Partnership Act, 1932 – Economic, Business and Commercial Laws Important Questions

Partnership Act, 1932 – Economic, Business and Commercial Laws Important Questions

Question 1.
Define ‘partnership’. Discuss the essential elements of the partnership.
Answer:
Partnership [Section 4]: 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.

Essentials: Following are the essentials of partnership:

  • Association of two or more persons
  • Carrying on business
  • Agreement/contract
  • Sharing the profits of the business
  • Mutual agency among partners.

Question 2.
“Sharing of profits is prima facie evidence of partnership but not conclusive evidence”. Discuss this statement and bring out the true test of partnership.
Answer:
Mode of determining the existence of partnership [Section 6]: In determining whether a group of persons is or is not a firm or whether a person is or is not a partner in a firm, regard shall be had to the real relation between the parties, as shown by all relevant facts taken together.

Sharing of profits: Sharing of profits is an important criterion but is no a conclusive test. Receipt by a person of a share of profits of a business or a payment contingent upon the earning of profits or varying with the profits earned by the business does not by itself make him a partner with the persons carrying on the business.

Specific exclusions from the partnership:
1. Joint owners sharing profit are not partners.

2. A partnership is not created when share or payment is received by:

  • Moneylender
  • Servant or agent as remuneration.
  • Widow or child or a deceased partner as an annuity.
  • A previous owner or part-owner of the business, as consideration for the sale of goodwill.

Existence of mutual agency: Mutual agency is the foundation of a partner’s liability, the true test, in determining whether a partnership exists, is to see whether relations of principal and agent exist between parties and not merely profit sharing. Thus, every partner is principal as well as an agent of other partners. This unique feature distinguishes a partnership from co-ownership or simple agreements for sharing the profit.

Question 3.
A is a publisher. He agrees to publish at his own expense a book written by B and to pay Y half the net profits. Does this create a relationship of partnership between A and B? Give reasons.
Answer:
As per Section 4 of the Partnership Act, 1932, the 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. The agreement between A and B does not create a partnership. The last essential which requires mutual agency is missing and hence it is not a partnership.

Question 4.
Distinguish between: Partnership and Hindu undivided family (HUE)
Answer:
Following are the main points of distinction between partnership & HUF:

Points Partnership HUF
Meaning The 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. The HUF can be defined as a family that consists of a common ancestor and all his lineal male descendants and their wives and unmarried daughters.
Creation The partnership is created by agreement. Right in a joint family is created by status i.e. by the birth of a male child in the family.
Maximum no. of members A partnership with objects of acquisition for gains cannot be formed beyond 50 numbers of partners. [Section 464 read with rule 10 of the Companies (Miscellaneous) Rules, 2014] No restriction as to the maximum number of members.
Registration Registration of partnership is not compulsory but the Partnership Act, 1932 had made it indirectly essential to enjoy certain benefits. Registration is not required.
Management All partners are equally entitled to a right of management of the business. Right of management of joint family business generally vests in Karta, the governing male member of the family
Authority to bind Every partner binds the firm by his acts and is bound by the act of the firm. Karta has the authority to contract for the family business.
Liability The liability of all partners is unlimited. Only the liability of Karta is unlimited. Co-parceners are liable only to the extent of their share.
Right to verify accounts A partner can bring a suit against the firm for accounts, provided he also seeks the dissolution of the Firm. On separation of joint family, a member is not entitled to ask for accounts of the family business.
Governed by The partnership is governed by the Partnership Act, 1932. HUF is governed by Hindu Law.
Minor Minor cannot become a partner but can be admitted to benefits of partnership, with the consent of all partners Minor becomes a member by his birth.
Death The death of a partner leads to the dissolution of a partnership. The death of a member in f IUF docs does not lead to dissolution.

Question 5.
Distinguish between Partnership and Co-ownership [Dec. 2019(3 marks)]
Answer:

Points Partnership Co-ownership
Meaning The 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. When two or more persons hold property and agree to share profit, their relationship is called co-ownership/joint ownership,
Business The agreement must be to carry on business. There is no necessity for any separate business.
Number of members A partnership with objects of acquisition for gains cannot be formed beyond 50 numbers of partners, Section 464 read with rule 10 of the Companies (Miscellaneous) Rules, 2014] There is no limit on the number of persons being co-owners.
Creation A partnership arises from a contract. It may arise by contract and also by status, e.g., A and B inherit a house from their father.
Transfer of interest Partner cannot transfer his interest/share without the consent of all other partners. The co-owner may transfer his interest/share to a third party without the consent of other co-owners.
Agency Every partner is principal as well as an agent of other partners. A co-owner is not the agent of other co-owners.
Sharing of profit/loss The partnership involves sharing of profits and losses. It does not always involve sharing of profits or losses because it may exist without any business.
Lien A partner has a lien on the firm property. A co-owner has no lien on the property.

