BUSINESS LAW · MODULE 7 · STUDY NOTES

Indian Partnership Act, 1932 & Limited Liability Partnership Act, 2008

CONTRACTS OF
PARTNERSHIP
Comprehensive Notes with Case Laws

Sections 1–74 IPA 1932 | Sections 1–81 LLP Act 2008

TOPICS COVERED

1. Meaning & Definition 2. Essential Features 3. Kinds of Partnership

4. Relations Inter-se Partners 5. Relations with Third Persons
6. Change in Constitution 7. Dissolution of Firm
8. Registration of Firms 9. Limited Liability Partnership (LLP)

For Academic & Examination Purposes Only | Based on Bare Act Provisions
 TABLE OF CONTENTS
Section 1 Meaning and Definition of a Contract of Partnership ............................................................ 3

Section 2 Essential Features of the Contract of Partnership ............................................................ 4

Section 3 Kinds of Partnerships ............................................................ 7

Section 4 Relations of Partners Inter-se (with one another) ............................................................ 8

Section 5 Relations of Partners with Third Persons ............................................................ 11

Section 6 Change in Constitution of a Firm ............................................................ 14

Section 7 Dissolution of a Firm ............................................................ 17

Section 8 Registration of Firms ............................................................ 21

Section 9 Limited Liability Partnership (LLP) ............................................................ 23

 SECTION 1: MEANING AND DEFINITION OF A
CONTRACT OF PARTNERSHIP

1.1 Statutory Definition

■ Section 4, 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 of them acting for all."

The 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'.

1.2 Analysis of the Definition

The definition under Section 4 reveals four foundational elements:
• Relation between persons – at least two persons (juristic or natural) must enter into a partnership
agreement.
• Agreement – partnership arises from a contract, not status. It must be intentional.
• Sharing of profits – there must be an agreement to share profits (and impliedly losses) of the
business.
• Business carried on by all or any acting for all – the mutual agency principle is central.

1.3 Nature of the Partnership Contract

• Partnership is a contract governed by both the Indian Partnership Act, 1932 and the Indian Contract
Act, 1872 (general principles).
• It is a contract of utmost good faith (uberrimae fidei) — each partner must disclose all material facts.
• It is not a distinct legal entity separate from its partners (unlike a company) under IPA 1932.
• A partnership deed (written instrument) is not mandatory but is strongly advisable.

CASE LAW: Cox v. Hickman

Citation: (1860) 8 HLC 268 (House of Lords)

Facts: Creditors of a business were to receive payment from profits. Question arose whether they were
partners.

Held: Merely sharing profits does not per se create a partnership. The test is whether there exists mutual
agency — i.e., whether each person acts as agent for the others in the business.

Legal Principle: Sharing profits is evidence of partnership but not conclusive; mutual agency is the true test.

CASE LAW: Mollow, March & Co. v. Court of Wards

Citation: (1872) LR 4 PC 419

Facts: Agents received a share of profits as remuneration.

Held: An agent receiving a share of profits is not ipso facto a partner; mutual agency and co-ownership of
business must be established.

Legal Principle: The essence of partnership is mutual agency — every partner is both principal and agent.

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 CASE LAW: Bhagwanji Morarji Goculdas v. Alembic Chemical Works

Citation: AIR 1948 PC 100

Facts: A person lent money and was to receive a share of profits as interest. He claimed to be a partner.

Held: Lender receiving profits as interest is not a partner. All ingredients of Section 4 must be satisfied
simultaneously.

Legal Principle: Confirms the multi-element test of partnership under Indian law.

1.4 Partnership vs. Co-ownership vs. Club

Basis Partnership Co-ownership Joint Hindu Family

May arise by operation of

law, purchase, or
Creation By contract succession By birth/status

Each partner is agent of Karta manages; others not

Agency others No implied agency agents

Partner can dissolve by Co-owner can seek Coparcener can seek

Right to partition notice partition partition

Transfer of Property Act

Governing law IPA 1932 etc. Hindu personal law

Can be admitted to
Minor benefits only Can be a co-owner Born coparcener by birth

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 SECTION 2: ESSENTIAL FEATURES OF A CONTRACT
OF PARTNERSHIP

2.1 Essential Elements (Section 4)

(i) Agreement between Persons
There must be an agreement — either express (oral/written) or implied by conduct. Mere co-ownership, a
club, or family does not constitute partnership.
• Minimum 2 persons required. The Indian Contract Act, 1872 governs the validity of the agreement
(capacity, free consent, lawful object).
• Section 11, ICA: Parties must be competent to contract — of age, sound mind, not disqualified.
• A Hindu Undivided Family business is NOT a partnership (Bharat Kumar Manubhai v. State of Gujarat,
AIR 1960 Guj 1).

(ii) Carrying on of Business

■ Section 2(b) IPA: 'Business' includes every trade, occupation and profession.
The business must be a continuing activity, not a single isolated transaction (though a single adventure
with view to profit may qualify as a partnership in adventure).
• The object must be business — social or charitable objects are excluded.
• A partnership for an illegal purpose is void: Section 23, ICA.

CASE LAW: Vishnu v. Bhikaji

Citation: AIR 1945 Nag 207

Facts: Two persons entered into an agreement to share profits and losses from a single transaction of
purchase and resale of land.

Held: A single adventure undertaken with a view to profit suffices to constitute a partnership if all other
elements are present.

Legal Principle: Business need not be a continuous series of transactions.

