Indian Partnership Act, 1932 : A Critique – By Rajat Mathur
POLICY / OBJECT / HISTORY-
IPA, 1932 is premised on English Partnership Act, 1890 with modifications, additions & improvements. This Act has Chapters I-VIII.
IPA is not exhaustive as word ‘consolidated’ is not used in its preamble, rather word used is “define and amend”, implying that this act is to be read with other acts as being not complete in itself. Example – to be r/w ICA, 1872 and CPC, 1908 etc.
‘Partnership’ as a subject is given as “Item No.7 in Concurrent List” – implies that both State and Centre have power to make law on it.
‘Partnership’ is created by contract[2] and not by status eg: Hindu Undivided Family [3].
Partnership is an extension of law of agency[4], i.e. one partner acting for all (i.e. ultimate test[5] of partnership).
Statement of Objects & Reasons –
Disputes between business partners were dealt in India uptill middle of 19th century, based on its prevalent customs and usages.
Earlier, partnership law was dealt with under Chapter XI consisting of S.239-266 of ICA, 1872 which now stands repealed as same incorporated into IPA, 1932.
Brief outlines of bill are –
(1) Registration not made compulsory in IPA, 1932 as opposed to English Law;
(2) Framing of inducements given in this Act for registration of firm;
(3) Outgoing partners;
(4) Retired or expelled partners;
(5) Public notice be given before dissolution of the firm;
(6) One year window period given after registration of a firm so that firm are not blind-sided with litigation forthcoming, which is why, S.69 of the Act comes effect from 01.10.1933 as opposed to date of 01.10.1932 on which this Act came into force;
(7) Goodwill of a dissolved firm not dealt with properly in English Law but now given a separate general provision u/S.55 under this Act.
Partnership firm is not a legal entity like a company[6], and hence, there is no concept of limited liability and all partners are equally liable and owners of property of the firm.
Main tests of a partnership are –
Participation of profits is a strong test of partnership but not the conclusive test, eg: commission agent may be working for profit with someone but sharing of profit cannot merely term as partnership. One has to look at the whole contract between the partnership and the circumstances around it[8].
VARIOUS RELEVANT PROVISIONS -:
Law of partnership is an extension of law of agency, as is clear from following -:
I. Agency defined as representative capacity u/S.226 of ICA, 1872 (legal fiction), and this law of agency is extended to IPA, 1932 u/S.2(a), 4 & 8.
II. Notice to agent is notice to principle (S.229, ICA, 1872) i.e. constructive notice – similarly, notice to partner u/S.24 of IPA.
III. Express/implied authority u/ICA, 1872 vide S.186, 187, and similarly, S.19-22 of IPA, 1932 for implied/express authority (See: discuss here – difference between Trading Firm & Non-Trading Firm).
IV. Authority of agent in emergency for protecting principle under S.189, ICA, 1872 and similarly, also in S.21 in IPA, 1932 (i.e. partner can act in emergency in the interest to protect firm).
V. If agent earned something out of business of the firm or earned personal profit out of business of the firm, then it belongs to principal and partner liable to return it to firm u/S.16, IPA.
VI. Theory of indemnity in agency u/S.223 & 224 of ICA and similarly, in IPA, 1932 – S.13 (d),(e).
VII. Mutual good, faith and loyalty provided u/S.211 to 214, ICA, 1872 – similarly, Mutual trust and confidence principle provided in S.9 of IPA.
VIII. Principle of estoppel provided u/S.237, ICA, 1872 and also, similarly, provided in S.28, 32(3), 30(5) and S.45 of IPA, 1932.
Partnership depends upon “Delectus Persona” – implying that it depends upon capacity and hardwork of each partner and all parties are important for business and no one is inferior to other.
If no contract then no Partnership, as contract is the source of relationship (S.5).
