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Partenership Act

 

PARTNERSHIP ACT

 

1. Define Partnership. What are the implied authorities of a partner?

 

Ans: Partnership may be defined as ďthe relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.Ē

The following are the implied authorities of a partner:

  1. Purchasing the goods on behalf of the firm;
  2. Selling the  goods dealt by the firm;
  3. Receiving payment on behalf of the firm and issuing valid receipt;
  4. Making payments on behalf of the firm;
  5. Engaging servants;
  6. Drawing, accepting, endorsing any negotiable instrument;
  7. Pledging the goods for the purpose of borrowing money on behalf of the firm;

 

2. When can a Partnership be dissolved under  a Court Order?

 

Ans: A  Partnership be dissolved under  a Court Order under the following conditions:

  1. When the Partner becomes insane. [Sec. 44(a)]
  2. When the Partner becomes incapable of performing his duties [Sec. 44(b)].
  3. When the Partner is guilty of contract. [Sec. 44(c)].
  4. When the Partner commits breach of agreement relating to management of the affairs of the firm or the contract of business. [Sec. 44(d)]
  5. When the Partner transfers the whole of his interest in the firm to a third party. [Sec. 44(e)].
  6. When the business cannot be carried on savings or at loss.[Sec. 44(f)]
  7. When it is rendered just and equitable to dissolve the firm. [Sec. 44(g)]

 

3. Briefly explain the significance of a Partnership agreement.

 

Ans: A Partnership Agreement is best drawn up by an Attorney to avoid any legal entanglements due to an improperly prepared document. A properly worded partnership agreement specifies the following:

  1. It specifies the responsibilities of the individual partners and the powers assigned to them.
  2. It highlights the proportions in which profits and losses of the firm may be shared.
  3. It describes the proposed business in detail.
  4. It specifies the details related to remuneration payable to the partners.
  5. It describes the rules related to resolving disputes arising between partners.

 

4. Explain the characteristics of a partnership.

 

Ans: The characteristics of a partnership are:

  1. Plurality of persons.
  2. Agreement.
  3. Sharing of profits.
  4. Business.

 

5. What is an Ostensible partner?

 

Ans: An ostensible partner is also known as an Active Partner. He is one of the partners authorized to manage the partnership concern. He represents all other partners before public and authorities. He is generally remunerated for his services in the form of salary and privilege of sharing profits.

 

6. Give any four reasons for the registration of a Partnership firm.

 

Ans:    1. To protect the interest of partners.

2.      To protect the interest of third-parties.

3.      To ensure smooth functioning of the firm.

4.      To obtain legal identity for the business.

 

7. Write a note on different tests of partnership.

 

Ans:    a. Sharing of profits.

            b. Principal and agency relationship.

            c. Contribution of capital.

            d. Sharing or holding of particular property.

 

8. Explain the duties of partners towards the firm.

 

Ans:    a. To conduct the business for common benefit.

            b. To be just and faithful.

            c. To render true accounts.

            d. To indemnify for fraud.

            e. To indemnify for wilful negligence losses.

f. Duty to utilize the firmís property for business alone.

      g. Duty not to conduct any business that competes with the firm.

 

9. What is partnership at will?

 

Ans: Partnership at will refers to that type of partnership wherein the entry and exit of a partner from the business is totally left at his own will.

 

10. What is meant by partner holding out?

 

Ans: If any person who is not a party to the partnerís agreement, conducts himself as a partner with outsiders either by words or actions and represents himself as a partner of a partnership firm, he is known as partner by holding out. Since he has acted like a partner, he is liable to the liabilities of the firm with other partners but he is not eligible for any benefit as he is a stranger to the agreement.

 

11. What is compulsory dissolution?

 

 Ans: Compulsory dissolution means the dissolution of the partnership firm when it is not possible for it to conduct its activities as in the following cases:

  1. When one or all but one are judged insolvents.
  2. When there is legal impossibility to conduct the business.
  3. When the no. of partners reduces to less than 2.
  4. When the partner is declared as an alien enemy.

 

12. State the circumstances under which a firm may be reconstituted.

 

Ans:  The circumstances under which a firm may be reconstituted are:

  1. Addition of a partner. (Sec. 31)
  2. Exit of a partner. (Sec. 32)
  3. Death of  a partner. (Sec. 35)
  4. Insolvency of a partner. (Sec. 37)
  5. Lunacy of  a partner.
  6. Transfer of a  partnerís share. (Sec. 29)
  7. Expulsion of a partner. (Sec. 33)

 

13. What are the rights of a Partner under the Indian Partnership Act, 1932?

 

Ans: The rights of a Partner under the Indian Partnership Act, 1932:

i)                   Right to express his opinion.

ii)                 Right of participation.

iii)              Right to access the accounts.

iv)               Right to share profits.

v)                 Right to acquire interest on capital.

vi)               Right to acquire interest on advance.

vii)            Right of indemnity.