Question 6.
What do you mean by the partnership at will?
Answer:
Partnership at will [Section 7]: Where no provision is made by contract between the partners for the duration of their partnership, or when ( no provision is made as to whom and how the partnership will come to an end, the partnership is known as partnership-at-will.

The partnership-at-will has no fixed or definite date of termination and, therefore, the death or retirement of a partner does not affect the existence | of such partnership.

Question 7.
Write a short note on Sleeping or dormant partner
Answer:
Sleeping/Dormant Partner: He is one who contributes to the capital and has a share in Profits, but does not actively participate in the business. | He is liable like any other Partner, but were specifically excluded, he is | not so. He is not required to give notice after he ceases to be a partner, nor does his insanity dissolve the firm.

Question 8.
Rohit is not a partner in a particular firm. But, he knowingly permits himself to be represented as a partner of that particular firm to Sanjay, who on the faith of such a representation gives credit to the firm. Is Rohit liable as a partner in the firm?
Answer:
As per Section 28 of the Partnership Act, 1932, if a person represents himself or knowingly permits himself to be represented as a partner of a particular firm when actually he is not, such person is liable as a partner of the firm.

Thus, a stranger, who represents himself to be a partner in a firm and induces others to give credit to the partnership firm is called a partner by holding j out. Hence, Rohit is liable as a partner by holding out.

Question 9.
What do you understand by “Holding out” under the Indian Partnership Act, 1932? Enumerate the circumstances under which the doctrine of “Holding out” is not applicable? [Dec. 2018 (3 Marks)]
Answer:
Partner by estoppels or holding out [Section 28]: Anyone who by words | spoken or written or by conduct represent himself, or knowingly permits j himself to be represented, to be a partner in a firm, is liable as a partner in J that firm to anyone who has on the faith of any such representation is 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.

In other words, if the behavior of a person arouses misunderstanding that he is a partner in a firm when actually he is not; such a person is stopped from later on denying the liabilities for the acts of the firm. Such a person is called a partner by estoppels and is liable to all third parties.

Holding out means to represent, a stranger, who represents himself to be a partner in a firm and induces others to give credit to the partnership are called a partner by holding out.

Example: Arun introduces Balu as a partner in his business to Chandan. Balu, in fact, was not a partner but he did not deny the statement. Chandan advanced a loan to Arun. Arun could not repay the loan. Balu is responsible for the repayment of the loan because Balu is a partner by estoppel.

Exceptions to the doctrine of holding out: The doctrine of Holding Out is not applicable in the following cases:

  1. It does not apply to cases of torts committed by partners. A person, therefore, cannot be held liable for the torts of another simply because that other person held himself to be his partner.
  2. It does not extend to bind the estate of a deceased partner, where after a partner’s death the business of the firm is continued in the old firm name.
  3. It also does not apply where the Holding Out partner has been adjudicated insolvent.

Question 10.
A and B entered into an agreement to carry on a business of manufacturing and selling toys. Each one of them contributed ₹ 35 lakhs as their capital with a condition that A and B will share the profits equally, but the loss, if any is to be borne by A alone. Referring to provisions of the Partnership Act, 1922 decides whether there exists a partnership between A and B.
Answer:
Facts of Case:

Points Sale Bailment
Meaning II the property in the goods is immediately transferred from the seller to the buyer, it is called a sale. Bailment is the delivery of goods, by one person to another, for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of, according to the instructions of the person delivering them.
Consideration In a contract of sale, there is consideration to both parties. A contract of bailment may be entered without consideration. This happens in gratuitous bailment.
Return of goods In a contract of sale, the buyer is not required to return the goods. In a contract of bailment, the bailee has to return the goods after the purpose is over.
Risk Risk follows ownership and hence in case of a contract of sale risk of goods with a buyer. In the contract of goods, ownership is with the bailor as only possession is transferred to the bailee and hence the risk of goods is with the bailor.
Act Contract of sale has governed the Sale of Goods Act, 1930 Contract of bailment is governed by the Contract Act, 1872.

