Partnership under Indian Partnership Act

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Selection of the form of business entity is one of the most important decisions before starting a business. A business enterprise can be broadly divided into two categories, namely, one which is non-corporate in form and the other which has a corporate character. The former includes sole proprietorship, partnership, and HUF while a company and other co-operative undertakings fall in the latter category. Since every business is profit motive, it is important to carefully choose the type of business. A non-corporate business does not have to be registered, while a corporate firm has to be compulsorily registered. In this article we will be briefly discussing on Partnership form of business and its characteristics.

Indian Partnership Act

Indian Partnership Act (herein referred to as the Act) is a pre independence act which came into force on October 1st, 1932. The act defines Partnership under Sec. 4 as “the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.” Such persons who have entered with each other for such partnership, are individually called as the partners of the firm. Since it has to be created through a contract and not merely by status, Hindu Undivided Family and other such business created by virtue of status are not deemed to be partnership as explained under Sec. 5.

Extent of liability and profit sharing is specified in a document called partnership deed, which also specifies other terms and conditions regulating the partnership. Depending on the extent of liability, there are different types of partnership.

Types of Partnership

The Act exclusively says about two types of partnership, based on objectives:

  1. Partnership-at-will – As said earlier, terms and conditions regarding partnership are decided by the partners. When there is no specific provision as to the duration of their partnership or for determination of such partnership, it is called as ‘partnership-at-will’. As the name suggests, such a partnership can be brought to an end at the will of the partners, which can be for an indefinite period. Sec. 7 of the act deals with this.
  2. Particular partnership – Such a partnership is formed for a specific business or undertaking as explained under Sec. 8 of the act. It is a temporary partnership formed for a specific business. For example, partnership for a building construction.

Types of Partners

The Act though does not explicitly restrict types of partners, the generally found types of partnership are being discussed herein:

  • Active or managing partner– He acts on behalf of all other partners, by daily carrying out the activities of the business. He acts as an agent for other partners, for which he may withdraw a salary from the partnership firm.
  • Nominal partner– As the name suggests, this type of partners do not have a significant interest in the firm. But his name and goodwill are used by the firm to promote its business. For example, a celebrity to endorse the business for which he is paid. Thus, he does not have any share in the profits nor is liable for the losses. However, he is responsible to the public for the acts of other partners.
  • Sleeping partner– Sleeping or dormant partner abstains from participating in daily activities of the firm, mainly due to lack of time. He is subject to every rules of the firm, like other partners and is also bound by the acts of other partners of the firm as well. However, he may retire without giving a public notice.
  • Partner by Estoppel or partner by holding out – He is not a partner in the firm nor contributes to the capital, but through words or conduct represented that he is a partner in the firm. Such representation must be with his knowledge.
  • Secret partner– He is an actual partner who has unlimited share in profit and liability on the losses of the firm, but his partnership is kept as a secret from the public.
  • Minor partner– The Indian Contract Act prohibits a minor being a partner; however, he can be admitted only to share the benefits and his liability will be limited to his share in the firm, for which he will not be personally liable. After attaining the age of majority, within six months he can decide whether to continue the partnership or not; such decision has to be issued through a public notice. In Uttamchand v Mohandas,[1] a partnership agreement with minor was discovered to be void.
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Introduction and Retirement of a Partner

A person can be admitted as a partner even without the consent of all the existing partners.[2] He will not be retrospectively liable for any acts of the partners before his introduction as a partner in the firm. As far as it considers for the retirement of a partner, the consent of all other partners is necessary as per Sec. 32. There is an agreement with such outgoing partners as to forbiddance on using the firm’s name, soliciting its customers notwithstanding provisions of Sec. 27 of Indian Contract Act, for other reasonable restrictions.

Dissolution of Partnership

A partnership firm is dissolved when the partnership between the partners is dissolved. This can be done in five ways (Ss 39-43):

  • Dissolution by agreement- This is done with the consent of all the partners or by a contract between them.
  • Compulsory dissolution- This is done when one or all the partners of the firm are adjudicated as insolvent; or when the business of the firm becomes unlawful as the result of any event.
  • Dissolution on the happening of certain contingencies – A partnership is dissolved on the expiry of the fixed term or undertaking for which it was constituted; by the death or insolvency of a partner. After death, a partner’s legal representatives can carry on the business if it is specified in the partnership deed. However, in the case of S.P. Misra & Ors. V Mohd. Laiquddin Khan and Anr [3], there were only two partners to a partnership, and thus death of one of the partners automatically dissolves the partnership deed. The legal representatives of late partner were not parties to the original partnership deed, thus SC held that the decree was not executable against them.
  • Dissolution by notice of partnership at will – This type of partnership may be dissolved by giving a notice in writing by any of the partners. Such a notice shall be clear and unambiguous as to the intention of the partner to dissolve the firm.[4]
  • Dissolution by the court – Any partner can file a suit on different grounds under which the Court can dissolve the firm: unsoundness of a partner, incapability of a partner to perform his duties, a partner is guilty of conduct which can affect the business, a partner wilfully commits breach of management agreements, a partner transferred his interest to a third party, the business is at a loss or any other just and equitable grounds.

After the dissolution of the firm till public notice of dissolution is given, the partners shall be liable to third parties. Estate of a deceased partner or an insolvent or retired partner is exempted to be liable.[5]

In the 2020 case, Guru Nanak industries, Faridabad and Anr. v. Amar Singh[6] – SC clarified on distinction between retirement of a partner and dissolution of partnership. It held that on retirement of a partner his dues are to be paid as per Sec. 37 of the Act and the firm thus reconstituted can continue its business. When a partner agrees to dissolve a partnership, it means dissolution and not his retirement. Such dissolution needs to be followed by settling of accounts as per Sec. 48 of the Act.

Effects of Non-Registration

Since a partnership does not have a separate legal identity unlike a company, it is at the option of the partners to register. However, the effects of non-registration are provided under Sec. 69 of the act- No suit shall be instituted in a Court for enforcement of a right from a contract by or on behalf of the partners and third party.[7] Also, no suit shall be instituted in a Court for dissolution of the partnership or for accounts or to realise the property. However as held in Mahendra v. Gurdeyal,[8] Sec. 69 does not bar a partner of an unregistered partnership firm from applying to the court under Sec. 8 of the Arbitration Act for referring the dispute.

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Hence, Partnership can be considered as a refined version of sole proprietorship, as the former helps in sharing the liabilities among the partner rather than a single person being liable as in the latter form of business. It also enables in pooling the resources of all the partners, thus facilitating a larger scale business.

[1] AIR 1964 Raj 50

[2] S 31, Indian Partnership Act, 1932 (Act No.IX of 1932).

[3] C.A. No.3311 of 2015. 

[4] Chainkaran Sidhkaran Oswal v. Radhakrishan, AIR 1956 Nag. 48.

[5] S 45, Indian Partnership Act, 1932 (Act No.IX of 1932).

[6] 378 SC (2020)

[7] M/s. Shreeram Finance Corporation v. Yasin Khan, AIR 1989 SC (1769).

[8] AIR 1951 Pat 0196.