Summary Notes on Partnership Law of India

Summary Notes on

The Indian Partnership Act, 1932

Contents
What is Partnership? .........................................................................................................................3

Elements of Partnership ...................................................................................................................3

True Test of Partnership..................................................................................................................4

Difference Between Partnership and Joint Stock Company (Normal Company) .................4

Difference Between Partnership and Club ...................................................................................4

Difference between Partnership and HUF ...................................................................................5

Difference between Partnership and Co-ownership ...................................................................5

Difference between Partnership and Association ......................................................................5

Kinds of Partnership ..........................................................................................................................5

Contents of Partnership Deed .........................................................................................................6

Types of Partners ...............................................................................................................................6

Relation of Partners to One Another.............................................................................................7

Rights of Partners (Section 12) (Conduct of Business) .............................................................8

Mutual Rights and Liabilities ............................................................................................................8

Property of the Firm (Section 14) ..................................................................................................9

Application Property of the Firm (Section 15) .......................................................................... 10

Personal Profit Earned by Partners (Section 16) ...................................................................... 10

Rights And Duties of Partners After A Change In The Firm ................................................ 11

Relation of Partners to Third Parties .......................................................................................... 11

Effect Of Admissions by A Partner............................................................................................. 12

Effect of Notice to Acting Partner ............................................................................................. 13

Liability to Third Parties ................................................................................................................ 13

Rights of Transferee of Partner’s Interest .............................................................................. 14

Admission of Minors......................................................................................................................... 14

Rights of Minors ............................................................................................................................... 15

Liabilities of Minors ......................................................................................................................... 15

pg. 1
 Summary Notes on Partnership Law of India

Legal Consequences of Partner Coming In And Going Out ...................................................... 16

Rights of Outgoing Partner to Carry on Competing Business ................................................. 18

Right of Outgoing Partner to Share Subsequent Profits ....................................................... 18

Revocation of Continuing Guarantee by Change in Firm .......................................................... 18

Registration of Firms....................................................................................................................... 19

Consequences of Non-Registration ............................................................................................... 19

Dissolution of Firm ........................................................................................................................... 21

Difference between Dissolution of Firm and Dissolution of Partnership ........................... 21

Modes of Dissolution of Firm ........................................................................................................ 21

Voluntary Dissolution of Firm ....................................................................................................... 22

Dissolution by Court ........................................................................................................................ 22

Consequences of Dissolution ......................................................................................................... 24

pg. 2
 Summary Notes on Partnership Law of India

What is Partnership?
‘Partnership’ 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.
Persons who have entered into partnership with one another are called individually
‘partners’ and collectively ‘a firm’.

Elements of Partnership
2 or More persons Partnership is an association of 2 or more persons.
A firm cannot be partner of another firm.
A company/LLP can be partner of a firm.
A minor cannot be a partner in a firm, but with the
consent of All the partners, may be admitted to the
benefits of partnership.
Maximum persons limit of partnership firm is 50.

Agreement There must be agreement between 2 or more persons.

Depicts voluntary contractual nature of partnership.
Can be express or implied.
Maybe in oral or in writing.
The ‘Partnership Agreement’ is also known as ‘Partnership
Deed’

Business There must exist a business.

No partnership where there is no intention to carry on
the business.

Profit Sharing There can be no partnership where only one of the partners
is entitled to the whole of the profits of the business.
Partners must agree to share the profits in any manner they
choose
But an agreement to share losses is not an essential element.
(Loss can be shared by single partner)

Agent Partnership is a binding contract of mutual agency between the

partners.
It may be noted that the true test of partnership is mutual
agency rather than sharing of profits.
An act of one partner during the business of the firm is in fact
an act of all partners.
Each partner carrying on the business is the principal as well
as the agent for all the other partners.

pg. 3
 Summary Notes on Partnership Law of India

True Test of Partnership

For determining the existence of partnership, all 3 must be proved.

Agreement: There was an agreement between all the persons concerned;

Share of Profits: The agreement was to share the profits of a business and
Business: The business was carried on by all or any of them acting for all.