As per Section 13 of the Partnership Act, 1932, subject to the contract | between the partners, the partners are entitled to share profits and losses equally. When all partners agree that a partner shall share only profits and not losses then such partner is known as a partner in profit only and such partnership is valid. Hence, there exists a partnership between A and B.

Question 11.
A and B, who work in partnership, deal in the purchase and sale of cloth. B starts cloth manufacturing business individually. A files a suit against B for sharing of profit of the cloth manufacturing business with him. Will he succeed? Give reasons.
Answer:
Facts of Case: A and B, who work in partnership, deal in the purchase and sale of cloth. B starts cloth manufacturing business individually. A files a suit against B for sharing of profit of cloth manufacturing business with him

Provision: As per Section 16 of the Partnership Act, 1932, a partner shall not carry on a business which is of the same nature as and competing with that of the firm, he shall account for the same and pay all such profits to the firm.

Conclusion: In the given case, B has started a cloth manufacturing business individually. Cloth manufacturing is a different activity and not similar to the purchase and sale of cloth. Hence, sharing of profits by B from the manufacturing of clothes with A is not covered u/s 16. Hence, A will not succeed.

Question 12.
A B and C enter into a partnership agreement under which C is not liable for the losses. D filed a suit against A, B and C. Examine the position of C.
Answer:
Facts of Case: A, B, and C enter into a partnership agreement under which C is not liable for the losses. D filed a suit against A, B, and C Provision: When all partners agree that a partner shall share only profits and not losses then such partner is known as a partner in profit only. As per Section 25 of the Partnership Act, 1932, every partner is liable, jointly with all the other partners, and also severally for all acts of the firm done when he was a partner. Even though C shares profit and not loss, but he is liable for all the debts of the firm jointly and severally with other partners.

Conclusion: Therefore, C is liable to D, jointly with A and B.

Question 13.
Amar, Bimal, and Chander are partners of a firm carrying on the banking business. Dhruv, a customer of the firm, deposits his ornaments with the firm for safe custody. Amar and Bimal sell these ornaments and misappropriate the money. Chander, being a sleeping partner, does not know anything about this act of Amar and Bimal. Now, Dhruv institutes a suit against the firm including all the partners. Chander intends to escape his liability on the ground of being a sleeping partner. Will Chander succeed? Give reasons.
Answer:
Facts of Case: Amar, Bimal, and Chander are partners of a firm carrying on banking business. Dhruv, a customer of the firm, deposits his ornaments with the firm for safe custody. Amar and Bimal sell these ornaments and misappropriate the money. Chander, being a sleeping partner, does not know anything about this act of Amar and Bimal. Now, Dhruv institutes a suit against the firm including all the partners. Chander intends to escape his liability on the ground of being a sleeping partner.

Provision: As per Section 25 of the Partnership Act, 1932, every partner is liable, jointly with all the other partners, and also severally for all acts of the firm done when he was a partner.

Conclusion: In the given case, Chander will not succeed to escape his liability on the grounds of being a sleeping partner. He will be jointly and severally liable along with other partners for the acts of the firm.

Question 14.
What is meant by the implied authority of a partner? Stale the acts for which a partner has implied authority to bind the firm.
Answer:
Implied Authority [Section 19]: Where the authority of a partner is not conferred by mutual agreement, but acts of partner which are excised in the ordinary course of business and which bind the firm is known as the implied authority of partner.

Following acts of partner are considered within the implied authority of partner.

  • Purchase goods dealt with or used by the firm on behalf of the firm.
  • Sale of the goods of the firm.
  • Receiving payments of debts due to the firm and issuing receipts for it.
  • Settlement of accounts with third parties.
  • Appointment of employees.
  • Borrowing money.
  • Pledging goods of the firm as security.
  • Drawing, accepting & endorsing negotiable instruments.
  • Hiring solicitor.

No implied authority: In the absence of any usage or custom of trade to the contrary, the implied authority of a partner does not empower him to:

  • Submit a dispute to arbitration relating to the business of the firm.
  • Open a banking account in his own name on behalf of the firm.
  • Compromise or relinquish any claim or portion of a claim by the firm.
  • Withdraw a suit or proceeding filed on behalf of the firm.
  • Admit any liability in a suit or proceeding against the firm.
  • Acquire immovable property on behalf of the firm
  • Transfer immovable property belonging to the firm.
  • Enter into partnership on behalf of the firm.

