is not sufficient to absolve retiring partner from liability to third parties.

1997 – May [4] Define ‘Partnership’ and state the procedure for its

registration. (10 marks)

Answer:

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. (Section 4).

The above definition of the Partnership given by the Indian Partnership Act, lays down three important elements:

(i) It must be a result of an agreement between two or more persons;

(ii) The agreement must be to share the profits of the business; and

(iii) The business must be carried on by all or any of them acting for all.

All the above elements must co-exist before a partnership can come into existence. Thus existence of an agreement, a business, sharing of profits and mutual agency form a core part of the existence of a partnership. Procedure for Registration: The firm has to file a statement in the prescribed form either in person by post with the prescribed fee, with the Registrar of the Firms of the area in which the firm is situated or is to be situated.

The Statement is to state the following particulars:

(i) The firm’s name.

(ii) The principal place of business.

(iii) The name of its other places of business.

(iv) The date of joining of each partner.

(v) The names in full and the permanent addresses of the partners, and

(vi) The duration of the firm.

When the Registrar is satisfied that the above mentioned provisions have been complied with, he shall record an entry of this statement in the register (called the Register of’ Firms) and shall file the statement.

The registration shall be completed only when the firm receives a certification of Registration. However, registration is deemed to be complete as soon as the application in the prescribed form and with the prescribed fee with necessary details concerning the particulars of the partnership is delivered to the Registrar. The recording of an entry in the Register of firms is a routing duty of Registrar.

1997- Nov [4] (a) Explain the meaning of ‘dissolution of a partnership firm’. When a dissolution of a firm takes place? (10 marks)

Answer:

Dissolution of a firm means the discontinuation of the jural relation existing between all the partners of the firm. But when only one of the partners retires or becomes incapacitated from acting as a partner due to death, insolvency or insanity, the partnership, i.e. the relationship between such a partner and others is dissolved, but the rest may decide to continue. In such cases, there is in practice no dissolution of the firm. The particular partner goes out, but the remaining partners carry on the business of the firm. In the case of dissolution of firm, on the other hand, the whole firm is dissolved. The partnership terminates as between each and every partner of the firm.

Section 39 of the Indian Partnership Act, defines it as follows:

“The dissolution of partnership between all the partners of a firm is called the dissolution of the firm”. Thus, the business is stopped and the relations between all the partners come td an end.

When a dissolution of a firm takes place?

Dissolution of a firm may take place in the following manner (Sections 39-44):

  1. As a result of any agreement between all the partners, this is called dissolution by agreement.
  2. By the adjudication of all the partners, or of all the partners but one, as insolvent, this is known as compulsory dissolution.
  3. By the business of the firm becoming unlawful, this is known as compulsory dissolution.
  4. As per the agreement, upon happening of any of the following contingencies:

(a) efflux of time;

(b) completion of the venture for which it was entered into;

(c) death of a partner;

(d) insolvency of partner.

In case of death of a partner, the number of the partners if do not exceed two, the firm is to be dissolved. In case the number of partners is more than two, the firm may continue even after the death of one partner, provided other partners agree to do so.

  1. By a partner giving notice of his intention to dissolve the firm, in case of partnership at will and the firm being dissolved as from the date mentioned as from the date of the communication of the notice; and
  2. By intervention of court in case of:

(i) a partner becoming of unsound mind;

(ii) permanent incapacity of a partner;

(iii) misconduct of a partner affecting the business;

(iv) wilful persistence breach of agreement by a partner;

(v) transfer or sale of the whole interest of partner;

(vi) improbability of the business being carried on save at a loss;

(viii) the court being satisfied on other equitable grounds that the firm should be dissolved.

1998 – May [5] (d) What will be the consequences in relations of partners of a partnership firm resulting from:

(i) Insolvency of partner, and

(ii) Death of a partner?                                                                                               (5 marks)

Answer:

Consequences of Insolvency and death of a partner:

(i) Insolvency of a partner (Section 34): When a partner in a firm is adjudicated and insolvent. He ceases to be a partner on the date of the order of adjudication whether or not the firm is thereby dissolved. His estate (which thereupon vests in the official assignee) ceases to be liable for any act of the firm done after the date of the order, and the firm also is not liable for any act of such a partner after such date(whether or not under a contract between the partners the firm is dissolved by such adjudication).