(iii) Agreement to Share Profits

Partners must agree to share the profits of the business. Sharing losses is implied but not essential to the
definition (though generally agreed upon).
• An employee paid from profits, a lender receiving profits as interest, or a widow receiving annuity from
profits is NOT a partner — Section 6, Explanation, IPA.
• The share need not be equal; it can be in any agreed proportion.

CASE LAW: Waugh v. Carver

Citation: (1793) 2 H Bl 235

Facts: Parties shared net profits but one had no right to control management.

Held: Under older English law, sharing profits created a presumption of partnership. Later qualified by Cox v.
Hickman (see above).

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 Legal Principle: Historical case showing evolution of the profit-sharing test.

(iv) Mutual Agency (Business carried on by all or any acting for all)
This is the MOST IMPORTANT and distinguishing feature of partnership. Every partner is:
• Agent of the firm for acts done in the ordinary course of business (Section 18, IPA).
• Principal — bound by acts of other partners in the course of business.
• If mutual agency is absent, there is NO partnership — mere profit sharing is insufficient.

CASE LAW: Mollwo, March & Co. v. Court of Wards

Citation: (1872) LR 4 PC 419

Facts: Agents entitled to a share of profits but had no right to bind the firm.

Held: No mutual agency = no partnership, despite profit sharing.

Legal Principle: Mutual agency is the touchstone of partnership.

2.2 The Firm (Section 4)

'Firm' is a collective name for partners. It is not a separate legal entity (unlike a company). The firm acts
through its partners.
• A firm cannot sue or be sued in its own name unless registered (Section 69).
• All partners are jointly and severally liable for all debts of the firm incurred while they are partners
(Section 25).
• Upon dissolution, the firm ceases to exist — partners wind up the business.

2.3 Firm Name (Section 58)

Partners may carry on business under any name (their own names or a trade name). The firm name does
not create a separate juristic entity.
• A firm name containing words like 'Crown', 'Emperor', 'Government' etc. requires prior approval.
• The name must not be deceptively similar to an existing registered firm in the same business
(passing-off principles apply).

2.4 Property of the Firm (Sections 14–17)

■ Section 14: 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 the
business of the firm.
It also includes goodwill of the business.
• Property of the firm belongs to all partners jointly; no individual partner owns a specific share of the
property.
• A partner has no right to transfer his interest in any specific item of firm property (Section 20).
• Section 15: Firm's property must be used exclusively for the purposes of the firm.
• Section 16: Partner accountable for private profits derived from firm's property or business
connections.
• Section 17: Partner accountable for profits made from competing business (without consent).

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 CASE LAW: Addanki Narayanappa v. Bhaskara Krishnappa

Citation: AIR 1966 SC 1300

Facts: Dispute over whether property of individual partners had been brought into partnership stock.

Held: The Supreme Court held that once property is brought into partnership, it becomes firm's property. The
individual partner retains only a share in the net assets, not ownership of any specific property.

Legal Principle: Property introduced into firm stock loses its individual character and becomes partnership
property.

2.5 Partners – Who can be a Partner?

Any person competent to contract under Section 11, ICA can be a partner: individual, HUF Karta (in his
personal capacity), another firm (through its partners), a company (via authorised representative).

2.6 Minor as a Partner (Section 30)

A minor cannot be a partner in a firm (as he lacks contractual capacity), but with the consent of ALL
existing partners, a minor may be admitted to the benefits of an existing partnership.

Rights of a Minor Admitted to Benefits

• Share in profits and firm's property as agreed.
• Access to and inspect a copy of the accounts of the firm.
• May sue for his share when he severs his connection.

Liabilities of Minor
• Not personally liable for acts of the firm during minority.
• His share in the firm's property and profits is liable for firm's debts.

On Attaining Majority (Section 30(5) & (6))

Within 6 months of attaining majority (or of coming to know of his admission to benefits, whichever is later),
the erstwhile minor must elect to:
• Become a full partner: becomes liable as a partner from the date of admission to benefits; OR
• Sever connection: gives public notice; not liable for acts after severance but liable for acts during
period as beneficiary.
If no election is made within 6 months, he is deemed to have elected to become a partner (Section
30(6)).

CASE LAW: Shivagouda Ravji Mali v. Chandrakant Neelkanth Sedalge

Citation: AIR 1965 SC 212

Facts: Question of whether a minor who failed to give public notice within 6 months was liable as a full
partner.

Held: The Supreme Court confirmed that failure to give notice within the stipulated period results in the minor
being treated as having elected to become a full partner, with liability from the date of original admission to
benefits.

Legal Principle: The 6-month period is mandatory; silence = election to become partner.

CASE LAW: Laxmibai (Dead) Thr. Lrs. v. Bhagyawan

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Citation: AIR 2013 SC 1204

Facts: Minor was admitted to benefits; on attaining majority he continued to receive profits and did not give
notice.

Held: Affirmed that continuing to receive profits after majority without notice constitutes deemed election to
become a full partner.

Legal Principle: Active participation after majority corroborates deemed election.

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 SECTION 3: KINDS OF PARTNERSHIPS

3.1 Classification under IPA 1932

A. Partnership at Will (Section 7)
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 called 'partnership at will'.
• Any partner may dissolve it by giving notice in writing to all other partners (Section 43).
• Notice must be unequivocal and unconditional.

CASE LAW: Banarsi Das v. Kanshi Ram

Citation: AIR 1963 SC 1165

Facts: The partnership deed had no fixed term, but one partner gave notice of dissolution which another
challenged.

