Partnership / Societas /

Partnership is defined in Section 4 of the Indian Partnership Act, 1932 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. The three essential elements: (1) an agreement between partners — there must be a contract (oral or written; a partnership deed, though advisable, is not compulsory); (2) sharing of profits — the test is sharing of profits (not losses); but sharing of profits is merely presumptive evidence of partnership, not conclusive (e.g., a creditor receiving interest from profits is not a partner); and (3) the business is carried on by all or any of them acting for all — mutual agency — each partner is an agent of the firm and of the other partners.

The mutual agency concept (Section 18 IPA) is the hallmark of partnership: each partner acts both as principal (their own acts bind them) and agent (their acts bind all other partners and the firm). A firm is not a separate legal entity — unlike a company — the partners are the firm. A partnership firm may sue and be sued in the firm name (Section 69 IPA registration enables this), but ultimately the personal assets of the partners are available to creditors. Each partner has unlimited liability — the firm's creditors can proceed against any individual partner's personal assets if firm assets are insufficient.

Types of partners: (1) Active partner — participates in management; (2) Sleeping/Dormant partner — contributes capital but takes no active part in management; (3) Nominal partner — lends their name only, takes no active part and has no share in profits; still liable as a partner to third parties who know of their association; (4) Partner by estoppel — holds themselves out as a partner or allows themselves to be held out, thereby incurring liability even if they are not actually a partner; and (5) Minor partner — cannot be a partner, but Section 30 IPA allows a minor to be admitted to the benefits of partnership (shares in profits but not in losses and not personally liable).

Dissolution of partnership occurs under Sections 39-44 IPA in two ways: (1) Dissolution by the court — on the grounds of insanity of a partner, permanent incapacity, wilful/persistent breach of the partnership agreement, conduct prejudicial to the firm's business, or just and equitable grounds; (2) Dissolution without court order — by notice (in a partnership at will), expiry of term, completion of the undertaking, death of a partner (unless the contract provides for continuation), and insolvency of a partner. On dissolution, the firm's assets are applied first to partnership debts, then to partners' individual debts, and the surplus is distributed among the partners.

For advocates, partnership disputes involve: (1) expulsion of a partner — whether the power of expulsion was exercised in good faith; (2) accounts — on dissolution, partners are entitled to audited accounts and distribution of assets; (3) non-registration consequences — an unregistered firm cannot sue; advocate should check registration before filing any suit on behalf of a firm; (4) personal liability of partners — whether a third party can sue a retiring partner for debts contracted after retirement (depends on whether proper notice of retirement was given); and (5) goodwill valuation on dissolution.