CMA Intermediate · Business Laws and Ethics

Indian Partnership Act, 1932: formula sheet

Full chapter guide

Key formulas

Definition of partnership (Section 4): Partnership = agreement + business + sharing of profits + business carried on by all or any of them acting for all; Write all four elements. Mutual agency is the one students forget.
Partnership from contract, not status (Section 5): Partnership arises from contract, not from status; Members of a HUF carrying on family business as such are not partners.
Test of existence (Section 6): Existence of partnership = real relation between parties, judged from all relevant facts taken together; Do not decide from the document title or from profit sharing alone.
Profit share that does not make a partner (Section 6, Explanation 2): Lender, servant or agent, widow or child of deceased partner, previous owner selling goodwill: receipt of profit share does not of itself make a partner; The words 'of itself' matter. Other facts may still show partnership.
Joint property (Section 6, Explanation 1): Sharing profits or gross returns from joint or common property does not of itself make co-owners partners; Co-ownership is not partnership unless the other elements exist.
Partnership defined: Partnership = agreement to share profits of a business carried on by all or any of them acting for all; Section 4. Arises from contract, not status (Section 5).
Partnership at will: No contract provision for duration or for determination = at will; Section 7. Dissolved by written notice to all other partners (Section 43).
Particular partnership: Partnership for particular adventures or undertakings; Section 8. Section 17(c): same rights and duties for other undertakings, subject to contract.
Holding out: Represents himself or knowingly permits representation as partner + credit given on faith = liable as partner; Section 28(1). Liable only to those who gave credit on that faith.
Date of dissolution on notice: Date in the notice; if none, date of communication of notice; Section 43(2).
Profit share is not proof: Profit share alone does not make a person a partner; Section 6, Explanation 2: lender, servant or agent, widow or child of deceased partner, seller of goodwill.
Source of rights and duties: Contract (express or implied) first; Act's default rules only where the contract is silent; Rights and duties may be varied by consent of all partners, express or implied by a course of dealing.
Default: remuneration: No salary for taking part in the conduct of the business; Applies subject to contract between the partners. A deed can give a salary or commission.
Default: profits and losses: Share profits equally; contribute equally to losses; Equal sharing is the default even if capitals are unequal. It holds unless the contract says otherwise.
Default: interest on capital: Payable only if agreed, and only out of profits; If a partner is entitled to interest on capital, it is payable only out of profits. The Act gives no default rate for capital.
Default: interest on advances: Interest on advance = Advance × 6% × time (per annum); Applies to payments or advances for the business beyond the agreed capital. It is not limited to profits as capital interest is.
Indemnity by the firm: Firm indemnifies a partner for payments made and liabilities incurred in the ordinary and proper conduct of business, and in an emergency to protect the firm from loss, as a prudent person would act in his own case; Covers both ordinary conduct and emergency acts.
Indemnity by the partner: Partner indemnifies the firm for loss caused by his wilful neglect in the conduct of the business; The word is wilful neglect, not any mistake.
General duties: Greatest common advantage + just and faithful + true accounts and full information; These are the duties to quote for 'duty of partners' questions.
Partner as agent: Partner = agent of the firm for the purposes of the firm's business (Section 18); This is the starting point. The firm is bound only through acts of partners as agents.
Implied authority: Act done to carry on, in the usual way, business of the kind the firm carries on → binds the firm (Section 19(1)); Two tests: the act must be for the firm's kind of business and done in the usual way.
Acts outside implied authority: No implied power to: arbitrate; open bank account in own name; compromise or relinquish claim; withdraw suit; admit liability in suit; acquire or transfer immovable property; enter partnership for the firm (Section 19(2)); This applies in the absence of a contrary usage or custom of trade. Remember it as a list of eight.
Restriction of authority: Restriction binds the outsider only if he knows of it, or does not know or believe the person to be a partner (Section 20); An internal restriction alone does not free the firm from an act within implied authority.
Emergency: Acts of ordinary prudence to protect the firm from loss bind the firm (Section 21); The purpose must be protecting the firm from loss.
Liability of partners: Every partner is liable jointly with the others and also severally for all acts of the firm done while he is a partner (Section 25); A creditor may sue one partner for the whole amount. That partner can then claim contribution from the others.
Wrongful acts: Firm liable to the same extent as the partner, if the wrong was in the ordinary course of business or with partners' authority (Section 26); This covers loss or injury to a third party and also penalties incurred.
Misapplication: Firm must make good the loss if (a) a partner within apparent authority receives money or property and misapplies it, or (b) the firm receives it in the course of business and a partner misapplies it while in the firm's custody (Section 27); Two limbs. Name the limb that fits the facts.
Retirement and notice: Retired partner and the partners remain liable to third parties until public notice of retirement (Section 32(3)); a retired partner is not liable to one who dealt with the firm without knowing he was a partner; The notice may be given by the retired partner or any partner of the reconstituted firm.
After dissolution: Partners remain liable for acts that would have been acts of the firm until public notice of dissolution (Section 45(1)); authority continues only as necessary to wind up and complete unfinished transactions (Section 47); Under Section 45(1), the estate of a deceased or insolvent partner is not liable for later acts. Nor is a retired partner who was not known to the dealer to be a partner.
