Unit 1 : : GENERAL NATURE OF PARTNERSHIP

Section 4 - ‘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’.

ELEMENTS OF PARTNERSHIP

1. ASSOCIATION OF TWO OR MORE PERSONS:

• Partnership is an association of 2 or more persons. Again, only persons recognized by law can
enter into an agreement of partnership. Therefore, a firm, since it is not a person recognized
in the eyes of law cannot be a partner.
• A minor cannot be a partner in a firm, but with the consent of all the partners, may be
admitted to the benefits of partnership
• maximum number of partners ( Section 464 – Companies Act 2013 – 50 max )

2. AGREEMENT:
• partnership is the result of an agreement between two or more persons
• may be oral or in writing.

3. BUSINESS:
• the term ‘business’ includes every trade, occupation and profession
• the motive of the business is the “acquisition of gains” which leads to the formation of
partnership
• there can be no partnership where there is no intention to carry on the business and to
share the profit thereof

4. AGREEMENT TO SHARE PROFITS:

• Partners must agree to share the profits
• But an agreement to share losses is not an essential element. It is open to one or more
partners to agree to share all the losses.
• However, in the event of losses, unless agreed otherwise, these must be borne in the
profit-sharing ratio

5. BUSINESS CARRIED ON BY ALL OR ANY OF THEM ACTING FOR ALL:

• cardinal principle of the partnership Law
• there should be a binding contract of mutual agency between the partners
• An act of one partner in the course of the business of the firm is in fact an act of all
partners
• Each partner carrying on the business is the principal as well as the agent for all the
other partners.
• He is an agent in so far as he can bind the other partners by his acts and he is a principal
to the extent that he is bound by the act of other partners.
• KD Kamath & Co
TRUE TEST OF PARTNERSHIP ( Section 6 ) –

It must be proved that –

1. Agreement: Partnership is created by agreement and not by status

2. Sharing of Profit: 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.
It is only a prima facie evidence and not conclusive evidence.
Cumulative effect of all relevant facts such as written or verbal agreement, real intention and
conduct of the parties, other surrounding circumstances etc., are to be considered while
deciding the relationship between the parties and ascertaining the existence of partnership.

3. Agency : Each partner carrying on the business is the principal as well as an agent of other
partners.
So, the act of one partner done on behalf of firm, binds all the partners.
Santiranjan Das Gupta Vs. Dasyran Murzamull (Supreme Court)

PARTNERSHIP DISTINGUISHED FROM OTHER FORMS OF ORGANISATION

1. Partnership Vs. Joint Stock Company

Basis Partnership Joint Stock Company

Legal status A firm is not legal entity separate legal entity

Agency every partner is an agent of the a member is not an agent of the
other partners as well as of the firm other members or of the company
Distribution It must be distributed among the There is no such compulsion to
of profits partners according to the terms of distribute its profits among its
the partnership deed. members. Some portion of the
profits, but generally not the entire
profit, become distributable among
the shareholders only when
dividends are declared.
Extent of In a partnership, the liability of the company limited by shares - liability
liability partners is unlimited. Partner is of a SH is limited to the amount, if
personally liable for debts of the any, unpaid on his shares
firm. Guarantee company, the liability is
limited to the amount for which he
has agreed to be liable.
However, there may be companies
where the liability of members is
unlimited.
Property The firm’s property is that which is In a company, its property is
the “joint estate” of all the partners separate from that of its members
as distinguished from the ‘separate’ who can receive it back only in the
estate of any of them and it does not form of dividends or refund of
capital.
 belong to a body distinct in law from
its members.
Transfer of A share in a partnership cannot be In a company a shareholder may
shares transferred without the consent of transfer his shares, subject to the
all the partners. provisions contained in its Articles.
In the case of public limited
companies whose shares are quoted
on the stock exchange, the transfer
is usually unrestricted.
Management In the absence of an express Members of a company are not
agreement to the contrary, all the entitled to take part in the
partners are entitled to participate management unless they are
in the management. appointed as directors, in which
case they may participate.
Members, however, enjoy the right
of attending general meeting and
voting where they can decide
certain questions such as election
of directors, appointment of
auditors, etc
Registration Registration is not compulsory in the A company cannot come into
case of partnership. existence unless it is registered
under the Companies Act, 2013
Winding up A partnership firm can be dissolved A company, being a legal person is
at any time if all the partners agree. either wind up by the National
Company Law Tribunal or its name is
struck of by the Registrar of
Companies.
Number of It shall not exceed 100 ( 464 – Pvt Company
membership Companies Act ) however rules – 50 Min – 2 , Max – 200
Public Company
Min – 7 , Max – No Limit
Duration of Unless there is a contract to the A company enjoys a perpetual
existence contrary, death, retirement or succession
insolvency of a partner results in the
dissolution of the firm

