BUSINESS LAWS QUESTION BANK CHAPTER:4

CA NIKESH AGRAWAL
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U1

Chapter: 4 – Indian Partnership Act, 1932

Unit – 1- General Nature of Partnership
(Covers All RTP, MTP, PYQ, ICAI SM, MDTP till Jan 2025)

CA NIKESH AGRAWAL 2
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U1

23 - Explain the following terms under the Indian Partnership Act, 1932:

(1) Partner by holding out

(2) Nominal Partner 5)b)4m,Jan2025

Ans - (1) Partner by holding out (Section 28 of the Indian Partnership Act, 1932):

Where a man holds himself out as a partner, or allows others to do it, he is then stopped from
denying the character he has assumed and upon the faith of which creditors may be presumed to
have acted.

(2) Nominal Partner: A person who lends his name to the firm, without having any real interest
in it, is called a nominal partner. He is not entitled to share the profits of the firm. Neither he
invests in the firm nor takes part in the conduct of the business. He is, however liable to third
parties for all acts of the firm.

22 – Ram and Shyam are partners in a partnership firm styled as RS & Co. (the firm).
Gopal, a renowned businessman, is their common friend. Ram introduced Gopal to Sundar, a
supplier to the firm, as his newly joined partner. Gopal knowing that he is not a partner
preferred to keep quiet on such an introduction. This information about Gopal, being a
partner of the firm, was shared by Sundar with another businessman Madhav. Next day,
Sundar supplied the raw material on credit and Madhav lent 5 lakhs to the firm for a short
period on the understanding that Gopal is a partner of the firm. On due dates, the firm
failed to discharge its liability towards both. Advise Gopal, whether he is liable to Sundar
and Madhav for the aforesaid liability of the firm.

3)a)i)3m,MDTP10, 3)a)i)4m,MDTP7, 3)a)i)4m,MTP1,Jan2025, RTP,Jan2025,

3)a)i)3m,Sept2024

Ans – Partner by holding out (Section 28 of the Indian Partnership Act, 1932):

Anyone who by words spoken or written or by conduct represents himself, or knowingly permits
himself to be represented, to be a partner in a firm, is liable as a partner in that firm to anyone
who has on the faith of any such representation 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 the instant case, since Gopal allowed himself to be represented as a partner to the RS & Co.
and third parties acted based on this belief and therefore, Gopal is held liable to Sundar as he
represented himself by his act to be a partner to the RS & Co.

CA NIKESH AGRAWAL 3
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U1

However, Gopal is not liable to Madhav for the liabilities incurred by the firm. Information of
Gopal being a partner to the firm was shared by the Sundar (Supplier to the firm) which is not
falling within the ambit of doctrine of holding out.

Hence Gopal is liable to Sundar and not to Madhav for the liability of the Firm.

21 - State whether the following are partnerships under the Indian Partnership Act, 1932:

i) A and B buy commodity X and agree to sell the commodity with sharing the profits
equally.

ii) Two firms each having 12 partners combine by an agreement into one firm.

iii) A and B, co-owners, agree to conduct the business in common for profit.

iv) Some individuals form an association to which each individual contributes ` 5000
annually. The objective of the association is to produce clothes and distribute the clothes
free to the war widows.

v) A and B, co-owners share between themselves the rent derived from a piece of land.

RTP,Sept2024, RTP,Dec2023

OR

i) A and B jointly own a car which they used personally on Sundays and holidays and let it
on hire as taxi on other days and equally divide the earnings. 4)b)Dec2021

OR

a) X, a contractor, appointed Y one of his servants to manage his business of loading and
unloading railway wagons. Y was to receive 50% of the profits of the business and also to
bear the losses, if any.

g) 10 major persons form an association to which each member contributes ` 10,000. The
purpose is to produce medicines for free distribution to poor patients. 3)a)7m,MDTP2

Ans – i) Yes, this is a case of partnership as there exists the element of doing business and
sharing of profits equally.

ii) Yes, this is a case of partnership because there is an agreement between two firms to
combine into one firm.

iii) Yes, this is a case of partnership because A & B, co-owners, have agreed to conduct a
business in common for profit.

CA NIKESH AGRAWAL 4
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U1

iv) No, this is not a case of partnership as no charitable association can be floated in
partnership.

v) No, this is not a case of partnership as they are co-owners and not the partners. Further,
there exist no business.

OR

i) No, this is not a case of partnership because the sharing of profits or of gross returns
accruing from property holding joint or common interest in the property would not by itself make
such persons partners.

Alternatively, this part can also be answered as below:

Yes, this is a case of partnership, as the car is used personally only on Sundays and holidays and
used for most of the days as a Taxi. Hence, it is inferred that the main purpose of owning the
car is to let it for business purpose. Also, there is an agreement for equally dividing the earnings.

OR

a) No, this is a case of partnership because no mutual agency relationship exist among X and Y.

g) No, this is not a case of partnership as there is no intention to carry on the business and to
share the profits thereof.

20 - What is the difference between partnership and co-ownership as per the Indian
Partnership Act, 1932?

1)c)i)4m,MDTP5, 1)c)i)4m,MTP1,Sept2024, 6)b)4m,MTP2,Dec2023, 6)b)4m,Dec2022

Ans - Partnership Vs. Co-Ownership or joint ownership i.e. the relation which subsists between
persons who own property jointly or in common.

Basis of difference Partnership Co-ownership

Formation Partnership always arises out of Co-ownership may arise either

a contract, express or implied. from agreement or by the
operation of law, such as by
inheritance.

Implied agency A partner is the agent of the A co-owner is not the agent of
other partners. other co-owners.

Nature of interest There is community of interest Co-ownership does not

which means that profits and necessarily involve sharing of

CA NIKESH AGRAWAL 5
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U1

losses must have to be shared. profits and losses.

Transfer of interest A share in the partnership is A co-owner may transfer his

transferred only by the consent interest or rights in the
of other partners. property without the consent
of other co-owners.

19 - State giving reasons whether the following are partnerships as per the provisions
under the Indian Partnership Act, 1932.

i) X, Y, and Z agree to divide the profits equally, but the loss, if any, is to be borne by X
alone. Is it case of partnership? (3 Marks)

ii) X, a publisher, agrees to publish a book at his own expense written by Y and to pay Y,
half of the net profit. Does this create a relationship of partnership between X and Y? Can
paper dealer i.e. third party make Y liable for paper supplied to X? (2 Marks)

iii) A and B purchase a tea shop and incur additional expenses for purchasing utensils etc.
each contributing half of the total expense. The shop is leased out on daily rent which is
divided between both. Does this arrangement constitute a partnership between A and B? (2
Marks) 3)a)7m,MDTP6, 3)a)7m,MTP1,Sept2024, 4)b)6m,Dec2023

Ans - As per Section 4 of the 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.

i) Yes, it is a case of partnership.

Reason: The sharing of profits is an essential feature of partnership. There can be no

partnership where only one of the partners is entitled to the whole of the profits of the
business. Partners must agree to share the profits in any manner they choose. But an agreement
to share losses is not an essential requirement. It is open to one or more partners to agree to
share all the losses.

ii) No, it is not a case of partnership

Reason: Sharing of profit, which is a prima facie evidence, exists but mutual agency among X and
Y, which is an essential element, does not exist here. Since there is no partnership, the third
party i.e. paper dealer cannot make Y liable for the paper supplied by him to X.

(iii) No, it is not a case of partnership

CA NIKESH AGRAWAL 6
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U1

Reason: Persons who share amongst themselves the rent derived from a piece of land are not
partners, rather they are co owners. Because, neither there is existence of business, nor mutual
agency is there.

18 - Mr. Ram and Mr. Raheem are working as teachers in Ishwarchand Vidhyasagar Higher
Secondary School and also are very good friends. They jointly purchased a flat which was
given on rent to Mr. John. It was decided between landlords and tenant that the rent
would be ` 10,000 per month inclusive of electricity bill. It means electricity bill will be
paid by landlords. The landlords, by mistake, did not pay the electricity bill for the month
of March 2021. Due to this, the electricity department cut the connection. Mr. John has
to pay the electricity bill of ` 2800 and ` 200 as a penalty to resume the electricity
connection. Mr. John claimed ` 3000 from Mr. Ram but Mr. Ram replied that he is liable
only for ` 1500. Mr. John said that Mr. Ram and Mr. Raheem are partners therefore he
can claim the full amount from any of the partners. Explain, whether under the provision of
the Indian Partnership Act, 1932, Mr. Ram is liable to pay whole amount of ` 3000 to Mr.
John? 3)a)i)4m,MDTP4, Rtp,June2024, 3)a)i)4m,MTP3,June2024, RTP,June2023

Ans - According to Section 4 of the Indian Partnership Act, 1932, "Partnership" is the relation
between persons who have ag reed to share the profits of a business carried on by all or any of
them acting for all. Therefore, for determining the existence of partnership, it must be proved:

1 - There must be an agreement between all the persons concerned;

2 - The agreement must be to carry on some business;

3 - The agreement must be to share the profits of a business and

4 - The business was carried on by all or any of them acting for all.

On the basis of above provisions and facts provided in the question, Mr. Ram and Mr. Raheem
cannot be said under partnership as they are teachers in a school and just purchased a flat
jointly. By merely giving the flat on rent, they are not doing business. They are just earning the
income from the property under their co-ownership. Hence, there is no partnership between
them. Therefore, Mr. Ram is liable to pay his share only i.e. ` 1500. Mr. John has to claim the
rest of ` 1500 from Mr. Raheem.