 

14. State the rule in claytonís case.

 

Ans: This rule is applicable where the parties have a current account and states that:

 

i)                   Where the account goes into debit, the first item on the debit side is cancelled by the first item on the credit side i.e. appropriations take place in order of time.

 

ii)                 Where the account goes into credit, the first item on the credit side is extinguished by the first item on the debit side and so on. i.e. appropriations take place in chronological order. 

 

15. Define Partnership Deed.

 

Ans: The written agreement creating the partnership firm is known as Partnership deed. The partnership deed should inter-alia contain the following:

  1. Full name, address and description of the persons entering into the partnership;
  2. The name under which the business of the firm is to be carried;
  3. The place or principal place of business of the firm;
  4.  Nature of business;
  5. Date of commencement;
  6. Duration;
  7. Provision in respect of capital investment by the partners and interest, if any payable thereon;
  8. The proportion in which the profit/loss would be shared by the partners;
  9. Accounting year to be followed by the firm.

 

A duly executed partnership deed may be registered with the Registrar of Firms by applying in prescribed form and paying prescribed fees.

 

16. What is particular partnership?

 

Ans: In terms of Sec. 8 of The Indian Partnership Act, a person may become a partner with another person in particular adventures or undertakings. Such a partnership is called a particular partnership. In such a partnership the agreement generally refers to a specific adventure or business.

 

17. Why registration of Partnership is needed?

 

Ans: It is highly advisable to register a Partnership firm. Any statement, intimation or notice recorded in the Registrar of Firms is conclusive proof of what is stated therein against any person by whom or on whose behalf such statement, intimation or notice was signed and a certified copy of an entry may be produced in proof of the same. (Sec. 68 of the Act).

 

18. Explain the different types of dissolution of a firm and how to settle the accounts in the event of dissolution of a firm.

 

Ans: The dissolution of partnership between all the partners of a firm is called the 'dissolution of the firm'.

 

The different types of dissolution of a firm are:

 

i). Dissolution by agreement: A firm may be dissolved with the consent of all the partners or in accordance with a contract between the partners.

  

ii)  Compulsory dissolution: A firm is dissolved -

 

(a) by the adjudication of all the partners or of all the partners but one as insolvent, or

(b) 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 ;

Provided that, where more than one separate adventure or undertaking is carried on by the firm the illegality of one or more shall not of itself cause the dissolution of the firm in respect of its lawful adventures and undertakings.

 

iii). Dissolution on the happening of certain contingencies

 

Subject to contract between the partners a firm is dissolved -

 

(a) if constituted for a fixed term, by the expiry of that term;

(b) if constituted to carry out one or more adventures or undertaking, by the completion thereof;

(c) by the death of a partner; and

(d) by the adjudication of a partner as an insolvent.

 

iv) Dissolution by notice of partnership at will

 

(1) 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.

(2) The firm is dissolved as from the date mentioned in the notice as the date of dissolution or, if no date is so mentioned, as from the date of the commencement of the notice.

 

v) Dissolution by the court

 

At the suit of a partner, the court may dissolve a firm on any of the following grounds, namely -

(a) that a partner has become of unsound mind, in which case the suit may be brought as well by the next friend of the partner who has become of unsound mind as by any other partner;

(b) that a partner, other than the partner suing, has become in any way permanently incapable of performing his duties as partner;

(c) that a partner, other than the partner suing, is guilty of conduct which is likely to affect prejudicially the carrying on of the business, regard being had to the nature of the business;

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

(e) that a partner, other than the partner suing, has in any way transferred the whole of his interest in the firm to a third party, or has allowed his share to be charged under the provisions of rule 49 of Order XXI of the First Schedule to the Code of Civil Procedure, 1908 (5 of 1908) or has allowed it to be sold in the recovery of arrears of land revenue or of any dues recoverable as arrears of land revenue due by the partner;

(f) that the business of the firm cannot be carried on save at a loss; or

(g) on any other ground which renders it just and equitable that the firm should be dissolved.

 

In settling the accounts of a firm after dissolution the following rules shall subject to agreement by the partners, be observed -

 

(a) losses, including deficiencies of capital, shall be paid first out of profits, next out of capital, and lastly, if necessary, by the partners individually in the proportions in which they were entitled to share profits;

 

(b) the assets of the firm, including any sums contributed by the partners to make up deficiencies of capital, shall be applied in the following manner and order -

(i) in paying the debts of the firm to third parties;

(ii) in paying to each partner rateably what is due to him from the firm for advances as distinguished from capital;

(iii) in paying to each partner rateably what is due to him on account of capital; and

(iv) the residue, if any, shall be divided among the partners in the proportions in which they were entitled to share profits. 

 

19. Define  of "partnership" partner firm and "firm name"

 

"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".

 

20. Is Partnership created by status?

 

The relation of partnership arises from contract and not from status; and in particular the members of a Hindu undivided family carrying on a family business as such, or a Burmese Buddhist husband and wife carrying business as such, are not partners in such business.

