Indian Partnership Act, 1932: Meaning, Essential Requirements and Kinds

What is a Partnership?

Before the enactment of the Indian Partnership Act, 1932 the arena of partnership law was covered under the ambit of the Indian Contract Act, 1872. However, due to rapid growth and development in trade and commerce and growing industrialization, a separate law on partnership was the need of the hour.

According to the provisions of Section 4 of the Indian Partnership Act, 1932, “Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any one of them acting for all.” Here the persons who have entered into partnership with each other are known as Partners and collectively they are known as a Firm. The name under which all the partners collectively run the business is known as Firm Name. In a partnership firm, two or more people come together to carry out a business to earn profits and share those profits in the agreed profit-sharing ratio as per the partnership deed.

Geeky Takeaways:

• The partners combine their capital and work jointly to carry on the business.
• According to Section 12 of the Indian Partnership Act, a partnership must be formed to carry out a legal business according to the law.
• Mere Co-ownership of any property is not considered as a partnership.
• However, the Partnership Act is not exhaustive.
• In any case, where the Partnership Act is silent at any point, the general principles of the Indian Contract Act shall apply.

Essential Requirements of a Partnership Act, 1932

The definition of Partnership lays down five essential elements which are as follows:

1. Association of Two or More Persons: A partnership is an association of two or more persons coming jointly to carry on business. A partnership agreement can only be entered by those persons who are recognized by law. The Partnership Act is silent about the maximum number of partners in a firm; however, the Companies Act, 2013 has a limit of 50 partners in any association/partnership firm.

2. Agreement: As per the act, a Partnership must be the result of an agreement between two or more persons. All the person who wishes to come together in a partnership firm must agree with each other. This element relates to the voluntary contractual nature which exists in the partnership. An agreement of partnership may be express or implied.

3. Business: For any partnership, there must exist a business. The term ‘business’ includes every trade, occupation, and profession and the partners should be engaged in such a business activity. The existence of business is essential. The motive of the business is the acquisition of gains; i.e., earning profits. Therefore, no partnership would exist if there is no intention to carry on the business and to share the profit.

4. Agreement to Share Profits: The sharing of profits is an important feature of a partnership. No partnership can exist where only one of the partners is entitled to all of the profits of the business. Partners must jointly agree to share the profits in any manner they choose and this should be mentioned in the partnership deed. However, an agreement to share losses is not an essential feature but in the event of losses, unless the partnership expressly mentions, the losses must be borne in the profit-sharing ratio.

5. Business to be carried on by All or Any One of them Acting for All: The business must be carried on by all the partners or by any of the partners who are acting for all. There should be a binding contract of mutual agency between all the partners. This is the most important principle of partnership. Each partner who is carrying on the business is the principal as well as the agent for all the other partners. Every partner can bind the other partners by his acts. The true test of partnership is not the sharing of profits but it is the mutual agency among partners. If mutual agency is absent, there can be no partnership.

Kinds of Partnership

There are different kinds of partnerships based on various aspects. These are:

A. With Regard to the Duration

1. Partnership at Will: A partnership will be considered as a Partnership at Will when two things shall be proved; i.e.,

• No fixed period has been agreed.
• No provision has been made for the determination of the partnership.

In case when a partnership entered was for a fixed term, but is continued even after the expiry of such term, the same shall be treated as a Partnership at Will. A Partnership at Will may be dissolved by any of the partners by giving notice in writing to all the other partners showing his intention to dissolve the firm.

2. Partnership for a Fixed Period: When the partnership has been created for a specific duration, it is called a Partnership for a Fixed Period. A Partnership for a Fixed Period comes to an end on the expiry of the fixed period.

B. With Regard to the Extent of Business

1. Particular Partnership: In some cases, the partnership may be organized for the execution of a single adventure as well as for the conduct of a continuous business. When a person enters as a partner with another person in any particular adventure or undertaking, the partnership is known as a Particular Partnership.

2. General Partnership: When a partnership is constituted concerning the business in general, it is treated as a General Partnership. A General Partnership is different from a Particular Partnership in the sense that in a Particular Partnership, the liability of the partners extends only to that particular adventure or undertaking; however, this is not the case of a General Partnership.

Rights of the Partner

1. Right to take part in the Conduct of the Firm’s Business: Section 12(a) of the Indian Partnership Act, 1932 provides that every partner in a firm has the right to be involved in the conduct of the business of the firm. All partners have the right to manage the business of the firm.

2. Right to Express Opinion: Section 12(c) of the Indian Partnership Act, 1932 provides that all partners can express their opinions freely in matters that are concerned with the firm’s business. However, before any decision is made based on the opinion of a partner, the consent of all other partners must be obtained.

3. Right to have Access to Books of the Firm: Section 12(d) of the Indian Partnership Act, 1932 provides that every partner has the right to look into the books of the firm. It is to be noted that it doesn’t matter whether the books concern the accounts of the firm or not.

4. Right to Profit: As per Section 13(b) of the Indian Partnership Act 1932, all partners must equally share profits earned through the business unless the profit-sharing ratio is expressly stated in the partnership deed.

5. Right to Interest on Capital: Section 13(c) of the Indian Partnership Act, 1932 provides that in an agreement, partners have the right to claim interest on the capital out of the profits of the firm.

6. Right to Interest on Advances made by the Partner: In some cases, the firm may require extra monetary resources apart from the capital. In such cases, a partner may advance the amount to the firm and he may also claim interest on such advances made by him.