Partnership is a mixed question of law and fact, and not mere question of fact as is clear from following:-
(a) Theory of ‘Holding Out’ (S.28, IPA) & theory of estoppel (S.114-117, IEA) – law
(b) Partnership by contract (S.4) – law
(c) Partnership by fact – fact
New definition of Partnership is an improvement over older definition as given u/S 239 of ICA, 1872 (Now repealed) as:- (1) introduction of concept of mutual agency (“acting for all”) in new definition which is crux of Partnership; (2) aspect of “minor” loosely worded as only two clauses dealt with it in old definition but now a whole provision given on it i.e. S.30, IPA; (3) in old law – no provision of registration of firm but now given in Chapter VII (S.69); (4) contribution not necessary now; (5) time of commencement of Partnership given via expression “carried on” in S.4 now; (6) who to manage business now i.e. all or any of them acting for all subject to contract (S.4)
Role of contract in partnership i.e. contract determines partnership as is clear from following:-
(a) Creation of Partnership (S.5)
(b) Continuation of Partnership
(c) Rights and duties of partners (S.11,12,13,15)
(d) Dissolution of firm (S.40)
(e) Preventing dissolution i.e. no dissolution of firm if contract says otherwise (S.42)
(f) Dissolution of firm (S.40) either by consent of all or with contract between the partners or by subsequent agreement (S.62, ICA, 1872)
(g) If any partner dies, then firm dissolved [S.42 (c),(d)]
Elements of S.4 –
(a)Relationship (i.e. abstract and not concrete like shop but firm is concrete)
(b) Persons (i.e. natural or legal, but must be competent to contract)
(c) Agreement (partners agree to do some business)
(d) Business must be there [i.e. condition precedent of Partnership & it may one transaction of business/venture[9] (S.8)]
(e) Share the profits of business (not the sole test, but prima facie test)
(f) Concept of mutual agency (S.18)– one acting for all (most important change in new definition)
(g) Firm (i.e. trading or non-trading firm)
Partnership at Will [S.7, 32 (c) & 43] is where no provision is made by contract either for its duration or for its determination.
Provisions providing for “Agreement in Restraint of Trade” in IPA, 1932 are -:
(a) S.16(b) – qua subsisting partner
(b) S.36(2) – qua outgoing partner
(c) S.53 – after dissolution but up till winding up of firm
(d) S.54 – after dissolution r/w S.27 of ICA, 1872
Proportion of sharing losses is same as sharing of profits, if nothing given re losses sharing in the contract[10].
As per S.14, goodwill also falls in the ‘property’ of the firm[11].
A partner cannot compromise any claim by the firm unless there is express authority given by all parties[12]. (See: Implied Authority- S.19 to 22, IPA)
S.25 – a partner is under no liability to the firm in respect of debts subsequently incurred by other partners at a time when he was not a partner[13].
A Principal is liable for fraud or other wrongful act of his agent if committed within the scope of his employment including a criminal act[14].
Concept of Holding-Out [S.28, 30(9), 32(3), 33(2) & 45] applies to a partner only via legal fiction, whereas; concept of ‘estoppel’ as given u/S.115, IEA, 1872 which applies to a representation made by a firm via legal fiction which is not rebuttable. Estoppel is a larger concept vis-à-vis ‘holding out’.
S.30 – Minor admitted to benefits of partnership – break up of provision:-
When minor is made full partner, the whole deed becomes invalid w.r.t. all partners, as a minor cannot be made full partner but only for benefits of partnership as per S.30(1)[15].
Minor cannot be made liable for losses as per S.30(2), and also that S.30(4) enables a minor to severe his connection with the firm and if he does so, then his share to be evaluated and determined in terms of S.48, IPA[16].
A guardian on behalf of minor can do all that is necessary to effectuate the conferment and receipt of all benefits pf partnership[17].
S.31 – for introduction of a new partner – does not apply to a partnership of two persons which is automatically dissolved on death of one of them, as in this case there is no partnership for any new partner to be introduced[18].
Liability of a Retired Partner under S.32 arises only through estoppel and in this case, the customer could either sue the late partner or the new firm and he could not sue all of them[19].
A partner who has retired is not liable even if no public notice of his retirement has been given, though creditors were informed individually[20].
Retiring partner is required to give notice to various classes of people, who might enter into transaction with the partnership firm[21].
Various types of dissolution provided under IPA are:- (1) Dissolution by agreement (S.40); (2) Compulsory Dissolution (S.41); (3) Dissolution on happening of certain contingencies (S.42); (4) Dissolution by notice of Partnership at Will (S.43); and (5) Dissolution by Court (S.44)
S.43 does not bar filing of a civil suit of comprehensive relief[22] by an appropriate remedy, in addition to notice in terms of dissolution of partnership at will.
S.44(g) deals with residuary clause of Dissolution by Court based on principle of Ejusdem Generis.
