The Partnership Act, 1932

What it does

The Act defines partnership as 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. It deals with the rights and duties of the partners among themselves, the authority of a partner to bind the firm, the admission and retirement of partners, the dissolution of the firm and the registration of firms.

The Act did not create the law of partnership. Until 1932 it was a chapter of the Indian Contract Act, 1872, and the 1932 Act took it out of that Act and re-enacted it with changes. A firm is not a legal person separate from its partners. It is the name under which the partners carry on business, and the Act treats the partners collectively as the firm.

Two features of the Act decide most disputes. Each partner is the agent of the firm for the purposes of its business, and an act done by a partner in the usual course of that business binds the firm. And every partner is liable, jointly with the others and severally, for the acts of the firm done while he is a partner, to the full extent of his own property.

Who it binds

Partners and the firms they form, and persons who deal with them. A partnership can arise by agreement, written or oral, and also from conduct, so that the question whether a relationship is a partnership is decided on the facts and not on the label the parties used. The Act sets default rules on matters such as the sharing of profits and the right to take part in the management, and the partners can vary them by agreement.

A business with a large number of members does not remain within the Act. The law on companies limits the number of persons who may carry on a business in partnership, and a larger association has to be a company. A business that wants the advantage of limited liability for its members has the Limited Liability Partnership Act, 2008 as the alternative, which this Act does not touch.

What has changed, and when

The Act has had few amendments, and the structure of 1932 remains. What has changed is its context. The Limited Liability Partnership Act, 2008 and the Companies Act, 2013 have given businesses other forms, and the choice between a partnership, a limited liability partnership and a company is now a matter of planning and not of habit.

What turns on it in practice

Registration is optional but has consequences. An unregistered firm, or a partner of one, cannot sue a third party or a co-partner to enforce a right arising from a contract, or a right conferred by the Act, subject to exceptions the Act states. That does not make the contracts void. It limits the remedy, so an unregistered firm that wants to sue has to register first, and the defect is a common one in family businesses.

The second point is liability. A partner's personal assets answer for the firm's debts, and a partner who retires remains liable for debts incurred before retirement unless the creditors agree otherwise. The notice of retirement and the allocation of liabilities need to be settled in writing.

The third point is dissolution. When the firm is dissolved by agreement, by notice, by the court or by some event, the Act provides how accounts are settled and in what order the assets are applied. The firm's corporate and commercial advice, in which this Act is named, begins with the question whether the business should be a partnership at all.