Unit IV — Indian Partnership Act, 1932

“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, Indian Partnership Act, 1932

Definition & the True Test

A partnership (S.4) 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 — the last phrase encapsulates mutual agency, which is the true test. Sharing of profits is strong evidence but not conclusive (S.6, Cox v. Hickman): a lender or an employee paid out of profits is not thereby a partner. Persons who have entered into partnership are individually “partners” and collectively a “firm” (S.4).

flowchart TD
    A["Is there a PARTNERSHIP? (S.4)"]:::root
    A --> B["Agreement between persons?"]:::q
    B --> C["Business carried on?"]:::q
    C --> D["Sharing of profits?"]:::q
    D --> E["MUTUAL AGENCY —<br/>'acting for all'? (the true test)"]:::q
    E --> F["YES on all -> PARTNERSHIP"]:::yes
    E --> G["No mutual agency -><br/>mere co-ownership / lender"]:::no

    classDef root fill:#FFF8DC,stroke:#333,color:#000;
    classDef q fill:#E6F3FF,stroke:#1E3A8A,color:#000;
    classDef yes fill:#E6FFE6,stroke:#1E7A1E,color:#000;
    classDef no fill:#FFE6E6,stroke:#8A1E1E,color:#000;
    linkStyle default stroke:#888,stroke-width:1px;

Third Parties, Types of Partners & Dissolution

Every partner is an agent of the firm (S.18) and his implied authority (S.19) binds the firm for acts done in the usual course of business. A partner’s liability is joint and several and unlimited (S.25). Types of partners include active, sleeping/dormant, nominal, partner in profits only, sub-partner, and a partner by holding out / estoppel (S.28) who, having represented himself as a partner, is liable to one who gave credit on that faith. The firm’s constitution changes by admission (S.31), retirement (S.32), expulsion (S.33), insolvency (S.34) or death (S.35) of a partner, with a continuing liability until public notice is given.

Dissolution may be: of the firm by agreement (S.40); compulsory on insolvency or illegality (S.41); on the happening of contingencies (S.42); by notice in a partnership at will (S.43); or by the court on grounds such as a partner’s insanity, permanent incapacity, misconduct or persistent breach (S.44).

⚠️ Effect of Non-Registration (S.69): registration is optional but crucial. An unregistered firm cannot sue a third party, and a partner of an unregistered firm cannot sue the firm or co-partners, to enforce a contractual right. Exceptions: a suit for dissolution, for accounts of a dissolved firm, or to realise the property of a dissolved firm, and a third party’s suit against the firm, are not barred.

✏️ Sample Solved Problem (IRAC Method)

Problem: X and Y carry on business as an unregistered firm. The firm supplies goods worth ₹50,000 to Z on credit, but Z does not pay. The firm sues Z to recover the price. Can it succeed?

I — Issue

Whether an unregistered firm can maintain a suit to enforce a contractual claim against a third party.

R — Rule

Section 69(2) — no suit to enforce a right arising from a contract may be instituted by or on behalf of a firm against a third party unless the firm is registered and the suing persons are shown as partners in the Register of Firms.

A — Analysis

The instinct is that Z plainly owes the money, so the firm should recover. But S.69 is a procedural bar that operates regardless of the merits: the debt may be genuine, yet the door of the court is shut to an unregistered firm suing a third party on a contract. The supply of goods is a contractual right, squarely within S.69(2); the firm is unregistered, so the bar applies. The bar is not lifted merely because the claim is meritorious — registration (or the statutory exceptions) is the only key, and none of the exceptions (dissolution/accounts) is in play here.

C — Conclusion

The firm’s suit against Z fails for non-registration under S.69(2). X and Y must first register the firm (which can cure the defect prospectively) before they can sue Z to recover the ₹50,000.

📄 The full bundle (₹199) has the complete Unit IV — the true test, all rights and duties, implied authority, every type of partner, the whole law of dissolution and Section 69 — plus the Question Bank’s model answers to the holding-out, dissolution-by-court and reconstitution problems. Get Notes + Question Bank — ₹199