The Author, Lakhan Gupta, is 1st year student of BA.LLB (H) at University School of Law and Legal Studies, GGSIPU, New Delhi. He is currently interning with LatestLaws.com.

Q1. What is meant by a ‘partnership’, ‘partner’, ‘firm’ and ‘firm-name’?

A1. "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", and the name under which their business is carried on is called the "firm-name".

Q2. What is the relation between a ‘firm’ and the ‘partners’?

A2. The essence of a partnership lies in the fact that the ‘firm’ is the ‘principal’ and every one of the ‘partner’ is its ‘agent’. This means that the ‘partner’ can act on behalf of and represent the ‘firm’ in dealings with third parties. According to Section 18 of the Partnership Act,” a partner is the agent of the firm for the purpose of the business of the firm.

Q3.  What is meant by the ‘implied authority’ of a partner as the agent of a firm?

A3. (1) Subject to the provisions of section 22, any act done by the partner in the usual course of business of the firm binds the firm. The authority of a partner to bind the firm conferred by this section is called his "implied authority". Section 22 states that, “In order to bind a firm, an act or instrument done or executed by a partner or other person on behalf of the firm shall be done or executed in the firm-name, or in any other manner expressing or implying an intention to bind the firm”.

(2) In the absence of any usage or custom of trade to the contrary, the implied authority of a partner does not empower him to –

  1. File a suit in the firm’s name on his own
  2.  open a banking account on behalf of the firm in his own name,
  3.  Use the firm’s property for personal use,
  4.  withdraw a suit or proceeding filed on behalf of the firm,
  5.  Accept any suit or proceeding filed against the firm ,
  6.  Buy property in firm’s name by himself,  
  7.  Admit new partners on behalf of the firm.

Q4. What is a partnership deed or a contract of partnership?

A4. The partnership deed or contract of partnership serves as the agreement between the partners to enter into the partnership. It can be either written or oral, although written deed is preferable as it can be presented in the court as evidence in case any dispute arises among the partners. It is a contract between the partners outlining their duties and liabilities, rights, their share in profits, property and losses of the firm, the duration of the partnership and their authority in deciding the functioning of the firm. This deed is different from registration of the firm. The registration of the firm gives it a legal identity. But the firm itself is born when the partners enter into a contract.

Q5. What are the duties of a partner?

A5. Partners are bound to carry on the business of the honestly and remain faithful to their partners. Every partner shall indemnify the firm for any loss caused to it by his fraud in the conduct of the business of the firm. Every partner should to attend to his duties diligently. Also, if a partner uses the firm’s property or name to earn personal profit, he is bound to pay those profits to the firm. Similarly if partner carries out a separate business of the same nature as that of the firm and earn some profit, he is bound to share this profit with the firm too. All of the above are duties of a partner.

Q6. What are rights available to a partner?                              

A6. Every partner has the following rights available to him as provided in the Act:

  1. The contract of partnership provides for the share which each partner would be entitled to take in from the profits and also the losses which they would have to bear. In absence of such a contract, profits are shared and losses are borne equally by the partners.
  2. Partners have the right to receive interest on their capital investments which is payable only out of profits, if any, earned by the firm.
  3. Partners have a right to interest on the money advanced by them to the firm over and above the capital which they need to invest in the firm. If not specifically mentioned in the partnership deed, they can claim interest of six percent per annum. This interest has to be paid even if the firms do not earn any profit.
  4. In the course of business, if due to an emergency a partner has to incur liabilities or expenses, he can later indemnify himself through the firm.
  5. Unless stated otherwise in the partnership deed, every partner in a firm has a right to take part in the management and conduct of the partnership business.
  6. Every partner of the firm has the right to be consulted when making a major decision that will affect the nature, conduct and composition of the partnership business. The nature of the partnership business can be changed only when all the partners agree. Also new partners cannot be introduced in the firm with the consent of the existing partners. A partner can be expelled through a majority decision only if it has been provided in the partnership deed and only in good faith with the expelled partner being treated as a retired partner.
  7. Lastly every partner has the right to inspect the books of the firm and make copies thereof.

Q7. What are the different types of partnerships?

