Model Q The Partnership Act 1932

Model Q. & Ans. for Judicial Service Main Exam On The Indian Partnership Act, 1932 Q.
1 Define Partnership and discuss its essentials. Ans. Partnership & its elements Vide S -4 Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or by of them acting for all. Thus three elements are necessary to constitute a partnership (1) (2) (3) agreement to carry on any business agreement to share the profits of business. the business must be carried on by all or any of the partners. In Raghunath Sahu Vs Trinath Das AIR 1985 Odisha H.C held that for the partnership business there must be voluntary contractual relationship, which gives motive to lead to the formation of firm and the persons of a group who conduct the business do so as agents for all the persons in the group and are liable to account for all. S -5 of the act declares that the relation of partnership arises from the contract, not from the status. But it is not necessary that there should be a very formal or written agreement. An agreement to create a partnership may be arises from the conduct of the parties concerned. In Shivraj Reddy & Bros Vs S.R. Reddy AIR 2002 it was held that The validity of a partnership firm does not depend upon capital contribution by partners. A person can become a partner without having to make any contribution towards the capital of the firm. A person may contribute his intellectual property rights or skill and experience or even sheer labour in consideration of becoming a partner. The division of profits is an essential condition of the existence of a partnership. In Cox Vs Hickman 1860 it was held that no man is a partner
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S.S. Law Academy, Civil & Judicial B-2, B-3-4, Ansal Building (Basement); Dr. Mukherjee Nagar, Delhi-09
unless he has the right to share the profits of the business. But every man who received profits is not necessarily a partner. Thus sharing of profits is only a prima facie evidence of the existence of a partnership. The conclusive test is that of mutual agency. For the validity of the partnership firm, business must be carried on by all or any of partners of the firm. The term business includes every trade, occupation and profession. The business must be of lawful nature. A partnership cannot be formed for an illegal purpose. Q. 2 Make Distinction between: (1) (2) (3) Partnership & Joint Hindu Family Business Partnership & Co-ownership and Partnership & Company.
Ans (1) Partnership and JHFB (1) (2) (3) An agreement is essential in the case of an ordinary partnership, while no agreement is necessary to constitute a joint family business. In an ordinary partnership, the members have no interest by birth, while in an ancestral business; the members have an interest by birth. Death of a partner has the effect of dissolving the partnership, while the death of any member of the joint Hindu family does not dissolve joint Hindu family business, but his interest passes by survivorship. In partnership each partner is the agent of another partner in respect of third party, it is not so in the joint Hindu family business. In partnership, the relation of partners arises out of a contract, while in joint Hindu family business, relation arises out of birth. Minors enjoy certain advantage U/S -30 of the I.P. Act, while the minors coparceners in the joint Hindu family business can have no such advantages.
(4) (5) (6)
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(2) (1) (2) (3) (4)
Partnership and Co-ownership: Partnership is the result of an agreement, while co-ownership is not necessarily the result of an agreement. In partnership, there is community of profits and losses, while there is no community of profit or losses in co-ownership. A partner is the agent of the other partner in partnership, while in coownership; a co-owner is never the agent of other co-owner. A partner is not entitled to transfer his interest to a third person, so as to substitute him in his place, while a co-owner is at liberty to transfer his interest to a stranger against the wishes of the co-owners. Partnership exists for no other purpose, but for gain, but Co-ownership does not necessarily exist for the sake of gain. A partner has more extensive remedies against his co-partners, while coowners have less extensive remedies against co-owners. Partnership and Company: Partnership is a group of persons collectively called as partners and does not have a separate legal personality, while a company is a separate juristic entity and is distinct from its shareholders. A partnership firm means all the partners put together. If the partners cease to be partners, the partnership firm gets dissolved. A company being a person different from the members, the members may come and go, but the Companys life is not affected thereby. A partner cannot substitute another person in his place unless all other partners agree to the same. The share holder of a company can transfer his shares to anybody he likes. On the death of a partner, his legal representative do not get substituted in his place in partnership while on the death of the member of the company,
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(5) (6) (3) (1)
(2)
(3)
(4)
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his legal representative step into his shoes for the purpose of rights in the Company. (5) (6) (7) The liability of the partners is unlimited, while the liability of the members of a company is limited. The registration of a partnership firm is optional, while the registration of a Company is compulsory. Decree against a firm can be executed against partners, while decree against a Company cannot be executed against shareholders.