17 - Define partnership and name the essential elements for the existence of a partnership
as per the Indian Partnership Act, 1932.

1)c)6m,MDTP1, 1)c)6m,MTP1,June2024, 3)a)6m,MTP2,June2023, 3)a)6m,MTP2,Dec2022,

3)a)6m,MTP1,June2022, 3)a)6m,Dec2021

CA NIKESH AGRAWAL 7
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U1

Ans - Definition of Partnership: '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 of
the Indian Partnership Act, 1932)

The definition of the partnership contains the following five elements which must co-exist
before a partnership can come into existence:

1. Association of two or more persons

2. Agreement

3. Business

4. Agreement to Share Profits

5. Business Carried on by all or any of them acting for all

ELEMENTS OF PARTNERSHIP

The definition of the partnership contains the following five elements which must co-exist
before a partnership can come into existence:

1. Association of two or more persons: Partnership is an association of 2 or more persons.

Again, only persons recognized by law can enter into an agreement of partnership. Therefore, a
firm, since it is not a person recognized in the eyes of law cannot be a partner. Again, a minor
cannot be a partner in a firm, but with the consent of all the partners, may be admitted to the
benefits of partnership.

2. Agreement: It may be observed that partnership must be the result of an agreement

between two or more persons. There must be an agreement entered into by all the persons
concerned. This element relates to voluntary contractual nature of partnership. Thus, the nature
of the partnership is voluntary and contractual. An agreement from which relationship of
Partnership arises may be express. It may also be implied from the act done by partners and
from a consistent course of conduct being followed, showing mutual understanding between
them. It may be oral or in writing.

3. Business: Firstly, there must exist a business. For the purpose, the term 'business' includes
every trade, occupation and profession. The existence of business is essential. Secondly, the
motive of the business is the "acquisition of gains" which leads to the formation of partnership.
Therefore, there can be no partnership where there is no intention to carry on the business and
to share the profit thereof.

4. Agreement to share profits: The sharing of profits is an essential feature of partnership.

There can be no partnership where only one of the partners is entitled to the whole of the

CA NIKESH AGRAWAL 8
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U1

profits of the business. Partners must agree to share the profits in any manner they choose. But
an agreement to share losses is not an essential element. It is open to one or more partners to
agree to share all the losses. However, in the event of losses, unless agreed otherwise, these
must be borne in the profit-sharing ratio.

5. Business carried on by all or any of them acting for all: The business must be carried on
by all the partners or by anyone or more of the partners acting for all. This is the cardinal
principle of the partnership Law. In other words, there should be a binding contract of mutual
agency between the partners. An act of one partner in the course of the business of the firm is
in fact an act of all partners. Each partner carrying on the business is the principal as well as the
agent for all the other partners. He is an agent in so far as he can bind the other partners by his
acts and he is a principal to the extent that he is bound by the act of other partners. It may be
noted that the true test of partnership is mutual agency rather than sharing of profits. If the
element of mutual agency is absent, then there will be no partnership.

16 - "Whether a group of persons is or is not a firm, or whether a person is or is not a

partner in a firm." Explain the mode of determining existence of partnership as per the
Indian Partnership Act, 1932?

1)c)i)4m,MDTP3,1)c)i)4m,MTP2,June2024, 3)b)4m,June2019

Ans - Mode of determining existence of partnership (Section 6 of the Indian Partnership

Act, 1932): In determining whether a group of persons is or is not a firm, or whether a person
is or 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.

For determining the existence of partnership, it must be proved.

1. There was an agreement between all the persons concerned

2. The agreement was to share the profits of a business and

3. the business was carried on by all or any of them acting for all.

1. Agreement: Partnership is created by agreement and not by status (Section 5). The relation
of partnership arises from contract and not from status; and in particular, the members of a
Hindu Undivided family carrying on a family business as such are not partners in such business.

2. Sharing of Profit: Sharing of profit is an essential element to constitute a partnership. But,

it is only a prima facie evidence and not conclusive evidence, in that regard. The sharing of
profits or of gross returns accruing from property by persons holding joint or common interest
in the property would not by itself make such persons partners. Although the right to participate

CA NIKESH AGRAWAL 9
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U1

in profits is a strong test of partnership, and there may be cases where, upon a simple
participation in profits, there is a partnership, yet whether the relation does or does not exist
must depend upon the whole contract between the parties.

3. Agency: Existence of Mutual Agency which is the cardinal principle of partnership law, is very
much helpful in reaching a conclusion in this regard. Each partner carrying on the business is the
principal as well as an agent of other partners. So, the act of one partner done on behalf of firm,
binds all the partners. If the elements of mutual agency relationship exist between the parties
constituting a group formed with a view to earn profits by running a business, a partnership may
be deemed to exist.

15 - What do you mean by 'Partnership for a fixed period' as per the Indian Partnership
Act, 1932? 1)c)i)MDTP2, RTP,Dec2023, 3)a)i)2m,MTP2,Dec2023

Ans - Partnership for a fixed period (Indian Partnership Act, 1932): Where a provision is
made by a contract for the duration of the partnership, the partnership is called ‘partnership
for a fixed period’. It is a partnership created for a particular period of time. Such a
partnership comes to an end on the expiry of the fixed period.

14 - “Sharing in the profits is not conclusive evidence in the creation of partnership”.

Comment. 6)b)4m,MTP1,Dec2023, 6)b)4m,Dec2021, 6)b)4m,MTP1,Dec2019

Ans - “Sharing in the profits is not conclusive evidence in the creation of partnership”

Sharing of profit is an essential element to constitute a partnership. But it is only a prima facie
evidence and not conclusive evidence, in that regard. The sharing of profits or of gross returns
accruing from property by persons holding joint or common interest in the property would not by
itself make such persons partners. Although the right to participate in profits is a strong test of
partnership, and there may be cases where, upon a simple participation in profits, there is a
partnership, yet whether the relation does or does not exist must depend upon the whole
contract between the parties.

Where there is an express agreement between partners to share the profit of a business and
the business is being carried on by all or any of them acting for all, there will be no difficulty in
the light of provisions of Section 4 of the Indian Partnership Act, 1932, in determining the
existence or otherwise of partnership.

But the task becomes difficult when either there is no specific agreement or the agreement is
such as does not specifically speak of partnership. In such a case for testing the existence or
otherwise of partnership relation, Section 6 has to be referred.

CA NIKESH AGRAWAL 10
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U1

According to Section 6, regard must be had to the real relation between the parties as shown by
all relevant facts taken together. The rule is easily stated and is clear, but its application is
difficult. Cumulative effect of all relevant facts such as written or verbal agreement, real
intention and conduct of the parties, other surrounding circumstances etc., are to be considered
while deciding the relationship between the parties and ascertaining the existence of
partnership.

Hence, the statement is true / correct that mere sharing in the profits is not conclusive
evidence.

13 - P, Q and R are partners in a partnership firm. R retires from the firm without giving
public notice. P approached S, an electronic appliances trader, for purchase of 25 fans for
his firm. P introduced E, an employee of the firm, as his partner to S. S believing E and R
as partners supplied 25 fans to the firm on credit. S did not receive the payment for the
fans even after the expiry of the credit period. Advise S, from whom he can recover the
payment as per the provisions of the Indian Partnership Act, 1932.

4)b)6m,MTP2,Dec2023, 4)b)6m,June2023

Ans - According to sub-section (3) of Section 32 of the Indian Partnership Act, 1932, a retiring
partner along with the continuing partners continue to be liable to any third party for acts of
the firm after his retirement until public notice of his retirement has been given either by
himself or by any other partner. But the retired partner will not be liable to any third party if
the latter deals with the firm without knowing that the former was a partner.

As per the provisions of Section 28, where a man holds himself out as a partner or allows others
to do it, when in fact he is not a partner, he is liable like a partner in the firm to anyone who on
the faith of such representation has given credit to the firm.

In the instant case, since Mr. R has not given the public notice of his retirement from the
partnership firm and Mr. S believes that Mr. R is a partner, Mr. R will be liable to Mr. S under
the provisions of Section 32.

Also Mr. E, who has been introduced as a partner of the firm to which Mr. E has not presumably
denied, will also be liable for the payment of 25 fans supplied to the firm on credit along with
other partners in terms of the provisions of Section 28 as stated above.

Over and above R and E, P and Q being the partners of the firm along with the firm will also be
held liable to S.

Therefore, S can recover the payment from the Firm, P, Q, R and E.

CA NIKESH AGRAWAL 11
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U1

12 - Mohan, Sohan and Rohan are partners in the firm M/s Mosoro & Company. They
admitted Bohan as nominal partner and on agreement between all the partners, Bohan is not
entitled to share profit in the firm. After some time, a creditor Karan filed a suit to
Bohan for recovery of his debt. Bohan denied for same as he is just a nominal partner and
he is not liable for the debts of the firm and Karan should claim his dues from the other
partners. Taking into account the provisions of the Indian Partnership Act, 1932

a) Whether Bohan is liable for the dues of Karan against the firm.

b) In case, Karan has filed the suit against firm, whether Bohan would be liable?

RTP,Dec2022

Ans - Nominal Partner is a partner only in name. The person’s name is used as if he were a
partner of the firm, though actually he is not. He is not entitled to share the profits of the firm
but is liable for all acts of the firm as if he were a real partner. A nominal partner must give
public notice of his retirement and his insanity is not a ground for dissolving the firm.

