QUANTUM UNIVERSITY

Campus:-Mandawar, 22 Km MileStone ,Roorkee –DehradunHighway(NH-73)

ROORKEE-247667(Uttarakhand, INDIA)

Lecture Notes
Course Name: Law of Contract-II
Course Code: LW52105

DEFINITION, NATURE, KINDS AND ESSENTIALS OF PARTNERSHIP

Introduction to Indian Partnership Act, 1932:

• The Indian Partnership Act, 1932 is an act of the Indian Parliament that governs partnerships in
India.
• It came into force on 1st October 1932 and has since been amended several times.
• The Act provides for the registration of partnership firms and the rights and obligations of partners
in a partnership.
• It is applicable to the whole of India, except for the state of Jammu and Kashmir.
• The Act defines partnership as 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.
• It lays down the essential elements of partnership, such as agreement, sharing of profits, carrying
on of a lawful business, number of partners, mutual agency, and unlimited liability.

Objectives of the Indian Partnership Act, 1932:

• The Act aims to provide a legal framework for partnerships and to ensure transparency and
accountability in the management of partnership firms.
• It seeks to provide a mechanism for the resolution of disputes among partners and between
partners and third parties.
• The Act also aims to protect the interests of minority partners and to prevent fraud and
mismanagement in partnership firms.
• It encourages the formation of partnerships by providing a legal framework for the creation and
dissolution of partnerships.

I. Definition of Partnership (Section 4):

• Partnership is defined as the relation between two or more persons who have agreed to share the
profits of a business carried on by all or any one of them acting for all.
• The essential feature of partnership is the agreement between the partners to carry on a business
and share its profits.
• The business must be carried on by all or any one of them acting for all.
• The partnership agreement can be written or oral and can be implied from the conduct of the
parties.
• The partnership can be formed for any lawful purpose.

II. Nature of Partnership:

• Partnership is a contractual relationship between two or more persons.
• Partnership is based on mutual trust and confidence.
• Partnership is not a legal entity distinct from its partners.
• Partnership is dissolved on the death, insolvency, or retirement of a partner.
• Partners are jointly and severally liable for the debts of the partnership.

ESSENTIALS OF PARTNERSHIP
I. Agreement (Section 5):

• Partnership is a contractual relationship based on the agreement between the partners.

• The agreement may be written or oral, but it must be legally enforceable.
• The agreement should specify the rights and obligations of each partner, including their capital
contribution, profit sharing ratio, and the duration of the partnership.
• Case Law: In the case of Gokuldas Gopaldas v. Purshottam Umedbhai & Co., the Supreme Court
held that a partnership agreement need not be in writing and can be implied from the conduct of the
parties.

II. Sharing of Profits (Section 13):

• The essence of a partnership is the sharing of profits.

• The partners must agree on the proportion in which the profits will be shared among them.
• The profit-sharing ratio may be equal or unequal, depending on the agreement between the
partners.
• Case Law: In the case of Mohd. Haneef & Anr. v. Mohd. Iqbal & Ors., the court held that in the
absence of an express agreement, the profits of the partnership must be divided equally among the
partners.

III. Business (Section 6):

• Partnership must be formed to carry on a lawful business.

• The business must be carried on with a view to making a profit.
• Partners cannot engage in any illegal or immoral activity.
• Case Law: In the case of Nandkishore v. Mst. S. Sowani, the court held that a partnership formed
to carry on an illegal business is void ab initio and cannot be enforced in law.

IV. Number of Partners (Section 4):

• A partnership must have at least two partners.

• The maximum number of partners in a firm is 50 for any business, and 20 for a banking business.
• Case Law: In the case of National Bank of India Ltd. v. R. Laxman & Sons, the court held that a
partnership with more than 20 partners cannot carry on a banking business as it is prohibited under
the Banking Regulation Act, 1949.
V. Mutual Agency (Section 18):

• Each partner is an agent of the firm and other partners.

• The acts of a partner in the ordinary course of business bind the firm and other partners.
• Partners can bind the firm even if they act outside the scope of their authority if the act is done to
carry on the business of the firm.
• Case Law: In the case of Ashoka Marketing Ltd. v. Punjab National Bank, the court held that a
partner who had no authority to sign cheques could bind the firm by issuing cheques if such action
was necessary for the conduct of the business.