2. Partnership Vs. Club

Basis Partnership Club

Definition It is an association of persons A club is an association of persons

formed for earning profits formed with the object not of
from a business carried on by earning profit, but of promoting
all or any one of them acting some beneficial purposes such as
for all. improvement of health or providing
recreation for the members, etc
 Relationship Persons forming a partnership Persons forming a club are called
are called partners and a members. A member of a club is not
partner is an agent for other the agent of other members
partners.
Interest in the Partner has interest in the A member of a club has no interest in
property property of the firm the property of the club.
Dissolution A change in the partners of A change in the membership of a club
the firm affect its existence does not affect its existence

3. Partnership vs. Hindu Undivided Family

Basis Partnership Joint Hindu family

Mode of creation Created by Agreement It created by status means
its creation by birth in the
family.
Death of a member Leads to dissolution It does not give rise to
dissolution of the family
business
Management All partners Generally vests in the Karta
Authority to bind Every partner can, by his The Karta or the manager,
act, bind the firm has the authority to
contract for the family
business and the other
members in the family.
Liability The liability of a partner is Karta – Unlimited
unlimited. Others - coparcener are liable
only to the extent of their share
in the profits of the family
business.
Calling for accounts on closure A partner can bring a suit On the separation of the joint
against the firm for accounts, family, a member is not entitled
provided he also seeks the to ask for account of the family
dissolution of the firm. business.
Governing Law A partnership is governed by the A Joint Hindu Family business is
Indian Partnership Act, 1932. governed by the Hindu Law.
Minor’s capacity Minor – Admitted to benefits of HUF - Minor becomes a
Partnership with consent of all member of the ancestral
business by the incidence of
birth. He does not have to wait
for attaining majority.
 KINDS OF PARTNERSHIPS
1. Partnership at will – It is when
• no fixed period has been agreed upon for the duration of the partnership; AND
• there is no provision made as to the determination of the partnership
Where a partnership entered into for a fixed term is continued after the expiry of such term, it is to be treated as
having become a partnership at will. It can y be dissolved by any partner by giving notice in writing to all the other
partners.

2. Partnership for a fixed period: It is a partnership created for a particular period of time. Such a partnership
comes to an end on the expiry of the fixed period.
3. Particular partnership : It may be organized for the prosecution of a single adventure as well as for the
conduct of a continuous business.
4. General partnership : Where a partnership is constituted with respect to the business in general.

Partnership Deed - Partnership is the result of an agreement, may be in writing or formed verbally but desirable
to have in writing to avoid future disputes. The document in writing containing the various terms and conditions
as to the relationship of the partners to each other is called the ‘partnership deed’

It contains Following Info -

1. NAME – firm, partners,
2. Nature and place of the business of the firm
3. Date – Commencement & Duration
4. Partners – Capital Contribution , PSR , Admission & Retirement, Rate of Interest on capital , Drawings.
5. Provision - settlement of accounts, Salaries or commissions, expulsion of a partner etc

TYPES OF PARTNERS

1. Active or Actual or Ostensible partner: Who has become a partner by agreement, and Who actively
participates in the conduct of the partnership. At time of retirement – Public notice is required.
2. Sleeping or Dormant Partner: Who is a partner by agreement, and Who does not actively take part in the
conduct of the partnership business. They share profits and losses and are liable to the third parties for all
acts of the firm. No public notice Required
3. Nominal Partner: A person who lends his name to the firm, without having any real interest.
Not entitled to share the profits. Does not take part in the conduct of the business. Liable to third parties for
all acts of the firm
4. Partner in profits only: Entitled to share the profits only, Not liable for the losses, Liable to the third parties
for all acts of the profits only
5. Incoming partners: person admitted with consent of all partners. Not liable for act before admission.
6. Outgoing partner: leaves a firm in which the rest of the partners continue to carry on business. remains
liable to third parties for all acts of the firm until public notice is given of his retirement.
7. Partner by holding out (Section 28): When a person represent himself, or Knowingly permits himself, to be
represented as a partner in a firm (when in fact he is not) he is liable, like a partner in the firm, to anyone
who on the faith of such representation has given credit to the firm.