In the instant case, Bohan was admitted as nominal partner in the firm. A creditor of the firm,
Karan has claimed his dues from Bohan as he is the partner in the firm. Bohan has denied for the
claim by replying that he is merely a nominal partner.

a) Bohan is a nominal partner. Even he is not entitled to share the profits of the firm but is liable
for all acts of the firm as if he were a real partner. Therefore, he is liable to Karan like other
partners.

b) In case, Karan has filed the suit against firm, answer would remain same.

11 - What is Particular Partnership as per Indian Partnership Act, 1932?

3)a)ii)2m,MTP1,Dec2022, RTP,June2020

Ans - Particular partnership: A partnership may be organized for the prosecution of a single
adventure as well as for the conduct of a continuous business. Where a person becomes a
partner with another person in any particular adventure or undertaking, the partnership is called
‘particular partnership’.

A partnership, constituted for a single adventure or undertaking is, subject to any agreement,
dissolved by the completion of the adventure or undertaking.

10 - Ms. Lucy while drafting partnership deed taken care of few important points. What
are those points? She wants to know the list of information which must be part of

CA NIKESH AGRAWAL 12
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U1

partnership deed drafted by her. Also, give list of information to be included in partnership
deed?

6)b)4m,MTP1,Dec2022, 3)a)6m,MTP2,Dec2021, RTP,Dec2020, 6)b)4m,MTP2,June2019,

RTP,Dec2018, 6)c)4m,MTP2,Dec2018, 6)b)4m,MTP1,June2018

Ans - Ms. Lucy while drafting partnership deed must take care of following important points:

• No particular formalities are required for an agreement of partnership.

• Partnership deed may be in writing or formed verbally. The document in writing containing the
various terms and conditions as to the relationship of the partners to each other is called the
‘partnership deed’.

• Partnership deed should be drafted with care and be stamped according to the provisions of
the Stamp Act, 1899.

• If partnership comprises immovable property, the instrument of partnership must be in writing,

stamped and registered under the Registration Act.

List of information included in Partnership Deed while drafting Partnership Deed by Ms.
Lucy:

• Name of the partnership firm.

• Names of all the partners.

• Nature and place of the business of the firm.

• Date of commencement of partnership.

• Duration of the partnership firm.

• Capital contribution of each partner.

• Profit Sharing ratio of the partners.

• Admission and Retirement of a partner.

• Rates of interest on Capital, Drawings and loans.

• Provisions for settlement of accounts in the case of dissolution of the firm.

• Provisions for Salaries or commissions, payable to the partners, if any.

• Provisions for expulsion of a partner in case of gross breach of duty or fraud.

CA NIKESH AGRAWAL 13
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U1

09 - What do you mean by 'Partnership for a fixed period' as per the Indian Partnership
Act, 1932? 3)a)i)2m,June2022

Ans - Partnership for a fixed period (Indian Partnership Act, 1932): Where a provision is made
by a contract for the duration of the partnership, the partnership is called ‘partnership for a
fixed period’. It is a partnership created for a particular period of time. Such a partnership
comes to an end on the expiry of the fixed period.

08 - Enumerate the differences between Partnership and Joint Stock Company.

3)i)6m,MTP2,June2022, 3)a)6m,MTP1,Dec2021

Ans –

Basis Partnership Joint Stock Company

Legal status A firm is not legal entity i.e. it has no A company is a separate legal entity
legal personality distinct from the distinct from its members (Salomon v.
personalities of its constituent Salomon).
members.

Agency In a firm, every partner is an agent In a company, a member is not an agent

of the other partners as well as of of the other members or of the company,
the firm. his actions do not bind either.

Distribution The profits of the firm must be There is no such compulsion to distribute
of profits distributed among the partners its profits among its members. Some
according to the terms of the portion of the profits, but generally not
partnership deed. the entire profit, become distributable
among the shareholders only when
dividends are declared.

Extent of In a partnership, the liability of the In a company limited by shares, the

liability partners is unlimited. This means liability of a shareholder is limited to the
that each partner is liable for debts amount, if any, unpaid on his shares, but
of a firm incurred in the course of in the case of a guarantee company, the
the business of the firm and these liability is limited to the amount for
debts can be recovered from his which he has agreed to be liable.
private property, if the joint estate However, there may be companies where
is insufficient to meet them wholly. the liability of members is unlimited.

Property The firm’s property is that which is In a company, its property is separate

CA NIKESH AGRAWAL 14
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U1

the “joint estate” of all the partners from that of its members who can
as distinguished from the ‘separate’ receive it back only in the form of
estate of any of them and it does not dividends or refund of capital.
belong to a body distinct in law from
its members.

Transfer of A share in a partnership cannot be In a company a shareholder may transfer

shares transferred without the consent of his shares, subject to the provisions
all the partners. contained in its Articles. In the case of
public limited companies whose shares
are quoted on the stock exchange, the
transfer is usually unrestricted.

Management In the absence of an express Members of a company are not entitled

agreement to the contrary, all the to take part in the management unless
partners are entitled to participate they are appointed as directors, in which
in the management. case they may participate. Members,
however, enjoy the right of attending
general meeting and voting where they
can decide certain questions such as
election of directors, appointment of
auditors, etc.

Registration Registration is not compulsory in the A company cannot come into existence
case of partnership. unless it is registered under the
Companies Act, 2013.

Winding up A partnership firm can be dissolved A company, being a legal person is either
at any time if all the partners agree. wind up by the National Company Law
Tribunal or its name is struck of by the
Registrar of Companies.

Number of According to section 464 of the A private company may have as many as
membership Companies Act, 2013, the number of 200 members but not less than two and a
partners in any association shall not public company may have any number of
exceed 100. However, the Rule given members but not less than seven. A
under the Companies (Miscellaneous) private Company can also be formed by
Rules, 2014 restrict the present limit one person known as one person Company.
to 50.

CA NIKESH AGRAWAL 15
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U1

Duration of Unless there is a contract to the A company enjoys a perpetual succession.

existence contrary, death, retirement or
insolvency of a partner results in the
dissolution of the firm.

07 - What do you mean by 'Partnership at will' as per the Indian Partnership Act, 1932?

3)a)i)2m,Dec2020, RTP,June2020

Ans - Partnership at will under the Partnership Act, 1932

According to Section 7 of the Act, partnership at will is a partnership when:

1. no fixed period has been agreed upon for the duration of the partnership; and

2. there is no provision made as to the determination of the partnership.

Where a partnership entered into for a fixed term is continued after the expiry of such term, it
is to be treated as having become a partnership at will.

06 - Explain the provisions of the Indian Partnership Act, 1932 relating to the creation of
Partnership by holding out. RTP,Dec2020

Ans - Partnership by holding out is also known as partnership by estoppel. Where a man holds
himself out as a partner, or allows others to do it, he is then stopped from denying the character
he has assumed and upon the faith of which creditors may be presumed to have acted.

A person may himself, by his words or conduct have induced others to believe that he is a
partner or he may have allowed others to represent him as a partner. The result in both the
cases is identical.

Example: X and Y are partners in a partnership firm. X introduced A, a manager, as his partner
to Z. A remained silent. Z, a trader believing A as partner supplied 100 T.V sets to the firm on
credit. After expiry of credit period, Z did not get amount of T.V sets sold to the partnership
firm. Z filed a suit against X and A for the recovery of price. Here, in the given case, A, the
Manager is also liable for the price because he becomes a partner by holding out (Section 28,
Indian Partnership Act, 1932).

It is only the person to whom the representation has been made and who has acted thereon that
has right to enforce liability arising out of ‘holding out’.

CA NIKESH AGRAWAL 16
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U1

05 - “Partner indeed virtually embraces the character of both a principal and an agent”.
Describe the said statement keeping in view of the provisions of the Indian Partnership
Act, 1932. 5)b)7m,MDTP4, RTP,June2020

Ans - “Partner indeed virtually embraces the character of both a principal and an agent”:
Subject to the provisions of section 18 of the Indian Partnership Act, 1932, a partner is the
agent of the firm for the purposes of the business of the firm.

A partnership is the relationship between the partners who have agreed to share the profits of
the business carried on by all or any of them acting for all (Section 4). This definition suggests
that any of the partners can be the agent of the others.

Section 18 clarifies this position by providing that, subject to the provisions of the Act, a
partner is the agent of the firm for the purpose of the business of the firm. The partner indeed
virtually embraces the character of both a principal and an agent. So far as he acts for himself
and in his own interest in the common concern of the partnership, he may properly be deemed as
a principal and so far as he acts for his partners, he may properly be deemed as an agent.

The principal distinction between him and a mere agent is that he has a community of interest
with other partners in the whole property and business and liabilities of partnership, whereas an
agent as such has no interest in either.

The rule that a partner is the agent of the firm for the purpose of the business of the firm
cannot be applied to all transactions and dealings between the partners themselves. It is
applicable only to the act done by partners for the purpose of the business of the firm.

04 - X and Y are partners in a partnership firm. X introduced A, a manager, as his

partner to Z. A remained silent. Z, a trader believing A as partner supplied 100 T.V sets
to the firm on credit. After expiry of credit period, Z did not get amount of T.V sets sold
to the partnership firm. Z filed a suit against X and A for the recovery of price. Advice Z
whether he can recover the amount from X and A under the Indian Partnership Act, 1932.

RTP,Dec2019

Ans - In the given case, along with X, the Manager (A) is also liable for the price because he
becomes a partner by holding out (Section 28, Indian Partnership Act, 1932).

