Partnership Firms: formula sheet

Key formulas

Definition of partnership (Section 4)

Partnership = agreement + business + sharing of profits + carried on by all or any acting for all

Use the four elements as your answer skeleton. Quote the section wording first.

Partner, firm and firm name (Section 4)

Partners (individually) = Firm (collectively); firm name = name under which the business is carried on

Write all three terms when the question says define partnership.

Mode of determining existence (Section 6)

Look at the real relation between the parties, as shown by all relevant facts taken together

Name and conduct decide, not the label the parties use.

Joint property (Section 6, Explanation 1)

Sharing of profits or gross returns from jointly held property does not of itself make co-owners partners

Co-ownership differs from partnership.

Profit-share receipts (Section 6, Explanation 2)

Receipt of a profit share does not of itself make a person a partner, e.g. lender, servant or agent, widow or child of a deceased partner, previous owner for goodwill

Profit sharing is necessary but not sufficient.

Contractual rights and duties (Section 11)

Mutual rights and duties may be fixed by contract, express or implied by a course of dealing, and varied by consent of all partners

Supports the point that partnership is contractual.

Section 5 rule

Partnership = arises from contract, NOT from status

The relation of partnership arises from contract and not from status.

Statutory examples under Section 5

HUF members carrying on a family business as such ≠ partners; Burmese Buddhist husband and wife carrying on business as such ≠ partners

The words 'as such' matter. The business is carried on by virtue of the family relation.

Definition test (Section 4)

Agreement + sharing of profits + business + carried on by all or any of them acting for all

All elements must be present for a partnership.

Real relation test (Section 6)

Existence of partnership = real relation shown by all relevant facts taken together

Profit sharing alone does not make a person a partner (Section 6, Explanation 2).

Partnership at will

No contract provision on duration AND no provision on determination → partnership at will (Section 7)

Both silences are needed. A term or a stated mode of ending takes the firm out of Section 7.

Particular partnership

Partners join in particular adventures or undertakings (Section 8)

Ends on completion of the adventure or undertaking, subject to contract (Section 42(b)).

Fixed-term partnership

Constituted for a fixed term → dissolved by expiry of that term, subject to contract (Section 42(a))

Death or insolvency of a partner can also dissolve it unless the contract says otherwise (Section 42(c), (d)).

Continuing after expiry of term

Business continues after term → same mutual rights and duties, so far as consistent with partnership at will (Section 17(b))

Subject to contract between the partners.

Other undertakings

Particular firm takes up other undertakings → same rights and duties as for the original ones (Section 17(c))

Subject to contract between the partners.

Dissolution of at-will firm

Written notice to all other partners; effective on the date stated, or if none, on communication of notice (Section 43)

Oral notice or notice to only some partners is not enough.

Retirement from at-will firm

Written notice to all other partners (Section 32(1)(c))

Other modes: consent of all partners or an express agreement.

Contract governs (Section 11)

Mutual rights and duties = contract between partners (express or implied by course of dealing); varied by consent of all partners

Section 13 defaults apply only if the contract is silent.

Default rules (Section 13)

No remuneration; equal share of profits and losses; interest on capital only out of profits; 6% p.a. on extra advances; mutual indemnity

All apply 'subject to contract between the partners'.

Interest on extra advance (Section 13(d))

Interest = Advance × 6% × time

Applies to payments or advances beyond the agreed capital, made for the business.

Indemnity (Section 13(e) and (f))

Firm indemnifies partner for ordinary and proper conduct and emergency acts; partner indemnifies firm for loss from wilful neglect

Emergency acts must be what a person of ordinary prudence would do in his own case.

Implied authority (Section 19(1))

Act done to carry on, in the usual way, business of the kind carried on by the firm binds the firm

Subject to Section 22.

Acts outside implied authority (Section 19(2))

No power to: arbitrate; open bank account in own name; compromise or relinquish claims; withdraw suit; admit liability in suit; acquire immovable property; transfer firm's immovable property; enter partnership for the firm

Holds in the absence of usage or custom of trade to the contrary.

Restriction of authority (Section 20)

Act within implied authority still binds the firm unless the outsider knows of the restriction or does not know or believe him to be a partner

Contract between partners can extend or restrict authority.

Wrongful acts (Section 26)

Firm liable to same extent as the partner

Act must be in the ordinary course of business or with partners' authority.

Misapplication (Section 27)

Firm liable to make good loss where a partner within apparent authority, or the firm, receives third-party money or property that a partner misapplies

Covers both receipt by the partner and misapplication while in the firm's custody.

Retirement and public notice (Section 32(3))

Retired partner stays liable to third parties until public notice of retirement

Not liable to a third party who dealt with the firm without knowing he was a partner.

After dissolution (Sections 46 and 47)

Property applied to debts and liabilities, surplus distributed; authority continues only to wind up and finish unfinished transactions

Firm is never bound by acts of a partner adjudicated insolvent.

Section 43(1): who and how

Partnership at will + written notice by any partner to all other partners of intention to dissolve ⇒ firm may be dissolved

Three things must exist: an at-will partnership, a written notice, and delivery to all the other partners.