 

21. What is the 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.

 

Explanation 1 : The sharing of profits or of gross returns arising from property by persons holding a joint or common interest in that property does not of itself make such persons partners.

 

Explanation 2 : The 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 itself make him a partner with the persons carrying on the business;
and in particular the receipt of such share or payment -

 

(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 the widow or 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 goodwill or share thereof, does not of itself make the receiver a partner with the persons carrying of the business.

 

22. Define Partnership at will

 

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 is 'partnership at will'.

  

23. Define Particular partnership

 

A person may become a partner with another person in particular adventures or undertakings.

 

RELATIONS OF PARTNERS TO ONE ANOTHER

 

24 What are the General duties of partners?

 

Partners are bound to carry on the business of the firm to the greatest common advantage, to be just and faithful to each other, and to render true accounts and full information of all things affecting the firm to any partner or his legal representative.

 

25. Should a Partner idemnify for loss caused by fraud?

 

Every partner shall indemnify the firm for any loss caused to it by his fraud in the conduct of the business of the firm.

 

26. State the rights and duties of partners by contract between the partners

 

(1) Subject to the provisions of this Act, 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 may be implied by a course of dealing.

 

Such contract may be varied by consent of all the partners, and such consent may be expressed or may be implied by a course of dealing.

 

(2) Agreements in restraints of trade - Notwithstanding anything contained in section 27 of the Indian Contract Act 1872 (9 of 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.

 

27. State the conduct of the business of the firm.

 

Subject to contract between the partners,-

 

(a) Every partner has a right to take part in the conduct of the business;

(b) Every partner is bound to attend diligently to his duties in the conduct of the business;

(c) Any difference arising as to ordinary matters connected with the business may be decided by a majority of the partners, and every partner shall have the right to express his opinion, before the matter is decided, but no change may be made in the nature of the business without the consent of all the partners; and

(d) Every partner has a right to have access to and to inspect and copy any of the books of the firm.

  

28. State the Mutual rights and liabilities of the partners.

 

Subject to contract between the partners,-

(a) A partner is not entitled to receive remuneration for taking part in the conduct of the business;

(b) Tthe partners are entitled to share equally in the profits earned, and shall contribute equally to the losses sustained by the firm;

(c) Where a partner is entitled to interest on the capital subscribed by him such interest shall be payable only out of profits;

(d) A partner making, for the purposes of the business, any payment or advance beyond the amount of capital he has agreed to subscribe, is entitled to interest thereon at the rate of six per cent per annum;

(e) The firm shall indemnify a partner in respect of payments made and liabilities incurred by him -

(i) in the ordinary and proper conduct of the business, and

(ii) in doing such act, in an emergency, for the purpose of protecting the firm from loss, as would be done by a person of ordinary prudence, in his own case, under similar circumstances; and

(f) A partner shall indemnify the firm for any loss caused to it by his wilful neglect in the conduct of the business of the firm.

 

29. What includes the property of the firm?

 

Subject to contract between the partners, the property of the firm includes all property and rights 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 purposes and in the course of business of the firm, and includes also the goodwill of the business.

 

Unless the contrary intention appears, property and rights and interests in property acquired with money belonging to the firm are deemed to have been acquired for the firm.

 

Subject to contract between the partners, the property of the firm shall be held and used by the partners exclusively for the purposes of the business.

 

30. How are the profits earned by partners distinguished?

 

Subject to contract between the partners -

 

(a) if a partner derives any profit for himself from any transaction of the firm, or from the use of the property or business connection of the firm or the firm name, he shall account for the 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.

 

 31. What are the Rights and duties of partners?

 

Subject to contract between the partners -

 

(a) 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;

(b) after the expiry of the term of the firm, and - 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) 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.

 

 

RELATIONS OF PARTNERS TO THIRD PARTIES

     

1. Define Partner to be agent of the firm?

 

      Subject to the provisions of this Act, a partner is the agent of the firm for the purpose of the business of the firm.

     

2. State the Implied authority of partner as agent of the firm

 

      (1) Subject to the provisions of section 22, 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.

      The authority of a partner to bind the firm conferred by this section is called his "implied authority".

      (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 -

            (a) submit a dispute relating to the business of the firm to arbitration,

            (b) open a banking account on behalf of the firm in him own name,

            (c) compromise or relinquish any claim or portion of a claim by the firm,

            (d) withdraw a suit or proceeding filed on behalf of the firm,

            (e) admit any liability in a suit or proceeding against the firm,

            (f) acquire immovable property on behalf of the firm,

            (g) transfer immovable property belonging to the firm, or

            (h) enter into partnership on behalf of the firm.

                                                                                                                           

3. State Extension and restriction of partner's implied authority.

 

      The partners in a firm may, by contract between the parties, extend or restrict the implied authority of any partner.