Q. 3 The relation of partnership arises from contract and not from status. Discuss. Ans S -5 says The relation of partnership arises from contract and not from status; and in particular, the members of Hindu undivided family carrying on a business as such, or a Burmese Buddhist husband and wife carrying business as such, are not partners in such business. Status means a persons relation to others fixed by law. No partnership can be created by the operation of law and the same is created only by the contractual relation between the parties. S -4 defines the partnership as under: Partnership is relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. S -5 r/w S -4 makes perfectly clear that the relation of partnership is the outcome of a voluntary contract between the parties and has no bearing on the status of the person entering into contract of partnership. In other words only those persons can be said to be partners who actually enter into a contract and not otherwise. A joint Hindu family is the creation of the Hindu law and is not based on any contract. every member of a joint Hindu family holds a status in family by birth according to Hindu law and not by any contract between the parties. The members of the joint Hindu family are not called partners in the
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joint Hindu family firm. The firm which consists of the male issues becomes a joint family firm. In Lala Baijnath Prasad Vs Ram Gopal Narayan 1938 it was held that The joint ownership so created between the male issue i s not an ordinary partnership arising out of a contract, but a family partnership, created by the operation of law Thus it can be said that the relation of partnership arises from contract and not from status. Q. 4 - Relations of partners to one another are based upon the principle of absolute good faith. Amplify with reference to the duties of partners. Ans S -9 of I.P. Act Says 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 firm to any partner or his legal representative. Thus S -9 lays down the following duties of partners: (1) (2) (3) The partners are bound to carry on the business of the firm to the greatest common advantage. They have to be just and faithful to each-other. They have to render true accounts and full information of all things affecting the firm to any partner or his legal representative. On partnership Lord Lindley has observed that Good faith requires that a partner shall not obtain a private advantage at the expense of the firm. He is bound in all transactions affecting the partnership to do his best for the common body and to share with his Co-partners any benefit which may have been able to obtain from other people and in which the firm is, in honour and conscience entitled to participate. In Gopal Chandra Vs Bipin Bihari AIR 1955 Calcutta High Court has held that The definition of good faith under General Clauses Act lays stress on honesty only. The act must have been done honestly irrespective of
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the fact that it has been done negligently. Negligence by itself does not show want of good faith. In Blisset Vs Daniel 1853, it was held that mutual trust and confidence and honesty of dealings is sine qua non of partnership and no power can be deemed to have been exercised in good faith unless it was made for the benefit of the firm and after giving opportunity to the partners concerned of being heard. Thus utmost good faith is requisite in relation between partners. It is due from every member of a partnership towards every other member. A partner is bound to render proper accounts to his other partners. This is one of the main legal incidents of the relation between them. It is incumbent on a partner as it is in the case of agent to render true and clear accounts of the partnership affairs. Thus we can say that relations of partners to one another are based upon the principle of absolute good faith. Q. 5 Discuss the doctrine of Holding out. When it does not apply. Ans. Doctrine of Holding out S -28 of the I.P. Act deals with the doctrine of holding out. It says (1) Any person who by words spoken or written or by conduct represents himself, or knowingly permits himself to be represented to be a partner in a firm, is liable as a partner in that firm to anyone who has on the faith of any such representation given credit to the firm, whether the person representing himself or represented to be a partner does or does not know that the representation has reached the person so giving credit. Where after a partners death the business is continued in the old firm name, the continued use of that name or of the deceased partners name as a part thereof shall not itself make his legal representative or his estate liable for any act of the firm done after his death.
