Partnership — Third Parties, Kinds of Partners & Dissolution — Contract II (Special Contracts) Notes

Relation of Partners to Third Parties

Because each partner is an agent of the firm, one partner’s act can land the whole firm in debt — even a partner who has left, if no public notice was given. And a person who is not a partner at all can be made liable if he lets himself be shown as one. The outside world’s protection is the theme here.

How are partners liable to third parties?

The key is mutual agency projected outward.

Partner as agent of the firm (s.18). Every partner is an agent of the firm for the purpose of its business.
Implied authority (s.19). A partner’s acts done to carry on, in the usual way, the business of the kind carried on by the firm, bind the firm. This is his implied authority. But s.19(2) lists acts outside implied authority (unless expressly authorised or usual): submitting a dispute to arbitration, opening a bank account in his own name, compromising a claim, withdrawing a suit, admitting liability in a suit, acquiring/transferring immovable property, entering into partnership on the firm’s behalf. Related to this, s.22 provides that an act binds the firm only if done in the firm name, or in any manner expressing an intention to bind the firm — so a negotiable instrument (e.g. a promissory note) signed by a partner in his own personal name binds only him, not the firm.
Liability of partners (s.25). Every partner is liable, jointly with all the others and also severally, for all acts of the firm done while he is a partner.
Liability by holding out (s.28). Anyone who, by words or conduct, represents himself, or knowingly lets himself be represented, as a partner is liable as a partner to anyone who gives credit to the firm on the faith of that representation — even if he is not in fact a partner.
Liability of a retiring partner (s.32). A retiring partner remains liable to third parties for acts done before retirement, and continues liable for acts after retirement to persons dealing with the firm who had no notice of his retirement, until public notice of retirement is given.

🧩 WORKED EXAMPLE — retired partner without public notice

Facts. R retires from a firm but no public notice is given. An old customer, C, who regularly dealt with the firm and did not know of R’s retirement, supplies goods on credit and the firm defaults. C sues R.

Rule. Under s.32(3), until public notice of retirement is given, a retiring partner remains liable to persons who deal with the firm without notice of his retirement.

Apply. No public notice was given; C was an old customer without notice, who dealt on the faith of the firm’s usual composition.

Conclusion. R is liable to C for the debt.

Section 25, Indian Partnership Act 1932: “Every partner is liable, jointly with all the other partners and also severally, for all acts of the firm done while he is a partner.”

In Simple Terms: Each partner is the firm’s agent, so his usual-business acts bind the firm (s.19), and all partners are jointly and severally liable (s.25). Someone who poses as a partner is liable by holding out (s.28); and a retiring partner stays liable to old customers until public notice is given (s.32).

flowchart TD
    A["Partners & third parties"]
    A --> B["Partner is agent of firm s.18"]
    A --> C["Implied authority s.19<br/>(limits in s.19(2))"]
    A --> D["Joint & several liability s.25"]
    A --> E["Holding out s.28"]
    A --> F["Retiring partner liable till public notice s.32"]
    classDef box fill:#e8f0fe,stroke:#333,color:#111;
    class A,B,C,D,E,F box;

Case Laws

Scarf v. Jardine (1882) — liability by holding out; a third party dealing on the faith of an apparent partnership can hold the ostensible partner.
Devji v. Maganlal (1965) — a retiring partner is liable until public notice of retirement is given.

Kinds of Partners

Not every partner works at the counter or shows his face. Some only put in money, some only lend their name, some are partners only in profits. A short note wants each type defined with its liability in one line.

What are the kinds of partners?

Partners differ by their role, contribution and liability. Learn each with a one-line tag:

Active (or actual/ostensible) partner — takes an active part in the conduct of the business; fully liable; must give public notice to escape liability on retirement.
Sleeping (or dormant) partner — invests and shares profits but does not take part in management and is not known to outsiders; fully liable for firm debts, but need not give public notice on retirement (he was never held out).
Nominal partner — lends his name to the firm without any real interest or capital; not entitled to profits, but liable to third parties as a partner (by holding out).
Partner in profits only — shares profits but not losses (by agreement); still liable to third parties for firm acts.
Sub-partner — a partner who agrees to share his own share of profits with a stranger; the sub-partner has no rights against the firm and no liability to it.
Partner by estoppel / holding out (s.28) — not a real partner, but liable as one to those who gave credit on the faith of the representation.
Minor admitted to the benefits (s.30) — a minor cannot be a full partner but may be admitted to the benefits of the firm (Topic 6).