      Notwithstanding any such restriction, any act done by a partner on behalf of the firm which falls within his implied authority binds the firm, unless the person with whom he is dealing knows of the restriction or does not know or believe that partner to be a partner.

                                                                                                                           

4. What is Partner's authority in an emergency.

 

      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, in his own case, acting under similar circumstances, and such acts bind the firm.

                                                                                                                           

5. What is the Mode of doing act to bind firm?

 

      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.

                                                                                                                           

6. What is the effect of admissions by a partner?

 

      An admission on representation made by a partner concerning the affairs of the firm is evidence against the firm, if it made in the ordinary course of business.

                                                                                                                           

7. State the effect of notice to acting partner.

 

      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.

                                                                                                                           

8. What is the Liability of a partner for acts of the firm?

     

Every partner is liable, jointly with all the other partners and also severally, for all acts of the firm done while he is a partner.

                                                                                                                           

9. What is the Liability of the firm for wrongful acts of a partner?

 

      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 same extent as the partner.

                                                                                                                           

10. What is the liability of firm for misapplication by partners

     

Where -

      (a) a partner acting within his apparent authority receives money or property from a third party and misapplies it, or

      (b) a firm in the course 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.

 

11. Define Holding out.

 

      (1) Anyone who by words spoken or written or by conduct represents himself or knowingly permits himself to be represented, to be a partner in a firm, is a liable as a partner in that firm to any 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.

                                                                                                                           

12. What are the rights of transferee or a partner's interest?

 

      (1) A transfer by a partner of his interest in the firm, either absolute or by mortgage, or by the creation by him of a change on such interest, 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 the firm, but entitles the transferee only to receive the share of profits of the transferring partner, and the transferee shall accept the account of profits agreed to by the partners.

      (2) If the firm is dissolved or if the transferring partner ceases to be a partner, the transferee is entitled as against the remaining partners to receive the share to the assets of the firm, to which the transferring partner is entitled, and, for the purpose of ascertaining that share, to an account as from the date of the dissolution.

                                                                                                                           

13. How can Minors admitted to the benefits of partnership?

 

      (1) A person who is a minor according to the law to which he is subject may not be a partner in a firm, but, with the consent of all the partners for the time being, he may be admitted to the benefits of partnership.

      (2) Such minor has a right to such share of the property and of the profits of the firm as may be agreed upon, and he may have assess to and inspect and copy any of the accounts of the firm.

      (3) Such minor's share is liable for the acts of the firm, but the minor is not personally liable for any such act.

      (4) Such minor may not sue the partners for an account or payment of his share of the property or profits of the firm, save when severing his connection with the firm, and in such case the amount of his share shall be determined by a valuation made as far as possible is accordance with the rules contained in section 48 :

            Provided that all the partners acting together or any partner entitled to dissolve the firm upon notice to other partners may elect in such suit to dissolve the firm, and thereupon the court shall proceed with the suit as one for dissolution and for setting accounts between the partners, and the amount of the share of the minor shall be determined along with the shares of the partners.

      (5) 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, such person may give public notice that he has elected to become or that he has elected not to become a partner in the firm, and such notice shall determine his position as regards the firm :

            Provided that, if he fails to give such notice, he shall become a partner in the firm on the expiry of the said six moths.

      (6) Where any person has been admitted as a minor to the benefits of partnership in a firm, the burden of proving the fact that such person had no knowledge of such admission until a particular date after the expiry of six months of his attaining majority shall lie on the persons asserting that fact.

      (7) Where such person becomes a partner -

            (a)his rights and liabilities as a minor continue up to the date on which he becomes a partner, but he also becomes personally liable to third parties for all acts of the firm done since he was admitted to the benefits of partnership, and

            (b) his share in the property and profits of the firm shall be the share to which he was entitled as a minor.

      (8) Where such person elects not to become a partner, -

            (a) his rights and liabilities shall continue to be those of a minor under this section up to the date on which he given public notice,

            (b) his share shall not be liable for any acts of the firm done after the date of the notice, and

            (c) he shall be entitled to sue the partners for his share of the property and profits in occurrence with sub-section (4).

      (9) Nothing in sub-sections (7) and (8) shall affect the provisions of section 28. 

  

INCOMING AND OUTGOING PARTNERS

 

1. Introduction of a partner

 

(1) Subject to contract between the partners and to the provisions of section 30, no person shall be introduced as a partner into a firm without the consent of all the existing partners.

 

(2) Subject to the provisions of section 30, a person who is introduced as a partner into a firm does not thereby become liable for any act of the firm done before he became a partner.

 

2. Retirement of a partner

 

(1) A partner may retire -

(a) with the consent of all the other partners,

(b) in accordance with an express agreements by the partners, or

(c) where the partnership is at will, by giving notice in writing to all the other partners of his intention to retire.