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

Ordinarily, the effect of the death of a partner is the dissolution of the partnership, but the rule in regard to the dissolution of the partnership by death of a partner is subject to a contract between the parties and the partners are competent to agree that the death of one will not have the effect of dissolving the partnership as regards the surviving partners unless the firm consists of only two partners [Commissioner of Income Tax v. G.S Mill, AIR (1966) S.C. 24].

Section 35 deals with the situation where the firm continues its business without dissolution and lays down that, in such a case, the estate of a deceased partner is not to be held liable for any act of the firm done after his death. Proviso to Section 45 lays down an incidental rule applicable to a case where the death of a partner has caused dissolution of the firm.

In order that the estate of a deceased partner may be absolved from liability for the future obligations of. the firm, it is not necessary to give any notice either to the public or the person having dealings with the firm.

1998 – Nov [4] (a).State the matters for which a partner of partnership firm required to give ‘Public Notice’ under the provision of the Indian Partnership Act, 1932. State also the consequences for not giving a public notice where it is required to be given under the Partnership Act. (10 marks)

Answer:

Public Notice: As per the requirements of Section 72 of the .Indian Partnership Act, 1932 a public notice has to be given:

  1. On the retirement or expulsion of a partner from a registered firm.
  2. On the dissolution of a registered firm.
  3. On the election to become or not to become a partner in a registered firm by a minor on his attaining majority.

Consequences of not giving public notice as required above;

  1. If a minor admitted to the benefits of partnership under Section 30 fails to give public notice within 6 months of his attaining majority or of his obtaining knowledge that he had been admitted to the benefits of partnership, whichever date is later, that he has elected to become or not to become a partner in the firm, he shall become a partner in the firm on the expiry of the said 6 months and is liable as a partner of the firm.
  2. If a retiring partner does not give a public notice of the retirement from the firm under Section 32, he and the other partners shall continue to be liable as partners to third parties for any act done by any of them which would have been an act of the firm if done before the retirement.
  3. If in case of expulsion of a partner from the firm a public notice is not given, the expelled partner and the other partners shall continue to be liable to third parties dealing with the firm as in the case of a retired partner. (Section 33).
  4. If a public notice is not given on dissolution of a registered firm, the partners shall to be liable to third persons of any act done by any of them which would have been an act of the firm if done before the dissolution (Section 45). When public notice is given of the dissolution of a firm, no partner shall have authority to bind the firm except for certain specific purposes as given in Section 47. According to this section, after the dissolution of a firm, the authority of each partner to bind the firm and their mutual rights and obligations of the partners shall continue:

(i) so far as may be necessary wind up the affairs of the firm; and

(ii) to complete transactions begun but unfinished at the time of the dissolution.

1999 – Nov [2] Explain briefly of the following:

(iv) Dissolution of partnership may or may not involve dissolution of firm.

(5 marks)

Answer:

Dissolution of partnership may or may not involve dissolution of firm:

The Indian Partnership Act, 1932 makes a distinction between the dissolution of partnership and dissolution of firm. Section 39 of the Act provides that the dissolution of partnership between all the partners of a firm is called the dissolution of the firm. Dissolution of partnership involves change in the relation of partners but it does not end the partnership. For example, where X, Y and Z were partners in a firm and X died or retired, the partnership firm would come to an end. If Y and Z agree to continue the business, the partnership between X, Y and Z would come to an end, although the firm of Y and Z continue in the firm. So the dissolution of a partnership may or may not include the dissolution of the firm, but the dissolution of the firm necessarily means the dissolution of the partnership as well. On the dissolution of partnership, the business may be carried on by the remaining constituted firm but on the dissolution of firm, all business must be stopped, the assets of the firm realised and distributed among the partners.

1999 – Nov [4] (i) Is registration of a partnership firm necessary? Discuss the effects of non-registration of a firm. (10 marks)

Answer:

The registration of a firm is not compulsory. But an unregistered firm suffers from certain disabilities and so registration is necessary.

The effects of non-registration as provided in Section 69 of the Indian Partnership Act, 1932 are:

(a) In an unregistered firm, a partner cannot file a suit against the firm on any other partner for enforcing his right conferred in the Act or arising from a contract.

(b) No suit can be filed on behalf of an unregistered firm against any third party for the purpose of enforcing a right arising from a contract.

(c) An unregistered firm or any partner thereof cannot claim setoff in a suit instituted against the firm by a third party to enforce a right arising from a contract.

But the non-registration of a firm does not attract the following rights:

(i) The right of a third party to sue the firm or any other partner.