🧩 WORKED EXAMPLE — nominal partner’s liability

Facts. N, a well-known businessman, lets a firm use his name as a partner to attract custom, though he invests nothing and takes no profit. A creditor gives the firm credit relying on N’s name; the firm defaults.

Rule. A nominal partner lends only his name but is liable to third parties as a partner (holding out, s.28).

Apply. The creditor relied on N’s name; N knowingly allowed himself to be shown as a partner.

Conclusion. N is liable to the creditor, despite having no share in profits.

Section 5 & 7 (basis): partnership arises from contract (s.5); a firm with no fixed term/undertaking is a “partnership at will” (s.7). The kinds of partner reflect differing roles and liabilities within that contractual relation.

In Simple Terms: Partners come in kinds — active (runs and is liable), sleeping (invests, hidden, liable), nominal (name only, still liable to outsiders), partner in profits only, sub-partner (shares one partner’s share), and partner by holding out.

flowchart TD
    A["Kinds of Partners"]
    A --> B["Active"]
    A --> C["Sleeping / dormant"]
    A --> D["Nominal (name only)"]
    A --> E["Partner in profits only"]
    A --> F["Sub-partner"]
    A --> G["By holding out s.28"]
    classDef box fill:#e8f0fe,stroke:#333,color:#111;
    class A,B,C,D,E,F,G box;

Case Laws

Scarf v. Jardine (1882) — the position of a nominal/ostensible partner and liability by holding out.

Minor Partner

A minor cannot make a valid contract, so he cannot be a full partner. But the law does not want to shut him out entirely — his guardian may still want the benefit of the family firm for him. So the Act lets a minor be admitted to the benefits of partnership, with a carefully limited liability, and a crucial six-month choice when he grows up.

What is the legal position of a minor partner?

Because a minor’s agreement is void, he cannot become a partner; but s.30 allows him to be admitted to the benefits of an existing firm, with the consent of all the partners.

During minority (s.30(1)–(4)):

He has a right to a share of the property and profits as agreed.
He may have access to and inspect the accounts of the firm.
His liability is limited to his share in the firm’s property and profits — he is not personally liable.
He cannot sue the partners for accounts or his share except when severing his connection with the firm.

On attaining majority (s.30(5)–(9)):

Within six months of attaining majority (or of knowing he was admitted, whichever is later), he must elect, by public notice, whether to become a full partner or not.
If he fails to give notice, he is deemed to have become a partner on the expiry of the six months.
If he elects to become a partner, he becomes personally liable to third parties for all acts of the firm since he was first admitted to the benefits.
If he elects not to become a partner, his rights and liabilities remain those of a minor up to the date of the public notice, and his share is not liable for acts after that date.

🧩 WORKED EXAMPLE — minor electing to become a partner

Facts. M is admitted to the benefits of a firm as a minor. The firm borrows money from a lender. On attaining majority, M gives public notice electing to become a full partner. The lender then sues M for the loan taken during his minority.

Rule. Under s.30(7), a minor who elects to become a partner becomes personally liable to third parties for all acts of the firm done since he was first admitted to the benefits.

Apply. M elected to become a partner; the loan was taken after his admission to the benefits.

Conclusion. M is personally liable to the lender for the loan.

Section 30(1), Indian Partnership Act 1932: “A person who is a minor according to the law to which he is subject may not be a partner in a firm, but, with the consent of all the partners for the time being, he may be admitted to the benefits of partnership.”