Valuation of the share of outgoing partner is to be ascertained u/S.48 on the basis of the value on the date of the retirement[23], unless there is a case where the valuation is directed by the Court in the exercise of its discretion, in which event the relevant date will be the date on which the share is actually valued.
Distribution of surplus u/S.48 at the time of dissolution of the firm is for the purpose of adjustment of the rights of the partners in the assets of the partnership, and it does not amount to transfer of assets and as such, does not require compulsory registration under S.17 of Indian Registration Act, 1908[24].
S.49 – in case of joint debts due from the firm and also separate debts from any partner, property of the firm is to be applied in first instance in payment of firm debts and then only in case of surplus, be utilized in payment of debts of individual partner.
Significance of goodwill – term ‘goodwill’ signifies the values of business in the hands of the successor and is generally considered to be an asset of the partnership and its value has to be worked out and divided between the partners[25].
Relevant provisions qua ‘Registration of Firm’ under Chapter VII are:-
S.69 for sake of convenience is broken into 4 parts:-
(a) Clause (1) – no present or past partner can file a suit against the firm to enforce a right arising from a contract or right conferred by this Act, unless: (1) firm is registered; and (2) person suing is or has been partner as shown in the register of firm (twin tests to be complied mandatory)[27].
(b) Clause (2) – no firm can file a suit against third party to enforce a right arising from a contract or right conferred by this Act, unless (1) firm suing is a registered one; and (2) person so suing is shown in register of firm as a partner.
(c) Clause (3) – provisions of clauses (1) & (2) apply to claim of set-off or other proceeding to enforce a right arising from a contract or right conferred by this Act, except: (1) Enforcement of right to sue for dissolution; & (2) Powers of Official Assignee, Receiver or Court u/Provincial Insolvency Act, 1920 or under Presidency Towns Insolvency Act, 1909.
(d) Clause (4) – this section not apply to place of business to which this Act extends to, or to suit or claim of set-off not exceeding Rs.100/- of value in Provincial Insolvency Act, 1920 or under Presidency Towns Insolvency Act, 1909.
Unregistered partnership firm notwithstanding bar of S.69 of this Act, can maintain complaint under Section 138 of this Act for dishonor of cheque, as it is neither a right conferred by a contract nor by the Partnership Act, 1932, rather it is a right conferred by a statute being penal in nature, as held by Rani Kapoor vs. Silvermount (J.Mukta Gupta – Delhi HC)[28], which took note of earlier case laws & discussed the view of P&H[29], Kerala[30], Karnataka[31] and Allahabad[32] High Court in line with Supreme Court (“BSI Ltd. Case”) view, except with Andhra Pradesh High Court[33], which gave a contrary view. BSI Ltd vs. Gift Holdings Pvt. Ltd[34] that “a criminal prosecution is neither for recovery of money nor for enforcement of any security etc. S.138 is a penal provision the commission of which offence entails a conviction and sentence on proof of the guilt in a duly conducted criminal proceedings. Once the offence u/S.138 is completed, the prosecution proceedings can be initiated not for recovery of the amount covered by the cheque but for bringing the offender to the penal liability”.
Supreme Court in Haldiram Bhujiawala & Anr.[35] – held that a suit is not barred by S.69(2) if a statutory right or a common law right is being enforced.
If a party applied for registration and in between the limitation period expired for filing the suit, then suit cannot be filed – that is why; the evil of non-registration cannot be cured later on.
U/S.69 of the Act – a partner can sue w.r.t other rights not arising out of contract or right conferred by IPA, 1932, for eg: right for damages under Law of Tort as held in VR Wonder Electricals and Electronics[36] (Delhi High Court) or that partner can sue for Trademark Right, Carriers Act, Insolvency Act or a partner can sue for right conferred under S.9 of Arbitration Act, 1996.
IMPORTANT RULINGS -:
[S V CHANDRA PANDIAN VS. S V SIVALINGA NADAR,Reported in (1993) 1 SCC 589 at P.7,8,10,12-18] & [N. KHADER VALI SAHEB VS. N GUDU SAHIB (DEAD), Reported in (2003) 3 SCC 229 (3-Judges) at P.4] – dealt with S.17 of Registration Act r/w S.48, IPA i.e. in case of distribution of share on dissolution of firm u/S.44 of IPA, no need for registration under S.17 of Registration Act, 1908, as partners are already owners of property, assets of the firm and there is no transfer.