Difference Between Partnership and Joint Stock

Company (Normal Company)
Basis Partnership Joint Stock Company
Legal Status No separate legal status Separate legal Status
Agency Every Partner is agent No shareholder is agent
Profits Shall distribute profit as per May distribute profit if
deed management wants to
Liability Unlimited Limited
Property Partners are co-owners Company is owner
Transfer of shares Cannot admit (transfer Freely transferable
share) freely
Management All partners are entitled to All Shareholders are not
manage business entitled to manage business
Registration Not mandatory Mandatory
Winding up If all partners leave With struck off by Registrar
Number of Persons 50 1,200,Unlimited for OPC,
Private and Public respectively
Duration Depends on partners Perpetual Existence

Difference Between Partnership and Club

Basis Partnership Club
Definition It is an association of persons formed A club is an association of persons
for earning profits from a business formed with the object not of earning
carried on by all or any one of them profit, but of promoting some
acting for all. beneficial purposes.
Relationship Partners Members
Property Partner have interest in property Member do not have interest in
Property
Dissolution Change in partners affects existence Change in members do not affect
of firm existence of club

pg. 4
 Summary Notes on Partnership Law of India

Difference between Partnership and HUF

Basis Partnership HUF
Creation By agreement By birth in Hindu Family
Death Death effects existence of firm Does not effect existence of HUF
Management Partners Karta or Adult Members
Authority Every partner Only Karta
to Bind
Liability Unlimited Limited (Unlimited for only Karta)
Act? The Indian Partnership Act, Hindu Law
1932
Minor? Cannot be partner unless Is member by birth
consented by ALL PARTNERS
Members 50 Unlimited

Difference between Partnership and Co-ownership

Basis Partnership Co-ownership
Formation Agreement Agreement or inheritance
Agency Implied agency No such agency
Sharing Sharing of profits is mandatory No such mandate
Transfer Cannot transfer freely unless No such thing, share freely
of share consented by partners transferable

Difference between Partnership and Association

Basis Partnership Association
Cause? Profit Sharing Social cause (other than profits)
Examples To earn profit firm is formed Residential Societies may form
association where intention is not
business nor profit

Kinds of Partnership

pg. 5
 Summary Notes on Partnership Law of India

Contents of Partnership Deed

1. Name of the partnership firm.
2. Names of all the partners.
3. Nature and place of the business of the firm.
4. Date of commencement of partnership.
5. Duration of the partnership firm.
6. Capital contribution of each partner.
7. Profit Sharing ratio of the partners.
8. Admission and Retirement of a partner.
9. Rates of interest on Capital, Drawings and loans.
10. Provisions for settlement of accounts in the case of dissolution of the firm.
11. Provisions for Salaries or commissions, payable to the partners, if any.
12. Provisions for expulsion of a partner in case of gross breach of duty or fraud.

Types of Partners
Active or Actual or Who has become a partner by agreement, and
Ostensible partner Who actively participates in the conduct of the
partnership

Sleeping or Who is a partner by agreement, and

Dormant Partner Who does not actively take part in the conduct of the
partnership business

Nominal Partner A person who lends his name to the firm, without having any
real interest in it, is called a nominal partner.

Partner in profits A partner who is entitled to share the profits only without
only being liable for the losses is known as the partner for profits
only and liable to the third parties for all acts of the profits
only.

Incoming partner A person who is admitted as a partner into an already

existing firm with the consent of all the existing partners is
called as “incoming partner”.

Outgoing partner A partner who leaves a firm in which the rest of the partners
continue to carry on business is called a retiring or outgoing
partner.

pg. 6
 Summary Notes on Partnership Law of India

Partner by holding When a person represent himself, or

out (Partner by Knowingly permits himself,
Estoppel) to be represented as a partner in a firm (when in fact
he is not)
IMP he is liable, like a partner in the firm
to anyone who on the faith of such representation has
given credit to the firm.
Example - A partnership firm consisting of P, Q, R and
S. S retires from the firm without giving public notice
and his name continues to be used on letterheads. Here,
S is liable as a partner by holding out to creditors who
have lent on the faith of his being a partner.