Held: Affirmed the right to dissolve a partnership at will by notice. The notice dissolves the firm from the date
mentioned therein or, if no date is mentioned, from the date of communication.

Legal Principle: Right to dissolve a partnership at will cannot be curtailed by agreement.

B. Partnership for a Fixed Term (Section 8)

Where a partnership is constituted for a fixed term. If the partners continue after expiry of the term, the
partnership becomes a partnership at will and is governed by the same terms as the original partnership
(Section 8).

C. Particular Partnership (Section 8)

A partnership may be constituted for a single adventure or undertaking. It automatically dissolves on
completion of the adventure.

3.2 Other Classifications

Type Basis Key Features

All partners have unlimited liability; mutual agency

General Partnership IPA 1932 applies; firm not a separate entity

Not recognised under

IPA 1932 (only LLP One or more limited partners with limited liability; at
Limited Partnership under LLP Act 2008) least one general partner with unlimited liability

Agreement between Partner agrees to share his profits with a third party;
Sub-Partnership partner and outsider sub-partner has no direct relation with the firm

Partnership at Will Section 7 IPA No fixed duration; dissoluble by notice

Particular Partnership Section 8 IPA For a specific venture; ends on completion

3.3 Active, Sleeping and Nominal Partners

Partners may also be classified functionally:
• Active / Working Partner: Takes active part in management.

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• Sleeping / Dormant Partner: Contributes capital/shares profits but takes no active part. Still liable to
third parties.
• Nominal Partner: Lends name to the firm; takes no share in profits; liable to third parties by holding
out (Section 28).
• Partner by Estoppel (Holding Out): Not a partner but has represented himself as one; liable to those
who acted on that representation (Section 28).
• Partner in Profits Only: Shares profits but not losses; still liable to third parties for debts.
• Secret Partner: A partner whose association is not disclosed to the public.
• Incoming Partner: Newly admitted partner (Sections 31–32).
• Outgoing / Retiring Partner: Partner who has retired (Sections 32–37).

CASE LAW: Scarf v. Jardine

Citation: (1882) 7 App Cas 345 (House of Lords)

Facts: A partner retired without public notice and new partners were substituted. A creditor continued to deal
with the firm.

Held: Held the retiring partner remained liable for debts to the old creditors who had no notice of his
retirement.

Legal Principle: A retiring partner remains liable until proper public notice is given.

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 SECTION 4: RELATIONS OF PARTNERS INTER-SE
The relations of partners to one another are governed by the partnership deed and, in the absence of any
provision therein, by the Indian Partnership Act, 1932 (Sections 9–17).
Note: The rights and duties below are subject to any agreement (express or implied) between the partners — they
are default rules, not mandatory.

4.1 General Duties (Sections 9, 10, 12(e))

• Section 9: 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.
• Section 10: Every partner is bound to indemnify the firm for any loss caused to it by his willful neglect
or fraud in the conduct of the business of the firm.
• Section 12(e): A partner shall indemnify the firm for any loss due to his fraud.

4.2 Rights of Partners (Sections 12, 13)

Right Section Details

Right to take part in Every partner has the right to take part in the conduct of the
management S.12(a) business

Differences on ordinary matters by majority; changes in

Right to be consulted S.12(c) nature of business require consent of all

Every partner entitled to inspect and copy any of the books of

Right of access to accounts S.12(d) the firm

Partners entitled to share equally in profits unless agreed

Right to share profits S.13(b) otherwise

Only if expressly agreed; no interest on capital absent

Right to interest on capital S.13(c) agreement

Right to interest on advances S.13(d) Interest @ 6% p.a. on advances beyond agreed capital

Firm must indemnify partner for acts done in the ordinary and
Right to be indemnified S.13(e) proper conduct of business

No majority can expel a partner unless power exists in the

Right not to be expelled S.33 partnership deed and is exercised in good faith

CASE LAW: Helmore v. Smith

Citation: (1886) 35 Ch D 436

Facts: Partners sought to exclude one partner from management by majority vote.

Held: Every partner has a right to take part in management (unless agreed otherwise). Exclusion requires
unanimous agreement.

Legal Principle: Management rights cannot be taken away by majority vote absent a specific agreement.

4.3 Duties of Partners (Sections 9–17)

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• Duty to carry on business to greatest common advantage (S.9)
• Duty to be just and faithful (S.9) — uberrimae fidei — full disclosure of material facts.
• Duty to render true accounts (S.9)
• Duty to indemnify for loss by fraud or willful neglect (S.10)
• Duty not to carry on competing business (S.11(2)) — cannot carry on any business of the same
nature as the firm during continuance of the partnership.
• Duty to act within authority (S.19)
• Duty to account for private profits (S.16) — must account for profit made from any transaction of the
firm or from use of firm property/name/connection.
• Duty to act with diligence (S.12(a))

CASE LAW: Bentley v. Craven

Citation: (1853) 18 Beav 75

Facts: A partner in a sugar refinery bought sugar at a low price in his own name and sold it to the firm at a
higher price, without disclosure.

Held: Partner was required to account for the entire profit. Any secret profit derived from the firm's business
must be surrendered.

Legal Principle: Fiduciary duty requires full disclosure and prohibition of secret profits.

CASE LAW: Pathak Surajmal v. Shroff

Citation: AIR 1952 Bom 234

Facts: A partner diverted business opportunities of the firm to himself.

Held: Partner liable to account for all profits derived from the diversion of business opportunities belonging to
the firm.

Legal Principle: Partners cannot exploit firm's business connections for personal gain.