Admission of a partner: New partner = consent of all existing partners (unless contract says otherwise); Without this consent no one becomes a partner. A minor can only be admitted to the benefits of partnership (Section 30).
Ways to retire (Section 32(1)): Consent of all other partners OR express agreement OR written notice (partnership at will); Written notice to all other partners works only where the partnership is at will.
Liability after retirement (Section 32(3)): Liable to third parties until public notice is given; Exception: no liability to a third party who dealt with the firm without knowing he was a partner.
Public notice (Section 72): Registered firm: notice to Registrar (Section 63) + Official Gazette + vernacular newspaper. Other cases: Gazette + newspaper; The newspaper must be a vernacular one circulating in the district of the firm's place or principal place of business. Notice may be given by the retired partner or any partner of the reconstituted firm (Section 32(4)).
Outgoing partner's claim (Section 37): Share of profits attributable to use of his share of property OR interest at 6% p.a. on his share, at his option; Applies where continuing partners use the firm's property with no final settlement of accounts and no contract to the contrary. If a contractual option to purchase is duly exercised, he has no further claim.
Minor's election (Section 30(5)): Notice within 6 months of majority or of knowledge, whichever is later; no notice = becomes a partner; On becoming a partner he is personally liable for all acts of the firm since admission to the benefits.
Continuing guarantee (Section 38): Revoked as to future transactions from the date of any change in the firm's constitution; Holds in the absence of agreement to the contrary.
Estate of a deceased partner (Section 35): No liability for firm's acts after death where the contract keeps the firm alive; Section 35 covers a firm that is not dissolved by death. Section 45 is about acts done after dissolution: its proviso says the estate of a partner who dies or is adjudicated insolvent is not liable under that section for acts done after he ceases to be a partner.
Section 58: contents of the statement: Firm name + principal place of business + other places + date each partner joined + names and permanent addresses of partners + duration; Statement is in the prescribed form with the prescribed fee, signed by all partners or their specially authorised agents, and verified by each signatory.
Section 59: act of registration: Registrar satisfied that Section 58 is complied with → entry in Register of Firms + statement filed; Registration is complete when the entry is made in the Register of Firms.
Section 69(1): suit by a partner: Suit by a partner against the firm or any partner allowed only if: firm is registered AND the plaintiff is or has been shown in the Register as a partner; Applies to rights arising from a contract or conferred by the Act.
Section 69(2): suit by the firm: Suit by the firm against a third party on a contract allowed only if: firm is registered AND the persons suing are or have been shown in the Register as partners; Applies to rights arising from a contract.
Section 69(3): extended and saved matters: Bar also covers set-off claims and other proceedings to enforce a contractual right. It does not affect suits for dissolution or accounts of a dissolved firm, or the power to realise property of a dissolved firm, or the powers of an official assignee, receiver or Court over an insolvent partner's property; Learn both halves: what is covered and what is saved.
Section 69(4): where the bar does not apply: Firms with no place of business in the territories to which the Act extends, or whose places are in areas exempted by notification; suits or set-off not exceeding ₹100 in value of the small-cause kind; Read the small-cause condition in the text before stating this exception.
Section 63: recording changes: Notice to Registrar of change in constitution or dissolution, stating the date → Registrar records it and files it with the Section 59 statement; Incoming, continuing or outgoing partner may give notice. On dissolution, any person who was a partner immediately before it, or a specially authorised agent, may give notice.
Section 65: rectification by Court: Court deciding a matter relating to a registered firm may direct the Registrar to amend the entry consequential on its decision; The Registrar must amend the entry accordingly.
Dissolution of the firm: Dissolution of the firm = dissolution of partnership between all the partners; Section 39. If the partnership ends only between some partners, it is dissolution of partnership, not of the firm.
Dissolution by agreement: Consent of all partners, or in accordance with a contract between partners; Section 40.
Dissolution by notice (partnership at will): Written notice to all other partners; dissolved from the date in the notice, else from the date of communication; Section 43. It applies only where the partnership is at will.
Grounds for dissolution by the Court: Unsound mind of a partner; permanent incapacity of another partner; prejudicial conduct of another partner; wilful or persistent breach of agreements, or conduct making it not reasonably practicable to carry on with him; transfer of whole interest by another partner, or his share being charged or sold; business cannot be carried on save at a loss; just and equitable ground; Section 44, clauses (a) to (g). Except for unsound mind, the grounds on incapacity, conduct, breach and transfer relate to a partner other than the one suing.
Order of meeting losses: Losses, including deficiency of capital: first out of profits, next out of capital, lastly by partners individually in the profit-sharing ratio; Section 48(a), subject to agreement.
Order of applying assets: Assets, including sums contributed to make up capital deficiencies: (i) debts to third parties; (ii) each partner's advances (loans), rateably; (iii) each partner's capital, rateably; (iv) residue shared in the profit-sharing ratio; Section 48(b), subject to agreement.
Goodwill on dissolution: Goodwill is included in the assets, subject to contract, and may be sold separately or with other property; Section 55(1). The buyer's protections and a reasonable restraint are in Section 55(2) and (3).