[KRISHNA MOTOR SERVICE VS. H.B.VITTALA KAMATH, Reported in (1996) 10 SCC 88 at P.7] – dealt with ‘Exceptions to S.69(3)’ of IPA, as S.20 of Arbitration Act, 1996 is not hit by S.69(3) bar of IPA.
[UTTAM TRADERS RANGHRI VS. TULE RAM, Reported in 2018 HPHC 132 at P.29] – dealt with S.138, N.I. Act is not hit by bar of S.69 of IPA.
[BSI LTD. VS GIFT HOLDINGS PVT LTD., Reported in (2000) 2 SCC 737 at P.20 (lead case)] – S.69(2), IPA bar does not hit S.138, NI Act proceedings.
[RANI KAPOOR VS. SILVERMOUNT, Reported in (242) 2017 DLT 363 at P.11] – S.69(2), IPA bar does not hit S.138, NI Act proceedings.
[ROOMAL & ORS. VS. SIRI NIWAS, Reported in (27) 1985 DLT 188 at P.5,7,9,10,18-21 (DB) (lead case on minor provision – referred to English case laws and traced out the law)] S.30 of IPA – benefits to minor of partnership – law discussed in detail – doctrine of mutuality no more applies to Indian law of partnership, as opposed to English law.
[JAGDISH CHANDER GUPTA VS. KAJARIA TRADERS INDIA LTD., Reported in (1964) 8 SCR 50 at P.5-7,11 (lead case): 4 Judges] – bar of S.69 apply to S.8(2) of Arbitration Act, 1996 and thus, application under this Section 8(2) does not lie on behalf of unregistered firm.
[BANARASI DAS VS. KANSHI RAM, Reported in (1964) 1 SCR 316 at P.13-16 (lead case): 4 Judges] – dealt with partnership at will u/S.43 of IPA.
[BHAGWAN DAS (DEAD) THRU LRS VS. PYARE KISHAN AGARWAL, Reported in (2019) 4 SCC 731 at P.12-13: 2 Judges] – exceptions to S.69(3) of IPA r/w Application u/S.20 of Arbitration Act, 1996 – matter remanded back by SC to HC to decide afresh in view of lead case on this topic namely, (1996) 10 SCC 88.
[VINAY EKNATH LAD VS. CHIU MAO CHEN, Reported in 2020 (1) SCALE 206 at P.14-15,19] – dealt with S.45 of IPA.
[S.P MISRA & ORS. VS. MOHD. LAIQUDDIN KHAN & ORS., Reported in (2019) 10 SCC 329 at P.21-22: 2 Judges] – dealt with S.42(c) of IPA/ death of partner – dissolution of firm and liability of LRs thereafter.
[UMESH GOEL VS. HIMACHAL PRADESH COOPERATIVE GROUP HOUSING SOCIETY LTD., Reported in (2016) 11 SCC 313 at P.13,14,36 (Imp. Case): 2 Judges] – dealt with interpretation of expression “other proceedings” in S.69(3) of IPA.
[NAREDNRA KUMAR JAIN VS. KARAM VIR SINGH JAIN & ORS., at P.3,5,7] (J.Valmiki Mehta) – dealt with S.14 / 48(b)(iii) of IPA i.e. Rateable share received by a partner on capital on dissolution.
[ANIL KUMAR SUNIL KUMAR VS. ASHA RASTOGI, at P.1,4-8] (J.Valmiki Mehta) – dealt with twin conditions of S.69(1) of IPA to be met mandatorily, namely, (1) firm to be registered and, (2) partner name to be entered in the register of the firm u/S.59 of IPA r/w in RFA, Court allowed application u/O.41 R.27 CPC to bring on record the certified copy of register which showed that partner in issue had his name mentioned in the register of firm as per law.
[AERO CLUB VS. ONKAR TRAVELS, at P.5-8] & [(2012) 132 DRJ 858 at P.1,4] (J.Valmiki Mehta) – dealt with twin conditions of S.69(1) of IPA to be met mandatorily, namely, (1) firm to be registered and, (2) partner name to be entered in the register of the firm u/S.59 of IPA.
[BHAGWANTI & ORS. VS. KANSHI RAM, at P.5,9,13-16] (J.Valmiki Mehta) – dealt with S.37 of IPA / right of outgoing partner.