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(2)
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Thus in order to make a person liable as a partner under this section on the basis of the principle of holding out the following facts must be established: (1) That he by words spoken or written or by his conduct represented himself to be a partner or knowingly permitted himself to be represented as a partner, and That the person acting in the faith of such representation gave credit to the firm. For application of this rule it is not necessary that the person representing himself or represented to be a partner does not know that the representation has reached the person so given credit. In order to make a person liable under the doctrine of holding out, it has to be proved that either he himself made a representation or knowingly permitted such a representation to be made by someone else. In order to entitle a person to bring an action under the doctrine of holding out, it has to be shown that he acted on the faith of the representation and gave credit to the firm. But if a person, while giving credit to the firm did not know about the representation, he cannot take advantage of this doctrine and make such a person liable as a partner. S -28(2) deals with cases where after a partners death, the business is continued in the old name and lays down that the continued use of firm name or the name of the deceased partner, shall not of itself make the legal representative of the deceased or his estate liable for any act of the firm done after his death. An important application of the doctrine of holding out takes place when a partner retires and a public notice of his retirement is not given. The retired partner remains liable by holding out to those customers of the firm, who have given credit without knowledge of the retirement. But the principle of holding out on retirement without giving public notice does not apply in the following cases:
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(2)
(1)
Deceased partner: The estate of a deceased partner is not liable for any act of the firm done after his death even if the business is continued by the surviving partners in the same style and place and even if his name appears in the name and affairs of the firm. Death is notice by itself. Insolvent partner: Insolvency of a partner also terminates his liability forth with. A person ceases to be a partner from the date of his insolvency and his estate is no more liable for any act of the firm done after his insolvency whether notice has been given or not. Dormant partner: A dormant partner means a partner, whose existence as a partner is not reflected by the name of the firm or otherwise. He has never taken part in the conduct of business as a partner and so, he is not known to the customers of the firm. As long as he remains a partner, his liability for the acts of the firm is the same as that of any acting, apparent or ostensible partner. But when he retires, public notice is not requisite to terminate his liability. His presence in the firm was not known to the public and his exit need not be publicly anounced.
(2)
(3)
Q. 6 Discuss the rights and liabilities of a minor admitted to the benefit of a partnership. Ans S -30 of the I.P. Act 1932 deals with rights and liabilities of a minor admitted to the benefit of a partnership. It says: (1) (2) A minor with the consent of all partners, may be admitted to the benefits of partnership. Such minor has a right to such share of the property and of the profit of the firm as may be agreed upon and he may have access to and inspect and copy any of the accounts of the firm. Such minors share is liable for the acts of the firm, but the minor is not personally liable for any such act. Such minor may not sue the partners for an account or payment of his share of the property or profits of the firm, save when severing his connection with
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the firm and in such case the amount of his share shall be possible in accordance with the rules contained in section 48. (5) At any time within 6 months of his attaining majority, or of his obtaining knowledge that he had been admitted to the benefits of partnership, whichever date is later, such person may give public notice that he has elected to become or that he has elected not to become a partner in the firm and such notice shall determine his position as regards the firm. Provided that, if he fails to give such notice, he shall become a partner in the firm on the expiry of the said 6 months. (6) Where any person has been admitted as a minor to the benefit of partnership in a firm, the burden of proving the fact that such person had no knowledge of such admission until a particular date after the expiry of 6 months of his attaining majority shall lie on the person asserting that fact. Where such person becomes a partner his rights and liabilities as a minor continued up to the date on which be becomes a partner, but he also becomes personally liable to third parties for all acts of the firm done since he was admitted to the benefits of partnership, and his share in the property and profits of the firm shall be share to which he was entitled as a minor. Where such person elects not be become a partner his rights and liabilities shall continue to be those of minor under this section upto date on which he gives public notice. his share shall not be liable for any acts of the firm done after the date of the notice and he shall be entitled to sue the partners for his share of the property and profits in accordance with sub-section (4).