Section 43(2): date of dissolution

Date in notice, if mentioned; otherwise date of communication of the notice

The date mentioned in the notice governs even if it is later than the date of delivery.

Section 7: partnership at will

No contract on duration and no contract on determination ⇒ partnership at will

If either the duration or the mode of ending is provided for, test carefully before applying Section 43.

Section 39: dissolution of the firm

Dissolution of partnership between all the partners

Use this to separate dissolution of the firm from a partner leaving.

Section 40: dissolution by agreement

Consent of all partners, or in accordance with a contract between the partners

Use it when the facts show agreement and not a unilateral notice.

Section 63(1) and Section 72(a): registered firm

Notice of dissolution to the Registrar; public notice by Registrar notice plus Official Gazette and a vernacular newspaper

These follow dissolution of a registered firm. They do not change the date of dissolution under Section 43.

Trigger for Section 52

Partnership contract rescinded on ground of fraud or misrepresentation of any of the parties

The party entitled to rescind is the innocent party. Rescission must actually be made.

Right (a): Lien or retention

Lien/retention on surplus assets after firm debts are paid, for (i) sum paid to buy a share + (ii) capital contributed

It attaches to the surplus, so outside creditors are paid first.

Right (b): Creditor ranking

Rank as creditor of the firm for any payment made towards the firm's debts

Covers only payments he made towards debts of the firm.

Right (c): Indemnity

Indemnified by the guilty partner(s) against all the debts of the firm

Liability is on the partners guilty of fraud or misrepresentation, not on innocent partners.

Saving clause

Rights under Section 52 are without prejudice to any other right

Other remedies, such as damages, stay available.

Related rule: Section 10

Every partner shall indemnify the firm for any loss caused by his fraud in the conduct of the firm's business

Section 10 concerns fraud in conducting business. Section 52 concerns fraud that induced the contract.

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.
• Persons in partnership are individually partners and collectively a firm. The name they trade under is the firm name.
• Partnership arises from contract and not from status (Section 5).
• Members of a Hindu undivided family carrying on a family business as such are not partners in that business.
• Partnership at will: no contract provision for duration or for determination (Section 7).
• Particular partnership: a person becomes a partner in particular adventures or undertakings (Section 8).
• Partners' mutual rights and duties may be fixed by contract, express or implied by a course of dealing, and varied by consent of all (Section 11).
• A contract may bar a partner from carrying on other business while a partner, despite Section 27 of the Contract Act (Section 11(2)).
• Section 17, subject to contract: after a change in constitution, rights and duties stay the same as far as may be; after a fixed term ends, they continue so far as consistent with partnership at will.
• Dissolution of an at-will firm: any partner gives written notice to all the other partners (Section 43).
• The firm is dissolved from the date in the notice, or from the date the notice is communicated if no date is stated.
• On rescission for fraud or misrepresentation, the party entitled to rescind has a lien on surplus assets, can rank as a creditor for debts paid, and is indemnified by the guilty partners (Section 52).

Common mistakes

• Saying that sharing profits automatically makes a person a partner. Fix: Add that under Section 6 a profit share does not of itself make one a partner. Test mutual agency and the real relation.
• Leaving out mutual agency. Fix: Always include 'carried on by all or any of them acting for all' as the fourth element.
• Saying family members can never be partners. Fix: Write that only family members carrying on business 'as such' are not partners. If they agree by contract to carry on business and share profits, they can form a firm.
• Treating HUF members as partners of the family business. Fix: Remember that HUF membership comes from birth (status). The relation does not come from a contract, so Section 5 denies partner status.
• Calling a firm at will just because the contract states no duration. Fix: Check both limbs: duration and determination. If the contract says how the firm ends, it is not at will.
• Treating a particular partnership as one for a fixed time. Fix: A particular partnership is tied to an adventure or undertaking, not to a calendar period. Fixed term ends by expiry; particular ends by completion.
• Treating Section 13 rules as compulsory. Fix: Always write 'subject to contract between the partners'. Equal sharing applies only if there is no agreement.
• Saying a restriction on a partner's authority always frees the firm. Fix: Add the second paragraph: the firm is still bound unless the outsider knows of the restriction or does not know or believe him to be a partner.
• Applying Section 43 to a partnership for a fixed term or a particular venture. Fix: Always first establish that no contract fixes duration or the mode of ending (Section 7). Without this, Section 43 does not apply.
• Saying the other partners must consent to the dissolution. Fix: Under Section 43 one partner's written notice is enough. Consent of all is the Section 40 route.

Exam tips

• Begin every answer with the exact wording of Section 4, then list the four elements.
• In case questions, write provision, analysis of facts, conclusion. Name the Section 6 exception that applies.
• For distinction questions, use a clear point-by-point format with source, legal status, business, agency and management.
• Do not guess partner-number limits or case names. State only what you are sure of.
• Mention Section 6 whenever the facts show a profit share given to a lender, servant, agent or annuitant.
• Quote the rule word for word: 'The relation of partnership arises from contract and not from status.' Then apply it to the facts.
• In case questions, underline whether the facts show an agreement or only a family relation. That one fact decides the answer.
• Cite Section 5 for the status rule, Section 4 for the definition and Section 6 for the real relation test. Do not mix them.