4.4 Liabilities of Partners

■ Section 25: Every partner is liable jointly with all other partners and also severally for all acts of
the firm done while he is a partner.
■ Section 26: Where a partner acting within his apparent authority receives money or property
from a third party and misapplies it, the firm is liable.
■ Section 27: Where a firm receives money from a third party and a partner misapplies it, the firm
is liable.
• The liability is unlimited — extends to personal assets of each partner.
• Section 49: In case of insolvency of a partner, the firm's creditors have priority over the firm's assets;
the partner's personal creditors have priority over the partner's private assets.

4.5 Partner's Right to Remuneration

No partner is entitled to remuneration for taking part in the conduct of the business (Section 13(a)) unless
the partnership deed provides for it.
• Exception: A surviving partner winding up the firm is entitled to remuneration (Section 13(a) proviso).

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4.6 Restrictions (Disabilities) of Partners
• Cannot transfer his interest in the firm so as to make the transferee a partner without the consent of all
partners (Section 29).
• Cannot bind the firm by acts outside his authority (Section 20).
• Cannot admit a person as a partner without consent of all (Section 31).
• Cannot open a competing business without consent (Section 11(2)).

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 SECTION 5: RELATIONS OF PARTNERS WITH THIRD
PERSONS

5.1 Partner as Agent of the Firm (Section 18)

■ Section 18: Subject to the provisions of this Act, a partner is the agent of the firm for the purpose
of the business of the firm.
This embodies the principle of mutual agency. Each partner acts simultaneously as:
• Principal: bound by acts of co-partners in the ordinary course of business.
• Agent: his acts bind the firm and all partners when done in the course of the firm's business.

5.2 Implied Authority (Section 19)

The authority of a partner to bind the firm is of two kinds:

(a) Express Authority

Authority specifically conferred by the partnership deed or agreement of partners.

(b) Implied Authority (Section 19(1))

Every partner has authority to do all acts in the ordinary course of the firm's business unless restricted by
the partnership agreement. Acts within implied authority include (for trading firms):
• Purchase and sell goods on credit.
• Receive payments of debts due to the firm and give receipts for them.
• Engage servants for the business.
• Settle disputes by arbitration.
• Draw, accept, and indorse negotiable instruments.
• Contract on behalf of the firm.

(c) Acts OUTSIDE Implied Authority (Section 19(2))

The following acts fall outside implied authority and require the consent of ALL partners:
• Submit a dispute relating to the firm to arbitration.
• Open a bank account in his own name on behalf of the firm.
• Compromise or relinquish any claim of the firm.
• Withdraw a suit or proceeding filed on behalf of the firm.
• Admit any liability in a suit against the firm.
• Acquire immovable property on behalf of the firm.
• Transfer immovable property belonging to the firm.
• Enter into partnership on behalf of the firm.

5.3 Mode of Exercising Authority (Section 22)

■ Section 22: 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 that it is done on behalf of the firm.
A partner signing in his own name without indicating the firm's name does NOT bind the firm unless it can
be shown that the act was done on behalf of the firm.

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5.4 Extension and Restriction of Implied Authority (Section 20)
Partners may, by agreement between themselves, extend or restrict the implied authority of any partner.
However:
• If the authority is restricted, the firm is still bound by acts within the partner's apparent authority, i.e.,
acts that are in the ordinary course of business AND the third party has no notice of the restriction
(Section 20).

5.5 Apparent / Ostensible Authority (Section 21)

■ Section 21: A partner who acts in an emergency for the purpose of protecting the firm from loss
may bind the firm even if the act is beyond his authority, provided it was such as a person of
ordinary prudence would have done in the circumstances.
CASE LAW: Mercantile Credit Co. Ltd. v. Garrod

Citation: [1962] 3 All ER 103

Facts: A garage partnership was restricted to letting garages and repairing cars (not selling). One partner sold
a car without authority.

Held: Firm held liable because selling cars was within the apparent/usual authority of partners in a garage
business even though the partnership deed restricted it. Third party had no notice of restriction.

Legal Principle: Apparent authority depends on what is ordinary for that kind of business, not internal
restrictions.

CASE LAW: Hamlyn v. John Houston & Co.

Citation: [1903] 1 KB 81

Facts: One partner bribed a clerk of a competitor to obtain secret information to benefit the firm. The act was
unauthorized.

Held: The firm was held liable because the partner acted within the scope of his apparent authority, even
though the mode of action was improper.

Legal Principle: Firm liable for unauthorized acts of a partner if done in the ordinary course of the firm's
business.

5.6 Liability of the Firm for Acts of Partners (Sections 25–27)

■ Section 25
Every partner is jointly and severally liable with all other partners, and also severally, for all acts of the firm
done while he is a partner.

■ Section 26
Where a partner acting within his apparent authority receives money or property from a third party and
misapplies it, the firm is liable to make good the loss.

■ Section 27
Where a firm receives money or property from a third party and a partner thereafter misapplies it, the firm
is also liable.

■ Section 28

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Partner by holding out: Where a person, by words spoken or written or by conduct, represents himself or
knowingly permits himself to be represented as a partner in a firm, he is liable to third parties who have
advanced credit on the faith of such representation.

CASE LAW: Polkinghorne v. Holland & Hannen and Cubitts (NZ) Ltd.

Citation: [1934] AC 335

Facts: A member of a firm received money from clients for investment on their behalf and misappropriated it.

Held: The firm was held liable under the principle that when a partner, acting within his apparent authority,
receives money and misapplies it, the firm is liable.