Partner by holding out (Section 28): Partnership by holding out is also known as partnership by
estoppel. Where a man holds himself out as a partner, or allows others to do it, he is then
stopped from denying the character he has assumed and upon the faith of which creditors may
be presumed to have acted.

CA NIKESH AGRAWAL 17
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U1

It is only the person to whom the representation has been made and who has acted thereon that
has right to enforce liability arising out of ‘holding out’.

You must also note that for the purpose of fixing liability on a person who has, by
representation, led another to act, it is not necessary to show that he was actuated by a
fraudulent intention.

The rule given in Section 28 is also applicable to a former partner who has retired from the firm
without giving proper public notice of his retirement. In such cases, a person who, even
subsequent to the retirement, give credit to the firm on the belief that he was a partner, will be
entitled to hold him liable.

03 - Distinguish between Partnership vs. Hindu Undivided Family. Write any two points.

3)a)2m,MTP1,Dec2019

Ans –

Basis of Partnership Joint Hindu family

difference

Mode of Partnership is created The right in the joint family is created

creation necessarily by an agreement. by status means its creation by birth in
the family.

Death of a Death of a partner ordinarily The death of a member in the Hindu

member leads to the dissolution of undivided family does not give rise to
partnership. dissolution of the family business.

Management All the partners are equally The right of management of joint family
entitled to take part in the business generally vests in the Karta,
partnership business. the governing male member or female
member of the family.

Authority to Every partner can, by his act, The Karta or the manager, has the
bind bind the firm. authority to contract for the family
business and the other members in the
family.

Liability In a partnership, the liability of In a Hindu undivided family, only the

a partner is unlimited. liability of the Karta is unlimited, and
the other co-partners are liable only to

CA NIKESH AGRAWAL 18
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U1

the extent of their share in the profits

of the family business.

Calling for A partner can bring a suit against On the separation of the joint family, a
accounts on the firm for accounts, provided member is not entitled to ask for
closure he also seeks the dissolution of account of the family business.
the firm.

Governing Law A partnership is governed by the A Joint Hindu Family business is

Indian Partnership Act, 1932. governed by the Hindu Law.

Minor’s capacity In a partnership, a minor cannot In Hindu undivided family business, a

become a partner, though he can minor becomes a member of the
be admitted to the benefits of ancestral business by the incidence of
partnership, only with the birth. He does not have to wait for
consent of all the partners. attaining majority.

Continuity A firm subject to a contract A Joint Hindu family has the continuity
between the partners gets till it is divided. The status of Joint
dissolved by death or insolvency Hindu family is not thereby affected by
of a partner. the death of a member.

Number of In case of Partnership, number Members of HUF who carry on a

Members of members should not exceed business may be unlimited in number.
50

Share in the In a partnership, each partner In a HUF, no coparceners has a definite

business has a defined share by virtue of share. His interest is a fluctuating one.
an agreement between the It is capable of being enlarged by deaths
partners. in the family diminished by births in the
family.

02 – What is the conclusive evidence of partnership? State the circumstances when

partnership is not considered between two or more parties. 6)b)4m,June2018

Ans - Conclusive evidence of partnership: Existence of Mutual Agency which is the cardinal
principle of partnership law is very much helpful in reaching a conclusion with respect to
determination of existence of partnership. Each partner carrying on the business is the principal
as well as an agent of other partners. So, the act of one partner done on behalf of firm, binds all
the partners. If the element of mutual agency relationship exists between the parties

CA NIKESH AGRAWAL 19
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U1

constituting a group formed with a view to earn profits by running a business, a partnership may
be deemed to exist.

Circumstances when partnership is not considered between two or more parties: Various judicial
pronouncements have laid to the following factors leading to no partnership between the parties:
(i) Parties have not retained any record of terms and conditions of partnership.

(ii) Partnership business has maintained no accounts of its own, which would be open to inspection
by both parties

(iii) No account of the partnership was opened with any bank

(iv) No written intimation was conveyed to the Deputy Director of Procurement with respect to
the newly created partnership.

01 - State the differences between Partnership and Hindu Undivided Family. RTP,June2018

Ans -

Basis of Partnership Joint Hindu family

difference

Mode of Partnership is created necessarily The right in the joint family is created by
creation by an agreement status means its creation by birth in the
family.

Death of a Death of a partner ordinarily The death of a member in the Hindu

member leads to the dissolution of undivided family does not give rise to
partnership. dissolution of the family business.

Management All the partners are equally The right of management of joint family
entitled to take part in the business generally vests in the Karta, the
partnership business. governing male member or female member
of the family.

Authority to Every partner can, by his act, bind The Karta or the manager, has the
bind the firm. authority to contract for the family
business and the other members in the
family.

Liability In a partnership, the liability of a In a Hindu undivided family, only the

partner is unlimited. liability of the Karta is unlimited, and the
other co -partners are liable only to the

CA NIKESH AGRAWAL 20
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U1

extent of their share in the profits of

the family business.

Calling for A partner can bring a suit against On the separation of the joint family, a
accounts on the firm for accounts, provided he member is not entitled to ask for account
closure also seeks the dissolution of the of the family business.
firm.

Governing A partnership is governed by the A Joint Hindu Family business is governed

Law Indian Partnership Act, 1932. by the Hindu Law.

Minor’s In a partnership, a minor cannot In Hindu undivided family business, a

capacity become a partner, though he can minor becomes a member of the ancestral
be admitted to the benefits of business by the incidence of birth. He
partnership, only with the consent does not have to wait for attaining
of all the partners. majority.

Continuity A firm subject to a contract A Joint Hindu family has the continuity
between the partners gets till it is divided. The status of Joint Hindu
dissolved by death or insolvency family is not thereby affected by the
of a partner. death of a member.

Number of In case of Partnership number of Members of HUF who carry on a business

Members members should not exceed 50 may be unlimited in number.

Share in the In a partnership each partner has In a HUF, no coparceners has a definite
business a defined share by virtue of an share. His interest is a fluctuating one. It
agreement between the partners. is capable of being enlarged by deaths in
the family diminished by births in the
family.

CA NIKESH AGRAWAL 21
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U1

CA NIKESH AGRAWAL 22
BUSINESS LAWS QUESTION BANK CHAPTER:4

Chapter: 4 – Indian Partnership Act, 1932

Unit – 2- Relations of Partners
Question Bank
(Covers All RTP, MTP, PYQ, ICAI SM, MDTP till Jan 2025)

CA NIKESH AGRAWAL
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U2

38 – P, Q and R, are partners in a construction firm, PQR Associates. P buys cement on

behalf of the firm from D. The cement is used in the ordinary course of the firm's
business. P uses the cement for his personal purposes. The supplier D, who is unaware of
the private use of cement by P, claims the price from the firm. The firm refuses to pay
for the price, on the ground that the cement was never received by it. Referring to the
provisions of the Indian Partnership Act, 1932, answer the followings:

(i) Whether the Firm's contention is tenable?

(ii) What would be your answer if a part of the cement so purchased by P was delivered to
the firm by him, and the rest of the cement was used by him for his private use, about
which neither the firm nor the supplier were aware? 3)a)7m,Jan2025

Ans - The given question is based on the Section 18 read with sections 25 & 26 of the Indian
Partnership Act, 1932. Section 18 deals with the Partner to be an agent of the firm. This means
that a partner is the agent of the firm for the purpose of the business of the firm.

The partner indeed virtually holds the character of both a principal and an agent. So as far as he
acts for himself and in his own interest in the common concern of the partnership, he may
properly be deemed a principal and so far as he acts for his partners, he may properly be
deemed as an agent.

The rule that a partner is the agent of the firm for the purpose of the business of the firm
cannot be applied to all transactions and dealings between the partners themselves. It is
applicable only to the act done by partners for the purpose of the business of the firm.

According to section 25, the partners are jointly and severally responsible to third parties for
all acts which come under the scope of their express or implied authority. “Act of firm’ connotes
any act or omission by all the partners or by any partner or agent of the firm, which gives rise to
a right enforceable by or against the firm.

As per section 26, the firm is liable to the same extent as the partner for any loss or injury
caused to a third party by the wrongful acts of a partner, if they are done by the partner while
acting:

(a) in the ordinary course of the business of the firm

(b) with the authority of the partners.

According to the facts given in the questions, P, a partner to PQR Associates, buys cement on
behalf of the firm from D in the ordinary course of the firm’s business. P uses the cement for
his personal purposes. D, the supplier was unaware of the private use of cement by P and claims

CA NIKESH AGRAWAL 24
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U2

price from the firm. Firm refuses to pay the price on the ground that the cement was never
received by it.

Referring to the stated provisions of the Indian Partnership Act, 1932, following are the
answers:

(i) Said Section is applicable only to the act done by partners for the purpose of the business of
the firm. In such case, partner act as the agent of the firm for the purpose of the business of
the firm. Since in the given case, P, buys cement on behalf of the firm from D in the ordinary
course of the firm’s business.

Therefore, in the given case, firms’ contention of refusal to pay the price on the ground that the
cement was never received by it, is not tenable.

(ii) Further for commission of the wrongful act by the partner, the firm is liable to the same
extent as the partner for any loss or injury caused to a third party by the wrongful acts of a
partner, if they are done by the partner while acting:

(a) in the ordinary course of the business of the firm

(b) with the authority of the partners.