Question 15.
A & B are Practicing Company Secretaries and are working in partnership. A places order with for the supply of ten bags of wheat on credit. The order is placed in the name of the firm. A signs it as one of the partners. Is the firm liable to pay the price of wheat? Give reasons.
Answer:
Facts of Case: A & B are Practicing Company Secretaries and are working in partnership. A places order with for the supply of ten bags of wheat on credit. The order is placed in the name of the firm. A signs it as one of the partners.

Provision: Where the authority of a partner is not conferred by mutual agreement, but acts of partner which are excised in the ordinary course of business and which bind the firm is known as the implied authority of partner.

As per facts given in the case, the firm provides professional service of Company Secretary. In case the firm is providing professional service then there is no implied authority to purchase goods on behalf of the firm. The firm is not liable to pay for the wheat.

Conclusion: A will be personally held liable for his actions.

Question 16.
A B & C are partners. A, without the authority of B and C, purchases 100 shares of Reliance Industries Ltd., out of the firm’s money in his own name. To whom the property in shares belongs? Give reasons.
Answer:
Facts of Case: A, B & C are partners. A, without the authority of B and C, purchases 100 shares of Reliance Industries Ltd., out of the firm’s money in his own name.

Provision: As per Section 14 of the Partnership Act, 1932, unless the contrary intention appears, property and rights and interest in property acquired with money belonging to the firm are deemed to have been acquired for the firm.

The shares are acquired out of money of partnership firm;
Conclusion: hence it is the property of the firm even though they stand in the name of A.

Question 17.
Write a note on Goodwill in a partnership business
Answer:
Goodwill is the value of the reputation of a business. It is profit expected in future above the normal level of profits. Goodwill is an intangible asset. Goodwill is generally valued at the time of admission or retirement. Property of partnership includes goodwill of the firm. [Section 14]

Return of premium on premature dissolution [Section 51]: Where a partner has paid a premium on entering into a partnership for a fixed term, and it is dissolved before the expiry of such term (otherwise than by” death), he shall be entitled to repayment of the premium or part thereof.

In determining the part of the premium, regard shall be had to:
(a) The terms upon which he became a partner;
(b) The length of time during which he was a partner.

Right to carry on business when goodwill is sold [Section 55]:
(a) When the firm’s goodwill is sold upon dissolution, a partner may carry on competing business with that of the buyer of goodwill.

(b) However, in view of an agreement with the buyer of goodwill, the partner may not:

  • Use the firm’s name
  • Represent as carrying on of the firm’s business
  • Solicit the firm’s customers.

Question 18.
Explain the position of a minor in a partnership firm.
Answer:
As per Section 11 of the Contract Act, 1872, an agreement with or by a minor is void and in-operative ab initio. Minor cannot be promisor. However, all agreements with minors are not void; if an agreement is for the benefit of the minor then it is valid and enforceable.

Minors admitted to the benefits of partnership [Section 30]: If all the partners agree, a minor may be admitted to the benefits of an already existing firm. There must be at least two major partners before a minor is admitted into the benefits of the partnership.

Share of profits & property: Such minor has a right to such share of the property and of the profits of the firm as may be agreed upon.

Inspection & copying of accounts: Minor has a right to access and inspect and copy any of the accounts of the firm.

Liability of minor: Minor’s share is liable for the acts of the firm but the minor is not personally liable for any such act.

Filing of the suit: Minor has the right to file a suit for his share of profits of the firm’s property when he is not given his due share. This right can be exercised only when he decides to sever his connections with the firm.

Election by minor: 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.

If he fails to give such notice, he shall become a partner in the firm on the expiry of the said 6 months.

Exercise of option by minor on attaining majority:
1. If minor elects to become a partner: When the minor elects to become a partner of his own volition or by his failure to give public notice within the specified time:

  • He becomes personally liable to third parties for all acts of the firm done since he was admitted to the benefits of the firm.
  • His share in the property and profits of the firm remains the same as he was entitled as a minor.

2. If minor elects not to become a partner: If minor elects not to become a partner:

  • His right and liabilities continue to be those of a minor up to the date of giving public notice.
  • His share is not liable for any acts of the firm done after the date of the public notice.
  • He is entitled to sue the partners for his share of the property and profits in the firm.