UNIT – 2: RELATIONS OF PARTNERS

RELATION OF PARTNERS TO ONE ANOTHER

1. GENERAL DUTIES OF PARTNERS (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 to any partner or his legal representative.

2. DUTY TO INDEMNIFY FOR LOSS CAUSED BY FRAUD (SECTION 10): Every partner shall indemnify the firm for any loss
caused to it by his fraud in the conduct of the business of the firm.

3. DETERMINATION OF RIGHTS AND DUTIES OF PARTNERS BY CONTRACT BETWEEN THE PARTNERS (SECTION 11): The mutual rights
and duties of the partners of a firm may be determined by contract between the partners, and such contract
may be express 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 express or may be
implied by a course of dealing.
Agreements in restraint of trade – Sec 27 shall be applied

4. THE CONDUCT OF THE BUSINESS (SECTION 12):

• every partner has a right to take part in the conduct of the business
• every partner is bound to attend diligently to his duties in the conduct of the business;
• Difference arising in matters – Ordinary matters- Decided by majority. Change in nature of business – Consent
of all.
• every partner has a right to have access to and to inspect and copy any of the books of the firm.
• in the event of the death of a partner, his heirs or legal representatives or their duly authorised agents shall
have a right of access to and to inspect and copy any of the books of the firm.
5. MUTUAL RIGHTS AND LIABILITIES (SECTION 13): Subject to contract between the partners-
1. Right to remuneration [Section 13(a)] : No additional remuneration in addition to his share in the profits
unless express or customary.
2. Right to share Profits [Section 13 (b)] – Share Equally profits & losses
3. Interest on Capital [Section 13 (c)]:
• express agreement
• trade custom
• statutory provision which entitles him to such interest.
4. Interest on advances [Section 13 (d)]: - Int @ 6%p.a. While interest on capital account ceases to run on
dissolution, the interest on advances keep running even after dissolution and up to the date of payment.
5. Right to be indemnified [Section 13 (e)]: If partner makes payment in the ordinary and proper conduct of
the business of the firm as well as in the performance of an act in an emergency for protecting the firm –
Payments which prudent man would make.
 6. Right to indemnify the firm [Section 13 (f)]: A partner must indemnify the firm for any loss caused to it by
wilful neglect in the conduct of the business of the firm.

PARTNERSHIP PROPERTY (SECTION 14)

1. THE PROPERTY OF THE FIRM (SECTION 14): Includes 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, and includes also the goodwill of the business.
Property of a partner: Where the property is exclusively belonging to a person, it does not become a
property of the partnership merely because it is used for the business of the partnership, such
property will become property of the partnership if there is an agreement.

2. APPLICATION OF THE PROPERTY OF THE FIRM (SECTION 15): 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.

PERSONAL PROFIT EARNED BY PARTNERS (SECTION 16) - subject to contract between the partners,-

1. 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 that profit and pay
it to the firm;
2. 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.

RIGHTS AND DUTIES OF PARTNERS AFTER A CHANGE IN THE FIRM (SECTION 17)

• after a change in the firm

same as those in respect previous
• after the expiry of the term of the firm
operation
• where additional undertakings are carried out

RELATION OF PARTNERS TO THIRD PARTIES

1. PARTNER TO BE AGENT OF THE FIRM - a partner is the agent of the firm for the purpose of the business of the
firm. Embraces the character of both a principal and an agent.
2. IMPLIED AUTHORITY OF PARTNER AS AGENT OF THE FIRM (SECTION 19): 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.
Implied authority does not include –
1. Submit a dispute relating to the business of the firm to arbitration;
2. open a banking account on behalf of the firm in his own name
3. compromise or relinquish any claim or portion of a claim by the firm
4. withdraw a suit or proceedings filed on behalf of the firm
5. admit any liability in a suit or proceedings against the firm
6. acquire immovable property on behalf of the firm
7. transfer immovable property belonging to the firm; and
8. enter into partnership on behalf of the firm.

MODE OF DOING ACT TO BIND FIRM (SECTION 22): In order to bind a firm - shall be done or executed in the firm name,
or in any other manner expressing or implying an intention to bind the firm.

