UNIT 5; LAW OF PARTNERSHIP

The Partnership Act, 1932.

 Came into effect from 01.10.1932 except Section 69 – w.e.f.
01.10.1933.
 Principles in both English Law and Indian Law are
identical.
 Partnership is an aspect of right of association guaranteed
under Article 19 (1) (c) of the Constitution of India.
However this right is subject to reasonable restrictions.
 A pre-constitutional enactment and continued to be in
force in view of Article 327 (1) of the Constitution of India.
 Source for legislation is from Schedule VII, Entry 7 of List
III (Concurrent List) .
 Subject of partnership can be legislated both by the
Parliament and State Legislatures, subject to restrictions
provided in Article 246.
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 UNIT 5; LAW OF PARTNERSHIP
THE PARTNERSHIP ACT, 1932. (continued)
DEFINITION OF PARTNERSHIP: LINDLEY:
 “An agreement that something shall be attempted with a
view to gain and that the gain shall be shared by the
parties to the agreement, is the grand characteristic of
every partnership”.
 STATUTORY DEFINITION: Section 4:
 Partnership is the relation between persons who have
agreed to share the profits of a business carried on by all
any one of them acting for all”.
 Firm has no existence of its own.
 A compendious expression of all partners.
 No distinct entity from the members composing it.
 Under Income-Tax Law firm is recognized as a separate
entity.
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 UNIT 5; LAW OF PARTNERSHIP
THE PARTNERSHIP ACT, 1932 (continued)
STATUTORY DEFINITION: Section 4: Essentials:
1. There must be a contract.
2. The contract must be between two or more persons.
3. The persons must agree to carry on a business.
4. The object of business is to share the profits and
5. The business must be carried on by all or any one of them
acting for all, i.e there must be mutual agency.
Explanation to the essentials:
1. There must be a contract:
 Partnership arises out of a contract and it does not arise
from status. operation of law or inheritance.
 To emphasize the element of contract Section 5 expressly
provides that “the relationship of partners arise from
contract and not status”.
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 UNIT 5; LAW OF PARTNERSHIP
THE PARTNERSHIP ACT, 1932 (continued)
STATUTORY DEFINITION: Section 4: Essentials:
Explanation to the essentials: (continued):
2. Association of two or more persons:
 As the partnership arises out of contract , at least two
persons are required to constitute partnership.
 The Partnership Act does not mention anything about the
maximum number of persons who can be partners in a
partnership firm but Section 11 of the Companies Act,
1956 lays down that a partnership consisting of more
than 10 persons for banking business and 20 persons for
any other business would be illegal.
 Only persons competent to contract can enter into a
partnership .
 Persons may be natural or artificial.
 A company may, being an artificial legal person enter into
a contract of partnership if authorized by the
Memorandum of Association of a company. 4
 UNIT 5; LAW OF PARTNERSHIP
THE PARTNERSHIP ACT, 1932 (continued)
STATUTORY DEFINITION: Section 4: Essentials:
Explanation to the essentials: (continued):
3. Carrying on of business:
 The persons must have agreed to carry on a business.
 The term ‘business’ is used in its widest sense and includes
every trade , occupation or profession . Sec. 2(b).
 If the purpose is to carry on some charitable work, it will
not be a partnership.
 Similarly, if a number of persons agree to share the
income of a property or to divide the goods purchased in
bulk amongst themselves, there is no partnership and
such persons cannot be called as partners because in
neither case they are carrying on a business.
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 UNIT 5; LAW OF PARTNERSHIP
THE PARTNERSHIP ACT, 1932 (continued)
STATUTORY DEFINITION: Section 4: Essentials:
Explanation to the essentials: (continued):
3. Carrying on of business: (continued):
 In order to be a partnership the business must be ‘carried
on’ which suggests continuity or repetition of acts.
 Merely, a single isolated transaction of purchase and sale
by a number of persons does not mean carrying on of a
business.
 But if a number of articles are purchased at one time and
the sales are to go on, profits are to be realized and are to