VI. Unlimited Liability (Section 25):

• Partners are jointly and severally liable for the debts and obligations of the firm.
• In case of default, creditors can recover the entire amount from any partner, regardless of their
profit-sharing ratio.
• Case Law: In the case of K.L. Johar & Co. v. Deputy Commercial Tax Officer, the court held that
the liability of partners is joint and several, which means that the creditor has the option to recover
the entire amount from any partner or from all the partners jointly.

Partnership by Holding Out

(Also known as Partnership by Estoppel)
Relevant Provision: Section 28 of the Indian Partnership Act, 1932

I. Meaning and Concept

Partnership by holding out occurs when a person is not actually a partner in a firm but:
 Represents himself as a partner, or
 Knowingly allows others to represent him as a partner,
And on the faith of that representation, a third party gives credit to the firm, then such a person
is liable as if he were a partner.
This is based on the doctrine of estoppel.

II. Essential Elements

1. Representation:
A person must represent himself as a partner by words (spoken or written) or by conduct.
o Even passive conduct, like not denying a public claim, may amount to
representation.
2. Reliance by Third Party:
A third party must have acted on such representation and given credit to the firm.
3. Consent of the Person:
o The person must have actively represented or knowingly permitted the
representation.
o Mere rumor or misunderstanding is not sufficient.
4. Liability Arises Only to Third Parties:
The person is not entitled to share in the profits, but is liable to third parties as if he were
a partner.
III. Legal Provision – Section 28
"Anyone who by words spoken or written or by conduct, represents himself or knowingly permits
himself to be represented as a partner in a firm is liable as a partner to anyone who has, on the faith
of such representation, given credit to the firm."

IV. Exceptions to the Rule

1. Deceased Partner:
o After a partner’s death, if the firm continues using his name, his estate is not liable
for acts done after his death.
2. Insolvent Partner:
o If a partner is declared insolvent, and the firm continues using his name, his estate is
not liable after adjudication.

V. Leading Case Law

Lake v. Duke of Argyll (1844)
 Duke’s name was used in the firm.
 Though he was not a real partner, he allowed it.
 A third party gave credit based on that belief.
 Held: The Duke was liable as a partner by holding out.
Scarf v. Jardine (1882)
 A new partner joined without informing creditors.
 A creditor who was unaware of the change sued the old partner.
 Held: The old partner was not liable as the creditor had not relied on his representation.

VI. Significance
 Protects third parties who act in good faith.
 Encourages transparency in partnership representation.
 Prevents fraudulent misuse of influential names.

Liability of a Partner for Carrying on Competing Business (Section 16(b))

Legal Provision:
Under Section 16(b) of the Indian Partnership Act, 1932:
"If a partner carries on any business of the same nature as and competing with that of the firm, he
must account for and pay to the firm all profits made by him in that business."
Key Points:
 A partner is not allowed to run a business that is similar or identical to the firm's business.
 If he does so, he is liable to pay all profits earned from such a business to the firm.
 The liability arises even if there is no loss to the firm or even if the partner conducts the
competing business outside firm hours.
Case Law:
 Loch v. Lynam (1857) – A partner who opened a rival business was held liable to account
for all profits from the competing firm.
Implied Authority of a Partner as an Agent (Section 19)
Legal Provision:
Under Section 19(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."
Key Points:
 A partner is an agent of the firm and other partners for the purpose of the business.
 Implied authority includes acts necessary, usual, or incidental to carrying on the business
in the ordinary course.
 However, Section 19(2) lists acts beyond implied authority, such as:
o Submitting disputes to arbitration,
o Opening bank accounts in his own name,
o Compromising or relinquishing claims,
o Acquiring or transferring immovable property, etc.
Limitation:
 Implied authority may be excluded or extended by contract between the partners (provided
third parties have notice of such limitation).
Case Law:
 Cox v. Hickman (1860) – Established that partners are agents for each other and the firm.
 M/s. Ram Narain v. Laxmi Narain AIR 1961 SC 1747 – Held that implied authority is
restricted to the usual course of the firm’s business.