7. Right to Indemnity: Section 13(e) of the Indian Partnership Act, 1932 provides that a partner is allowed to make payments and incur liabilities on behalf of the firm. The firm is required to indemnify a partner in respect of any payments or liabilities, whether it was made in the ordinary course of business or an emergency.

8. Right to Dissolve the Partnership: Section 44 of the Indian Partnership Act, 1932 provides that a partner has the right to file a suit to express his intention to dissolve the partnership. The court may dissolve the firm on the following grounds:

• Unsound mind of a partner.
• Permanent incapability of any partner to perform his duties.
• Another partner is guilty of misconduct.
• Committing a breach of agreement by another partner either willfully or persistently.
• Transfer of interest in the firm by another partner to any third person.
• Business or firm cannot be carried forward due to losses.
• Any other ground.

9. Right to not get Expelled: Section 33 of the Indian Partnership Act, 1932 provides that all partners will have the right not to get expelled by the majority partners except on certain grounds for which reasonable warning must be given to them. Also, an opportunity for an explanation must be given before making the expulsion of a partner.

10. Right to prevent Introduction of New Person: Section 31 of the Indian Partnership Act, 1932 provides that every partner has the right to prevent the introduction of any new partner without taking his consent unless the partnership agreement has expressly provided that such introduction is permitted.

11. Right to Retire: Section 32 of the Indian Partnership Act, 1932 has provided that a person has the right to retire with the consent of all other partners; however, no consent is required when the requirement of consent is waived by the agreement. The partners can retire by simply providing a notice to all other partners in partnership constituted at will.

Dissolution of a Firm

Dissolving a partnership firm means discontinuing the business under the current name of the partnership firm. In this case, all liabilities are settled by selling off assets or transferring them to a partner’s accounts. Also, all the accounts are settled at the time of dissolution that existed in the partnership firm. Any profit or loss is transferred to partners in their profit-sharing ratio as mentioned in the partnership deed. Dissolving a partnership firm is different from dissolving a partnership in the sense that in the dissolution of the firm, the firm ends its name and hence cannot do business in the future as it has ceased to exist. But in case of dissolving a partnership, the existing partnership is dissolved by consent or on the happening of a certain event, but the firm can retain its name and existence if the remaining partners enter into a new partnership agreement. A firm may be dissolved in the following ways:

1. When Partners Mutually Agree: It is the simplest way of dissolving a partnership firm, where all the partners mutually decide to close up the firm. Partner may give their consent or may agree to dissolve.

Compulsory Dissolution happens in the given two cases:

• When all partners except one partner are declared insolvent.
• When the firm is carrying out unlawful activities or is engaged in doing business with alien countries.

2. Dissolution by Notice: If a partnership business is at will, in such a case any partner can dissolve the partnership by giving advance notice to all the partners. Notice will contain a date from which dissolution shall come into effect.

3. Dissolution by Court: If any of the partners becomes mentally unstable and misbehaves with the other partners or does not abide by the clauses of the partnership agreement, the other partners may file a case in court to dissolve the firm. However, the court can only dissolve the firm if it is registered with the Registrar of Firms. An unregistered firm cannot be dissolved by the court.

4. Transfer of Interest or Equity to the Third Party: If any partner transfers control in the form of interest or equity to any third party without consulting with other partners, then the partners may choose to dissolve the firm.

Dissolution Due to Certain Contingencies: A firm can be dissolved in any of the following cases:

• By adjudication of any partner as insolvent.
• By the death of any partner.
• When the fixed time of partnership has been completed.
• When the firm was carried out for a particular purpose.

Conclusion

Partnership is a widely popular arrangement of business in India. Indian Partnership Act 1932 governs the partnerships in India. It is defined in Section 4 of the Indian Partnership Act, 1932 as, “Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any one of them acting for all.” The existence of a Mutual Agency is the true test of a partnership. In the absence of mutual agency, a business arrangement can’t be called a partnership. Indian Partnership Act, 1932 has specified the rights and duties of the partners and also how a partnership can be dissolved. The court can also order the dissolution of firms if they are registered with the registrar of firms. A partnership can only be formed when the subject matter of the partnership is undergoing business activity and sharing the profits out of that business in the profit-sharing ratio as may be agreed in the partnership deed.

Indian Partnership Act, 1932- FAQs

What is a Partnership?

According to the provisions of Section 4 of the Indian Partnership Act, 1932, “Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any one of them acting for all.”

What is the true test of Partnership?

For determining the existence of partnership, following elements are required to be proved:

• There is an agreement between all the persons engaged as partners.
• The agreement contains the provision to share the profits of a business.
• The business is carried on by all or any of them acting for all.

In simple terms, Mutual Agency must exist in the partnership for its existence.

What is Partnership at Will?

A Partnership will be considered as a Partnership at Will when two things shall be proved; i.e.,

• No fixed period has been agreed.
• No provision has been made for the determination of the partnership.

What is the difference between the Dissolution of a Firm and the Dissolution of a Partnership?

Dissolving a partnership firm is different from dissolving a partnership in a sense that in dissolution of firm, the firm ends its name and hence cannot do business in the future as it has ceased to exist. But in case of dissolving a partnership, the existing partnership is dissolved by the consent or on happening of a certain event, but the firm can retain its name and existence if remaining partners enter into a new partnership agreement.

In what circumstances Compulsory Dissolution is ordered?

Compulsory dissolution can be ordered in the following cases:

• All partners except one partner are declared insolvent.
• The firm is carrying unlawful activities or is engaged in doing business with alien countries.