Relation of Partners to One Another

1 General Duties of Partners

• The partners should carry business to greatest common advantage
• Partner should keep utmost good faith in dealings with other partners
• Shall give accounts and information to each other with honesty

2 Indemnify loss caused by fraud

• Partner comitting fraud must make the loss good
• If a partner commits fraud on co-partners, he must be responsible to
such partners to make losses good

3 Determination of Rights and Duties

• Must be determined via contract (agreement or deed)
• Such determination can be express or implied
• Agreement can provide that "A partner shall not carry any business
while he is partner of firm"
• Such agreement is called 'agreement to restrain'

pg. 7
 Summary Notes on Partnership Law of India

Rights of Partners (Section 12) (Conduct of Business)

1 Conduct of the Every partner has the right to take part in the business of
Business the firm.
2 Right to be Where any difference arises between the partners
consulted with regard to the business of the firm, it shall be
determined by the views of the majority of them
Every partner shall have the right to express his
opinion before the matter is decided.
But no change in the nature of the business of the
firm can be made without the consent of all the
partners. (unanimous consent needed)
This means that in routine matters, the opinion of
the majority of the partners will prevail.

3 Books Every partner whether active or sleeping is entitled to have

access to any of the books of the firm and to inspect and
take out of copy thereof.

4 Right of legal In the event of the death of a partner, his heirs or legal
heirs/ representatives or their duly authorised agents shall have a
representatives/ right of access to and to inspect and copy any of the
their duly books of the firm.
authorised agents

Mutual Rights and Liabilities

1 Right to It is customary to pay remuneration to a partner
remuneration for conducting the business of the firm.
He can claim it even in the absence of a contract
for the payment of the same.

2 Right to share Partners in a firm share profits equally and also

Profits share losses equally unless agreed otherwise.
To determine a partner’s share, check if there is any
specific agreement between the partners.
If no agreement exists, it is assumed that all
partners have equal shares.
The responsibility to prove unequal shares lies with
the person claiming it.
Profit-sharing is not linked to the amount of capital
contributed by each partner.

pg. 8
 Summary Notes on Partnership Law of India

3 Interest on Capital A partner is entitled to interest on money contributed to

the partnership only if one of the following conditions is met
There is an explicit agreement allowing it.
It is a common practice in that specific partnership.
A trade custom supports it.
A legal provision grants the right to such interest.

4 Interest on If a partner gives an advance to the firm beyond

advances their capital contribution, they are entitled to 6%
annual interest on the advance.
Interest on capital stops accruing when the firm is
dissolved.
Interest on advances continues to accrue after
dissolution until the amount is fully paid.

5 Right to be Every partner has the right to be reimbursed by the firm

indemnified for:
Payments made and liabilities incurred during the
normal and proper conduct of the firm’s business.
Actions taken in an emergency to protect the firm
from loss.

6 Right to indemnify A partner must compensate the firm for any loss caused
the firm by their willful neglect in managing the firm's business.

Property of the Firm (Section 14)

Definition of Partnership Includes all property, rights, and interests collectively
Property owned by all partners.

Components of Property, rights, and interests contributed by

Partnership Property (in partners to the common business.
the absence of contrary Property, rights, and interests acquired or
agreements) purchased for the firm or its business purposes.
Goodwill of the business.

Determining Partnership Depends on the real intention or agreement

Property between partners.
Mere usage of a partner's property for the firm's
business does not make it partnership property
unless agreed upon.

pg. 9
 Summary Notes on Partnership Law of India

Conversion to Partners can convert individual or separate

Partnership Property property into partnership property through an
agreement.
Such conversions, if made in good faith, are valid
against partners and creditors of the firm.

Goodwill Treated as part of the firm’s property, subject

to agreement between partners.
Represents the value of a business’s reputation
and expected future profits beyond normal levels.
Upon dissolution, goodwill must be sold for the
benefit of all partners unless agreed otherwise.
Can be sold separately or with other firm assets.
Partners can make reasonable agreements with
the buyer to restrict competing businesses.