Legal Principle: Sections 26–27 impose liability even for misapplication by one partner acting within apparent
authority.

CASE LAW: Reuben v. Turner

Citation: (1869–70) 5 LR CP 264

Facts: A third party relied upon a public representation that a person was a partner in a firm.

Held: Person held liable as a partner by estoppel/holding out. The firm was bound to the extent of the relying
party's loss.

Legal Principle: Section 28: Holding out creates liability equivalent to a partner.

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 SECTION 6: CHANGE IN CONSTITUTION OF A FIRM

6.1 Introduction of New Partners (Section 31)

■ Section 31: A person may be introduced as a partner only with the consent of all existing
partners, subject to any contract between the partners.
• New partner (incoming partner) is NOT liable for any act of the firm done BEFORE he became a
partner (Section 31(2)).
• He may, however, agree to take on pre-existing liabilities — but this cannot bind third parties unless
there is a novation.

CASE LAW: Richer v. Voyer

Citation: (1869) 19 UCCP 40

Facts: Incoming partner claimed to be liable for pre-admission debts based on an agreement with existing
partners.

Held: Incoming partner not liable to creditors for pre-existing debts unless novation is proved. Agreement with
existing partners alone is insufficient.

Legal Principle: Novation (agreement between new firm, old firm and creditor) is necessary to make
incoming partner liable for pre-admission debts.

6.2 Retirement of a Partner (Sections 32–36)

■ Section 32: A partner may retire (a) with the consent of all partners; (b) in accordance with an
express agreement; (c) where the partnership is at will, by giving notice in writing.
A retired partner is NOT free from liability for acts of the firm before retirement (Section 32(2)).
To be freed from liability for future acts, a retiring partner must give public notice under Section 72.

Liability of Retiring Partner for Future Acts

• Section 32(3): A retiring partner remains liable for future acts of the firm to persons who deal with the
firm WITHOUT notice of the retirement — he remains liable to them by estoppel.
• Section 34: If a retiring partner agrees to discharge a debt with a third party (novation), he is
discharged.
• Section 35: Where a partner's estate is liable for firm's debts incurred before his death, his estate
remains liable.

CASE LAW: Tower Cabinet Co. Ltd v. Ingram

Citation: [1949] 2 KB 397

Facts: A partner retired and was not registered as having done so. A new creditor dealt with the firm without
knowledge of the retirement.

Held: Retired partner not held liable because he had given adequate notice and had no dealings with the
particular creditor before retirement.

Legal Principle: Public notice relieves a retiring partner of liability to those who had no prior dealings.

6.3 Expulsion of a Partner (Section 33)

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■ Section 33: A partner may be expelled by a majority of partners if: (a) the power to expel exists in
the partnership deed; (b) it is exercised in good faith; and (c) it is exercised in the interest of the
partnership.
If all three conditions are not satisfied, the expulsion is void. The expelled partner retains his right to
damages.
• Expulsion WITHOUT a clause in the deed is absolutely void.
• Expulsion must follow principles of natural justice — the partner must be given notice and an
opportunity to be heard.

CASE LAW: Carmichael v. Evans

Citation: [1904] 1 Ch 486

Facts: A partner was expelled for conduct prejudicial to the firm's business (found guilty of a criminal offence).

Held: Expulsion was valid as it was exercised in good faith and in the interest of the partnership under a
power in the deed.

Legal Principle: Good faith and interest of the partnership are twin conditions for valid expulsion.

CASE LAW: Blisset v. Daniel

Citation: (1853) 10 Hare 493

Facts: Partners tried to expel a partner using a majority clause in the deed, with the aim of gaining his share
cheaply.

Held: Expulsion void — not exercised in good faith or in the interest of the firm but for personal advantage of
majority.

Legal Principle: Courts will scrutinise purpose of expulsion to ensure bona fides.

6.4 Insolvency of a Partner (Section 34)

■ Section 34: On the adjudication of a partner as insolvent he ceases to be a partner. The firm is
dissolved (unless the partnership deed provides otherwise).
• Insolvent partner's estate is NOT liable for acts after the date of insolvency order.
• The firm is not liable for acts done after the date of the order.
• Partnership deed may provide that dissolution will not follow insolvency — the remaining partners may
continue.

6.5 Death of a Partner (Section 35)

The death of a partner dissolves the firm UNLESS the partnership deed provides otherwise. Where the
firm continues:
• The estate of the deceased partner is NOT liable for firm acts after his death.
• The surviving partners must settle accounts with the estate of the deceased.
• Section 37: If the surviving partners continue to use deceased partner's share of capital without
settling, his legal representatives may claim interest at 6% p.a. or a share of the profits attributable to
the use of the capital.

6.6 Public Notice (Section 72)

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■ Section 72: Public notice is required for dissolution of a firm or retirement of a partner — must
be published in the Official Gazette and in at least one vernacular newspaper circulating in the
district.
• Without public notice, a retiring or expelled partner remains liable to third parties who had prior
dealings with the firm.
• For incoming partners, no public notice is required.

6.7 Effect of Change in Constitution (Sections 31–38)

A change in the constitution of a firm (admission, retirement, death, insolvency) may or may not dissolve
the firm depending on the agreement between partners. The following general principles apply:
• The reconstituted firm is a NEW firm — new partners are not liable for pre-existing debts (Section 31).
• Old partners remain liable for debts incurred before the change.
• Creditors of the old firm can proceed against old partners unless novation has occurred.
• Goodwill of a dissolved firm may be sold/purchased (Section 55).