In the given case, part of the cement so purchased by P was delivered to the firm by him and the
rest of the cement was used by him for his private use, was not known to the firm and the
supplier. Since the act of the P to purchase the cement was in the ordinary course of business
with the authority of the partner, however wrongful use by the partner will make the firm liable
to the same extent as the partner for loss or injury caused to D.

However, PQR Associates can take action against P, the partner.

37 – Referring to the provisions of the Indian Partnership Act, 1932, answer the following:

(i) "If a partner is otherwise expelled; the expulsion is null and void." Discuss.

(ii) "The partner who is expelled will cease to be liable to the third party for the act of
the firm done after expulsion." Analyse.

1)c)6m,MDTP10, 1)c)6m,MDTP7, 1)c)6m,MTP1,Jan2025, 1(c)6m,Sept2024

Ans – (i) If a partner is otherwise expelled, the expulsion is null and void.

According to Section 33 of the Indian Partnership Act, 1932

(i) the power of expulsion must have existed in a contract between the partners;

(ii) the power has been exercised by a majority of the partners; and
CA NIKESH AGRAWAL 25
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U2

(iii) it has been exercised in good faith.

If all these conditions are not present, the expulsion is not deemed to be in bona fide interest of
the business of the firm.

The test of good faith as required under Section 33(1) includes three things:

(i) The expulsion must be in the interest of the partnership.

(ii) The partner to be expelled is served with a notice.

(iii) He is given an opportunity of being heard. Hence, it is correct to say that, if a partner is
otherwise expelled, the expulsion is null and void.

(ii) “The partner who is expelled will cease to be liable to the third party for the act of
the firm done after expulsion”

According to Section 32(3) of the Indian Partnership Act, 1932, notwithstanding the expulsion a
partner from a firm, he and the partners continue to be liable as partners to third parties for
any act done by any of them which would have been an act of the firm if done before the
expulsion, until public notice is given of the expulsion.

However, an expelled partner is not liable to any third party who deals with the firm without
knowing that he was a partner.

Hence, the statement given is partially correct.

36 - On admission as a new partner, Amar agreed to be liable for the existing debts
(referred to as the old debts) of the firm by an agreement signed by the all partners
including Amar. Examine, whether Amar will be liable in a suit filed by the creditor against
the firm and all existing partners for recovery of the old debt of the firm.

3)a)ii)2m,MDTP10, 3)a)ii)3m,MDTP7, 3)b)ii)MTP1,Jan2025, 3)a)ii)2m,Sept2024

Ans - Rights and liabilities of new partner: The new firm, including the new partner who joins
it, may agree to assume liability for the existing debts of the old firm, and creditors may agree
to accept the new firm as their debtor and discharge the old partners. The creditor’s consent is
necessary in every case to make the transaction operative. Novation is the technical term in a
contract for substituted liability, of course, not confined only to case of partnership.

But a mere agreement amongst partners cannot operate as Novation. Thus, an agreement
between the partners and the incoming partner that he shall be liable for existing debts will not
ipso facto give creditors of the firm any right against him.

CA NIKESH AGRAWAL 26
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U2

In the instant case, Amar will not be liable in a suit filed by the creditor against the firm and all
existing partners for recovery of the old debt of the firm.

35 - Suman, having 10% share in the property of 200 lakh of a firm retires from the firm
on 31 March, 2023. The firm continues with the business thereafter without final
settlement of accounts between the existing and retired partners and earned profits of 10
lakh during the financial year ending 31st March, 2024. Suman, in her own interest and in
the absence of any provision in the partnership firm on this point, claimed 3 lakh from the
firm toward the use of her share in the property and profit of the firm which was rejected
by the partners. There is no contract between the partners contrary to the provisions of
the Act in this regard. Examine the validity of the amount claimed by Suman under the
provisions of The Indian Partnership Act, 1932. 3)a)iii)2m,MDTP10, 3)a)iii)2m,Sept2024

Ans - According to section 37 of the Indian Partnership Act, 1932,

• Where any member of a firm has died or otherwise ceased to be partner, and the surviving
or continuing partners

• carry on the business of the firm with the property of the firm without any final settlement
of accounts as between them and the outgoing partner or his estate, then, in the absence of
a contract to the contrary,

• the outgoing partner or his estate is entitled at the option of himself or his representatives

• to such share of the profits made since he ceased to be a partner as may be attributable to
the use of his share of the property of the firm or

• to interest at the rate of six per cent per annum on the amount of his share in the property
of the firm.

In the instant case, Suman is entitled to claim either interest on her share in the property
i.e. ` 1,20,000 (6% of ` 20 Lakh) or a share of the profits i.e. ` 1 Lakh (10% of ` 10 Lakh)
from the firm for the use of her share in the property.

Therefore, claim of Suman of ` 3 Lakh is not valid.

34 - Sahil, Amit and Kunal were partners in a firm. The firm is a dealer in office
furniture. They have regular dealings with M/s AB and Co. for the supply of furniture for
their business. On 30th June 2023, one of the partners, Mr. Kunal died in a road accident.
The firm ordered M/s AB and Co. to supply the furniture for their business on 25th May
2023, when Kunal was also alive.

CA NIKESH AGRAWAL 27
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U2

Now Sahil and Amit continue the business in the firm’s name after Kunal’s death. The firm
did not give any notice about Kunal’s death to the public or the persons dealing with the
firm. M/s AB and Co. delivered the furniture to the firm on 25th July 2023. The fact
about Kunal’s death was known to them at the time of delivery of goods. Afterwards the
firm became insolvent and failed to pay the price of furniture to M/s AB and Co. Now M/s
AB and Co. has filed a case against the firm for recovery of the price of furniture. With
reference to the provisions of Indian Partnership Act, 1932, explain whether Kunal’s
private estate is also liable for the price of furniture purchased by the firm?

ii) Whether does it make any difference if supplied the furniture to the firm believing that
all the three partners are alive?

RTP,Sept2024, RTP,June2022, 4)b)6m,MTP2,June2022, 4)b)6m,MTP1,Dec2021,

RTP,June2021

Ans - According to Section 35 of the Indian Partnership Act, 1932, where under a contract
between the partners the firm is not dissolved by the death of a partner, the estate of a
deceased partner is not liable for any act of the firm done after his death.

Further, in order that the estate of the deceased partner may be absolved from liability for the
future obligations of the firm, it is not necessary to give any notice either to the public or the
persons having dealings with the firm.

In the light of the facts of the case and provisions of law, since the delivery of furniture was
made after Kunal’s death, his estate would not be liable for the debt of the firm. A suit for
goods sold and delivered would not lie against the representatives of the deceased partner. This
is because there was no debt due in respect of the goods in Kunal’s lifetime. He was already dead
when the delivery of goods was made to the firm and also it is not necessary to give any notice
either to the public or the persons having dealings with the firm on a death of a partner (Section
35). So, the estate of the deceased partner may be absolved from liability for the future
obligations of the firm.

ii) It will not make any difference even if supplied furniture to the firm believing that all the
three partners are alive, as it is not necessary to give any notice either to the public or the
persons having dealings with the firm, so the estate of the deceased partner may be absolved
from liability for the future obligations of the firm.

33 - Discuss the provisions regarding personal profits earned by a partner under the Indian
Partnership Act, 1932?

CA NIKESH AGRAWAL 28
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U2

1)c)ii)2m,MDTP5, 1)c)ii)MDTP3, 1)c)ii)2m,MTP1,Sept2024, 1)c)ii)2m,MTP2,June2024,

3)a)ii)2m,June2019

Ans - Personal Profit earned by Partners (Section 16 of the Indian Partnership Act, 1932)

According to section 16, subject to contract between the partners:

a) If a partner derives any profit for himself from any transaction of the firm, or from the use
of the property or business connection of the firm or the firm name, he shall account for that
profit and pay it to the firm;

b) If a partner carries on any business of the same nature and competing with that of the firm,
he shall account for and pay to the firm all profits made by him in that business.

32 - M/s ABC & Associates, a partnership firm with A, B and C as senior partners engaged
in the business of curtain manufacturing and exporting to foreign countries. On 25th
August, 2022, they inducted Mr. P, an expert in the field of curtain manufacturing as
their partner. On 10th January 2024, Mr. P was blamed for unauthorized activities and
thus expelled from the partnership by approval of all of the remaining partners.

(i) Examine whether action by the partners was justified or not?

(ii) What should have the factors to be kept in mind prior expelling a partner from the firm
by other partners according to the provisions of the Indian Partnership Act, 1932?

3)a)7m,MDTP5, 3)a)7m,MTP1,Sept2024, 4)b)6m,MTP1,June2023, RTP,Dec2020,

4)b)6m,June2019

Ans - Expulsion of a Partner (Section 33 of the Indian Partnership Act, 1932):

A partner may not be expelled from a firm by a majority of partners except in exercise, in good
faith, of powers conferred by contract between the partners.

The test of good faith as required under Section 33(1) includes three things:

• The expulsion must be in the interest of the partnership.

• The partner to be expelled is served with a notice.

• He is given an opportunity of being heard.

If a partner is otherwise expelled, the expulsion is null and void.

a) Action by the partners of M/s ABC & Associates, a partnership firm to expel Mr. P from the
partnership was justified as he was expelled by approval of the other partners exercised in good

CA NIKESH AGRAWAL 29
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U2

faith to protect the interest of the partnership against the unauthorized activities charged
against Mr. P. A proper notice and opportunity of being heard has to be given to Mr. P.

b) The following are the factors to be kept in mind prior expelling a partner from the firm by
other partners:

• the power of expulsion must have existed in a contract between the partners;

• the power has been exercised by a majority of the partners; and

• it has been exercised in good faith.