Application Property of the Firm (Section 15)

Usage of Firm Must be used exclusively for the purposes of the firm.
Property
Community of All partners share a collective interest in the firm’s property.
Interest
Rights During No individual partner has a proprietary claim on specific
Partnership assets of the firm during its existence.
Partners are entitled to their share of profits and to
ensure that partnership assets are used for the business.

Personal Profit Earned by Partners (Section 16)

If a partner earns personal profit from firm transactions, property, business
connections, or the firm's name, they must account for and pay that profit to
the firm.
If a partner runs a competing business of the same nature as the firm's business,
they must account for and pay all profits from that business to the firm.
Example - Partners A, B, C, and D operate a salt import business. A made
personal transactions in salt of the same nature as the firm's business. Held:
A must account to the firm for profits earned from those transactions.
Partners must act in the best interest of the firm and avoid personal gains at
the expense of the firm.

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 Summary Notes on Partnership Law of India

Rights And Duties of Partners After A Change In The Firm

After a change in the firm: Where a change occurs in the constitution of a
firm, the mutual rights and duties of the partners in the reconstituted firm
remain the same as they were immediately before the change, as far as may
be;
After the expiry of the term of the firm: 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
Where additional undertakings are carried out: where a firm constituted to
carry out one or more adventures or undertakings carries out other adventures
or undertakings are the same as those in respect of the original adventures
or undertakings.

Relation of Partners to Third Parties

Agent of firm

A partner acts as an agent of the firm for conducting its business.

Partners have a dual role: acting as both principals (for themselves) and agents
(for others).
Unlike regular agents, partners share an interest in the firm's property, business,
and liabilities.
This rule applies only to acts done for the firm's business, not to dealings
between partners.

Implied Authority

A partner has the authority to bind the firm through actions done in the usual
course of the firm’s business, known as "implied authority."
Limitations on Implied Authority, A partner cannot;
o Submit a dispute to arbitration.
o Open a bank account in their own name on behalf of the firm.
o Compromise or relinquish any claim by the firm.
o Withdraw a lawsuit filed by the firm.
o Admit any liability in a lawsuit against the firm.
o Acquire or transfer immovable property on behalf of the firm.
o Enter a partnership on behalf of the firm.

pg. 11
 Summary Notes on Partnership Law of India

To bind the firm, an act must be done in the firm’s name or in a manner that
expresses or implies an intention to bind the firm.
Conditions for Implied Authority:
o Relevance to Firm’s Business - The act must relate to the firm's usual
business.
o Usual Business Conduct - The act must be done in the usual way for that
type of business
o Binding the Firm - The act must be performed in the firm’s name or in a
way that reflects the intention to bind the firm.
The implied authority of a partner may vary depending on the nature of the
business.

Extension of Implied Authority

Implied authority allows a partner to act on behalf of the firm in the ordinary course
of business.
It can be extended or restricted by a contract between all partners with mutual
consent.
A single partner or a majority cannot impose restrictions or extensions unilaterally.
Restrictions are effective against a third party only if the third party knows about the
restriction and does not know they are dealing with a partner.
In trading firms, borrowing is generally within implied authority unless restricted by
agreement.
If a lender is unaware of a restriction, the firm is liable for the borrowed amount.
If the lender is aware of the restriction, the firm is not liable to repay.

Emergency Actions

A partner has authority, in an emergency, to do all such acts for the purpose of
protecting the firm from loss as would be done by a person of ordinary prudence.

Effect Of Admissions by A Partner

Partners, as agents of each other, can make binding admissions related to
partnership transactions in the ordinary course of business.
Admissions or representations do not bind the firm if the partner’s authority
is restricted, and the third party knows of the restriction.
Such admissions are binding on the firm when used by third parties but may
not apply in disputes between partners.

pg. 12
 Summary Notes on Partnership Law of India

Effect of Notice to Acting Partner

Notice to a partner who habitually acts in the firm’s business is considered notice
to the entire firm.
Exception: Not applicable in cases of fraud on the firm committed by or with
the partner’s consent.
A notice to a partner is equivalent to a notice to the firm, similar to how a notice
to an agent is notice to the principal.
The notice must be actual, not constructive.
It must be received by a working partner, not a sleeping partner.
The notice must relate to the firm’s business to be valid.