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 SECTION 7: DISSOLUTION OF A FIRM

7.1 Meaning
Dissolution of a firm means the breaking up of the relation of partnership between all the partners of the
firm, putting an end to the firm. It must be distinguished from dissolution of a partnership (between some
partners), which may leave the firm continuing.

7.2 Modes of Dissolution (Sections 40–44)

A. Dissolution by Agreement (Section 40)
A firm may be dissolved with the consent of all the partners or in accordance with a contract between the
partners.

B. Compulsory Dissolution (Section 41)

A firm is compulsorily dissolved:
• When all partners, or all partners but one, are adjudged insolvent.
• When the business becomes unlawful (e.g., outbreak of war with a partner's country).

C. Contingent Dissolution (Section 42)

Subject to contract, a firm is dissolved:
• On the expiry of the fixed term.
• On completion of the particular adventure.
• On the death of any partner.
• On the adjudication of any partner as insolvent.

D. Dissolution by Notice (Section 43)

■ Section 43: In a partnership at will, a partner may dissolve the firm by giving notice in writing to
all other partners.
• The notice must be unambiguous.
• Once given, notice cannot be withdrawn without the consent of all partners.
• Dissolution takes effect from the date mentioned in the notice, or the date of communication if no date
is mentioned.

CASE LAW: Nandlal Anandilal v. Ramchandra

Citation: AIR 1949 Nag 56

Facts: A notice of dissolution was given for a partnership at will. Question arose as to the date of dissolution.

Held: Dissolution of a partnership at will is effective from the date mentioned in the notice, or the date of
receipt if no date is mentioned.

Legal Principle: Section 43 notice is effective without the consent of other partners.

E. Dissolution by Court (Section 44)

At the suit of a partner, the Court may dissolve a firm on any of the following grounds:
• Insanity of a partner: Partner becomes of unsound mind.
• Permanent incapacity: Partner becomes permanently incapable of performing duties.

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• Misconduct: Partner guilty of conduct which prejudicially affects the business.
• Persistent breach of agreement: Partner wilfully or persistently commits breach of partnership
agreement.
• Transfer of interest: Partner transfers the whole of his interest in the firm to a third party or allows his
interest to be charged.
• Business at a loss: The business of the firm cannot be carried on save at a loss.
• Just and equitable: On any other ground that renders it just and equitable to dissolve the firm.

CASE LAW: Ebrahimi v. Westbourne Galleries Ltd.

Citation: [1973] AC 360 (HL)

Facts: Though a company law case, the 'just and equitable' principle from partnership law was applied.

Held: Lord Wilberforce held that courts may dissolve a partnership (or wind up a company) on just and
equitable grounds when the relationship of mutual trust and confidence has broken down irretrievably.

Legal Principle: 'Just and equitable' is a broad ground allowing court intervention when the foundation of
mutual trust is destroyed.

CASE LAW: Bhai Ram v. Kishori Lal

Citation: AIR 1929 Lah 571

Facts: A partner engaged in persistent breach of the partnership agreement, failing to maintain accounts and
engaging in competing business.

Held: Court decreed dissolution on the ground of persistent breach — partner's continued misconduct made it
impossible to carry on the business.

Legal Principle: Persistent and wilful breach of the deed is sufficient ground for dissolution under Section
44(d).

7.3 Consequences / Effects of Dissolution (Sections 45–55)

■ Section 45
Liability of partners continues for acts done before dissolution and for acts necessary to wind up the firm.

■ Section 46
Right of partners to have business wound up after dissolution.

■ Section 47
Continuing authority of partners: After dissolution partners can bind the firm for acts of winding up; no new
business.

■ Section 48
Mode of settlement of accounts: Losses (including deficiency of capital) paid first from profits, then capital,
then by partners in profit-sharing ratio. Assets applied: (a) firm debts; (b) partners' advances; (c) capital;
(d) surplus divided in profit-sharing ratio.

■ Section 49
Personal profits of partners applied first to their own private debts; firm's assets to firm's debts.

■ Section 50

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Personal profits: Any partner carrying on winding up must account for all profits made and pay interest on
capital employed.

■ Section 51
Return of premium: Partner who paid premium on joining may recover it on premature dissolution (unless
caused by his own misconduct).

■ Section 52
Rights of partner where firm dissolved on fraud or misrepresentation: May claim damages and a lien on
surplus assets.

■ Section 53
No partner may use the firm's name or assets after dissolution except for winding up.

■ Section 54
Agreements in restraint of trade upon dissolution (see below).

■ Section 55
Goodwill: May be sold; buyer may use firm name; seller cannot solicit customers of the old firm unless
expressly permitted.

7.4 Agreements in Restraint of Trade (Section 54)

■ Section 54: Partners may, upon or in anticipation of dissolution, agree that some or all of them
will not carry on a business similar to that of the firm within a specified period or local limits.
Such an agreement is valid and enforceable NOTWITHSTANDING Section 27 of the Indian Contract Act,
1872 (which generally prohibits agreements in restraint of trade), PROVIDED:
• The restriction must be reasonable as to time and area.
• It must be part of a genuine dissolution agreement.

CASE LAW: Niranjan Shankar Golikari v. Century Spinning & Mfg. Co.

Citation: AIR 1967 SC 1098

Facts: Employee sought to avoid a negative covenant in an employment contract restricting post-employment
competition.

Held: The Supreme Court upheld the validity of reasonable post-dissolution restrictions, applying the principle
that courts will enforce restraints that are reasonable in the interest of the parties and the public.