[V R WONDER ELECTRICALS & ELECTRONICS VS. C-QUEST CAPITAL GREEN VENTURES PVT LTD., at P.1,7,10-11] (J.Valmiki Mehta) –contention raised that bar of S.69(2) of IPA not apply as right sought to be enforced is under Law of Tort and not under Contract or Partnership Act, 1932 – Court dismissed this plea and hence, held that bar of S.69(2) apply with full force as right sought to be enforced purely contractual in nature. Suit dismissed at admission stage itself.
[MOHAR SINGH & ORS. VS SARDARI LAL 7 ORS., at P.6-11,13] (J.Valmiki Mehta) – dealt with S.4 of IPA i.e. foundational aspects, meaning of partnership Act discussed.
[SHADOW COMMUNICATIONS VS. PRINCE GUTKA LTD., Reported in 2003 (2) COMPLJ 262 (DEL) at P.1,5] (J.Valmiki Mehta) – winding up proceedings u/S434,439 of Companies Act, 1956 not affected by bar of S.69 of IPA, 1932.
[NAVIN KUMAR & ORS. VS. STANDARD RESTAURANT & ORS., Reported in (2003) 103 DLT 209 at P.24,25,27]– dealt with S.44 of IPA r/w Arbitration Act.
[ASHOK KUMAR MITTAL VS. ASHWANI KAPOOR & ORS., Reported in AIR 2005 DEL 323]– dealt with S.41, 43, 45, 46, 47 & 52 of IPA r/w Dissolution and appointment of Receiver.
[NOIDA TOLL BRIDGE CO. LTD. VS. MITSUI MARUBENI CORPORATION, Reported in (2005) 124 DLT 337 at P.1,5,6,8,9,12]– dealt with S.16, 34, 52 of IPA r/w bar of S.69 of IPA does not apply to arbitration proceedings.
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Rajat Mathur is a practicing lawyer in Delhi [B.Com (H) SRCC, DU] [LLB, Law Faculty, DU]. Despite gaining experience in Civil and Tax Law, he has worked extensively on the criminal side and has represented bureaucrats and Government Servants in matters related to the ‘Coal Block Allocation Scam case’. At 33 years of age, Mr. Mathur got the controversial acquittal of former Coal Secretary, Mr. H. C. Gupta, a decorated IAS office (now retired) in the high-profile case.
[1] Referred: Commentary on Partnership Act, 1932, Bare Act and Case laws
[2] Section 4 of IPA, 1932 (“this Act”)
[3] Section 5 of this Act
[4] Cox vs. Hickman, (1860) 8 HLC 268: 9 CB (NS) 47 (Lead case on this aspect)
[5] Mollow, March & Co. vs. Court of Wards, (1872) LR 4 PC 419 (Lead English case on test of partnership)
[8] Ibid 4 (Mollow, March & Co. case)
[11] AIR 1973 J&K 74
[13] (1949) 11 All ER 1033 [Tower Cabinet Co. vs. Ingram]
[14] (1903) 1 KB 81 [Hamlyn vs. Houston and Co.]
[18] AIR 1966 SC 24 – Imp
[19] (1882) 7 App Cas 345 (Scarf vs. Jardine)
[20] AIR 1986 Guj 162
[21] AIR 1984 Kan 55
[22] AIR 1994 NOC 26 (AP) [A.Chinna Ramanatham vs. B.Subbarami Reddy]
[23] AIR 1995 AP 49
[24] AIR 1968 SC 676 – Imp
[25] (2004) 1 SCC 497 – Imp
[26] AIR 1971 SC 1015 – Imp
[27] Sethia vs. Evan John, SC case
[28] 242 (2017) DLT 363 at P.11
[29] Capital Leasing and Finance Co. vs. Navrattan Jain at P.25
[31] (2003) 6 KANT LJ 205 at P.5
[33] (2001) 107 CompCas 22 at P.15
[34] (2000) 2 SCC 737 at P.19-20 (lead case)
[35] Anand Kumar Deepak Kumar & Anr. vs. Haldiram Bhujia Wala & Anr. : 2000 (1) Unreported Judgments 603
[36] VR Wonder Electricals and Electronics V. C -Quest Capital Green Ventures Pvt. Ltd. & Ors. at P.1,7,10-11
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