 

(2) A retiring partner may be discharged from any liability to any third party for acts of the firm done before his retirement by an agreement made by him with such third party and the partners of the reconstituted firm, and such agreement may be implied by a course of dealing between such third party and the reconstituted firm after he had knowledge of the retirement.

 

(3) Notwithstanding the retirement of a partner from a firm, he had the partners 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, until public notice is given of the retirement :

 

Provided that a retired partner is not liable to any third party who deals with the firm without knowing that he was a partner.

 

(4) Notices under sub-section (3) may be given by the retired partner or by any partner of the reconstituted firm.

 

3. Expulsion of a partner

 

(1) A partner may not be expelled from a firm by any majority of the partners, save in the exercise in good faith of powers conferred by contract between the partners.

(2) The provisions of sub-sections (2), (3) and (4) of section 32 shall apply to an expelled partner as if he were a retired partner.

 

4. Insolvency of a partner

 

(1) Where a partner in a firm is adjudicated an insolvent he ceases to be a partner on the date on which the order of adjudication is made, whether or not the firm is hereby dissolved.

 

(2) Where under a contract between the partners the firm is not dissolved by the adjudication of a partner as an insolvent, the estate of a partner so adjudicated is not liable for any act of the firm and the firm is not liable for any act of the insolvent, done after the date on which the order of adjudication is made.

 

5. Liability of estate of deceased partner

 

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.

 

6. Right of outgoing partner to carry on competing business

 

(1) An outgoing partner may carry on a 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 the business of the firm, or  

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

 

(2)Agreements in restraint of trade - A partner may make an agreement with his partners that on ceasing to be a partner he will not carry on any business similar to that of the firm within a specified period or within a specified local limits; and, notwithstanding anything contained in of the Indian Contract Act, 1872 (9 of 1872), such agreement shall be valid if the restriction imposed are reasonable.

 

7. Right of outgoing partner in certain cases to share subsequent profits

 

Where any members of a firm has died or otherwise ceased to be a partner, and the surviving or continuing partners carry on the business of the firm with the property of the firm without any final settlement of 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 at the 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 per cent per annum on the amount of his share in the property of the firm :

 

Provided that where by contract between the partners an option is given to surviving or continuing partners to purchase the interest of a deceased or outgoing partner, and the option is duly exercised, the estate of the deceased partner, or the outgoing partner or his estate, as the case may be, is not entitled to any further or other share of profits; but if any partner assuming to act in exercise of the option does not in all material respects comply with the terms thereof, he is liable to account under the foregoing provisions of this section.

 

8. Revocation of continuing guarantee by change in firm

 

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

 

DISSOLUTION OF A FIRM

 

1. Define Dissolution of a firm

 

The dissolution of partnership between all the partners of a firm is called the 'dissolution of the firm'.

 

2. Dissolution by agreement

 

A firm may be dissolved with the consent of all the partners or in accordance with a contract between the partners. 

 

3. Compulsory dissolution

 

A firm is dissolved -

 

(a) by the adjudication of all the partners or of all the partners but one as insolvent, or

(b) 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 :

 

Provided that, where more than one separate adventure or undertaking is carried on by the firm the illegality of one or more shall not of itself cause the dissolution of the firm in respect of its lawful adventures and undertakings.

 

4. Dissolution on the happening of certain contingencies

 

Subject to contract between the partners a firm is dissolved -

 

(a) if constituted for a fixed term, by the expiry of that term;

(b) if constituted to carry out one or more adventures or undertaking, by the completion thereof;

(c) by the death of a partner; and

(d) by the adjudication of a partner as an insolvent.

 

5. Dissolution by notice of partnership at will

 

(1) 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.

(2) The firm is dissolved as from the date mentioned in the notice as the date of dissolution or, if no date is so mentioned, as from the date of the commencement of the notice.

 

6. Dissolution by the court

 

At the suit of a partner, the court may dissolve a firm on any of the following grounds, namely -

(a) that a partner has become of unsound mind, in which case the suit may be brought as well by the next friend of the partner who has become of unsound mind as by any other partner;

(b) that a partner, other than the partner suing, has become in any way permanently incapable of performing his duties as partner;

(c) that a partner, other than the partner suing, is guilty of conduct which is likely to affect prejudicially the carrying on of the business, regard being had to the nature of the business;

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

(e) that a partner, other than the partner suing, has in any way transferred the whole of his interest in the firm to a third party, or has allowed his share to be charged under the provisions of rule 49 of Order XXI of the First Schedule to the Code of Civil Procedure, 1908 (5 of 1908) or has allowed it to be sold in the recovery of arrears of land revenue or of any dues recoverable as arrears of land revenue due by the partner;

(f) that the business of the firm cannot be carried on save at a loss; or

(g) on any other ground which renders it just and equitable that the firm should be dissolved.