Liability to Third Parties

Liability of a Partners are jointly and severally liable to third parties
Partner for Acts for acts within the scope of their express or implied
of The Firm authority.
Acts within the scope of authority are considered acts
done in the course of the firm's business.
The term ‘act of firm’ includes any act or omission by all
partners, any partner, or an agent, which creates
enforceable rights or liabilities for the firm.
Liability arises only if the act was done while the person
was a partner in the firm.

Liability of Firm The firm is liable for loss or injury caused to a third
for wrongful party by a partner’s wrongful acts if done:
Acts of Partner (a) In the ordinary course of the firm’s business.
(b) With the authority of the partners.
All partners are liable for a negligent act of a partner if it
occurs in the ordinary course of the firm’s business.

Liability of Firm Misapplication is when money or property comes into the

for firm’s custody and is misapplied by any partner.
Misapplication If receipt of money by a partner is outside the scope of
by Partners his apparent authority, the firm is not liable unless the
money comes into the possession or control of the firm
or other partners.

pg. 13
 Summary Notes on Partnership Law of India

Rights of Transferee of Partner’s Interest

A share in a partnership is transferable, but the transferee does not gain the rights
and privileges of the original partner due to the mutual confidence basis of
partnership.

Rights of the Transferee:

During the Not entitled to interfere with the conduct of the

Continuance of the business.
Partnership Not entitled to require accounts.
Not entitled to inspect books of the firm.
Entitled only to receive the transferring partner’s
share of profits and must accept the profits as
agreed by the partners without challenging the
accounts.
On Dissolution or Entitled to the transferring partner’s share of the
Retirement firm's assets.
Entitled to an account from the date of dissolution
to ascertain the share.

Section 31:

A new person cannot become a partner without the consent of all existing
partners.
A partner cannot unilaterally make another person a partner by transferring
their interest.

Admission of Minors
A minor cannot be a partner in a firm since a minor’s contract is void, and
partnership is based on a contract.
However, under Section 30 of the Act, a minor can be admitted to the benefits
of partnership.
Admission to benefits requires the consent of all partners.
A minor admitted to benefits is entitled to a share in the partnership profits.
A minor admitted cannot be part of losses of firm.

pg. 14
 Summary Notes on Partnership Law of India

Rights of Minors
Before Attaining A minor partner has a right to his agreed share of
Majority the profits and of the firm.
He can have access to, inspect and copy the
accounts of the firm.
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.

After Attaining On attaining majority, he may within 6 months elect to

Majority 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.

Liabilities of Minors
Before The liability of the minor is confined only to the extent of his
Attaining share in the profits and the property of the firm.
Majority Minor has no personal liability for the debts of the firm incurred
during his minority.
Minor cannot be declared insolvent, but if the firm is declared
insolvent his share in the firm vests in the Official
Receiver/Assignee (which means minor can recover his share in the
firm on proportionate basis from official receiver/assignee)

After Attaining When he elects to become a partner

Majority He becomes personally liable to third parties for all acts of the
firm done since he was admitted to the benefits of partnership.
His share in the property and the profits of the firm remains
the same to which he was entitled as a minor.

When he elects not to become a partner

His rights and liabilities continue to be those of a minor up to
the date of giving public notice.
His share shall not be liable for any acts of the firm done after
the date of the notice.
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.

pg. 15
 Summary Notes on Partnership Law of India

Legal Consequences of Partner Coming In And Going Out

Introduction A new partner cannot be introduced into a firm without the consent
of a Partner of all existing partners, subject to any contract between them and
provisions regarding minors.

Liabilities of a New Partner:

Commence from the date of admission unless the partner
agrees to be liable for prior obligations of the firm.
The new firm, including the incoming partner, may assume
liability for the old firm's debts if creditors consent.
Creditor's consent is essential to make the transaction valid
(Novation).