31 - State the legal position of a minor partner under the Indian Partnership Act, 1932
after attaining majority:

(A) When he opts to become a partner of the same firm.

(B) When he decides not to become a partner.

5)b)ii)3m,MDTP5, 5)b)ii)MTP1,Sept2024, 3)a)2m,Dec2018

OR

State the liabilities of a minor partner both: (i) Before attaining majority and (ii) After
attaining majority.

3)a)ii)MTP1,June2021, 3)b)6m,MTP1,June2020, 3)a)ii)2m,MTP1,June2019

Ans – A) When he becomes partner: If the minor becomes a partner on his own willingness or
by his failure to give the public notice within specified time, his rights and liabilities as given in
Section 30(7) of the Indian Partnership Act, 1932, are as follows:

(a) He becomes personally liable to third parties for all acts of the firm done since he was
admitted to the benefits of partnership.

(b) His share in the property and the profits of the firm remains the same to which he was
entitled as a minor.

B) When he elects not to become a partner:

(a) His rights and liabilities continue to be those of a minor up to the date of giving public notice.

(b) His share shall not be liable for any acts of the firm done after the date of the notice.

(c) He shall be entitled to sue the partners for his share of the property and profits. It may be
noted that such minor shall give notice to the Registrar that he has or has not become a partner.

CA NIKESH AGRAWAL 30
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U2

OR

Liabilities of a minor partner before attaining majority:

a) The liability of the minor is confined only to the extent of his share in the profits and the
property of the firm.

b) Minor has no personal liability for the debts of the firm incurred during his minority.

c) Minor cannot be declared insolvent, but if the firm is declared insolvent his share in the firm
vests in the Official Receiver/Assignee.

2) Liabilities of a minor partner after attaining majority:

Within 6 months of his attaining majority or on his obtaining knowledge that he had been
admitted to the benefits of partnership, whichever date is later, the minor partner has to
decide whether he shall remain a partner or leave the firm.

Where he has elected not to become partner he may give public notice that he has elected not
to become partner and such notice shall determine his position as regards the firm. If he fails to
give such notice he shall become a partner in the firm on the expiry of the said six months.

30 - Whether a minor may be admitted in the business of a partnership firm? Also, explain
the rights of a minor in the partnership firm under the Indian Partnership Act, 1932.
1)c)6m,MDTP6, 1)c)6m,MTP1,Sept2024, 3)a)ii)4m,MTP2,Dec2023, 3)a)6m,MTP1,June2023,
RTP,Dec2021, 3)a)i)3m,MTP1,June2021, 3)b)6m,MTP2,June2021,
3)a)i)3m,MTP1,June2019, 3)a)6m,MTP2,Dec2018, RTP,June2018

Ans - A minor cannot be bound by a contract because a minor’s contract is void and not merely
voidable. Therefore, a minor cannot become a partner in a firm because partnership is founded
on a contract. Though a minor cannot be a partner in a firm, he can nonetheless be admitted to
the benefits of partnership under Section 30 of the Indian Partnership Act, 1932. In other
words, he can be validly given a share in the partnership profits. When this has been done and it
can be done with the consent of all the partners then the rights of such a partner will be
governed under Section 30 as follows:

Rights:

(i) A minor partner has a right to his agreed share of the profits and of the firm.

(ii) ) He can have access to, inspect and copy the accounts of the firm.

(iii) He can sue the partners for accounts or for payment of his share but only when severing his
connection with the firm, and not otherwise.

CA NIKESH AGRAWAL 31
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U2

(iv) On attaining majority he may within 6 months elect to become a partner or not to become a
partner. If he elects to become a partner, then he is entitled to the share to which he was
entitled as a minor. If he does not, then his share is not liable for any acts of the firm after the
date of the public notice served to that effect.

29 - A and B operate a textile merchant business in partnership. Mr. A finances the

business and is a sleeping partner. In the regular course of business, B acquires certain
fabric goods belonging to C. However, B is aware that these goods are stolen property.
Despite this knowledge, B proceeds to purchase and sell some of these stolen goods.
Moreover, B records proceeds from these sales in the firm’s books. Now, A wants to avoid
the liability towards C, on the grounds of misconduct by B. In the light of the provisions of
the Indian Partnership Act, 1932 discuss the liability of A and B towards C.

3)a)ii)3m,MDTP9, 3)a)ii)3m,MDTP8, 3)b)ii)3m,MTP2,Jan2025, 3)a)ii)3m,June2024

Ans - According to Section 25 of the Indian Partnership Act, 1932, every partner is jointly and
severally liable for all acts of the firm done while he is a partner.

As per section 26, the firm is liable to the same extent as the partner for any wrongful act or
omission of a partner while acting:

(a) in the ordinary course of the business of the firm, or

(b) with the authority of the partners.

Section 27 provides that the firm is liable if a partner, acting within the scope of his apparent
authority, receives money or property from a third party and misapplies it, or if the firm in the
course of its business receives money or property and the same is misapplied while it is in the
custody of the firm.

In the instant case, both A and B are liable to C for the wrongful acts committed by B. A cannot
avoid liability merely on the grounds of being a sleeping partner.

28 - Moni and Tony were partners in the firm M/s MOTO & Company. They admitted Sony
as partner in the firm and he is actively engaged in day to-day activities of the firm.
There is a tradition in the firm that all active partners will get a monthly remuneration of
` 20,000 but no express agreement was there. After admission of Sony in the firm, Moni
and Tony continued getting salary from the firm but no salary was given to Sony from the
firm. Sony claimed his remuneration but denied by existing partners by saying that there
was no express agreement for that. Whether under the Indian Partnership Act, 1932,
Sony can claim remuneration from the firm? Rtp,June2024, RTP,June2022

CA NIKESH AGRAWAL 32
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U2

Ans - By virtue of provisions of Section 13(a) of the Indian Partnership Act, 1932 a partner is
not entitled to receive remuneration for taking part in the conduct of the business. But this rule
can always be varied by an express agreement, or by a course of dealings, in which event the
partner will be entitled to remuneration. Thus, a partner can claim remuneration even in the
absence of a contract, when such remuneration is payable under the continued usage of the firm.
In other words, where it is customary to pay remuneration to a partner for conducting the
business of the firm, he can claim it even in the absence of a contract for the payment of the
same.

In the given problem, existing partners are getting regularly a monthly remuneration from firm
customarily being working partners of the firm. As Sony also admitted as working partner of the
firm, he is entitled to get remuneration like other partners.

27 - A, B & C are partners of a partnership firm carrying on the business of construction

of apartments. B who himself was a wholesale dealer of iron bars was entrusted with the
work of selection of iron bars after examining its quality. As a wholesaler, B is well aware
of the market conditions. Current market price of iron bar for construction is INR 350 per
Kilogram. B already had 1000 kg of iron bars in stock which he had purchased before price
hike in the market for INR 200 per Kg. He supplied iron bars to the firm without the firm
realising the purchase cost. Is B liable to pay the firm the extra money he made, or he
doesn’t have to inform the firm as it is his own business and he has not taken any amount
more than the current prevailing market price of INR 350? Assume there is no contract
between the partners regarding the above. Rtp,June2024, RTP,Dec2021

Ans - According to section 16 of the Indian Partnership Act, 1932, subject to contract between
partners –

(a) if a partner derives any profit for himself from any transaction of the firm, or from the use
of the property or business connection of the firm or the firm name, he shall account for that
profit and pay it to the firm;

(b) if a partner carries on any business of the same nature as and competing with that of the
firm, he shall account for and pay to the firm all profits made by him in that business.

In the given scenario, B had sold iron bar to the firm at the current prevailing market rate of
350 per Kg though he had stock with him which he bought for INR 200 per Kg. Hence, he made
an extra profit of INR 150/Kg. This arises purely out of transactions with the firm. Hence, B is
accountable to the firm for the extra profit earned thereby.

CA NIKESH AGRAWAL 33
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U2

26 - State the modes by which a partner may transfer his interest in the firm in favour of
another person under the Indian Partnership Act, 1932. What are the rights of such a
transferee?

1)c)6m,MDTP8,1)c)6m,MTP2,Jan2025, RTP,June2024, RTP,June2023,

3)a)6m,MTP2,June2019, RTP,Dec2018, 3)a)6m,MTP1,June2018

Ans - Section 29 of the Indian Partnership Act, 1932 provides that a share in a partnership is
transferable like any other property, but as the partnership relationship is based on mutual
confidence, the assignee of a partner’s interest by sale, mortgage or otherwise cannot enjoy the
same rights and privileges as the original partner.

The rights of such a transferee are as follows:

During the continuance of partnership, such transferee is not entitled

(a) to interfere with the conduct of the business,

(b) to require accounts, or

(c) to inspect books of the firm.

He is only entitled to receive the share of the profits of the transferring partner, and he is
bound to accept the profits as agreed to by the partners, i.e., he cannot challenge the accounts.

On the dissolution of the firm or on the retirement of the transferring partner, the transferee
will be entitled, against the remaining partners:

(a) to receive the share of the assets of the firm to which the transferring partner was
entitled, and

(b) for the purpose of ascertaining the share,

he is entitled to an account as from the date of the dissolution.