 

7. Liability for acts of partners done after dissolution

 

(1) Notwithstanding the dissolution of a firm, the partners continue to be liable as such to third parties for any act done by any of them which would have been an act of the firm if done before the dissolution, until public notice is given of the dissolution :

 

Provided that the estate of a partner who dies, or who is adjudicated an insolvent, or of a partner who, not having been known to the person dealing with the firm to be a partner, retires from the firm, is not liable under this section for acts done after the date on which he ceases to be a partner.

 

(2) Notices under sub-section (1) may be given by any partner.

 

8.Right of partners to have business wound up after dissolution

 

On the dissolution of a firm every partner or his representative is entitled, as against all the other partners or their representatives, to have the property of the firm applied in payment of the debts liabilities of the firm, and to have the surplus distributed among the partners or their representatives according to their rights.

 

9. Continuing authority of partners for purposes of winding up

 

After the dissolution of a firm the authority of each partner to bind the firm, and the other mutual rights and obligations of the partners continue notwithstanding the dissolution, so far as may be necessary to wind up the affair of the firm and to complete transactions begun but unfinished at the time of the dissolution, but not otherwise :

 

Provided that the firm is in no case bound by the acts of a partner who has been adjudicated insolvent; but this proviso does not effect the liability of any person who has after the adjudication represented himself or knowingly permitted himself to be represented as a partner of the insolvent.

 

10. Mode of settlement of accounts between partners

 

In settling the accounts of a firm after dissolution the following rules shall subject to agreement by the partners, be observed -

  

(a) losses, including deficiencies of capital, shall be paid first out of profits, next out of capital, and lastly, if necessary, by the partners individually in the proportions in which they were entitled to share profits;

 

(b) the assets of the firm, including any sums contributed by the partners to make up deficiencies of capital, shall be applied in the following manner and order -

(i) in paying the debts of the firm to third parties;

(ii) in paying to each partner rateably what is due to him from the firm for advances as distinguished from capital;

(iii) in paying to each partner rateably what is due to him on account of capital; and

(iv) the residue, if any, shall be divided among the partners in the proportions in which they were entitled to share profits.

 

11. Payment of firm debts and of separate debts

 

Where there are joint debts due from the firm, and also separate debts due from any partner, the property of the firm shall be applied in the first instance in payment of the debts of the firm, and, if there is any surplus, then the share of each partner shall be applied in payment of his separate debts, or paid to him. The separate property of any partner shall be applied first in the payment of his separate debts and the surplus (if any) in the payment of the debts of the firm.

 

12. Personal profits earned after dissolution

 

Subject to contract between the partners, the provisions of clause (a) of section 16 shall apply to transaction by any surviving partner or by the representative of a deceased partner, undertaken after the firm is dissolved on account of the death of a partner and before its affairs have been completely wound up :

 

Provided that where any partner or his representative has bought the goodwill of the firm, nothing in this section shall affect his right to use the firm name.

 

13.. Return of premium on premature dissolution

 

Where a partner has paid a premium on entering into partnership of a fixed term, and the firm is dissolved before the expiration of that term otherwise than by the death of a partner, he shall be entitled to repayment of the premium or of such part thereof as may be reasonable, regard being had to the terms upon which he became a partner and to the length of time during which he was partner, unless -

 

(a) the dissolution is mainly due to his own misconduct, or

(b) the dissolution is in pursuance of an agreement containing no provision for the return of the premium or any part of it.

  

14. Rights where partnership contract is rescinded for fraud or misrepresentation

 

Where a contract creating partnership is rescinded on the ground of the fraud or misrepresentation of any of the parties thereto the party entitled to rescind is, without prejudice to any other right, entitled -

 

(a) to a lien on, or a right of retention of, the surplus or the assets of the firm remaining after the debts of the firm have been paid, for any sum paid by him for the purchase of a share in the firm and for any capital contributed to him;

 

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

 

(c) to be indemnified by the partner or partners guilty of the fraud or misrepresentation against all the debts of the firm.

 

15 . Right to restrain from use of firm name or firm property

 

After a firm is dissolved, every partner or his representative may, in the absence of a contract between the partners to the contrary, restrain any other partner or his representative from carrying on a similar business in the firm name or from using any of the property of the firm for his own benefit, until the affairs of the firm have been completely wound up :

 

Provided that where any partner or his representative has bought the goodwill of the firm, nothing in this section shall affect his right to use the firm name.

 

16. Agreements of restraint of trade

 

Partners may, upon or in anticipation of the dissolution of the firm, make an agreement that some or all of them will not carry on a business similar to that of the firm within a specified period or within specified local limits; and notwithstanding anything contained in section 27of the Indian Contract Act, 1872 (9 of 1872), such agreement shall be valid if the restrictions imposed are reasonable.

 

17. Sale of goodwill after dissolution

 

(1) In settling the accounts of a firm after dissolution, the goodwill shall, subject to contract between the partners, be included in the assets, and it may be sold either separately or along with other property of the firm.