Question 19.
A B & C are partners. They admit D, a minor, to the benefit of the partnership. Within the six months of attaining majority, D gives public notice that he has become a full-fledged partner. But all other partners refuse to take him. Can D become a partner or not? Give reason.
Answer:
As, Section 30 of the Partnership Act, 1932, deals with the exercise of an option by a minor on attaining majority. Section 30 provides that 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.

In the given case, D has given public notice within 6 months of his attaining majority and his contention that he has become a full-fledged partner is correct.

Question 20.
“Whether a minor may be admitted in the business of partnership firm under the Indian Partnership Act, 1932? Whether the minor will have any rights in a partnership firm? Explain. [June 2019 (3 Marks)]
Answer:
Goodwill is the value of the reputation of the business. It is profit expected in future above the normal level of profits. Goodwill is an intangible asset. Goodwill is generally valued at the time of admission or retirement. Property of partnership includes goodwill of the firm. [Section 14]

Return of premium on premature dissolution [Section 51]: Where a partner has paid a premium on entering into a partnership for a fixed term, and it is dissolved before the expiry of such term (otherwise than by” death), he shall be entitled to repayment of the premium or part thereof.

In determining the part of the premium, regard shall be had to:
(a) The terms upon which he became a partner;
(b) The length of time during which he was a partner.

Right to carry on business when goodwill is sold [Section 55]:
(a) When the firm’s goodwill is sold upon dissolution, a partner may carry on competing business with that of the buyer of goodwill.

(b) However, in view of an agreement with the buyer of goodwill, the partner may not –

  • Use the firm’s name
  • Represent as carrying on of the firm’s business
  • Solicit the firm’s customers.

Question 21.
Explain the provision of the Indian Partnership Act, 1932 relating to admission of a partner.
Answer:
Introduction of a partner [Section 31]: No person shall be introduced as a partner into a firm without the consent of all the existing partners. Following are the important points relating to the admission of a new partner:

  • Such a new partner is not liable for any act done by the firm before his admission.
  • Where he specifically agrees to bear the past liabilities, he will be liable to other partners for such past liabilities.
  • Third parties cannot hold him liable since there is no privity of contract between the new partner and creditors.
  • Any act of the old partners cannot be ratified by the new partner as he was not in existence as a principal at the time when such acts were done.
  • A minor opting to become a partner on attaining majority shall be liable for the acts of the firm done since the date of his admission into the benefits of a partnership.

Question 22.
A B & C are partners. C is a sleeping partner who has not been known by creditors to be a partner of A & B. C retires without giving the public notice of his retirement. Is C liable for subsequent debts incurred by A and B?
Answer:
A sleeping partner is one who does not actively participate in the business. He is not required to give notice after he ceases to be a partner. As per Section 32 of the Partnership Act, 1932, a retiring partner may be discharged from any liability to any third party for acts of the firm done before his retirement by an agreement made by him with such third party and the partners of the reconstituted firm. However, a retired partner is not liable to any third party who deals with the firm without knowing that he was a party.

As per the facts given in the case, C is a sleeping partner who has not been known by creditors to be a partner of A & B. –

Thus, considering the above-stated provisions, being a sleeping partner, C is not required to give public notice of his retirement and he is not liable for the debts incurred by the firm after his retirement.

Question 23.
P, 0 & R were three partners. P by his willful neglect has caused much loss to the firm. Q and R by a resolution decided to expel P from the firm. By the same resolution, they admit S into partnership in place of P. P objects to this arrangement. Decide.
Answer:
As per Section 33 of the Partnership Act, 1932, a partner can be expelled from the firm if the following conditions are fulfilled:
(a) Decision of a particular partner is taken by a majority of the partners.
(b) The contract/partnership deed provides for such expulsion.
(c) Such right of expulsion is exercised in good faith and for the firm’s benefit.

The test of good faith includes:

  • That the expulsion must be in the interest of the partnership.
  • That the partner to be expelled is served with a notice.
  • That the partner has been given an opportunity of being heard.

If P has expelled after complying with the above-stated provisions and procedure, his expulsion is valid. After the expulsion, P does not remain a partner in the firm and hence he cannot object to the admission of S.

