Module 04

Session 13-14
Dr. Garima Tiwari
All Copyrights Reserved
 Formation of Partnership

• Relation of partnership arises from agreement and not

from status or law.
• Agreement may, however, be express or implied.
• Mutual rights and obligations of the partners: preferably be
put into writing in the form of a ‘Partnership Deed’.
 Partnership Deed
• Oral or written: agreement-in-writing is called a
‘Partnership Deed’.
• Carefully drafted and stamped according to the
provisions of the Indian Stamp Act.
• According to Section 11(1) of the Partnership Act, 1932,
the terms contained in the partnership deed can be
altered by the consent of all the partners, and such
consent may be expressed or implied by a course of
dealing.
 Duration of Partnership

• Partnership at will and Particular partnership.

• Partnership at Will: no fixed period defined. Section 43(1) –by

any partner giving notice in writing to all the other partners.
• Particular Partnership: When a partnership is formed for a
specific venture, or for a particular period, [Section 8]. Or before with
the consent of all the partners [Section 40].
 Types of Partners
1. Active or ostensible partner
2. Dormant or sleeping partner: invest, does not
participate in management, but liable for losses
3. Nominal partner: lends name
4. Partner-in-profits only
5. Sub-partner: Where a partner agrees to share his
profits in the firm with a third person, that third person is
known as a ‘sub-partner’.
6. Partner by estoppel or holding out e.g.
A retiring partner, who has not given a public notice of his
retirement.
 Registration of a Firm
• ‘Register of Firms’ kept in the office of the Registrar of Firms.
• Registration optional, Solely at the discretion of the partners;
at any time.
• Unregistered firm has disabilities.
• Registration is compulsory for filing a suit Section 69(2)
Refer the Procedure of Registration : Filing a statement in the
prescribed form with requisite fee to Registrar of Firms :1.
Firm’s name; 2. Place of business; 3. Names of any other
places where the firm carries on business; 4. Date when each
partner joined the firm; 5. Names in full and permanent
addresses of the partners; 6. Duration of the firm
 Rights, Duties, and Liabilities of Partners Chapter 11

• Mutual Rights and Liabilities: Section 11(1) of the

Partnership Act, 1932.
• Determined by agreement apart from the cases where
the Act: contained in Sections 9 and 10 and cannot be
altered by individual agreements.
Rights of Partners
1. Right to take part in the conduct of business
2. Right to be consulted and heard in business matters.
3. Right of access, copy and inspect records, books,
and accounts
4. Right to share profits equally
5. Right to claim interest on capital as decided by
partnership deed.
6. Right to interest on advances made for business:
6% if nothing given.
7. Right to be indemnified for payments made.
8. Right to use partnership property
9. Right in emergency: to do all such acts as are
reasonably necessary for protecting the firm from losses
[Section 21].
10. Right to prevent admission of a new
partner : without his/her consent [Section 21].
11. Right to retire
12. Right not to be expelled
13. Right to carry out competing business :
[Section 36].
14. Right to share profits subsequent to retirement
15. Right to dissolve the firm
 Duties of Partners
The duties of partners’ inter-se may broadly be
classified into two heads.
1. Absolute duties and
2. Duties subject to agreement by partners.
 Absolute duties
• Mandatory, binding, imposed by law.
• Duty to carry out the firm’s business to the
greatest common advantage [Section 9]
• A and B were partners in a firm of sugar refiners. A, who had
greater skill and experience of buying sugarcane, was
entrusted with the job of buying the same for the firm.
He supplied the sugarcane from his personal stock,
which he had bought earlier when the prices were low.
He, however, charged the prevailing market price and
made secret profit for himself. It was held that the firm
was entitled to those profits and A must account to the
firm for these private profits. A was negligent in his duty to
carry out the firm’s business to the greatest common
advantage [Bentley vs Craven[1853] 18 BEAV 75.].
• Duty to act in good faith [Section 9]
• Duty to render true, fair and correct accounts
• Duty to provide full information
• Duty to indemnify for loss caused by fraud
[Section 10
• Duty not to transfer one’s rights and interests
 Duties subject to agreement by partners
duties of partners Inter-se. [ S. 12 and 13]
• Duty to attend diligently to duties in the conduct of the business of
the firm.
• Duty to work without remuneration A partner is not entitled to
receive remuneration for taking part in the conduct of the business.
• Duty to share losses In the absence of an agreement to the
contrary, every partner is bound to contribute to the losses equally.
• Duty to indemnify for willful neglect
• Duty to hold and use property of the firm exclusively for the firm
• Duty to account for personal profits
• Duty to account for profits of a competing business
• Duty to act within authority
Also refer liabilities of partners.
 Reconstitution of a Partnership Firm
• Any change in the composition or relations of partners
has the effect of ‘reconstitution of the partnership firm’.
• Reconstitution takes place in the following
circumstances:
1. A new partner is admitted
2. A partner retires
3. A partner is expelled.
4. A partner is declared insolvent
5. A partner dies
6. A partner transfers his share in the firm to another
person.
Outgoing Partner
An outgoing partner is one who discontinues
being a partner in the firm. Following 5 ways:
1. When he retires
2. When he is expelled
3. When he is adjudicated as insolvent
4. When he dies, and
5. When he transfers his interest in the firm
 Chapter 12: Dissolution of a
Partnership Firm
• The term ‘dissolution’ implies breaking up of any
constituted body of persons.
• The dissolution of a firm refers to discontinuation
of the mutual relations existing between all the
partners of the firm.
• The Partnership Act makes a distinction between the
‘dissolution of partnership’ and ‘dissolution of firm’.
 Dissolution of Partnership