 

(2) Rights of buyer and seller of goodwill - Where the goodwill of a firm is sold after dissolution, a partner may carry on a business competing with that of the buyer and he may advertise such business, but, subject to agreement between him and the buyer, he may not -

 

 (a) use the firm name,

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

(c) solicit the custom of persons who were dealing with the firm before its dissolution.

 

(3) Agreement in restraint of trade - Any partner may, upon the sale of the goodwill of a firm, make an agreement with the buyer that such partner will not carry on any business similar to that of the firm within a specified period or within specified local limits and, notwithstanding anything contained in of the Indian Contract Act, 1872 (9 of 1872), such agreement shall be valid if the restrictions imposed are reasonable. 

 

REGISTRATION OF FIRMS

 

1. Appointment of Registrars

 

(1) The State Government may appoint Registrars of Firms for the purposes of this Act, and may define the areas within which they shall exercise their powers and perform their duties.

 

(2) Every Registrar shall be deemed to be a public servant within the meaning of section 21 of the Indian Penal Code (45 of 1860).

 

2. Application for registration

 

(1) The registration of a 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 and accompanied by the prescribed fee stating -

 

(a) the firm name,

(b) the place or principal place of business of the firm,

(c) the names of any other places where the firm carries on business,

(d) the date when each partner jointed the firm,

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

(f) the duration of the firm.

 

The statement shall be signed by all the partners, or by their agents specially authorised in this behalf.

 

(2) Each person signing the statement shall also verify it in the manner prescribed.

 

(3) A firm name shall not contain any of the following words, namely -"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.

 

3. Registration

 

When the Registrar is satisfied that the provisions of section 58 have been duly complied with, he shall record an entry of the statement is a register called the Register of Firms, and shall file the statement.

 

4. Recording of alterations in firm name and principal place of business

 

(1) When an alteration is made in the firm name or in the location of the principal place of business of a registered firm, a statement may be sent to the Registrar accompanied by the prescribed fee, specifying the alteration and signed and verified in the manner required under section 58.

 

(2) When the Register is satisfied that the provisions of sub-section (1) have been duly complied with, he shall amend the entry relating to the firm in the Registrar of Firms is accordance with the statement, and shall file it along with the statement relating to the firm filed under section 59.

 

5. Noting of closing and opening of branches

 

When a registered firm discontinued business at any place or begins to carry on business at any place, such place not being its principal place of business, any partner or agent of the firm may send intimation thereof to the Registrar, who shall make a note of such intimation in the entry relating to the firm in the Register of Firms, and shall file the intimation along with the statement relating to the firm filed under section 59.

 

6. Noting of changes in names and addresses of partners

 

When any partner is a registered firm alters his name or permanent address, an intimation of the alteration may be sent by any partner or agent of the firm to the Registrar, who shall deal with it in the manner provided in section 61.

 

7. Recording of changes in and dissolution of a firm

 

(1) When a change occurs in the constitution of a registered firm any incoming, continuing or outgoing partner, and when a registered firm is dissolved any person who was a partner immediately before the dissolution, or the agent of any such partner or person specially authorised in this behalf, may give notice to the Registrar of such change or dissolution, specifying the date thereof; and the Registrar shall make a record of the notice in the entry relating to the firm in the Registrar of Firms, and shall file the notice along with the statement relating to the firm under section 59.

 

(2) Recording of withdrawal of a minor - When a minor who has been admitted to the benefits of partnership in a firm attains majority and elects to become or not to become a partner, and the firm is then a registered firm, he, or his agent specially authorised in this behalf, may give notice to the Registrar that he has or has not become a partner, and the Registrar shall deal with the notice in the manner provided in sub-section (1).

 

8. Rectification of mistakes

 

(1) The Registrar shall have power at all times to rectify any mistake in order to bring the entry in the Register of Firms relating to any firm into conformity with the documents relating to that firm filed under this Chapter.

 

(2) On application made by all the parties who have signed any document relating to a firm filed under this Chapter, the Registrar may rectify any mistake in such document or in the record or note thereof made in the Register of Firms.

 

9. Amendment of Register by order of court

 

A court deciding any matter relating to a registered firm may direct that the Registrar shall make any amendment in the entry in the Register of Firms relating to such firm which is consequential upon its decision; and the Registrar shall amend the entry accordingly.

 

10. Inspection of Register and filed documents

 

(1) The Register of Firms shall be open to inspection by any person on payment of such fee as may be prescribed.

 

(2) All statements, notices and intimations filed under this Chapter shall be open to inspection, subject to such conditions and on payment of such fee as may be prescribed.

 

11. Grant of copies

 

The Registrar shall on application furnish to any person, on payment of such fee as may prescribed, a copy, certified under his hand, of any entry or portion thereof in the Register of Firms.

 

12. Rules of evidence

 

(1) Any statement, intimation or notice recorded or noted in the Register of Firms shall, as against any person by whom or on whose behalf such statement, intimation or notice was singed, be conclusive proof of any fact therein stated.