(7) (a)
(b) (8) (a) (b) (c)
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The true nature of benefits of partnership and the role of the guardian of minor in this regard has been explained by the Supreme Court in Commissioner of Income-Tax Vs Shah Mohan Das Sadhuram AIR 1966 SC 15 as under: S -30(2) makes clear that a minor cannot be liable for losses and S -30(4) enables a minor to sever his connection with the firm and if he does so, the amount of his share has to be determined by evaluation made as far as possible in accordance with the rules contained in S -48, which section visualizes capital having been contributed by partners. There is no difficulty in holding that this severance may be affected on behalf of a minor by his guardian clause (5) proceeds on the basis that he has been admitted to the benefits of partnership. This sub-section enables him to elect on majority, either to remain a partner or not to become a partner in a firm. Q. 7 Discuss the different modes of dissolution of a partnership firm. Ans Dissolution of partnership S -39 says The dissolution of a partnership between all the partners of a firm is called the dissolution of the firm. Thus it is clear that where only some of the partners cease to carry on the partnership business, there can be no dissolution of the firm. Where some of the partners make an agreement between themselves for carrying on a partnership on the dissolution of the old firm, the firm so constituted will be a new firm and not a continuation of the old one. Modes of dissolution A firm may be dissolved in any of the following ways: (1) By consent and agreement: S -40 provides that A firm may be dissolved at any time with the consent of all the partners. This applies to all cases, whether the firm is for a fixed period or at will. A firm may be dissolved in accordance with a contract between the partners. The contract providing for dissolution may be contained in the partnership deed itself or in a separate agreement.
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(2) (a) (b)
Compulsory dissolution: Vides, S 41 A firm is dissolved By the adjudication of all the partners or of all the partners but one as insolvent, or By the happening of any event which makes it unlawful for the business of the firm to be carried on for the partners to carry it, on in partnership: Provided that, where 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 firm in respect of its lawful adventures and undertakings.
(3)
Contingent dissolution: Vide S 42 A firm is dissolved on the happening of any of the following contingencies, provided that there is no agreement to the contrary If the firm is constituted for a fixed period, by the expiry of that term. If the firm is constituted to carry out one or more adventures or undertaking, when they are completed; By the death of a partner; and By the adjudication of a partner as an insolvent. In C.I.T Vs Nalli Silk Emporium 1991 the Madras H.C has held that If there is no provision under the deed of partnership, that the firm would continue in spite of the death of a partner, on death of a partner, surviving partners have no option to continue the partnership. The firm is treated as dissolved. Separate assessments have to be made for the period upto the date of death of a partner, from the date of death to the date of constitution of the new form and after constitution of the new firm.
(a) (b) (c) (d)
(4)
By notice: Vide S 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.
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(2)
The firm is dissolved from the date mentioned in the notice as the date of dissolution, or if no date is so mentioned, as from the date of the communication of the notice.
In Banarsi Das Vs Kanshi Ram AIR 1963 the S.C has held that In case of a partnership at will, mere filing of a suit for dissolution does not amount to a notice of dissolution. The section contemplates the mentioning of a date in the notice of dissolution, from which the firm would stand dissolved. Assuming that term of notice is wide enough to include within the plaint, it would follow that the partnership would be dissolved when the summons accompanied by a copy of the plaint is served on the defendant and on all defendants, where there several defendants. Since a partnership would be dissolved only from one date, the date of dissolution would have to be regarded to be the one, on which the last summons was served. (5) (a) (b) (c) (d) (e) (f) Dissolution by Court: Vide S -44 of I.P. Act, 1932 At the suit of a partner, the court may dissolve a firm on any of the following grounds, namely: that a partner has become of unsound mind. that a partner has become in any way permanently incapable of performing his duties as a partner; that a partner, is guilty of misconduct which is likely to affect prejudicially, the carrying on, of the business. that a partner, willfully or persistently commits breach of agreements relating to the management of the affairs of firm. that a partner, has in any way transferred the whole of his interest in the firm to a third party. that the business of the firm cannot be carried on save at a loss; or
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(g)
on any other ground which renders it just and equitable that the firm should be dissolved. In Narinder Singh Randhawa Vs Hardial Singh Dhillon AIR 1985 P& H High Court has held that wherever dissolution of partnership is sought U/S -44(g), then it is for Court to decide, whether it would be just and equitable to dissolve the partnership or not and such a matter cannot be left to be decided by the arbitrator in pursuance of the arbitration clause contained in the partnership deed. Applied Questions and Answers