3. EXTENSION AND RESTRICTION OF PARTNERS’ IMPLIED AUTHORITY (SECTION 20): It may be extended or
restricted by contract between the partners. Restriction imposed on implied authority of partner shall be
effective -
1. The third party knows about the restrictions, and
2.The third party does not know that he is dealing with a partner in a firm
 4. PARTNER’S AUTHORITY IN AN EMERGENCY (SECTION 21) - 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.

EFFECT OF ADMISSIONS BY A PARTNER (SECTION 23) - an admission or representation made by a partner

concerning the affairs of the firm is evidence against the firm, if it is made in the ordinary course of business.

EFFECT OF NOTICE TO ACTING PARTNER (SECTION 24) - 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. It must be received by a
working partner and not by a sleeping partner

LIABILITY TO THIRD PARTIES (SECTION 25 TO 27) –

1. LIABILITY OF A PARTNER FOR ACTS OF THE FIRM (SECTION 25): The partners are jointly and severally
responsible to third parties for all acts which come under the scope of their express or implied authority.
2. LIABILITY OF THE FIRM FOR WRONGFUL ACTS OF A PARTNER (SECTION 26): Where, by the wrongful act
or omission of a partner 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 therefor to
the same extent as the partner.
3. LIABILITY OF FIRM FOR MISAPPLICATION BY PARTNERS (SECTION 27): Firm is Liable in both cases –
1. where a partner acts within his authority and due to his authority as partner, he receives money
or property belonging to a third party and misapplies that money or property.
2. when such money or property has come into the custody of the firm and it is misapplied by any
of the partners.

RIGHTS OF TRANSFEREE OF A PARTNER’S INTEREST (SECTION 29)

A share in a partnership is transferable like any other property, but as the partnership relationship is based on mutual
confidence, the assignee of a partner’s interest by sale, mortgage or otherwise cannot enjoy the same rights and
privileges as the original partner. Other partners should agree to transfer interest.

a) During the continuance of partnership, such transferee is not entitled:

- to interfere with the conduct of the business
- to require accounts, or
- to inspect books of the firm

He is only entitled to receive the share of the profits of the transferring partner and he is bound to accept the profits
as agreed to by the partners, i.e., he cannot challenge the accounts.

b) On the dissolution of the firm or on the retirement of the transferring partner, the transferee will be entitled,
against the remaining partners:
- to receive the share of the assets of the firm
- for the purpose of ascertaining the share

he is entitled to an account as from the date of the dissolution.

MINORS ADMITTED TO THE BENEFITS OF PARTNERSHIP (SECTION 30)

Rights:

1. right to his agreed share of the profits

2. access to, inspect and copy the accounts of the firm
3. sue the partners for accounts or for payment of his share but only when severing his connection with the
firm, and not otherwise.
4. On attaining majority he may within 6 months elect to become a partner or not to become a partner. If he
elects to become a partner, then he is entitled to the share to which he was entitled as a minor. If he does
 not, then his share is not liable for any acts of the firm after the date of the public notice served to that
effect.

Liabilities:

1. Before attaining majority:

a) confined only to the extent of his share in the profits and the property of the firm.
b) no personal liability for the debts of the firm incurred during his minority
c) cannot be declared insolvent, but if the firm is declared insolvent his share in the firm vests in the Official
Receiver/Assignee.
2. After attaining majority:
Within 6 months of his attaining majority or on his obtaining knowledge that he had been admitted to the
benefits of partnership, whichever date is later, the minor partner has to decide whether he shall remain a
partner or leave the firm.
Where he has elected not to become partner he may give public notice that he has elected not to become
partner and such notice shall determine his position as regards the firm. If he fails to give such notice he shall
become a partner in the firm on the expiry of the said six months.