• Where there is an end to relation between some of the

partners only, it is called dissolution of the partnership.
• When any one of the partners retires or becomes
incapacitated from continuing as a partner due to death,
insolvency, transfer of partnership interest, or insanity, the
relationship between such a partner and others comes to an
end, but the rest of the partners may resolve to continue with the
partnership.
• If they do not do so then the dissolution of the firm may take
place automatically.
• Dissolution of partnership may or may not involve the dissolution of a
firm.
 Firm: Modes of Dissolution
• Dissolution of a firm may take place with or without the order of court.
Dissolution Without Order of Court- 4 modes
• Dissolution by mutual agreement: With the consent of all the partners
or in accordance with a contract between the partners.
• Dissolution by notice
• Compulsory dissolution: A firm is compulsorily dissolved by,
insolvency of partners and business becoming unlawful etc.
• Dissolution due to certain contingencies: e.g. death of partner,
expiry of firm duration etc.
e.g. 1: There were two partners in a firm. One of them was
adjudicated as insolvent by a court of law. The firm must come to
an end, as the partnership with one partner cannot continue.
e.g. 2: A firm is doing the business of trading in free sale cement.
After sometime a law is passed, by which the business of free sale
cement is prohibited. In this case the business of the firm becomes
illegal, and so the firm will have to be compulsorily dissolved.
 Dissolution of the Firm by Order of Court

• When a partner becomes of unsound mind: When a

partner becomes of unsound mind, partners may file a suit
seeking the dissolution of the firm. [Section 44(a)].
• Permanent incapacity of a partner : When a partner is in
any way rendered permanently incapable of performing his
duties, for example, he/she turns blind, or paralytic, etc.,
the court may at the instance of any other partner,
order the dissolution of the firm. [Section 44(b)]. The court
may not pass an order for dissolution if the incapacity or
disability is of a temporary and recoverable nature.
• For example, in Whitewell vs Arthur 1804, 5 Esp 160, a
partner suffered a paralytic stroke. On this ground one
of his co-partners filed a suit in the court seeking
dissolution of the firm. The court deputed a doctor to
examine the paralytic partner. The doctor diagnosed
that the paralysis was of a temporary nature and
the patient was improving. Accordingly, the court
refused to pass on order of dissolution of the firm.
• Misconduct of a partner: Gambling by a partner,
conviction of a partner for travelling without ticket,
adultery by one partner with the wife of another partner,
etc.,
• Persistent breach of agreement: embezzlement,
keeping erroneous accounts, and not entering
receipts, continuing to quarrel with other partners,
fraudulent breach of trust, refusal to meet on matters of
business, etc.,
• Transfer of interest by a partner
• Perpetual losses in business
• Any other just and equitable ground : For example,
the partners are not on speaking terms or where there
is a complete deadlock and destruction of confidence
among the partners –court’s discretion[Re: Yenidjee
Tobacco Co. Ltd 1916, 2 Ch. 426].
 Limited Liability Partnership [Chapter
20]
• A hybrid business structure combining features of a company and a
partnership.
• In LLP, one partner is not accountable for the acts (negligence or
misconduct) of other partners unlike conventional (unlimited liability)
partnership.
• Dual benefits of limited liability of a company and the flexibility of
a partnership. An LLP, however, is much closer to a private ltd.
company.
What is Limited Liability Partnership?