Q. 8 A suit was brought by two plaintiffs, but there was no evidence as to what was the exact contract between them with regard to the joint business which was carried on by them and there was no evidence that partnership business was carried on by all or any of partners acting for all nor did the bond upon which the suit was based described them as partners in a firm, though there was a recital in the bond which was to the effect that money was advanced from a common fund. The defendant pleaded that suit was barred U/S -69 of the I.P. Act 1932. Decide, giving reasons. Ans S -4 provides that partnership is the relation between the persons who have agreed to share the profits of a business carried on by all or any of them acting for all. In the case in hand, there is no evidence to prove that the business was being carried on by all and any of partners acting for all. In other words, the essential elements of a partnership is not established. Therefore, it cannot be said that the plaintiff carried on their business as partners. Unless a partnership between the plaintiff is established, S -69 of the I.P. Act is not attracted and the suit cannot be said to be barred under the said provision. Q. 9 A and B were partners, the latter being the managing partner. The partnership was dissolved and its winding up devolved on B. A part of the assets consisted of bales of cotton. A requested B to sell these bales immediately. B delayed in selling them, with the result that they were ultimately sold at much lower price than they would have fetched if sold when A desired. A contended that the loss sustained by the postponement of the sale ought to be borne by B alone. Decide.
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Ans S -13(f) of the I.P. Act 1932, provides that Subject to contract between the partners, a partner shall indemnify the firm for any loss caused to it by his willful neglect in the conduct of the business of the firm. However the liability of one partner to another for his act is not as wide as that of an agent to a principal. U/S -212 of the contract Act an agent is responsible to his principal for the direct consequence of his neglect want of skill or misconduct. A partner is not liable to the same extent as an agent. In case a partner acts bona-fide in order to benefit the firm and without culpable negligence and willful default, he alone will not be liable and loss must be borne by all. The problem in question is based on Cragg Vs Ford 1842 Case, in which the plaintiff and the defendant were partners and the defendant was the managing partner. The partnership was dissolved and the winding up of its affairs devolved on the defendant. Part of the assets consisted of bales of cotton and the plaintiff requested that these might be immediately sold. However, the defendant delayed to sell them and they were ultimately sold at a much lower price than they would have fetched, if they had been sold, when the plaintiff desired. The plaintiff contended that the loss sustained by the postponement of the sale ought to be borne by the defendant alone. But the Court held that the plaintiff, if he had chosen, might himself have sold the cotton and that the defendant, in delaying the sale, had acted bona fide and in exercise of his discretion, the loss ought not to be thrown on him alone, but ought to be shared by the plaintiff. In the present case it was for B to wind up the firm. Under these powers he had power to sell the partnership assets at any time, in the exercise of his discretion. It is not the case of A that B acted in bad faith. A if he had chosen, might himself have sold the cotton. Since B in delaying the sale had acted bona-fide and in exercise of his discretion, he cannot be said to be guilty of willful neglect and loss must be borne by A also. Q. 10- X and Y are partners in a trading firm; X borrows Rs. 90,000 from P and executes a promote in the name of the firm. X spends the money in purchasing a plot of land in his own name for personal purpose. Can P hold Y liable for the debt? Decide with reasons.
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Ans S -27 Says where (a) (b) a partner acting within his apparent authority receives money or property from a third party and misapplies it, or a firm in the course of its business receives money or property from a third party, and the money or property is misapplied by any of the partners, while it is in the custody of the firm, the firm is liable to make good the loss, The apparent authority to borrow money of a partner depend on the nature of the business. It is thus well settled that in a trading firm, the power of borrowing money for the purpose of the firm exists and that bills and promotes given by one of the partners in the firm for money so borrowed will bind the firm. In such a case, no duty is cast upon the person advancing the money to make any further enquiries and the other partners are liable though the borrowing partner may misappropriate the money. Even from readings of S -19 & 22 of the I.P. Act 1932, it emerges that, if an act is done by one partner on behalf of the firm and it is done for carrying on the partnership business, in the ordinary way, the firm will prima facie be liable although in point of fact, the act was not authorized by other partners. In the present case, the partnership firm of X and Y is a trading partnership firm. It has been established that X who is a partner in the said firm, took the loan in question from the plaintiff during the course of the business of the firm and he executed a promote in suit on behalf of the partnership firm in his capacity as a partner. Under these circumstances, the plaintiff was under no duty to make any further enquiries and to see that the amount taken by X was applied towards business of partnership firm. So the firm and other partners are liable, though X might have misappropriated the money so borrowed from the plaintiff. Thus, it is clear that Y is also liable for the debt. Q. 11- One of the partners of firm, while on touring business of the firm, usually travelled without ticket. In consequence, he was prosecuted by the railway police. The other partners objected his behaviour and sought dissolution of the firm through Court. Discuss with reasons whether the partners would succeed?