Liability of the Firm for Misappropriation and Wrongful Acts of a Partner

(Section 26 and 27)
Section 26 – Liability for Wrongful Acts:
"Where, by the wrongful act or omission of a partner acting in the ordinary course of the business of
the firm, or with the authority of his co-partners, loss or injury is caused to any third party, the firm
is liable to the same extent as the partner."
Implication:
 The firm is vicariously liable for the wrongful acts of its partner committed:
o In the ordinary course of business, or
o With express/implied authority of the other partners.
Section 27 – Liability for Misapplication:
"The firm is liable to make good the loss where a partner acting within his apparent authority
receives money or property from a third party and misapplies it."
Examples:
 Receiving payments for investments and misusing them.
 Collecting client funds and not crediting to the firm.
Case Law:
 Hamlyn v. Houston & Co. (1903) – A firm was held liable for wrongful acts committed by
a partner acting in the ordinary course of business.
 Lidstone v. Anderson (1930) – Held the firm liable when a partner misappropriated money
entrusted to him for the firm’s business.
Modes of Dissolution of Partnership Firm
I. Introduction
 A Partnership Firm is formed by an agreement between two or more persons to share the
profits of a business carried on by all or any of them acting for all.
 Dissolution refers to the termination of the partnership relation among all the partners of the
firm.
 Governed by Sections 39 to 44 of the Indian Partnership Act, 1932.

II. Types of Dissolution

There are two broad categories:
A. Dissolution of Partnership
 Refers to a change in the relationship among partners (e.g., admission, retirement, death
of a partner), but the firm continues.
 Business continues under a reconstituted partnership.
B. Dissolution of Partnership Firm
 Refers to the complete break-up of the firm where the business ceases to exist.
 Involves winding up of the firm, settlement of accounts, and distribution of assets.

III. Modes of Dissolution of a Partnership Firm

1. Dissolution by Agreement (Section 40)
 A firm may be dissolved:
o With the consent of all partners, or
o According to the terms of the partnership agreement.
Example: A partnership agreement may specify that the firm will dissolve on completion of a
project.

2. Compulsory Dissolution (Section 41)

A firm is compulsorily dissolved under the following circumstances:
 All partners become insolvent.
 Business becomes unlawful due to a change in law.
Case Law: Khiralla v. Haji Ismail – Firm dissolved as business of trading in prohibited goods
became illegal.

3. Dissolution on the Happening of Certain Contingencies (Section 42)

Unless otherwise agreed by contract, firm dissolves on:
 Expiry of fixed term (in case of partnership for a fixed period).
 Completion of the specific venture (if formed for a particular undertaking).
 Death of a partner.
 Insolvency of a partner.

4. Dissolution by Notice (Section 43)

 Applies to partnership at will.
 A partner may dissolve the firm by giving written notice to all other partners of his
intention to dissolve.
Requirements:
 Must be in writing.
 Must clearly express the intention to dissolve.

5. Dissolution by Court (Section 44)

The court may dissolve a firm on the following grounds:
a. Insanity/Unsoundness of Mind (Clause a)
 Of a partner (not temporary illness).
b. Permanent Incapacity (Clause b)
 Due to illness or accident.
c. Misconduct (Clause c)
 Partner’s conduct affecting the business.
d. Persistent Breach of Agreement (Clause d)
 Continuous breach, misconduct, or willful neglect.
e. Transfer of Interest (Clause e)
 If a partner transfers his entire interest to a third party.
f. Continued Losses (Clause f)
 Business unable to earn profits and firm suffers losses.
g. Just and Equitable Clause (Clause g)
 Breakdown of mutual trust.
Case Law:
Bose v. Mukherjee – Firm dissolved on the ground that it was just and equitable as partners had lost
mutual confidence.

IV. Consequences of Dissolution

 Winding up of the firm.
 Settlement of accounts (Section 48).
 Payment of debts.
 Distribution of remaining assets among partners.