be divided amongst a number of persons, there is a
carrying on of a business.
 Section 8, however provides that there can be ‘particular
partnership’ between partners whereby they engage in a
particular adventure or undertaking, if successful, would
result in profit.
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 UNIT 5; LAW OF PARTNERSHIP
THE PARTNERSHIP ACT, 1932 (continued)
STATUTORY DEFINITION: Section 4: Essentials:
Explanation to the essentials: (continued):
3. Carrying on of business: (continued):
 It should be noted that an agreement to carry on a
business at a future time does not result in partnership
unless that time arrives and the business is commenced.
R.R.SARMA v REUBEN, AIR, 1946 Oudh 68.
4. Sharing of Profits: The agreement to carry on a business
by the partners should be with the object of sharing
profits amongst all the partners
 Impliedly, the partnership must aim to make profits
because then only profits may be divided amongst the
partners.
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 UNIT 5; LAW OF PARTNERSHIP
THE PARTNERSHIP ACT, 1932 (continued)
STATUTORY DEFINITION: Section 4: Essentials:
Explanation to the essentials: (continued):
4. Sharing of Profits: (continued):
 Thus, there would be no partnership where the business is
carried on with a philanthropic motive and not for
making a profit or where only one of the partners is
entitled to the whole of the profits of the business.
 The partners may, however, agree to share profits in any
ratio they like.
 Sharing of losses not necessary:
 To constitute a partnership it is not essential that the
partners should agree to share the losses.
 It is open to one or more partners to agree to bear all the
losses of the business.
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 UNIT 5; LAW OF PARTNERSHIP
THE PARTNERSHIP ACT, 1932 (continued)
STATUTORY DEFINITION: Section 4: Essentials:
Explanation to the essentials: (continued):
4. Sharing of Profits: (continued):
Sharing of losses not necessary: (continued):
 The Act, therefore, does not seek to make agreement to
share losses a test of the existence of the partnership.
 Section 13 (b), however, provides that the partners are
entitled to share equally in the profits earned, and shall
contribute equally to the losses sustained by the firm,
unless otherwise agreed.
 Thus sharing of losses may be regarded as consequential
upon the sharing of profits and where nothing is said as to
the sharing of losses, an agreement to share profits implies
an agreement to share losses as well. It must be noted that
even though a partner my not share in the losses of the
business, yet his liability vis-à-vis outsiders shall be
unlimited because there cannot be ‘limited partnership,
under The Partnership Act.
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 UNIT 5; LAW OF PARTNERSHIP
THE PARTNERSHIP ACT, 1932 (continued)
STATUTORY DEFINITION: Section 4: Essentials:
Explanation to the essentials: (continued):
 Sharing of Profits: (continued):
 Sharing of profits not conclusive test:
 Although sharing of profits is an evidence of partnership but
this test is not the conclusive test of partnership.
 There may be persons sharing the profits of a business but who
do not by that reason become partners.
 In this respect, Explanation II to Section 6 clearly states: “The
receipt by a person of the share in the profits of a business, or
of a payment contingent upon the earning of profits or varying
with profits earned by a business, does not of itself make him a
partner with the persons carrying on the business; and in
particular, the receipt of such a share or payment:
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 UNIT 5; LAW OF PARTNERSHIP
THE PARTNERSHIP ACT, 1932 (continued)
STATUTORY DEFINITION: Section 4: Essentials:
Explanation to the essentials: (continued):
 Sharing of Profits: (continued):
 Sharing of profits not conclusive test: (continued):
 a) by a lender of money to persons engaged or about to
engage in any business;
 b) by a servant or agent as remuneration;
 c) by a widow or a child of a deceased partner as annuity
or
 d) by a previous owner or part-owner of the business as
consideration for the sale of the good-will or share thereof,
does not itself make the receiver a partner, with the
person carrying on business”.
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 UNIT 5; LAW OF PARTNERSHIP