 

(2) A certified copy of an entry relating to a firm in the Register of Firms may be produced in proof of the fact of the registration of such firm, and of the contents of any statement, intimation or notice recorded or noted therein.

 

13.  Effect of non-registration

(1) No suit to enforce a right arising from a contract or conferred by this Act shall be instituted in any court by or on behalf of any person suing as a partner in a firm against the firm or any person alleged to be or to have been a partner in the firm unless the firm is registered and the person suing is or has been shown in the register of firms as a partner in the firm.

(2) No suit to enforce a right arising from a contract shall be instituted in any court by or on behalf of a firm against any third party unless the firm is registered and the persons suing are or have been shown in the register of firms as partners in the firm.

 

(3) The provisions of sub-sections (1) and (2) shall apply also to a claim of set-off or other proceeding to enforce a right arising from a contract, but shall not affect -

 

(a) the enforcement of any right to sue for the dissolution of a firm or for accounts of a dissolved firm, or any right or power to realise the property of a dissolved firm, or

(b) the powers of an official assignee, receiver or court under the Presidency-towns Insolvency Act, 1909 (3 of 1909) or the Provincial Insolvency Act, 1920 (5 of 1920) to realise the property of an insolvent partner.

 

(4)

This section shall not apply -

(a) to firms or to partners in firms which have no place of business in the territories to which this Act extends, or whose places of business in the said territories, are situated in areas to which, by notification under section 56, this Chapter does not apply, or

(b) to any or claim of set-off not exceeding one hundred rupees in value which, in the Presidency-towns, is not a kind specified in section 19 of the Presidency Small Cause Courts Act, 1882 (5 of 1882), or, outside the Presidency-towns, is not of a kind specified in Schedule II to the Provincial Small Cause Courts Act, 1887 (9 of 1887), or to any proceeding in execution or other proceeding incidental to or arising from any such suit or claim.

 

14. Penalty for furnishing false particulars

 

Any person who signs any statement, amending statement, notice or intimation under this Chapter containing any particular which he knows to be false or does not believe to be true, or containing particulars which he knows to be incomplete or does not believe to be complete, shall be punishable with imprisonment which may extend to three months, or with fine, or with both.

 

15. Power to make rules

 

(1) The State Government may by notification in the Official Gazette make rules describing the fees which shall accompany documents sent to the Registrar of Firms, or which shall be payable for the inspection of documents in the custody of the Registrar of Firms or for copies from the Register of Firms :

 

Provided that such fees shall not exceed the maximum fees specified in Schedule I.

 

(2) The State Government may also make rules -

(a) prescribing the form of statement submitted under section 58, and of the verification thereof; 

 (b) requiring statements, intimations and notices under sections 60, 61, 62 and 63 to be in

prescribed form, and prescribing the form thereof; 

(c) prescribing the form of the Register of Firms, and the mode in which entries relating to firms are to be made therein, and the mode in which such entries are to be amended or notes made therein; 

(d) regulating the procedure of the Registrar when disputes arise; 

(e) regulating the filing of documents received by the Registrar; 

(f) prescribing conditions for the inspection of original documents; 

(g) regulating the grant of copies; 

(h) regulating the elimination of registers and documents; 

(i) providing for the maintenance and form of an index to the Register of Firms; and 

(j) generally, to carry out the purposed of this Chapter.

 

 

(3) All rules made under this section shall be subject to the condition of previous publication.

 

(4) Every rule made by the State Government under this section shall be laid as soon as it is made, before the State Legislature.

 

SUPPLEMENTAL

 

1. Mode of giving public notice

 

A public notice under this Act is given -

 

(a) where it relates to the retirement or expulsion of a partner from a registered firm, or to the dissolution of a registered firm, or to the election to become or not to become a partner in a registered firm by a person attaining majority who was admitted as a minor to the benefits of partnership, by notice to Registrar of Firms under section 63, and by publication in the Official Gazette and in at least one vernacular newspaper circulating in the district where the firm to which it relate has its place or principal place of business, and

 

(b) in any other case, by publication in the Official Gazette and in at least one vernacular newspaper circulating in the district where the firm to which it relates has its place or principal place of business.

  

2. Repealed

 

Repealed by the Repealing Act, 1938 (1 of 1938)

 

 3. Saving

 

Nothing in this Act or any repeal effected thereby shall affect or be deemed to affect -

 

(a) any right, title, interest, obligation or liability already acquired, accrued or incurred before the commencement of this Act, or

 

(b) any legal proceeding or remedy in respect of any such right, title, interest, obligation or liability or anything done or suffered before the commencement of this Act, or

 

(c) anything done or suffered before the commencement of this Act, or

 

(d) any enactment relating to partnership not expressly repealed by this Act, or

 

(e) any rule in insolvency relating to partnership; or

 

(f) any rule of law not inconsistent with this Act.

 

 

 

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