(ii) The right of a partner to sue for dissolution of firm or for accounts of a dissolved firm or any right or power to realise the property of a dissolved firm.

(iii) The power of official assignee or receiver to realise the property of an insolvent partner..

(iv) The rights of firms having no place of business in India.

(v) A suit for set off not exceeding ? 100 in amount which is of a nature cognisable by Small Causes Court.

2000 – Nov [7] Answer briefly of the following:

(e) Mode of effecting registration of a partnership firm                                              (5 marks)

Answer:

Mode of Effecting Registration of a Partnership Firm: The registration of a partnership firm may be effected at any time by sending by post or delivering to the Registrar of the area in which any place of business of the firm is situated or proposed to be situated, a statement in the prescribed form. It is not essential that the firm should be registered from the very beginning. When the partners so decide they may go for registration of the firm. However, the application is to be made by them in the prescribed form as per the provisions of Section 58 of the Indian Partnership Act, 1832.

The statement must be accompanied by the prescribed fee and must contain the following matters:

  1. The firm’s name.
  2. The principal place of business.
  3. The names of its other places of business.
  4. The date of joining the firm by each partner.
  5. The name in full and the permanent addresses of the partners.
  6. The duration of the firm.

The aforesaid statement in signed by all the partners or by their agents specially authorised in this behalf. Each partner so signing it shall also verify it in the manned prescribed.

When the Registrar is satisfied that the above mentioned provisions have been complied with, he shall record ah entry of this statement in the register (called the Register of Firms) and shall file the statement.

Subsequent alterations like, alterations in the name, place of business, constitution of the firm etc. may also be registered.

2001 – Nov [4] (a) You want to form a partnership firm. Would you like to get it registered? If so, why? Also state the procedure you have to follow for getting the firm registered. (10 marks)

Answer:

Yes, the firm should be registered under the Indian Partnership act, 1932 since its non-registration has the following consequences; (Section 69).

  1. A person suing as a partner of an unregistered firm cannot sue the firm or any partners of the firm to enforce a right arising from a contract or conferred by the Partnership Act.
  2. An unregistered firm cannot sue a third party to enforce a right arising from a contract.
  3. An unregistered firm or any partner thereof cannot claim a set-off in a nroceeding instituted against the firm by a third party to enforce a right arising from a contract.

Non-registration, however, does not affect the right of a firm or of its partners having no place of business in India. It also does not affect the right to any suit or claim of set-off not exceeding ? 100.

Procedure; (Section 58 and 59):

The registration of a firm may be effected at any time by filing an application in the form of a statement, giving the necessary information with the Registrar of Firms of the area. The application shall be accompanied by the prescribed fee. It shall state:

(a) The name of the firm;

(b) The place or principal place of business of the firm;

(c) the names of other places where the firm carried on business.

(d) The date when each partner joined the firm;

(e) The names in full and permanent address of the partners;

(f) The duration of the firm.

The statement shall be signed by all the partners or by their agents specially authorized in this behalf. (Section 58(1)). It shall also be verified by them in the prescribed manner. (Section 58(2)).

When the Registrar is satisfied that the above provisions have been duly complied with, he shall record an entry of the statement in the Register of Firms and file the statement.(Section 59). He shall then issue under his hand a certificate of registration. Registration is effective from the date when the Registrar files the statement and makes entries in the Register of Firms and not from the date of presentation of the statement to him.

2002 – May [7] Explain the following (Give brief answers):

(e) Dissolution of a Partnership Firm by the intervention of the Court.

(5 marks)

Answer:

Dissolution of a firm by the intervention of the Court:

A firm can be dissolved by the intervention of the Court on the following grounds:

(i) A partner becoming of unsound mind;

(ii) Permanent incapacity .of a partner to perform his duties as such.

(iii) Misconduct of a partner affecting the business.

(iv) Willful or persistent breaches of agreement by a partner.

(v) Transfer or sale of the whole interest of a partner.

(vi) Improbability of the business being carried on save at a loss.

(vii) The Court being satisfied on other equitable grounds that the firm should be dissolved.

2018 – May [3] (b) What are the consequences of Non-Registration of a Partnership Firm? Discuss.        (4 marks)

Answer:

Under the english law, the registration of firms is compulsory. But the Indian Partnership Act does not make the registration of firms compulsory nor does it impose any penalty for non-registration. However, under section 69, non registration of partnership gives rise to a number of disabilities. Thus, the consequences of non-registration have a persuasive pressure for their registration. These disabilities are as follows:

  1. No suit in a civil court by firm or other co-partners against third party:

The firm or any other partner on its behalf cannot bring an action against third party for breach of contract entered into by the firm, unless the firm is registered and the person suing are or have been shown in the register of firms as partners in the firm.