In Simple Terms: A minor cannot be a full partner but can be admitted to a firm’s benefits — sharing profits, with liability limited to his share and no personal liability. On majority he has six months to elect (by public notice) in or out; electing in (or staying silent) makes him a full, personally-liable partner from the date he was first admitted.

flowchart TD
    A["Minor & partnership s.30"]
    A --> B["Cannot be full partner"]
    A --> C["Admitted to BENEFITS (all consent)"]
    C --> D["Share of profits; inspect accounts"]
    C --> E["Liability limited to his share;<br/>not personally liable"]
    A --> F["On majority: elect in 6 months by public notice"]
    F --> G["Elect IN / silent: full partner,<br/>liable since first admitted s.30(7)"]
    F --> H["Elect OUT: liable only till notice"]
    classDef box fill:#e8f0fe,stroke:#333,color:#111;
    class A,B,C,D,E,F,G,H box;

Case Laws

CIT v. Dwarkadas Khetan & Co. (1961) — a minor cannot be made a full partner; a deed making a minor a full partner is invalid to that extent (he can only be admitted to benefits).
Shivagouda Ravji Patil v. Chandrakant Neelkanth Sedalge (1965) — a minor admitted to benefits is not personally liable; the limited-liability position under s.30.

Dissolution of a Firm

There is a difference between a firm reshuffling (a partner leaves, the rest carry on) and a firm ending altogether. The Act calls the ending “dissolution of the firm”, and it can happen by agreement, by an event, or by a court order. Keep “dissolution of the firm” apart from “dissolution of partnership”.

How is a firm dissolved?

Section 39: the dissolution of partnership between all the partners of a firm is called the dissolution of the firm. (Where only some partners cease and the firm continues, that is a mere reconstitution, not dissolution of the firm.)

Modes of dissolution:

By agreement (s.40). A firm may be dissolved with the consent of all the partners, or per a contract between them.
Compulsory dissolution (s.41). By the adjudication of all partners (or all but one) as insolvent, or by the business becoming unlawful.
On the happening of certain contingencies (s.42). Subject to contract — by expiry of the term; completion of the venture; death of a partner; or insolvency of a partner.
By notice of partnership at will (s.43). Where the partnership is at will, any partner may dissolve it by giving notice in writing to all the others; dissolution takes effect from the date named (or the date of communication).
By the court (s.44). On a suit by a partner, the court may dissolve the firm on grounds such as a partner’s unsoundness of mind, permanent incapacity, misconduct prejudicial to the business, persistent breach of the agreement, transfer of the whole interest, the business running only at a loss, or any other just and equitable ground.

After dissolution, the partners settle accounts (s.48), and the firm’s assets are applied first to debts, then to partners’ advances and capital, and any surplus is divided in the profit-sharing ratio.

🧩 WORKED EXAMPLE — dissolution of a partnership at will

Facts. A, B and C are partners in a partnership at will. A, wishing to leave the venture entirely, gives written notice to B and C that the firm is dissolved from a stated date.

Rule. Under s.43, a partnership at will may be dissolved by any partner giving notice in writing to all the others; it dissolves from the date mentioned (or of communication).

Apply. The firm is at will; A gave written notice to all partners naming a date.

Conclusion. The firm stands dissolved from the notified date.

Section 39, Indian Partnership Act 1932: “The dissolution of partnership between all the partners of a firm is called the ‘dissolution of the firm’.”

In Simple Terms: A firm dissolves when the partnership between all the partners ends — by agreement (s.40), compulsorily on insolvency/illegality (s.41), on contingencies like death or expiry (s.42), by notice in a partnership at will (s.43), or by court order on specified grounds (s.44).

flowchart TD
    A["Dissolution of firm s.39"]
    A --> B["By agreement s.40"]
    A --> C["Compulsory s.41<br/>(insolvency / unlawful)"]
    A --> D["Contingencies s.42<br/>(expiry, death, insolvency)"]
    A --> E["Notice - at will s.43"]
    A --> F["By court s.44"]
    classDef box fill:#e8f0fe,stroke:#333,color:#111;
    class A,B,C,D,E,F box;

Case Laws

Garner v. Murray (1904) — on dissolution, a deficiency of capital arising from an insolvent partner is borne by the solvent partners in proportion to their capitals.
Banarsi Das v. Kanshi Ram (1963) — the distinction between dissolution of the firm and mere retirement/reconstitution.

Registration and Non-registration of a Firm

Registering a firm in India is optional — nobody is fined for not doing it. But the Act attaches a sharp penalty to staying unregistered: an unregistered firm essentially cannot sue to enforce its contracts. That disability, in section 69, is what carries the marks.

How is a firm registered, and what if it is not?

Registration is optional but strongly incentivised.