THE PARTNERSHIP ACT, 1932 (continued)

STATUTORY DEFINITION: Section 4: Essentials:
Explanation to the essentials: (continued):
 Sharing of Profits: (continued):
 Sharing of profits not conclusive test: (continued):
 Therefore, the question whether a person sharing the
profits of a business is a partner or not depends upon the
real relation between the parties, as shown by all relevant
facts taken together. Section 6.
5. Mutual Agency:
 As one of the essential elements is that the business must
be carried on by all or any one of them acting for all, that
is, there must be mutual agency.
 Thus every partner is both an agent and a principal for
himself and others.
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 UNIT 5; LAW OF PARTNERSHIP

THE PARTNERSHIP ACT, 1932 (continued)

STATUTORY DEFINITION: Section 4: Essentials:
Explanation to the essentials: (continued):
5. Mutual Agency: (continued):
 To test whether a person is a partner or not, it should be
seen, among other things, whether or not the element of
agency exists, i.e., whether or not the business is
conducted on his behalf.
 It is on the basis of this test that a widow of a deceased
partner or a manager having a share in the partnership is
a partner, because business is not carried on, on her or on
his behalf. If she or he does something the firm is not
legally bound by that.
 The importance of this element of mutual agency lies in
the fact that it enables every partner to carry on the
business on behalf of others.

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 UNIT 5; LAW OF PARTNERSHIP
THE PARTNERSHIP ACT, 1932 (continued)
STATUTORY DEFINITION: Section 4: Essentials:
Explanation to the essentials: (continued):
5. Mutual Agency: (continued):
 Partners may agree among themselves that some one of them
shall not enter into any contracts on behalf of the firm, but by
virtue of the principle of mutual agency, such partner can bind
the firm vis-a-vis third parties without notice in contracts made
according to the ordinary usage of the trade.
 Of course, he can be made liable by other partners inter-se for
exceeding his authority .
 In fact, the law of partnership governing relations of the
partners inter-se and with the outside world is an extension of
the principle of law of agency.
 In COXv HICKMAN, 1860 8 HLC 268, it was rightly observed
“The law as to partnership is undoubtedly branch of the law of
the principal and agent….
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 UNIT 5; LAW OF PARTNERSHIP
THE PARTNERSHIP ACT, 1932 (continued)
PARTNERS, FIRM & FIRM NAME:
 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’. Section 4.
 A ‘firm’ is not a separate legal entity distinct from its
members.
 It is really a collective name of the individuals composing
it.
 Hence, unlike a company which is a separate legal entity
distinct from its members, a firm cannot possess property
or employ servants, neither it can be a debtor nor a
creditor.
 It cannot sue and be sued.
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 UNIT 5; LAW OF PARTNERSHIP
THE PARTNERSHIP ACT, 1932 (continued)
PARTNERS, FIRM & FIRM NAME: (continued)
 It is only for the sake of convenience that in commercial
usage terms like ‘firm’s property’, ‘employees of the firm’,
‘suit against the firm’ and so on are used, but in the eyes of
law that simply means ‘property of the partners’,
‘employee of the partners’ and a’ suit against the partners’
of the firm.
 The parties are free to choose any name of the firm subject
to the following rules:
1. The name must not be too identical or similar to the name
of another existing firm doing similar business so as to
lead to confusion.
 The reason for this rule being that the reputation or
goodwill of a firm may be injured, if a ne firm could adopt
an allied name.

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 UNIT 5; LAW OF PARTNERSHIP
THE PARTNERSHIP ACT, 1932 (continued)
PARTNERS, FIRM & FIRM NAME: (continued)
2. Rule regarding choice of name : (continued):
 The name must not contain words like Crown, Emperor,
Empress, Empire, Imperial, King, Queen, Royal, or words
expressing or implying the sanction, approval or
patronage of Government except when the State
Government signifies its consent to the use of such words
as part of the firm name by order in writing. (Section 58
(3).
 Distinctions between Partnership and co-ownership:
 According to Lord Lindley the main points of difference
between co-ownership and partnership are as follows:
1. Co-ownership is not necessarily the result of an
agreement. Partnership is the result of an agreement.