Question 24.
Distinguish between: Dissolution of partnership & dissolution of the firm
Answer:
Following are the main points of distinction between the dissolution of partnership & dissolution of the firm:

Points Dissolution of Partnership Dissolution of Firm
Meaning Any change in the relations of partners is called the dissolution of the partnership. This may happen due to admission, retirement, or death of a partner. The dissolution of a partnership between all the partners of a firm is called the dissolution of the firm.
Business Business of the firm continues as before. The business of the firm comes to an end.
Relation Relation of partners continues to exist but in a changed form. Relation between partners comes to an end.
Account In case of dissolution of the partnership, the ‘Revaluation Account’ is opened. In case of dissolution of partnership ‘Realization Account’ is opened.
Close of books Books of account are not closed. Books of account are closed.

Question 25.
On what ground a partnership firm may be dissolved by the order of the Court.
Answer:
Dissolution by order of the Court [Section 44]: The Court may, at the suit of a partner, dissolve a firm on the following grounds:
1. Insanity: If a partner has become of unsound mind, the firm is dissolved. The Court may order dissolution based on a petition made by any of the other partners or by the next friend of the insane partner.

2. Permanent incapacity: A partner becomes permanently incapable of performing his duties as a partner. Application to Court shall be made by the partner who is not incapacitated.

Example: If a partner was diagnosed for paralysis which on evidence was found to be curable, dissolution shall not be granted,

3. Misconduct: If a partner is found guilty of conduct that is likely to affect the carrying on of the business of the firm then application to Court shall be made by any partner who is not guilty of misconduct for dissolution of the firm.

Example: Tina & Karina are partners. Tina has adulterous relations with Karina’s husband. This is sufficient ground for the compulsory dissolution of the firm.

Sufficient grounds for dissolution:

  • Gambling on a Stock Exchange

Persistent refusal or neglect by a partner to attend to business

  • Taking away of partnership books by a partner.

4. Persistent breach of agreement: The Court may dissolve a firm if:
(a) Partner wilfully and persistently commits a breach of the partnership agreement as management.
(b) Partner conducts himself in such a way that it is not reasonably practicable for the other partners to carry on business in partnership with him.

5. Transfer of interest: The Court may order dissolution when a partner has in any way –
(a) Transferred the whole of his interest in a firm to a third party.
(b) Allowed his share to be charged on account of a decree passed by a court towards payment of liabilities of that partnership.
(c) Allowed his share to be sold in the recovery of arrears of land revenue.

6. Business working at loss: The firm has been continuously suffering losses and in the future also the business cannot be carried on except at a loss, then application to Court shall be made by any partner for dissolution of the firm.

7. Any other just & equitable grounds: If on any other ground, it can be proved to the satisfaction of the Court that it is just and equitable to dissolve the firm, the Court may order dissolution. Sufficient reasons include:

  • Deadlock in management
  • The disappearance of a substratum of business
  • Partners not on speaking terms.

Question 26.
A, B, C, D & E are partners in a firm. They decided to dissolve the firm from 1st January 2006 but failed to give public notice of its dissolution and continued the business of the firm even after that date. D died on 5th January 2006 and E was declared insolvent on 10th January 2006. On 11th January 2006, A borrowed in the firm’s name ₹ 20,000 from R who was ignorant of the dissolution. Discuss the liability of partners.
Answer:
Facts of Case: A, B, C, D & E are partners in a firm. They decided to dissolve the firm from 1st January 2006 but failed to give public notice of its dissolution and continued the business of the firm even after that date. D died on 5th January 2006 and E was declared insolvent on 10th January 2006. On 11th January 2006, A borrowed in the firm’s name ₹ 20,000 from R who was ignorant of the dissolution

Provision: As per Section 45 of the Partnership Act, 1932, until public notice is given of the dissolution, the partners continue to be liable as such to third parties for any act done by any of them which would have been the act of the firm if done before dissolution. Public notice may be given by any partner.

Conclusion: In the given case, A had borrowed money in the name of the firm but after the death of D and E had been declared insolvent. Hence, as per section 45, the rest of the partners i.e. A, B, and C will be liable to pay the debt to R.