Procedure (ss.58–59). The partners send the Registrar of Firms a statement in the prescribed form, signed and verified by all partners, giving: the firm name, the principal place of business, other places, the date each partner joined, the names and addresses of partners, and the duration of the firm. On being satisfied, the Registrar records an entry in the Register of Firms — registration is then complete (s.59). Registration can be effected at any time (not necessarily at formation).

Effects of non-registration (s.69) — the crucial part. An unregistered firm suffers these disabilities:

No suit by a partner against the firm or co-partners to enforce a right under the contract or the Act (s.69(1)).
No suit by the firm against third parties to enforce a contractual right (s.69(2)).
The same bar applies to a claim of set-off (over ₹100) or other proceeding to enforce a contractual right (s.69(3)).

Exceptions — what an unregistered firm CAN still do (s.69(3)–(4)):

Sue for dissolution of the firm, or for accounts of a dissolved firm, or to realise the property of a dissolved firm.
The third party can still sue the unregistered firm (the bar is only on the firm suing).
Claims not exceeding ₹100, and set-offs of that value.
Rights arising otherwise than under a contract (e.g. for an injury), and firms in areas where s.69 does not apply.

🧩 WORKED EXAMPLE — unregistered firm trying to sue

Facts. An unregistered firm supplies goods worth ₹5,00,000 to a buyer who does not pay. The firm sues the buyer for the price.

Rule. Under s.69(2), an unregistered firm cannot sue a third party to enforce a right arising from a contract.

Apply. The firm is unregistered and is suing to enforce a contractual right (the price).

Conclusion. The suit is barred; the firm must first get registered (and can then sue for causes arising thereafter, subject to limitation) — though the buyer could have sued the firm.

Section 69(2), Indian Partnership Act 1932: “No suit to enforce 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 Register of Firms as partners in the firm.”

In Simple Terms: Registration is optional — partners file a statement with the Registrar (ss.58–59). But an unregistered firm cannot sue its partners or third parties to enforce contracts (s.69) — though it can sue for dissolution/accounts, and third parties can still sue it, and small claims under ₹100 are exempt.

flowchart TD
    A["Registration of firm"]
    A --> B["Optional; statement to Registrar ss.58-59"]
    A --> C["Non-registration s.69"]
    C --> D["No suit by partner vs firm s.69(1)"]
    C --> E["No suit by firm vs third party s.69(2)"]
    C --> F["No set-off > Rs.100 s.69(3)"]
    C --> G["Exceptions: dissolution/accounts;<br/>third party can sue firm; < Rs.100"]
    classDef box fill:#e8f0fe,stroke:#333,color:#111;
    class A,B,C,D,E,F,G box;

Case Laws

Jagdish Chandra Gupta v. Kajaria Traders (1964) — s.69 bars a suit to enforce a contractual right by an unregistered firm; “a right arising from a contract” is read widely.
Haldiram Bhujiawala v. Anand Kumar Deepak Kumar (2000) — s.69 does not bar a suit to enforce a right arising otherwise than under the partnership contract (e.g. a statutory/common-law right).

Outgoing Partner; Expulsion; Partnership at Will

Partners come and go, but leaving a firm is not as simple as walking out — a departing partner has continuing rights and continuing liabilities, and a partner cannot be thrown out except on strict conditions. This cluster of short notes is easy marks if you know the sections.

What are the rules for outgoing partners?

An outgoing partner is one who leaves a continuing firm (by retirement, expulsion, insolvency or death). The Act protects both the partner and outsiders.

Retirement (s.32). A partner may retire with the consent of all, per an express agreement, or (in a partnership at will) by written notice. He remains liable for acts before retirement and, to third parties, for acts after retirement until public notice is given.
Expulsion (s.33). A partner may be expelled only if the power to expel is conferred by contract and is exercised in good faith by a majority for the benefit of the firm (bona fide, after notice and opportunity to explain). An expulsion not satisfying these is invalid.
Rights of an outgoing partner (ss.36–37).
- s.36 — he may carry on a competing business, but (absent agreement) may not use the firm name, represent himself as carrying on the firm’s business, or solicit its old customers. A valid agreement in restraint of trade against him is permitted (exception to s.27 of the Contract Act).
- s.37 — where he leaves his share in the firm and the surviving partners carry on the business with it without a final settlement, he (or his estate) is entitled, at his option, to 6% interest on his share, or to the share of profits attributable to the use of his share.
Partnership at will (s.7). A partnership is “at will” where no fixed term or particular undertaking is provided; it may be dissolved by any partner by notice (s.43).
Partner’s right to indemnity. A partner is entitled to be indemnified by the firm for payments and liabilities properly incurred in the ordinary and proper conduct of the business (s.13(e)).