A7. There are two major types of partnerships according to the Indian Partnership Act, 1932 which are as follows:

  1. Partnership-at-will: In this form, people enter into a partnership based only on their will or choice. This means that the partnership between people can end at any point by any partner through the means of notice.
  2. Particular partnership: In this form, people enter into a partnership for the fulfillment of a particular task or undertaking and the partnership ends automatically through fulfillment of the undertaking. It can also be converted into a partnership at will at the wish and consent of the partners.

Q8. Can a minor be a partner?

A8. A minor may not be a partner in a firm till he attains majority but with the consent of all the partners, he may be admitted to the benefits of the partnership. Therefore, the minor when admitted to enjoy the benefits of partnership has the following rights and duties:

  1. He may have a right in the property and profits of the firm as agreed upon by the admitting partners and may have access to the firm’s accounts.
  2. His share would be liable for the acts of the firm but his personal liability would not be used as opposed to full partners.
  3. He cannot sue the partners for his share of property and profits of the firm unless he is severing his connection with the firm.

After him attaining majority, the minor has the right to become a full partner of the firm or cut his ties with the firm at any time within six months of his attaining majority, or of his obtaining knowledge that he had been admitted to the benefits of partnership, whichever date is later. He has to inform his decision through a public notice which would serve as evidence. After becoming a full partner, he would retain the same property and profit in the firm as that when he was a minor. If the person elects not to become a partner, his rights and liabilities shall continue to be those of a minor under the section up to the date of the public notice. He shall also be entitled to sue the partners for his share of the property and profits.

Q9. What is meant by dissolution of a firm? How does a firm dissolve?

A9. The dissolution of partnership between all the partners of a firm is called the “dissolution of the firm”. A firm may be dissolved due to multiple reasons:

  1. A firm may be dissolved when all partners consent to the dissolution or when it is according to the contract of partnership.
  2. A firm may also be dissolved when all of the partners except one are insolvent. This means that all of the partners except one have gone bankrupt; thereby they are incompetent to enter into a contract.
  3. A firm may be dissolved by the happening of any event which makes it unlawful for the business of the firm to be carried on or for the partners to carry it on in partnership.
  4. Another valid reason for dissolution of a firm is death or lunacy of a partner or when he becomes incapacitated (through a disease, accident etc.) thereby rendered unable to carry out his duties permanently. In case of a partner becoming of unsound mind or incapacitated, the firm can be dissolved through a suit filed in court.
  5. If a partner is found guilty of serious misconduct which could affect the business of the firm adversely, the other partners can ask for dissolution of the firm. However, if the misconduct does not affect the business of the firm, dissolution of the firm will not occur.
  6. If a partner’s acts lead to willful breach of the partnership deed, such as the partner not performing his assigned duties and responsibilities, the partners could file a suit in court asking for dissolution of the firm.
  7. If a partner transfers all of his rights to a third party, the remaining partners have a right to demand dissolution of the partnership from a court. This is because the moment the rights are transferred a “new partner” enters the firm without the consent of the existing partners thereby undermining their rights.
  8. A firm can also be dissolved if it can function no longer save at a loss thereby only increasing the liabilities of the partner without any hope of profits at all. To carry out such a business would prove improvident on part of the partners.
  9. A court may dissolve a firm on other equitable grounds that have not been covered in the above points.

Q10. What are the harmful effects of not registering a partnership business?

A10.  The following are the effects of non-registration of a firm:

  1. A partner cannot institute a suit against the firm or any partner of the firm to enforce a right arising from a contract or conferred under the Act.
  2. The firm cannot sue a third party to enforce a right arising from a contract.
  3. The firm or partner cannot plead a set-off if legal proceedings are initiated against them to enforce a right arising from a contract. All these actions are made unavailable to the firm and its partners due to its non-registration.

However the Act allows the following suits to be maintained even in case of non-registration of a firm:

  1. Suit for accounts of a dissolved firm;
  2. Suit for dissolution of the firm;
  3. Suit for realizing the property of a dissolved firm;
  4. Proceeding by an Official Assignee or Receiver to realize the property of an insolvent partner.

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Lakhan Gupta