• An LLP is a new business vehicle and is a hybrid

between company and conventional partnership
offering fundamentally:
1. the privilege of limited liability accorded to the
partners of the LLP; and
2. the flexibility of internal control and management
of firm’s affairs through ‘LLP Agreement’, or in the
absence of the Agreement, default provisions
(Schedule I Limited Liability Partnership Act, 2008.)
covering the mutual rights and duties of LLP and its
partners.
 Timeline: Genesis and Foundation of LLP in India
•1972: Bhat Committee highlights the need for LLP for small enterprises in India.
•1992: Naik Committee further recommends the LLP model for small sector
enterprises.
•1997: Abid Hussain Committee advocates for LLP in the context of small sector
enterprises (SSEs).
•2001: Dr. S.P. Gupta Committee recommends LLPs for the development of small
sector enterprises.
•2003: Naresh Chandra Committee suggests regulation for private companies and
partnerships, including LLP.
•2005: Dr. J.J. Irani Committee recommends legislation for LLPs under the new
company law framework.
•2008:
•24 October: The Limited Liability Partnership (LLP) Bill passed by Rajya
Sabha.
•12 December: The Bill passed by Lok Sabha.
•7 January 2009: The President assents to the Bill, marking the birth of the LLP Act,
2008.
•1 April 2009: LLP Act, 2008 comes into effect.
•April 2022: More than 1 lakh LLPs registered in India, as reported by the Ministry of
Corporate Affairs.
 Features of LLP
1. Distinct Business Model: Operates based on an agreement,
offering flexibility with fewer legal requirements, combining
expertise and financial risk-taking. Name must include "Limited
Liability Partnership" or "LLP.“
2. Separate Legal Entity & Perpetual Succession: LLP is a
body corporate, separate from its partners, with perpetual
succession. Partners' liability is limited to their contribution, and
the LLP continues despite changes in partners.
3. Ability to Sue in Own Name: LLP can sue or be sued in its
own name, separate from partners, who are not liable for its
debts.
4. Limited Liability of Partners: Partners’ liability is limited to
their agreed contribution, shielding them from liabilities caused
by other partners' actions.
5. Control and Influence: Partners manage the business directly,
unlike corporate shareholders who elect a board of directors to manage
a corporation.

6. Mutual Rights and Duties of Partners: Governed by the LLP

Agreement, or Schedule I if no agreement exists. The agreement can
exclude provisions of Schedule I.

7. Accounts and Filing: LLP must maintain true and fair annual
accounts and file an annual return (Form 11) with the ROC within 60
days of year-end. Tax matters are governed by the Income Tax Act,
1961.

8. Winding Up: LLP can be wound up voluntarily under the Insolvency

and Bankruptcy Code or by the Tribunal (NCLT) under The Companies
Act, 2013.
 Structure of an LLP
• Minimum of two partners who may be individuals or bodies corporate
through their nominees.
• Besides, as per Section 7(1), every limited liability partnership shall
have at least two designated partners who are individuals and at
least one of them shall be a resident in India.
• No specific requirement to have any non-designated members and there
is no specified limit of maximum number of partners in LLP. An LLP
may be established such that all members are considered to be
designated members.
• LLP Governance: Governed by an LLP Agreement, not required to be filed
with Registrar of companies but highly recommended.
• Registered Office: Every LLP must have a registered office.
• No Directors or Company Secretary: Unlike limited companies, LLPs don’t
have directors or shareholders.
• Name Requirement: Must include ‘Limited Liability Partnership’ or ‘LLP’ as the
last part of the name.
Summary: Steps to Incorporate an LLP
Step Action Details
Minimum two partners (at least two
Deciding Partners &
Step I designated partners, one must be resident
Designated Partners
in India).
Designated Partner Identification Number
Obtaining DPIN & Digital
Step II (DPIN) from Central Government (Form 7)
Signature
and Digital Signature Certificate.
Apply for name reservation (Form 1),
Choosing a Name for the
Step III ensuring uniqueness and compliance with
LLP
naming rules.
Agreement outlining rights, duties,
Step IV Drafting LLP Agreement
contributions, profit-sharing, etc.
Filing Incorporation Submit Form 2, Form 3, Form 4, and
Step V
Documents & Paying Fees Subscription Sheet; file within 30 days.
Obtaining Certificate of ROC issues Certificate of Incorporation
Step VI
Incorporation within 14 days.
 LLP vs Conventional Partnership

Conventional Limited Liability

Aspect
Partnership Partnership (LLP)
Limited Liability Partnership
Governing Act Partnership Act, 1932
Act, 2008
Unlimited liability: Partners Limited liability: A partner's
Liability of Partners are jointly and severally liability is limited to their
liable for the firm's actions. agreed contribution.
Partners are liable for each Partners are not liable for
Liability for Other
other's wrongful acts or the independent acts of
Partners' Acts
misconduct. other partners.
Mutual rights and duties Governed by the LLP
governed by an agreement, Agreement; in absence of
Governing Agreement
subject to the Partnership one, Schedule I of the LLP
Act. Act applies.
Maximum of 50 partners./ No upper limit on the
Number of Partners
100 number of partners.