🧩 WORKED EXAMPLE — validity of an expulsion

Facts. A partnership deed empowers a majority to expel a partner. The majority expels P suddenly, without notice or any reason connected to the firm’s benefit, merely because of a personal quarrel.

Rule. Under s.33, expulsion is valid only if the power exists by contract and is exercised in good faith for the benefit of the firm, after notice and hearing.

Apply. Though a power existed, it was used in bad faith (a personal quarrel), without notice or the firm’s benefit.

Conclusion. The expulsion is invalid; P remains a partner.

Section 33(1), Indian Partnership Act 1932: “A partner may not be expelled from a firm by any majority of the partners, save in the exercise, in good faith, of powers conferred by contract between the partners.”

In Simple Terms: A retiring partner stays liable until public notice (s.32). A partner can be expelled only under an express power used in good faith for the firm (s.33). An outgoing partner may compete but not use the firm’s name/customers (s.36), and may claim 6% interest or a profit share for the use of his left-in capital (s.37).

flowchart TD
    A["Outgoing partner"]
    A --> B["Retirement s.32<br/>(liable till public notice)"]
    A --> C["Expulsion s.33<br/>(power + good faith)"]
    A --> D["Rights s.36<br/>(compete, not firm name/customers)"]
    A --> E["Share/interest s.37<br/>(6% or profit share)"]
    classDef box fill:#e8f0fe,stroke:#333,color:#111;
    class A,B,C,D,E box;

Case Laws

Blisset v. Daniel (1853) — a power of expulsion must be exercised in good faith and for the benefit of the firm, not for a partner’s private gain.
Carmichael v. Evans (1904) — an expulsion in good faith under an express power (for misconduct) is valid.

Admission of a New Partner

A firm is a relationship of trust, so you cannot force a new face on the existing partners. Bringing someone in needs everyone’s agreement — and the newcomer starts with a clean slate for the firm’s past debts.

How is a new partner admitted?

Section 31 governs the introduction of a partner.

Consent of all (s.31(1)). Subject to any contract between the partners and to s.30 (minors), no new partner can be introduced without the consent of all the existing partners. This flows from the personal, trust-based nature of partnership (mutual agency).
No liability for past acts (s.31(2)). A person introduced as a partner into an existing firm does not thereby become liable for any act of the firm done before he became a partner. He is liable only for acts after his admission (unless he agrees otherwise).
The incoming partner’s rights and duties are then those of any partner, governed by the (new) agreement.

🧩 WORKED EXAMPLE — introducing a new partner

Facts. A and B are partners. A wants to bring in C as a partner; B objects. There is no contract permitting introduction without unanimous consent. The firm also owes an old debt to a creditor.

Rule. Under s.31(1), a new partner can be introduced only with the consent of all existing partners; under s.31(2), the incoming partner is not liable for acts done before he joined.

Apply. B has not consented, so C cannot be introduced. Even if C later joined, he would not be liable for the pre-existing debt.

Conclusion. C cannot be admitted over B’s objection; and a newly admitted partner is not liable for the firm’s earlier debt.

Section 31(1), Indian Partnership Act 1932: “Subject to contract between the partners and to the provisions of section 30, no person shall be introduced as a partner into a firm without the consent of all the existing partners.”

In Simple Terms: A new partner can join only if all the existing partners agree (s.31), and once in, he is not liable for the firm’s debts incurred before he joined.

flowchart TD
    A["Admission of a partner s.31"]
    A --> B["Consent of ALL existing partners"]
    A --> C["Not liable for acts before joining s.31(2)"]
    A --> D["Subject to contract & s.30 (minor)"]
    classDef box fill:#e8f0fe,stroke:#333,color:#111;
    class A,B,C,D box;

Case Laws

CIT v. Seth Govindram Sugar Mills (1965) — the introduction/continuation of partners is governed by the agreement and the consent requirement; a partnership cannot continue contrary to s.31/s.42 where the statute so requires.

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