By virtue of Section 31, no person can be introduced as a partner in a firm without the consent
of all the partners. A partner cannot by transferring his own interest, make anybody else a
partner in his place, unless the other partners agree to accept that person as a partner. At the
same time, a partner is not debarred from transferring his interest. A partner’s interest in the
partnership can be regarded as an existing interest and tangible property which can be assigned.

25 - A and B are partners in M/s Aee Bee & Company. Firm is doing business of trading of
plastic bottles. A is authorised to sell the stock of plastic bottles. It was decided between
them that A should sell the plastic bottles at the minimum price which they have decided
and if A sells at a price less than minimum price, he should first take the permission of B.
CA NIKESH AGRAWAL 34
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U2

Due to sudden change in government policy, the price of plastic bottles were continuously
declining. To save the loss of firm, A sold the stock at lower price. Meanwhile, A tried to
contact B but could not do so as B was on foreign trip. Afterwards when B came, he filed
the suit to recover the difference of sale price and minimum price to the firm. Whether B
can do so under the provisions of Indian Partnership Act, 1932?

3)a)7m,MDTP1, 3)a)7m,MTP1,June2024, 4)b)6m,MTP1,June2024

Ans - According to Section 13(e) of Indian Partnership Act, 1932, every partner has the right
to be indemnified by the firm in respect of payments made and liabilities incurred by him in the
ordinary and proper conduct of the business of the firm as well as in the performance of an act
in an emergency for protecting the firm from any loss, if the payments, liability and act are such
as a prudent man would make, incur or perform in his own case, under similar circumstances.

In the instant case, M/s Aee Bee & Company is doing business of trading of plastic bottles. A and
B, partners of the firm, authorised A to sell the stock of plastic bottles on the condition to sale
at the minimum price. In case A has to sell at a price less than minimum price, he should first
take the permission of B. Due to some emergency, A sold the stock at lower price to save the
firm from loss.

On the basis of above provisions and facts of the problem given, selling by A at a lower price was
to save the firm from loss. As the act of A was in favour of firm, he was not liable to bear the
loss.

24 – i) When the continuing guarantee can be revoked under the Indian Partnership Act,
1932?

1)c)2m,MDTP4, 5)b)i)4m,MDTP1, 5)b)4m,MTP1,June2024, 1)c)i)2m,MTP3,June2024,

RTP,Dec2023

ii) What do you mean by Goodwill as per the provisions of Indian Partnership Act, 1932?

5)b)ii)3m,MDTP1, 5)b)3m,MTP1,June2024, RTP,Dec2023, 3)a)4m,Dec2019

Ans - i) Revocation of continuing guarantee (Section 38 of the Indian Partnership Act,

1932): According to section 38, a continuing guarantee given to a firm or to third party in
respect of the transaction of a firm is, in the absence of an agreement to the contrary, revoked
as to future transactions from the date of any change in the constitution of the firm. Such
change may occur by the death, or retirement of a partner, or by introduction of a new partner.

CA NIKESH AGRAWAL 35
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U2

ii) Goodwill: The term “Goodwill” has not been defined under the Indian Partnership Act, 1932.
Section 14 of the Act lays down that goodwill of a business is to be regarded as a property of
the firm.

Goodwill may be defined as the value of the reputation of a business house in respect of profits
expected in future over and above the normal level of profits earned by undertaking belonging to
the same class of business.

23 - P, Q, R and S are the partners in M/S PQRS & Co., a partnership firm which deals in
trading of Washing Machines of various brands.

Due to the conflict of views between partners, P & Q decided to leave the partnership firm
and started competitive business on 31st July, 2023, in the name of M/S PQ & Co.
Meanwhile, R & S have continued using the property in the name of M/S PQRS & Co. in
which P & Q also has a share.

Based on the above facts, explain in detail the rights of outgoing partners as per the
Indian Partnership Act, 1932 and comment on the following:

(i) Rights of P & Q to start a competitive business.

(ii) Rights of P & Q regarding their share in property of M/S PQRS & Co.

3)a)7m,MDTP3, 3)a)7m,MTP2,June2024, 4)b)6m,Dec2020

Ans - Rights of outgoing partner to carry on competing business (Section 36 of the Indian
Partnership Act, 1932)

1) An outgoing partner may carry on business competing with that of the firm and he may
advertise such business, but subject to contract to the contrary, he may not,-

(a) use the firm name,

(b) represent himself as carrying on the business of the firm or

(c) solicit the custom of persons who were dealing with the firm

before he ceased to be a partner.

(2) Although this provision has imposed some restrictions on an outgoing partner, it effectively
permits him to carry on a business competing with that of the firm. However, the partner may
agree with his partners that on his ceasing to be so, he will not carry on a business similar to
that of the firm within a specified period or within specified local limits. Such an agreement will
not be in restraint of trade if the restraint is reasonable [Section 36 (2)]

CA NIKESH AGRAWAL 36
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U2

From the above, we can infer that P & Q can start competitive business in the name of M/S PQ &
Co. after following above conditions in the absence of any agreement.

(ii) Right of outgoing partner in certain cases to share subsequent profits (Section 37 of
the Indian Partnership Act, 1932)

According to Section 37, where any member of a firm has died or otherwise ceased to be
partner, and the surviving or continuing partners carry on the business of the firm with the
property of the firm without any final settlement of accounts as between them and the outgoing
partner or his estate, then, in the absence of a contract to the contrary, the outgoing partner or
his estate is entitled at the option of himself or his representatives to such share of the profits
made since he ceased to be a partner as may be attributable to the use of his share of the
property of the firm or to interest at the rate of six per cent per annum on the amount of his
share in the property of the firm.

In the instant case, P & Q can share in property of M/s PQRS & Co. keeping in view of the above
provisions.

22 - With reference to the provisions of Indian partnership Act, 1932 explain the various
effects of insolvency of a partner.

1)c)ii)4m,MDTP4, RTP,Jan2025, 1)c)ii)4m,MTP3,June2024, RTP,Dec2023

Ans - Effects of insolvency of a partner (Section 34 of the Indian Partnership Act, 1932):

(i) The insolvent partner cannot be continued as a partner.

(ii) He will be ceased to be a partner from the very date on which the order of adjudication is
made.

(iii) The estate of the insolvent partner is not liable for the acts of the firm done after the date
of order of adjudication.

(iv) The firm is also not liable for any act of the insolvent partner after the date of the order of
adjudication,

(v) Ordinarily, the insolvency of a partner results in dissolution of a firm; but the partners are
competent to agree among themselves that the adjudication of a partner as an insolvent will not
give rise to dissolution of the firm.

21 - Explain in detail the circumstances which lead to liability of firm for misapplication by
partners as per provisions of the Indian Partnership Act, 1932.

CA NIKESH AGRAWAL 37
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U2

3)a)ii)3m,MDTP1, 3)a)ii)3m,MTP3,June2024, RTP,June2021, 6)b)4m,Dec2020

Ans - Liability of Firm for Misapplication by Partners (Section 27 of Indian Partnership

Act, 1932):

The two clauses of Section 27 bring out an important point of distinction between the two
categories of cases of misapplication of money by partners.

Clause (a) covers the case where a partner acts within his authority and due to his authority as a
partner, he receives money or property belonging to a third party and misapplies that money or
property. For this provision to be attracted, it is not necessary that the money should have
actually come into the custody of the firm.

On the other hand, the provision of clause (b) would be attracted when such money or property
has come into the custody of the firm, and it is misapplied by any of the partners.

The firm would be liable in both cases.

20 - “Partner indeed virtually embraces the character of both a principal and an agent”.
Describe the said statement keeping in view of the provisions of the Indian Partnership
Act, 1932. 5)b)7m,MTP3,June2024

Ans - “Partner indeed virtually embraces the character of both a principal and an agent”:
Subject to the provisions of section 18 of the Indian Partnership Act, 1932, a partner is the
agent of the firm for the purposes of the business of the firm.

A partnership is the relationship between the partners who have agreed to share the profits of
the business carried on by all or any of them acting for all (Section 4). This definition suggests
that any of the partners can be the agent of the others.

Section 18 clarifies this position by providing that, subject to the provisions of the Act, a
partner is the agent of the firm for the purpose of the business of the firm. The partner indeed
virtually embraces the character of both a principal and an agent. So far as he acts for himself
and in his own interest in the common concern of the partnership, he may properly be deemed as
a principal and so far as he acts for his partners, he may properly be deemed as an agent.

The principal distinction between him and a mere agent is that he has a community of interest
with other partners in the whole property and business and liabilities of partnership, whereas an
agent as such has no interest in either.

The rule that a partner is the agent of the firm for the purpose of the business of the firm
cannot be applied to all transactions and dealings between the partners themselves. It is
applicable only to the act done by partners for the purpose of the business of the firm.

CA NIKESH AGRAWAL 38
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U2

19 - Discuss the rule regarding a partner’s implied authority to bind the firm for his acts.
Also, explain the situations when the partner has no implied authority to bind the firm.

3)a)6m,Dec2023

OR

Define 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 do certain acts. State the acts
which are beyond the implied authority of a partner under the provisions of the Indian
Partnership Act, 1932? 3)a)6m,June2021, RTP,June2019, 3)a)6m,MTP1,Dec2018

Ans - As per the provisions of Sections 19(1) read with the provisions of Section 22 of the
Indian Partnership Act, 1932, which deal with the implied authority of a partner, provide that
the act of a partner which is done to carry on, in the usual way, business of the kind carried on
by the firm, binds the firm, provided that the act is done in the firm name, or any manner
expressing or implying an intention to bind the firm. Such an authority of a partner to bind the
firm is called his implied authority.