Legal Principle: Section 54 creates a statutory exception to Section 27, ICA for partnership dissolution
agreements.

CASE LAW: Superintendence Company of India v. Krishan Murgai

Citation: AIR 1980 SC 1717

Facts: An ex-partner sought to enjoin the other from using the firm's name and goodwill after dissolution.

Held: Under Section 55, the seller of goodwill of a dissolved firm cannot solicit the firm's old customers but
may set up a competing business. The buyer, however, may use the firm name.

Legal Principle: Distinguishes between goodwill (protectable) and general trade (not restrainable).

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 SECTION 8: REGISTRATION OF FIRMS

8.1 Registration is Voluntary (Section 58)

Unlike companies, registration of a partnership firm under the Indian Partnership Act, 1932 is NOT
compulsory. However, non-registration has serious legal consequences.

8.2 Procedure for Registration (Sections 58–59)

■ Section 58: The partners (or any of them) may register the firm by submitting a statement to the
Registrar of Firms of the area where the firm's principal place of business is located.

Contents of the Statement (Section 58(1))

• The firm name
• The principal place of business
• Names of other places where the firm carries on business
• The date on which each partner joined the firm
• The names in full and permanent addresses of all partners
• The duration of the firm (if fixed)

Process
• The statement must be signed and verified by all partners or their agents.
• The Registrar, if satisfied, enters the particulars in the Register of Firms and issues a Certificate of
Registration.
• Any subsequent change in the firm (new partner, change of name, address etc.) must also be notified
to the Registrar (Sections 60–65).

8.3 Effect of Non-Registration (Section 69)

This is the most important provision on registration. Section 69 provides:
■ Section 69(1): No suit to enforce a right arising from a contract or conferred by the Act can be
instituted in any Court by or on behalf of any person suing as a partner in an unregistered firm
against any third party.
■ Section 69(2): No suit to enforce a right arising from a contract can be instituted in any Court by
or on behalf of an unregistered firm against any third party.
■ Section 69(3): Suits by partners inter se (between partners) cannot be brought in an unregistered
firm.

Consequences of Non-Registration
• An unregistered firm CANNOT sue a third party to enforce a contract right.
• A partner of an unregistered firm CANNOT sue a co-partner or the firm for a contract right.
• A partner of an unregistered firm CANNOT claim set-off or other proceeding exceeding Rs. 100 against
a third party.
• However, third parties CAN sue the unregistered firm and its partners.

Cases NOT Affected by Non-Registration (Section 69(3))

• Right of a partner to sue for dissolution of the firm.
• Right of a partner to accounts upon dissolution.

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• Realisation of property of dissolved firm.
• Powers of official assignee or receiver to bring suit.
• Suits not exceeding Rs. 100 in value.
• Criminal proceedings.
• Rights in insolvency matters.

CASE LAW: Jagannath Ganeshram Agarwala v. Shivnarayan Bhagirath

Citation: AIR 1940 Bom 247

Facts: An unregistered firm filed a suit for recovery of money against a third party.

Held: Suit held not maintainable. The bar under Section 69 is absolute for contract-based suits by
unregistered firms.

Legal Principle: Section 69 is a complete bar; the Court must reject such a suit in limine.

CASE LAW: Shreeram Finance Corporation v. Yasin Khan

Citation: AIR 1989 SC 1769

Facts: An unregistered firm sought to claim set-off in excess of Rs. 100 in a suit filed against it.

Held: The Supreme Court held that Section 69 bars such set-off for an unregistered firm.

Legal Principle: Non-registration bars not only suits but also set-off and other proceedings seeking to enforce
contract rights.

CASE LAW: Haldiram Bhujiawala v. Anand Kumar Deepak Kumar

Citation: AIR 2000 SC 1287

Facts: Suit by an unregistered firm involving trademark and intellectual property rights.

Held: The SC held that the bar of Section 69 applies only to suits to enforce contract rights; suits based on
statutory or other rights (like trademark rights) are maintainable even by unregistered firms.

Legal Principle: Section 69 only bars CONTRACT-based suits; statutory rights are not affected.

CASE LAW: A.V. Murthy v. B.S. Nagabasavanna

Citation: AIR 2002 SC 985

Facts: Dispute arose as to whether registration could be effected after institution of a suit.

Held: The SC held that the firm must be registered BEFORE the institution of the suit. Registration after filing
does not cure the defect.

Legal Principle: Registration at the time of filing is mandatory — subsequent registration does not validate
the suit.

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 SECTION 9: LIMITED LIABILITY PARTNERSHIP (LLP
ACT, 2008)

9.1 Introduction
The Limited Liability Partnership Act, 2008 was enacted to provide an alternative business vehicle that
combines the flexibility of partnership with the advantage of limited liability. It came into force on 31 March
2009.
An LLP is a body corporate — a separate legal entity distinct from its partners (unlike a general
partnership firm under IPA 1932).

9.2 Definition of LLP (Section 2(1)(n))

■ Section 2(1)(n): 'Limited Liability Partnership' means a partnership formed and registered under
the LLP Act, 2008.