Novation
A substituted liability that requires creditor consent.
An agreement among partners alone does not constitute
Novation or give creditors rights against the new partner.

IMP: This section does not apply to partnerships with only two
partners, as the firm is automatically dissolved upon the death of
one partner.

Retirement of Modes of Retirement:

Partner With the consent of all other partners.
As per an express agreement among partners.
In a partnership at will, by giving written notice to all
other partners.

Liability for Acts Before Retirement:

A retiring partner may be discharged from liability for
acts of the firm done before retirement through an
agreement with the third party and reconstituted firm.
Such an agreement may be implied through the course of
dealing after the third party is aware of the retirement.

Liability for Acts After Retirement:

Retired partners and existing partners remain liable for
acts of the firm until public notice of retirement is given.
A retired partner is not liable to third parties unaware of
their prior involvement with the firm.

Public Notice: Public notice of retirement can be given by the

retired partner or any partner of the reconstituted firm.

pg. 16
 Summary Notes on Partnership Law of India

Expulsion of a Contractual Power: The power of expulsion must exist in the

Partner partnership contract.
(Removal of Majority Decision: The expulsion must be exercised by a
Partner) majority of the partners.
Good Faith: The expulsion must be exercised in good faith.

The expulsion must meet three criteria:

It is in the interest of the partnership.
The expelled partner is served notice.
The expelled partner is given an opportunity to be heard.

If any of the above conditions are not met, the expulsion is deemed
invalid. Invalid expulsion does not dissolve the firm; the partnership
continues as before, even if it is at will.

Additional Points:
Expulsion does not automatically result in the dissolution of the
firm.
Expulsion is null and void if not in good faith or if the procedural
requirements are not fulfilled.
The expulsion must align with the bona fide interest of the firm.

Insolvency of Cessation as a Partner: An insolvent partner ceases to be a

a Partner partner on the date of the adjudication order. The insolvent
partner cannot continue in the firm.
Effect on Liabilities: Partner Not liable for any act of the firm
done after the adjudication date. Firm Not liable for any act of
the insolvent partner after the adjudication date.
Dissolution of the Firm: Insolvency of a partner ordinarily results
in the dissolution of the firm. However, partners can agree
contractually to exclude insolvency as a ground for dissolution.
Key Implications: Adjudication as insolvent severs the partner’s
connection with the firm. The relationship between the firm and the
insolvent partner becomes independent for acts after the
adjudication.

Liability of The death of a partner generally leads to the dissolution of the

Estate of partnership.
Deceased Partners can agree via contract that the death of one partner
will not dissolve the firm (except when the firm has only two
Partner
partners).
The estate of the deceased partner is not liable for any future
obligations of the firm.
No notice to the public or persons dealing with the firm is
required to absolve the deceased partner's estate from liability for
future acts.
Surviving partners can continue the business if there is an
agreement to do so.

pg. 17
 Summary Notes on Partnership Law of India

Rights of Outgoing Partner to Carry on Competing Business

Competing Business An outgoing partner may start a business competing
with that of the firm.
He may advertise his business.

Restrictions He cannot use the firm name.

He cannot represent himself as carrying on the firm's
business.
He cannot solicit customers who dealt with the firm
before his departure.

Agreement in An outgoing partner can agree with other partners not

Restraint of Trade to start a similar business within a specified period or
local limits.
Such agreements are valid if the restrictions are
reasonable, despite Section 27 of the Indian Contract
Act, 1872.

Right of Outgoing Partner to Share Subsequent Profits

An outgoing partner or their estate is entitled to a share of profits made using
their share of the firm’s property or interest at 6% per annum if accounts are
not settled.
Surviving or continuing partners can avoid this by exercising a contractual
option to purchase the outgoing partner’s interest.

Revocation of Continuing Guarantee by Change in Firm

A continuing guarantee given to a firm or a third party for firm transactions is
revoked for future transactions upon any change in the constitution of the firm.