1. When he becomes partner: Rights & liabilities If the minor becomes a partner on his own willingness or
by his failure to give the public notice within specified time –
a) He becomes personally liable - since he was admitted to the benefits of partnership
b) His share in the property and the profits of the firm remains the same to which he was entitled as a
minor.
2. When he elects not to become a partner:
a) His rights and liabilities continue to be those of a minor up to the date of giving public notice.
b) His share shall not be liable for any acts of the firm done after the date of the notice
c) entitled to sue the partners for his share of the property and profits

LEGAL CONSEQUENCES OF PARTNER COMING IN AND GOING OUT (SECTION 31 – 35)

1. INTRODUCTION OF A PARTNER (SECTION 31):
- no person shall be introduced as a partner into a firm without the consent of all the existing partners.
- Admitted partner not liable for any acts of the firm done before he became a partner unless he agrees
2. RETIREMENT OF A PARTNER (SECTION 32):
a) A partner may retire:
- consent of all
- express agreement
- partnership is at will, by giving notice in writing to all the other partners
b) 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 the third party and the reconstituted
firm after he had knowledge of the retirement.
c) he and 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

3. EXPULSION OF A PARTNER (SECTION 33):

a) power of expulsion must have existed in a contract between the partners
b) power has been exercised by a majority of the partners
c) exercised in good faith

If all these conditions are not present, the expulsion is not deemed to be in bona fide interest of the business of the
firm.

Good faith includes – 1. Expulsion must be in interest of partnership

2. Served with a notice
3. Oppo to heard
If a partner is otherwise expelled, the expulsion is null and void.

INSOLVENCY OF A PARTNER (SECTION 34):

LIABILITY OF ESTATE OF DECEASED PARTNER (SECTION 35):
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.

RIGHTS OF OUTGOING PARTNER TO CARRY ON COMPETING BUSINESS (SECTION 36)

An outgoing partner may carry on business competing with that of the firm and he may advertise such business, but
subject to contract to the contrary, he may not,- use the firm name, represent himself as carrying on the business of
the firm or solicit the custom of persons who were dealing with the firm before he ceased to be a partner.

Agreement in restraint of trade – Valid on

RIGHT OF OUTGOING PARTNER IN CERTAIN CASES TO SHARE SUBSEQUENT PROFITS (SECTION 37)

Where any member of a firm has died or otherwise ceased to be 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 or 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
a) 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
b) to interest at the rate of six per cent per annum on the amount of his share in the property of the firm

REVOCATION OF CONTINUING GUARANTEE BY CHANGE IN FIRM (SECTION 38)

Mere changes in the constitution of the firm operates to revoke the guarantee as to all future transactions. Such
change may occur by the death, or retirement of a partner, or by introduction of a new partner.

UNIT – 3: REGISTRATION AND DISSOLUTION OF A FIRM

REGISTRATION OF FIRMS ( Section 58 )– ROF 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 – Statement of
Fees + Fees , stating –

1. Name – Firm , other places where firm carries on business , partner address in full
2. place or principal place of business of the firm,
3. Date – Partner joined , Duration of firm

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

1. Each person signing the statement shall also verify it in the manner prescribed
2. 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
REGISTRATION (SECTION 59): Registrar is satisfied + he shall record an entry of the statement in a register called the
Register of Firms, and shall file the statement.

LATE REGISTRATION ON PAYMENT OF PENALTY (SECTION 59A-1): 100/year + Penalty of ROF

CONSEQUENCES OF NON-REGISTRATION (SECTION 69)

The Indian Partnership Act does not make the registration of firms compulsory nor does it impose any penalty for
non-registration. However non-registration of partnership gives rise to a number of disabilities.

1. No suit in a civil court by firm or other co-partners against third party : A registered firm can only file a suit
against a third party and the persons suing have been in the register of firms as partners in the firm.
2. No relief to partners for set-off of claim: If value is more than 100 then firm or partner cant claim set off.
3. Aggrieved partner cannot bring legal action against other partner or the firm: A partner of an unregistered
firm (or any other person on his behalf) is precluded from bringing legal action against the firm or any person
alleged to be or to have been a partner in the firm. But, such a person may sue for dissolution of the firm or
for accounts and realization of his share in the firm’s property where the firm is dissolved
4. Third party can sue the firm: In case of an unregistered firm, an action can be brought against the firm by a
third party.

Exceptions: Non-registration of a firm does not, however effect the following rights:

a) Third party can sue the firm or any partner.

b) right of partners to sue for the dissolution of the firm or for the settlement of the accounts of a dissolved
firm, or for realization of the property of a dissolved firm.
c) The power of an Official Assignees, Receiver of Court to release the property of the insolvent partner and to
bring an action.
d) Set off – Amount < 100
e)The right to suit and proceeding instituted by legal representatives or heirs of the deceased partner of a firm
for account s of the firm or to realise the property of the firm

Modes of Dissolution of a firm (Sections 40-44)

1. DISSOLUTION WITHOUT THE ORDER OF THE COURT OR VOLUNTARY DISSOLUTION:

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
• adjudication of all the partners or of all the partners but one as insolvent
 • 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

However, when 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.

c) Dissolution on the happening of certain contingencies (Section 42):

d) Dissolution by notice of partnership at will (Section 43):

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. In case date is mentioned in the Notice: The firm is dissolved as from

the date mentioned in the notice as the date of dissolution, or In case
no date is so mentioned, as from the date of the communication of the
notice.