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Ans S -44(c) provides that - At the suit of the partner, the court may dissolve a firm inter alia on the ground that a partner other than the partner suing, is guilty of conduct which is likely to affect prejudicially the carrying on the business, regard being had to the nature of business. Under this clause, the court will pass a decree for dissolution, if it is satisfied that the conduct of the partner in question is calculated to prejudice the carrying on of the partnership business, that is, if the conduct is such that it is not reasonable or practicable for the co-partners to carry on business. The suit may be brought by any one or more of the innocent partners. But it is not necessary that the conduct, which is made ground of dissolution should be connected with the partnership business. All that the Court is concerned with is whether having regard to the nature of the partnership business the conduct of the delinquent partner is calculated to injure it. In the case in hand, the nature of partnership business required the delinquent partner to go on business tour. He usually travelled without ticket and was thus prosecuted by the railway police. This conduct undoubtedly is calculated to injure the reputation and goodwill of the partnership firm. Therefore, the other partners are entitled to the dissolution of the partnership firm U/S -44(c) of the I.P. Act 1932 Q. 12- A, B and C were partners of a firm, which was not registered, the firm brought a suit for the recovery of debt due from X to the firm. A, B and C had sent an application to the registrar of firms in prescribed form and all formalities were completed, but the firm was yet not registered. The firm brought a suit against X. Can the suit proceed? Discuss with case law. Ans S -69(2) provides that No suit to en force a right arising from a contract shall be instituted in any court by or on behalf of a firm against any third party unless the firm is registered and the persons suing are or have been shown in the Registar of Firms as partners of the Firm. This section is mandatory. It provides that court has no power to grant any relief against the disability imposed by the section. It makes a suit or other proceeding by an unregistered firm or by a partner whose name does not appear as a member in the register of firms, bad at its inception. It does not confer on the defendant any right which can be waived at his option, but debars the institution of a suit or other proceeding in contravention of its
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provisions. The moment the Court is satisfied that the plaintiff is an unregistered firm or partner, it is bound to treat the suit or other legal proceeding as if it had not been validly instituted and dismiss it. In Puran Mal Ganga Ram Vs Central Bank of India Ltd. AIR 1953 , it was held that where there was no registration of the firm U/S -69 before the suit was instituted, subsequent registration will not rectify that mistake. In UOI Vs M/S Durgadutta Biswanath AIR 1961 , it was held S 69(2) prohibits the institution of the suit by a firm without registration. The words in S -69(2) are mandatory and the suit instituted without obtaining registration of the firm is void cannot be proceeded with. The subsequent registration of the firm will not validate the institution of the suit. Nor can the suit be deemed to have commenced on the date when the registration has been obtained. In the case in hand, the partnership firm was not registered on the date when it filed the suit. In other words there was no proper plaint. The subsequent registration or the fact that the application for registration was pending would not cure the original defect. Therefore, the plaint is liable to be rejected U/S -69(2) of the Act.
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Model Q The Partnership Act 1932

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Model Q The Partnership Act 1932

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Model Q. & Ans. for Judicial Service Main Exam On The Indian Partnership Act, 1932 Q.

(4) (5) (6)

(2) (1) (2) (3) (4)

(5) (6) (3) (1)

(b) (8) (a) (b) (c)

(2) (a) (b)

(a) (b) (c) (d)

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