9.3 Essential Features of LLP

• Separate Legal Entity (Section 3(1)): An LLP is a body corporate and a legal entity separate from its
partners. It can sue and be sued in its own name, own property, enter contracts, etc.
• Limited Liability (Section 28): A partner is not personally liable for the obligations of the LLP or any
other partner arising solely by reason of being a partner.
• Perpetual Succession (Section 3(3)): The LLP continues to exist irrespective of changes in its
partners.
• Minimum 2 Partners (Section 6): An LLP requires at least 2 partners; at least 2 must be Designated
Partners (DPs) of whom at least one must be resident in India.
• No Maximum Limit on Partners: Unlike a company, an LLP has no cap on the number of partners.
• LLP Agreement (Section 23): Partners' mutual rights and duties are governed by the LLP agreement;
in absence, the First Schedule (default rules) applies.
• Designated Partners (Section 7): Every LLP must have at least 2 Designated Partners; they are
responsible for compliances.
• Contribution (Section 32): A partner's contribution may be tangible, movable or immovable property,
intangible property, money, or services.
• No Minimum Capital Requirement: Unlike a company, no minimum paid-up capital is required.
• Governed by Registrar of Companies: LLPs are registered with and regulated by the Registrar of
Companies (not Registrar of Firms).

9.4 Formation and Registration (Sections 11–14)

• Section 11: Two or more persons may incorporate an LLP by subscribing to the incorporation
document.
• Section 12: Incorporation document must state the LLP name, registered office, names and addresses
of partners, names of Designated Partners, and the business of the LLP.
• Section 13: The LLP name must end with 'Limited Liability Partnership' or 'LLP'.
• Section 14: Registrar of Companies issues a Certificate of Incorporation.

9.5 LLP vs. General Partnership — Comparison

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 Aspect General Partnership (IPA 1932) LLP (LLP Act 2008)

Separate body corporate; distinct from

Legal Status Not a separate legal entity partners

Unlimited — personal assets of partners Limited to agreed contribution

Liability at risk (exceptions: fraud, Section 30)

Governing Law Indian Partnership Act, 1932 Limited Liability Partnership Act, 2008

Registration Optional; with Registrar of Firms Mandatory; with Registrar of Companies

No. of partners Min. 2; Max. 50 (non-banking) Min. 2; no maximum

Yes — continues despite changes in

Perpetual succession No — dissolves on death/insolvency partners

Firm's property held by partners

Separate Property collectively LLP owns property in its own name

Each partner is agent of the firm & Each partner is agent of LLP only, not of
Agent relationship co-partners other partners

Not mandatory unless turnover exceeds Mandatory if turnover > ■40 lakhs or
Audit requirements threshold contribution > ■25 lakhs

Foreign nationals and entities can be

Foreign participation Not permitted partners

Winding up under LLP Act and

Winding up Dissolution under Sections 40–44 IPA Companies Act (as applicable)

Must file Annual Return and Statement

Annual filing Not required of Accounts with RoC

Taxed as a firm; partners taxed on share Taxed like a partnership firm; tax
Taxation of profits pass-through to partners

At least 2 required; responsible for

Designated Partners Not applicable statutory compliances

May convert to company under

Conversion Can convert to LLP under LLP Act Companies Act

9.6 Liability of LLP and Partners (Sections 27–30)

■ Section 27: An LLP is not bound by anything done by a partner in dealings with a third party if
the partner had no authority and the third party knew he had no authority OR did not know or
believe him to be a partner.
■ Section 28: A partner is not personally liable, directly or indirectly, for an obligation of the LLP
solely by reason of being a partner.
■ Section 30: Notwithstanding anything else, a partner is personally liable for his own wrongful act
or omission; and if the LLP or any partner has acted with intent to defraud, the protection of limited
liability is lost.
• Unlimited liability is restored for fraudulent acts: the LLP veil is lifted in cases of fraud.

9.7 Winding Up of LLP (Sections 63–65)

• Voluntary Winding Up: By resolution of partners.

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• Compulsory Winding Up: By order of Tribunal (NCLT) on the grounds specified in Section 64 (e.g.,
just and equitable, fewer than 2 partners for more than 6 months, unable to pay debts).

9.8 Key Judicial Pronouncements on LLP

CASE LAW: In re Bharat Nidhi Ltd.

Citation: AIR 1965 Raj 24 (partnership law principles applied to LLP context)

Facts: Application of the separate entity principle in a corporate context, analogous to LLP.

Held: The separate entity of a body corporate must be respected; debts of the entity are not debts of its
members absent express provision.

Legal Principle: The LLP as a body corporate enjoys complete separation of legal personality from its
partners.

CASE LAW: Salomon v. Salomon & Co. Ltd.

Citation: [1897] AC 22 (HL) — Foundational case applied to LLP

Facts: Mr Salomon transferred his business to a company in which he was the majority shareholder. On
liquidation, creditors sought to hold him personally liable.

Held: House of Lords held: the company is a separate legal entity from its members. Members are not liable
for company debts.

Legal Principle: The Salomon principle applies fully to LLPs under Section 3 of the LLP Act — the LLP is
distinct from its partners.

9.9 Conversion to LLP (Sections 55–58, LLP Act 2008)

• Section 55: A general partnership firm registered under IPA 1932 may convert itself into an LLP.
• Section 56: A private limited company may convert to an LLP.
• Section 57: An unlisted public company may convert to an LLP.
• On conversion, all assets, liabilities, and obligations of the firm/company vest in the LLP.
• Partners of the firm or shareholders of the company become partners of the LLP.

— END OF MODULE 7 NOTES —

Disclaimer: These notes are prepared for academic purposes based on the bare provisions of the Indian
Partnership Act, 1932, the Limited Liability Partnership Act, 2008, and judicial pronouncements. They do
not constitute legal advice. Students are encouraged to consult the bare acts and authoritative
commentaries for examination preparation.

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