V. Distinction Between Dissolution of Partnership and Dissolution of Firm

Basis Dissolution of Partnership Dissolution of Partnership Firm
Continuity of Business Business continues Business comes to an end
Relationship Only relationship changes All relations between partners end
Scope Wider Narrower
Legal Provision Not specifically provided Covered under Sections 39–44

Mode of Registration of a Firm

I. Introduction
 Partnership firm registration refers to the process of getting a firm officially recorded
with the Registrar of Firms under the Indian Partnership Act, 1932.
 Registration is not compulsory under the Act but is highly recommended due to the legal
advantages it offers.
II. Relevant Provisions
 Chapter VII of the Indian Partnership Act, 1932 (Sections 56 to 71) deals with the
registration of firms.
 Section 58 specifically lays down the mode of registration.

III. Mode of Registration of a Partnership Firm (Section 58)

1. Filing of Application (Statement)
 Partners must send a statement in the prescribed form to the Registrar of Firms of the
area in which the firm's principal place of business is located.
2. Contents of the Statement
The application must include:
1. Name of the Firm
2. Place of business (principal place and other places, if any)
3. Names and full addresses of all partners
4. Date of joining of each partner
5. Duration of the firm (whether fixed, at will, or for a specific venture)
3. Signed and Verified
 The statement must be:
o Signed by all partners or their agents, and
o Verified in the prescribed manner.
4. Payment of Prescribed Fees
 The application must be accompanied by the prescribed government fee.

IV. Certificate of Registration

 Upon satisfaction, the Registrar records the entry in the Register of Firms and issues a
Certificate of Registration.
 The date of registration is the date when the Registrar files the statement.

V. Effects of Non-Registration
As per Section 69, the following disabilities arise in case of non-registration:
1. No suit by the firm or partners against third parties to enforce contractual rights.
2. No suit by partners against other partners to enforce rights arising from the partnership
agreement.
3. The firm cannot claim a set-off in a dispute with a third party.
Exception:
 Third parties can sue the unregistered firm.
 Firms can file suit for dissolution or realization of property after dissolution.
Case Law:
Sunder Lal v. Amar Singh – An unregistered firm’s suit for recovery of dues was not maintainable.
Limited Liability Partnership (LLP) Act, 2008

I. Introduction
 The Limited Liability Partnership Act, 2008 was enacted to introduce a new form of
business entity called the LLP.
 It came into effect on 31st March 2009.
 LLP combines the advantages of a company (limited liability) with the flexibility of a
partnership.

II. Salient Features of the LLP Act, 2008

1. Body Corporate (Section 3)
o LLP is a separate legal entity from its partners.
o It has perpetual succession, meaning it continues to exist regardless of changes in
partners.
2. Incorporation
o LLP must be incorporated with the Registrar of Companies (ROC).
o It comes into existence after registration under the Act.
3. Minimum Two Partners
o An LLP must have at least two partners.
o There is no maximum limit on the number of partners.
4. Limited Liability (Section 27)
o Liability of each partner is limited to their contribution in the LLP.
o Partners are not personally liable for acts of other partners.
5. Designated Partners (Section 7)
o LLP must have at least two designated partners, one of whom must be a resident in
India.
o Responsible for compliance with the LLP Act.
6. LLP Agreement
o Governs mutual rights and duties of the partners.
o In absence of such agreement, the First Schedule of the Act applies.
7. Flexible Structure
o Partners can organize internal structure as per mutual agreement.
8. No Requirement of Minimum Capital
o There is no mandatory minimum capital contribution.
9. Less Compliance
o LLPs have to comply with fewer regulations compared to companies.
o They are exempted from many provisions of the Companies Act.
10. Taxation
 LLPs are taxed like partnership firms, not as companies.
 No Dividend Distribution Tax (DDT) applicable.

III. Nature of a Limited Liability Partnership

 Separate Legal Entity: It can own assets and incur liabilities in its own name.
 Perpetual Succession: The existence of the LLP is unaffected by death or exit of a partner.
 Contractual Capacity: LLP can enter into contracts in its own name.
 Limited Liability: Partners’ liability is restricted to their capital contribution.
 Mutual Agency Absent: One partner is not liable for the misconduct or negligence of
another.
 Hybrid Form: It blends the features of company (legal entity, limited liability) and
partnership (flexibility, management by partners).