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 UNIT 5; LAW OF PARTNERSHIP
THE PARTNERSHIP ACT, 1932 (continued)
Distinctions between Partnership and co-ownership:
(continued)
2. Co-ownership does not necessarily involve community of
profits or of loss. Partnership does.
3. One co-owner can, without the consent of the others,
transfer his interest to a stranger, so as to put him in the
same position as regards other co-owners as the transferor
himself was before the transfer. A partner cannot do this.
4. One co-owner is not as such the agent, real or implied of
the other. A partner is.
5. One Co-owner has no lien on the thing owned in common
for outlays or expenses, nor for what may be due from the
others as their share of a common debt. A partner has.
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 UNIT 5; LAW OF PARTNERSHIP
THE PARTNERSHIP ACT, 1932 (continued)
Distinctions between Partnership and co-ownership: (continued)
6. Co-ownership not nece3ssarily existing for the sake of gain,
and partnership existing for no other purpose, the remedies
by way of account and otherwise which one co-owner has
against the others are in many important respects different
from, and less extensive than those which one partner has
against his co-partners.
7. In co-ownership there is no maximum limit of co-owners.
In a partnership the maximum limit of partnership is fixed.
8. Co-ownership does not necessarily involve the carrying on
of a business but a partnership does.
9. A co-owner is entitled to demand partition of joint
property in specie. A partner has no such right and he can
only sue his co-partners for the dissolution of partners and
accounts.
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 UNIT 5; LAW OF PARTNERSHIP
THE PARTNERSHIP ACT, 1932 (continued)
Distinctions between a Partnership & a Joint Hindu Family:
1. Regulating Law:
 A partnership is governed by the provisions of The
Partnership Act, 1932.
 A joint Hindu Family business is governed by the
principles of Hindu Law
2. Mode of creation:
 A partnership arises out of a contract.
 A joint Hindu Family business arises by the operation of
law and is not the result of a contract.
3. Admission of new members:
 In a partnership no new member is admitted without the
consent of all the partners.
 In the case of a joint Hindu Family firm a new member is
admitted by birth.
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 UNIT 5; LAW OF PARTNERSHIP

THE PARTNERSHIP ACT, 1932 (continued)

Distinctions between a Partnership & a Joint Hindu Family (continued)
4. The position of females:
 In a partnership women can be full-fledged partners.
 In a joint Hindu Family business membership is restricted
to males only. After the passage of the Hindu Succession
Act, 1956 females got only co-sharer’s interest at the death
of coparcener and they do not become coparceners
themselves.
5. Number of members:
 In partnership the maximum limit of partners is 10 for
Banking business and 20 for any other business.
 There is no maximum limit of members in the case of a
joint Hindu Family business.

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 UNIT 5; LAW OF PARTNERSHIP

THE PARTNERSHIP ACT, 1932 (continued)

Distinctions between a Partnership & a Joint Hindu Family (continued)
6. Authority of members:
 In partnership each partner has an implied authority to
bind his co-partners by act done in the ordinary course of
business, there being mutual agency between various
partners.
 In a joint family business all the powers are vested in the
Karta and he is the only representative of the family who
can contract debts or bind his coparceners by acts done in
the ordinary course of business, there being no mutual
agency between various coparceners. But a coparcener
other than the Karta of the family may be authorized
expressly or by implication to contract debts on behalf of
the firm.
 LALCHAND v GHANAYALAL, 1939 Lah.243.

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 UNIT 5; LAW OF PARTNERSHIP
THE PARTNERSHIP ACT, 1932 (continued)
Distinctions between a Partnership & a Joint Hindu Family (continued)
7. Liability of members;
 In partnership, the liability of the partners is joint and
several as well as unlimited.
 In a joint Hindu Family business only the Karta is
personally liable to an unlimited extent i.e., his self-
acquired prop0erty or other property besides his share in
the joint family property is liable, for debts contracted on
behalf of the family business. Other coparceners’ liability
is limited to the extent of their interest in the joint family
property and they do not incur any personal liability But
an adult coparcener can be made personally liable if he is
also expressly or impliedly, a party to the contract or if he
has subsequently ratified and accepted the transaction out
of which the obligation of the creditor arise.
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 UNIT 5; LAW OF PARTNERSHIP
THE PARTNERSHIP ACT, 1932 (continued)
Distinctions between a Partnership & a Joint Hindu Family (continued)
8. Right of members to share in profits:
 In a partnership each partner is entitled to claim his share
of profits.
 A member of a joint Hindu Family business has no such
right. His only remedy lies in a suit for partition.
9. Effect of death of a member:
 A partnership, subject to a contract between the partners,
is dissolved on the death of a partner.
 A joint Hindu Family firm is not dissolved on the death of
a coparcener. BAIJ NATH v RAM GOPAL, AIR 1939 Cal
92.
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