This rule applies unless there is an agreement to the contrary.

pg. 18
 Summary Notes on Partnership Law of India

Registration of Firms
Application for Registration can be done at any time by submitting a
Registration statement to the Registrar.
The statement should include the firm’s name, principal
place of business, other business locations, partners’
details, and duration of the firm.
The statement must be signed by all partners or their
authorized agents and verified as prescribed.
The firm name should not contain certain words like
‘Crown,’ ‘King,’ or ‘Royal,’ unless approved by the
government.

Registration The Registrar records the statement in the Register

Process of Firms and issues a certificate of registration once
all provisions of Section 58 are complied with.
Registration is deemed complete once the application
and fee are submitted to the Registrar.
Registration can also occur after a suit is filed, but
the firm must first withdraw the suit, get
registered, and file a new suit.

Late Registration If the registration is delayed, the firm can still be

registered by paying a penalty of ₹100 per year or part
thereof for the delay.

(YES, 100 PER YEAR CHECKED AND VERIFIED, SHOCKINGLY

LOW BUT TRUE)

Consequences of Non-Registration
Registration Not Compulsory in India:

The Indian Partnership Act does not mandate the registration of firms, unlike
English law, which makes it compulsory and imposes penalties for non-registration.

However, non-registration results in certain disabilities as per Section 69 of the

Indian Partnership Act, which makes registration persuasive.

pg. 19
 Summary Notes on Partnership Law of India

Disabilities of Non-Registration:

1 No Civil Suit A firm or its partners cannot file a suit against a third
Against Third party unless the firm is registered and the partners suing are
Party listed in the Register of Firms.

2 No Set-Off in If a third party sues the firm, the firm or its partners
Claims cannot claim a set-off or enforce rights from any contract
if the suit exceeds ₹100.

3 No Legal Action A partner in an unregistered firm cannot bring legal action

Against Partners against the firm or any partner. However, they can sue for
or Firm dissolution or for accounts if the firm is dissolved.

4 Third Party Can Third parties can file suits against an unregistered firm.
Sue the Firm

Exceptions to Disabilities:

1 Right of Third Third parties retain the right to sue the firm or any
Parties to Sue partner.

2 Right to Sue for Partners can still sue for the dissolution of the firm and
Dissolution and settlement of accounts.
Settlement
3 Right of Official Official assignees or receivers can release property of an
Assignees and insolvent partner and initiate actions.
Receivers
4 Claims for Set- Partners can claim a set-off in suits valued at ₹100 or
Off (Suit ≤ less.
₹100)
5 Legal Legal representatives or heirs of a deceased partner can
Representatives' sue for accounts or realization of the firm’s property.
Rights

Suit After Dissolution

If a registered firm continues after dissolution by the death of a partner, the

remaining partners can still file a suit for subsequent transactions even without
notifying the Registrar, provided they meet the requirements of Section 69(2):

1. The suit must be filed by or on behalf of the firm that was originally registered.

2. The person suing must be listed as a partner in the Register of Firms.

pg. 20
 Summary Notes on Partnership Law of India

Impact of New Partner

If a new partner is introduced, the change must be notified to the Registrar. If not,
the firm cannot sue because the new partner's name has not been recorded in the
Register.

Dissolution of Firm
Section 39 of the Indian Partnership Act, 1932, defines the dissolution of a firm as
the end of the legal relationship between all the partners. This means the firm no
longer exists as a partnership. However, if one or more partners retire or become
unable to continue due to death, insolvency, or insanity, the partnership between those
partners and the others is dissolved. In such cases, the remaining partners may decide
to continue the business. This is called the dissolution of the partnership, but the
firm itself is not dissolved. The firm continues, but the partnership with the outgoing
partner ends.