Question 27.
X enters into partnership with Y. As per the terms of the agreement they have decided to continue the partnership for 10 years. Accordingly, X pays a premium of ₹ 2,00,000 to Y who is aware of the fact that X is inexperienced and incompetent. After the expiration of 1 year, Y complains that X’s incompetency is injurious to the business and calls upon to dissolve the partnership. X thereupon files a suit for the dissolution of the partnership and for a return of a proportionate part of the premium. Decide.
Answer:
Facts of Case: X, enters into partnership with Y. As per the terms of the agreement they have decided to continue the partnership for 10 years. Accordingly, X pays a premium of ₹ 2,00,000 to Y who is aware of the fact that X is inexperienced and incompetent. After the expiration of 1 year, Y complains that X’s incompetency is injurious to the business and calls upon to dissolve the partnership. X thereupon files a suit for the dissolution of the partnership and for a return of a proportionate part of the premium.

Provision: As per Section 51 of the Partnership Act, 1932, where a partner has paid a premium on entering into a partnership for a fixed term, and it is Sr dissolved before the expiry of such term, he shall be entitled to repayment of the premium or part thereof.

As per the facts given in the case, partners have decided to continue the partnership for 10 years, and for this X had paid ₹ 2,00,000 but the partnership comes to end before the expiry of the fixed term.

Conclusion: X shall be entitled to repayment of the proportionate premium of ₹ 1,80,000.

Question 28.
Write a short note on Registered partnership
Answer:
Registration of a firm is not mandatory under the Act. Certain privileges are available only to registered firms, thus indirectly making it compulsory to register so as to enjoy those privileges. Registration does not create a partnership but is only evidence of the existence of the partnership. It is advantageous both to the firm and also outsiders.

Provision & procedure for registration of partnership [Sections 58 & 59]:

  1. Time: Registration of partnership may be effected at any time during the continuance.
  2. Application form & fee: Application for registration has to be made in the prescribed form along with the prescribed fee.
  3. Signing & verification: Application for registration has to be signed by all the partners, or their agent specially authorized on this behalf.
  4. Registration by Registrar: If Registrar is satisfied that all requirement relating to registration of firm has been fulfilled, issues a certificate of registration.
  5. The effective date of registration: Registration is effective from the date when Registrar makes entries in the ‘Register of Firms’ and not from the date of presentation of the statement to him.

Question 29.
“Registration of partnership firm is not compulsory, yet it is desirable.” Comment.
Answer:
Effects of non-registration [Section 69]: Registration of firms is not compulsory, but an unregistered firm suffers from the following disabilities as mentioned:

  1. The suit between partners and firm: A partner of an unregistered firm cannot sue the firm or any other partner of the firm to enforce a right arising from a contract, or conferred by the Partnership Act.
  2. The suit between the firm and third party: An unregistered firm cannot file a suit against a third party to enforce any right arising from a contract. However, a third party can file suit against an unregistered firm.
  3. A claim of set-off: An unregistered firm or a partner thereof cannot claim set-off or other proceedings to enforce a right arising from a contract above t 100.

Non-registration not to affect the following [Section 69]:
1. Even if the firm is unregistered partners can sue for:

  • Dissolution of the firm; or
  • Settlement of accounts of a dissolved firm; or
  • Realizing the property of a dissolved firm.

2. Right of the firm to institute a suit or claim of set-off not exceeding ₹ 100.

3. An unregistered firm can bring a suit against third parties to enforce a right arising otherwise than out of a contract, e.g., for enforcing a trademark.

Question 30.
A, B & C, who are partners of an unregistered firm, sell washing machine to D for ₹ 10,000 on a credit basis. After some time, the firm purchases from D a photocopying machine for ₹ 40,000 on a credit basis. On failure to pay the price, D files a suit against the firm, but the firm insists that the amount of ₹ 10,000 should be adjusted against the claim in question. Will the firm succeed? Give reasons.
Answer:
Facts of Case: A, B & C, who are partners of an unregistered firm, sell washing machine to D for ₹ 10,000 on a credit basis. After some time, the firm purchases from D a photocopying machine for ₹ 40,000 on a credit basis. On failure to pay the price, D files a suit against the firm, but the firm insists that the amount of ₹ 10,000 should be adjusted against the claim in question.

Provision: As per Section 69 of the Partnership Act, 1932, registration of firms is not compulsory, but an unregistered firm suffers from certain disabilities. An unregistered firm cannot file a suit against a third party to enforce any right arising from a contract. However, a third party can file suit against an unregistered firm.

Further, an unregistered firm cannot claim set-off or other proceedings to enforce a right arising from a contract above ₹ 100.

Conclusion: Hence, the firm will not succeed in claiming set-off as the amount is exceeding ₹ 100.

Economic, Business and Commercial Laws Questions and Answers

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