  1. No relief to partners for set-off of claim:

In an action against the firm by a third party, neither the firm nor the partner can claim any set off, if the suit be valued for more than ? 100.

  1. Aggrieved partner cannot bring legal action against other partner or the firm:

A partner of an unregistered firm is precluded from bringing legal action against the firm or any person alleged to be or to have been a partner in the firm. (But such a person may sue for dissolution of firm).

  1. Third party can sue the firm:

In case of an unregistered firm, an action can be brought against the firm by a third party.

2018 – Nov [6] (b) State any four grounds on which Court may dissolve a partnership firm in uase any partner files a suit for the same.

(4 marks)

Answer:

The four grounds as mentioned under Section 44 on which the Court can dissolve a partnership firm arq :

(a) insanity/ Unsound mind.’Where a partner (not a sleeping partner) has bec’ome of unsound mind; the Court may dissolve the firm on a suit of the other partners or by the next friend of the insane partner.

(b) Permanent incapacity : When a partner other than the partner suing has become in any way permanently incapable of performing his duties as partner, then the Court may dissolve the firm.

(c) Misconduct: Where a partner, other than the partner suing, is guilty of conduct which is likely to affect prejudicially the carrying on of business, the Court may order for dissolution of the firm, by giving regard to the nature of business

(d) Persistent breach of agreement:

Where a partner other than the partner suing, wilfully or persistently commits breach of agreements relating to the management of the affairs of the firm or the conduct of its business, or otherwise so conduct himself in matters relating to the business that it is not reasonably practicable for other partners to carry on the business in partnership with him.

2019 – June [6] (b)“lndian Partnership Act does not make the registration of firms compulsory nor does it impose any penalty for non-registration.” Explain. Discuss the Various disabilities or disadvantages that a non- registered partnership firm can face in brief?                                                            (4 marks)

Answer:

Under the English Law, the registration of firms is compulsory. But the Indian Partnership Act does not make the registration of firm’s compulsory nor does it impose any penalty for non-registration.

However, section 69, of the Act gives rise to a number of disabilities which will attach to an unregistered partnership firm. Although registration of firms is not compulsory, yet the consequences or disabilities of non-registration have a persuasive pressure for their registration. These disabilities are as follows:

(i) No suit in a civil court by firm or other co-partner against third party: The firm or any other person on its behalf cannot bring an action against the third party for breach of contract, unless the firm is registered-

(ii) No relief to partner for set off of claim: Neither the firm, nor the partner can claim any set off if the suit be valued for more than ? 100.

(iii) Aggrieved partner cannot bring legal action against the other partner of the firm: A partner of an unregistered firm is precluded from bringing legal action against the firm or any person alleged to be or to have been a partner in the firm.

(iv) Third party can sue the firm: In case of an unregistered firm, an action can be brought against the firm by a third party.

Practical Questions

2019 – June [4] (b) M/S XYZ & Associates, a partnership firm with X, Y, Z as senior partners were engaged in the business of carpet manufacturing and exporting to foreign countries. On 25th Aug. 2016, they inducted Mr. G an expert in the field of carpet manufacturing as their partner. On 10th Jan. 2018, Mr. G was blamed for unauthorized activities and thus expelled from the partnership by united approval of rest of the partners.

(i) Examine whether action by the partners was justified or not?

(ii) What should have the factors to be kept in mind prior expelling a

partner from the firm by other partners according to the provisions of the Indian Partnership Act, 1932?   (6 marks)

Answer:

A partner may not be expelled from a firm by a majority of partners except in exercise, in good faith of powers conferred by contract between the partners. It is, thus, essential that:

(i) the power of expulsion must have existed in a contract between the partners.

(ii) the power has been exercised by a majority of the partners, and

(iii) it has been exercised in good faith.

If all these conditions are not present the expulsion is not deemed to be done in bonafide interest of the business of the firm.

If a partner is otherwise expelled, the expulsion is null and void.

Thus, action taken by partner in expelling partner G is valid.

*This article contains all topics about the Indian Partnership Act 1932-BUSINESS LAWS.

For notes on all CA foundation topics, you can visit this article CA foundation note

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