Difference between Dissolution of Firm and Dissolution

of Partnership
Basis Dissolution of Firm Dissolution of Partnership
Continuation Business is discontinued Business is Continued
of business
Winding up Firm winds up Firm does not wind up

Order of May be by order of court Can never be by order of court

Court
Scope It involves dissolution of It does not involve dissolution of
partnership firm

Books Closure Books are closed and accounts It does not involve such thing
are settled

Modes of Dissolution of Firm

Firm may be dissolved in 2 ways: Voluntary Dissolution and Dissolution by Court

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 Summary Notes on Partnership Law of India

Voluntary Dissolution of Firm

Dissolution by Dissolution can occur by mutual agreement with the
Agreement consent of all partners.
Dissolution can also occur according to an existing
contract between the partners.

Compulsory A firm is dissolved Automatically when:

Dissolution or If all partners, or all but one, are adjudicated as
Automatic insolvent.
Dissolution If an event makes it unlawful for the business to
continue or for the partners to carry on the business
in partnership.

Note: However, if the firm carries out more than one

separate venture, the illegality of one does not
automatically dissolve the firm for its lawful ventures.

Dissolution on the On the expiry of the fixed term if the firm is

happening of certain constituted for a specific duration.
contingencies Upon the completion of the adventure or undertaking
if the firm is constituted for one or more specific
ventures.
By the death of a partner.
By the adjudication of a partner as insolvent.

Dissolution by notice If a date is mentioned in the notice, the firm is

of partnership at will dissolved from that specified date.
If no date is mentioned, the firm is dissolved from the
date the notice is communicated to the other
partners.

Dissolution by Court
Insanity/Unsound Court may dissolve the firm if a partner (other than a
Mind sleeping partner) becomes of unsound mind.
Temporary sickness (e.g., typhoid) is not a valid ground.

Permanent If a partner (other than the one suing) becomes permanently

Incapacity incapable of performing their duties due to physical
disability or illness.

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 Summary Notes on Partnership Law of India

Misconduct Court may dissolve the firm if a partner is guilty of

misconduct likely to affect the business.
Misconduct need not relate directly to business but
must impact it adversely.

Persistent Breach of Breach of agreements related to management or

Agreement conduct of business.
Includes actions like embezzlement, erroneous
accounts, refusal to show accounts, etc.

Transfer of If a partner (other than the suing partner) transfers their

Interest entire interest to a third party or allows their share to be
charged or sold by the court.

Continuous/Perpetual Court may dissolve the firm if the business can only continue
Losses at a loss in the future.

Just and Equitable Court may dissolve a firm on other just and equitable grounds,
Grounds such as:
• Deadlock in management
• Partners not on speaking terms
• Loss of substratum (core purpose of the firm)
• Gambling by a partner on the stock exchange.
Etc.

(This list is not Exhaustive but inclusive, all points in module

are covered here, but court may order to dissolve for other
reasons than those mentioned above)

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 Summary Notes on Partnership Law of India

Consequences of Dissolution
Liability for Protection for Third Parties: Third parties unaware of
Acts After dissolution can still bind the firm.
Dissolution Protection for Partners: Partners are not liable for acts
after dissolution if a public notice is given.
Exceptions: No liability for subsequent acts if the partner
is:
o Deceased
o Insolvent
o Dormant (not known as a partner to third parties)

Right to Wind Partners or their representatives are entitled to have firm

Up the Business property applied to settle debts and liabilities, with the surplus
distributed according to their rights.

Continuing Even after dissolution, a partner's authority continues

Authority for for completing ongoing transactions and winding up the
Winding Up firm’s affairs.
Exclusion: A partner adjudicated as insolvent cannot bind
the firm, but others may be liable if they represent the
insolvent partner as still being part of the firm.

Mode of Settling Losses: First paid from profits, then capital, and lastly by
Partnership partners individually according to their profit-sharing
Accounts ratio.

Asset Distribution:

Debts to third parties are paid first.

Partners receive their capital dues.
Remaining surplus is divided among partners based on
their profit-sharing ratio.

Payment of Firm Joint (Firm’s) Debts: Firm property is used to pay off
and Separate joint debts first. Any surplus is used for individual
Debts partner’s separate debts.
Separate (Personal) Debts: A partner’s separate
property is used to pay their own debts first, with any
surplus going to the firm’s debts.

pg. 24