2. DISSOLUTION BY THE COURT (SECTION 44):

a) Insanity/unsound mind: Where a partner (not a sleeping partner) has become of unsound mind, the court
may dissolve the firm on a suit of the other partners or by the next friend of the insane partner. Temporary
sickness is no ground for dissolution of firm.
b) Permanent incapacity: When a partner, other than the partner suing, has become in any way permanently
incapable of performing his duties as partner, then the court may dissolve the firm. Such permanent
incapacity may result from physical disability or illness etc.
c) Misconduct: Where a partner, other than the partner suing, is guilty of conduct which is likely to affect
prejudicially the carrying on of business, the court may order for dissolution of the firm, by giving regard to
the nature of business. It is not necessary that misconduct must relate to the conduct of the business.
d) Persistent breach of agreement: Where a partner other than the partner suing, wilfully or persistently
commits breach of agreements relating to the management of the affairs of the firm or the conduct of its
business, or otherwise so conduct himself in matters relating to the business that it is not reasonably
practicable for other partners to carry on the business in partnership with him, then the court may dissolve
the firm at the instance of any of the partners. Following comes in to category of breach of contract:

Embezzlement, Keeping erroneous accounts, Holding more cash than allowed, Refusal to show accounts despite
repeated request etc

e) Transfer of interest: Where a partner other than the partner suing, has transferred the whole of his interest
in the firm to a third party or has allowed his share to be charged or sold by the court, in the recovery of
arrears of land revenue due by the partner, the court may dissolve the firm at the instance of any other
partner.
f) Continuous/Perpetual losses: Where the business of the firm cannot be carried on except at a loss in future
also, the court may order for its dissolution.
g) Just and equitable grounds: Where the court considers any other ground to be just and equitable for the
dissolution of the firm, it may dissolve a firm. The following are the cases for the just and equitable grounds-
- Deadlock in the management.
- Where the partners are not in talking terms between them
- Loss of substratum.
- Gambling by a partner on a stock exchange.

CONSEQUENCES OF DISSOLUTION (SECTIONS 45 - 55)

a) Liability for acts of partners done after dissolution (Section 45):

 Section 45 has two fold objectives
1. It seeks to protect third parties dealing with the firm who had no notice of prior dissolution and
2. It also seeks to protect partners of a dissolved firm from liability towards third parties

However, there are exceptions to the rule there will be no liability for subsequent acts in the case of:

a) the estate of a deceased partner,

b) an insolvent partner, or
c) a dormant partner, i.e., a partner who was not known as a partner to the person dealing with the firm.

b) Right of partners to have business wound up after dissolution (Section 46): On the dissolution of a firm
every partner or his representative is entitled, as against all the other partners or their representative, to
have the property of the firm applied in payment of the debts and liabilities of the firm, and to have the
surplus distributed among the partners or their representatives according to their rights.

c) Continuing authority of partners for purposes of winding up (Section 47): 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 affairs 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 affect 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.

d) Mode of Settlement of partnership accounts (Section 48): n settling the accounts of a firm after dissolution,
the following rules shall, subject to agreement by the partners, be observed:-
- Losses, including deficiencies of capital SHALL be paid first out of profits , Capital lastly partners in
PSR.
- The assets of the firm, including any sums contributed by the partners to make up deficiencies of
capital, must be applied in the following manner and order:
1. paying the debts of the firm to third parties
2. paying to each partner rateably what is due to him from capital
3. paying to each partner rateably what is due to him on account of capital
4. the residue, if any, shall be divided among the partners in the proportions in which they were
entitled to share profits.

e) Payment of firm debts and of separate debts (Section 49): Where there are joint debts due from the firm
and also separate debts due from any partner
a) 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 to the payment of his separate debts or
paid to him;
b) the separate property of any partner shall be applied first in the payment of his separate debts and
surplus, if any, in the payment of debts of the firm.
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