Quick revision

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 (Section 4).
Partners are individually called partners and together a firm; the name they trade under is the firm name.
Partners' mutual rights and duties can be set by contract, expressed or implied by a course of dealing, and varied by consent of all partners (Section 11).
A contract may bar a partner from carrying on other business while he is a partner, despite Section 27 of the Contract Act (Section 11(2)).
After a change in the firm, mutual rights and duties stay the same as far as may be, subject to contract (Section 17(a)).
If a fixed-term firm continues after expiry, rights and duties stay the same so far as consistent with partnership at will (Section 17(b)).
A partner may retire with consent of all, by express agreement, or in a partnership at will by written notice to all the others (Section 32(1)).
A retired partner stays liable to third parties for the firm's acts until public notice is given, but not to those who dealt without knowing he was a partner (Section 32(3)).
A minor may not be a partner but can be admitted to the benefits of partnership with consent of all partners; the minor's share is liable, the minor is not personally liable (Section 30).
A minor has six months from attaining majority, or from knowing of the admission if later, to elect; failing notice, the minor becomes a partner (Section 30(5)).
The Section 58 statement names the firm, principal place of business, other places, joining dates, partners' full names and addresses, and duration.
After dissolution, partners remain liable for acts that would have been the firm's until public notice is given (Section 45).

Common mistakes

Saying that sharing profits always makes a person a partner. Fix: Remember Section 6, Explanation 2: profit share does not of itself make a partner. Check mutual agency and the real relation.
Leaving out mutual agency from the essential elements. Fix: Always write the fourth element: business carried on by all or any of them acting for all.
Treating a sleeping partner as not liable for firm debts. Fix: A sleeping partner is a full partner. He shares profits and is liable to third parties like any other partner.
Saying a nominal partner is a real partner who shares profits. Fix: A nominal partner only lends his name, has no real interest and takes no profit. Sleeping partner shares profit but does not work.
Sharing profits in the capital ratio when the deed is silent. Fix: Default is equal sharing of profits and equal contribution to losses, whatever the capitals.
Allowing interest on capital as a default right. Fix: Interest on capital is paid only if the partners agreed to it, and then only out of profits.
Saying a restriction among partners always frees the firm. Fix: Add the second half of Section 20. The firm is still bound for an act within implied authority unless the outsider knew of the restriction or did not know or believe that person to be a partner.
Writing that a partner can never do the acts in Section 19(2). Fix: Say implied authority does not extend to them, in the absence of a contrary usage or custom of trade. Partners can grant such power by agreement.
Saying a retired partner is free of all liability once he retires. Fix: Remember Section 32(3): he stays liable to third parties until public notice. Past debts also remain unless the third party agrees to discharge him.
Treating any announcement as public notice. Fix: For a registered firm, give notice to the Registrar and publish in the Official Gazette and a vernacular newspaper. A private letter to customers is not public notice.

Exam tips

Write the Section 4 definition word for word in the first line. It earns marks even in short questions.
For distinction questions (partnership vs company, vs HUF, vs co-ownership), use a two-column point layout with at least five points, such as legal status, creation, liability, membership and management.
In case questions, name the Section 6 explanation that applies, then give your conclusion.
In MCQs, watch for the words 'of itself'. An option saying profit sharing always makes a partner is wrong.
Mention Section 5 whenever a Hindu undivided family appears in the question.
For MCQs, learn the one-line test for each partner type: works, only invests, only lends name, represented as partner.
In written answers, always attach the section number: 7, 8, 28, 43 and 17(c).
Use the exact phrase 'on the faith of such representation' for holding out; it earns the mark.