As per the provisions of Section 20 of the Indian Partnership Act, 1932, the partners in a firm
may, by contract between the partners, extend or restrict the implied authority of any partner.
Notwithstanding any such restriction, any act done by a partner on behalf of the firm which falls
within his implied authority binds the firm, unless the person with whom he is dealing knows of
the restriction or does not know or believe that partner to be a partner.

As per the provisions of Section 21 of the Indian Partnership Act, 1932, a partner has authority,
in an emergency, to do all such acts for the purpose of protecting the firm from loss as would be
done by a person of ordinary prudence, in his own case, acting under similar circumstances, and
such acts bind the firm.

As per the provisions of sub-section (2) of Section 19 the Indian Partnership Act, 1932, in the
absence of any usage or custom of trade to the contrary, the implied authority of a partner does
not empower him to-

(a) Submit a dispute relating to the business of the firm to arbitration;

(b) open a banking account on behalf of the firm in his own name;

(c) compromise or relinquish any claim or portion of a claim by the firm;

(d) withdraw a suit or proceedings filed on behalf of the firm;

(e) admit any liability in a suit or proceedings against the firm;

CA NIKESH AGRAWAL 39
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U2

(f) acquire immovable property on behalf of the firm;

(g) transfer immovable property belonging to the firm; and

(h) enter into partnership on behalf of the firm.

Mode Of Doing Act To Bind Firm (Section 22): In order to bind a firm, an act or instrument done
or executed by a partner or other person on behalf of the firm shall be done or executed in the
firm name, or in any other manner expressing or implying an intention to bind the firm.

18 - M/s ABC Associates has been a partnership firm since 1990. Mr. A, Mr. B and Mr. C
were partners in the firm since beginning. Mr. A, being a very senior partner of aged 78
years transfers his share in the firm to his son Mr. Vikas, a Chartered Accountant. Mr. B
and Mr. C were not interested that Mr. Vikas joining them as partner in M/s ABC
Associates. After some time, Mr. Vikas felt that the books of accounts were displaying
only a small amount as profit despite a huge turnover. He wanted to inspect the book of
accounts of the firm arguing that it is his entitlement as a transferee. However, the other
partners believed that he cannot challenge the books of accounts. Can Mr. Vikas be
introduced as a partner if his father wants to retire? As an advisor, help them resolve the
issues applying the necessary provisions from the Indian Partnership Act, 1932.

RTP,Dec2023, RTP,Dec2021

Ans - (i) Introduction of a Partner (Section 31 of the Indian Partnership Act, 1932):
Subject to contract between the partners and to the provisions of Section 30, no person shall be
introduced as a partner into a firm without the consent of all the existing partners. In the
instant case, Mr. Vikas can be introduced as a partner with the consent of Mr. B and Mr. C, the
existing partners.

(ii) Rights of Transferee of a Partner’s interest (Section 29): A transfer by a partner of his
interest in the firm, either absolute or by mortgage, or by the creation by him of a charge on
such interest, does not entitle the transferee, during the continuance of the firm, to interfere
in the conduct of business, or to require accounts, or to inspect the books of the firm, but
entitles the transferee only to receive the share of profits of the transferring partner, and the
transferee shall accept the account of profits agreed to by the partners.

Hence, here Mr. Vikas, the transferee in M/S ABC Associates, cannot inspect the books of the
firm and the contention of the other partners is right that Mr. Vikas cannot challenge the books
of accounts.

CA NIKESH AGRAWAL 40
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U2

17 - Master X was introduced to the benefits of partnership of M/s ABC & Co. with the
consent of all partners. After attaining majority, more than six months elapsed and he
failed to give a public notice as to whether he elected to become or not to become a
partner in the firm. Later on, Mr. L, a supplier of material to M/s ABC & Co., filed a suit
against M/s ABC & Co. for recovery of the debt due.

In the light of the Indian Partnership Act, 1932, explain:

(i) To what extent X will be liable if he failed to give public notice after attaining
majority?

(ii) Can Mr. L recover his debt from X? RTP,Dec2023, RTP,Dec2020, 4)b)6m,Dec2019

Ans - As per the provisions of Section 30(5) of the Indian Partnership Act, 1932, at any time
within six 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,
and such notice shall determine his position as regards the firm.

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

If the minor becomes a partner by his failure to give the public notice within specified time, his
rights and liabilities as given in Section 30(7) are as follows:

(A) He becomes personally liable to third parties for all acts of the firm done since he was
admitted to the benefits of partnership.

(B) His share in the property and the profits of the firm remains the same to which he was
entitled as a minor.

(i) In the instant case, since, X has failed to give a public notice, he shall become a partner in the
M/s ABC & Co. and becomes personally liable to Mr. L, a third party.

(ii) In the light of the provisions of Section 30(7) read with Section 30(5) of the Indian
Partnership Act, 1932, since X has failed to give public notice that he has not elected to not to
become a partner within six months, he will be deemed to be a partner after the period of the
above six months and therefore, Mr. L can recover his debt from him also in the same way as he
can recover from any other partner.

16 - What are the rights of partners with respect to conduct of the business of a firm as
prescribed under the Indian Partnership Act, 1932? 6)b)4m,June2023

CA NIKESH AGRAWAL 41
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U2

Ans - Conduct of the Business (Section 12 of the Indian Partnership Act, 1932): Subject to
contract between the partners-

a) every partner has a right to take part in the conduct of the business;

b) every partner is bound to attend diligently to his duties in the conduct of the business;

c) any difference arising as to ordinary matters connected with the business may be decided by
majority of the partners, and every partner shall have the right to express his opinion before
the matter is decided, but no change may be made in the nature of the business without the
consent of all partners; and

d) every partner has a right to have access to and to inspect and copy any of the books of the
firm.

e) in the event of the death of a partner, his heirs or legal representatives or their duly
authorised agents shall have a right of access to and to inspect and copy any of the books of the
firm.

15 - Shyam, Mohan and Keshav were partners in M/s Nandlal Gokulwale and Company. They
mutually decided that Shyam will take the responsibility to sell the goods, Mohan will do
the purchase of goods for firm and Keshav will look after the accounts and banking
department. No one will interfere in other’s department. Once, when Shyam and Keshav
were out of town, Mohan got the information that the price of their good is going down
sharply due to some government policy which would result in heavy loss to firm if goods not
sold immediately. He tried to contact Shyam who has authority to sell the goods. When
Mohan couldn’t contact to Shyam, he sold all goods at some reduced price to save the firm
from heavy loss. Thereafter, Shyam and Keshav denied accepting the loss due to sale of
goods at reduced price as it’s only Shyam who has express authority to sell the goods.
Discuss the consequences under the provisions of the Indian Partnership Act, 1932.

RTP,June2023

Ans - According to Section 20 of Indian Partnership Act, 1932, the partners in a firm may, by
contract between the partners, extend or restrict the implied authority of any partner.
Notwithstanding any such restriction, any act done by a partner on behalf of the firm which falls
within his implied authority binds the firm, unless the person with whom he is dealing knows of
the restriction or does not know or believe that partner to be a partner.

Further, according to Section 21, a partner has authority, in an emergency to do all such acts for
the purpose of protecting the firm from loss as would be done by a person of ordinary prudence,
in his own case, acting under similar circumstances, and such acts bind the firm.
CA NIKESH AGRAWAL 42
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U2

On the basis of provisions and facts provided in the question, though Shyam was expressly
authorised to sell the goods, Mohan sold the goods at some loss. It was very much clear that
Mohan has done what a person of ordinary prudence does in an emergency to protect the firm
from heavy loss. Hence, this sale will bind the firm.

14 - Mr. Naresh is one of the four partners in M/s XY Enterprises. He owes a sum of ` 6
crore to his friend Mr. Akash which he is unable to pay on due time. So, he wants to sell
his share in the firm to Mr. Akash for settling the amount.

In the light of the provisions of the Indian Partnership Act, 1932, discuss each of the
following:

i) Can Mr. Naresh validly transfer his interest in the firm by way of sale?

ii) What would be the rights of the transferee (Mr. Akash) in case Mr. Naresh wants to
retire from the firm after a period of 6 months from the date of transfer?
4)b)6m,MTP2,June2023, 4)b)6m,MTP2,Dec2022, 4)b)6m,MTP1,June2022,
4)b)6m,June2021

Ans - According to Section 29 of the Indian Partnership Act, 1932,

1) A transfer by a partner of his interest in the firm, either absolute or by mortgage, or by the
creation by him of a charge on such interest, does not entitle the transferee, during the
continuance of the firm, to interfere in the conduct of business, or to require accounts, or to
inspect the books of the firm, but entitles the transferee only to receive the share of profits of
the transferring partner, and the transferee shall accept the account of profits agreed to by
the partners.

2) If the firm is dissolved or if the transferring partner ceases to be a partner, the transferee
is entitled as against the remaining partners to receive the share of the assets of the firm to
which the transferring partner is entitled, and, for the purpose of ascertaining that share, to an
account as from the date of the dissolution.

In the light of facts of the question and provision of law:

i) Yes, Mr. Naresh can validly transfer his interest in the firm by way of sale.

ii) On the retirement of the transferring partner (Mr. Naresh), the transferee (Mr. Akash) will
be entitled, against the remaining partners:

a) to receive the share of the assets of the firm to which the transferring partner was entitled,
and

CA NIKESH AGRAWAL 43
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U2

b) for the purpose of ascertaining the share, he is entitled to an account as from the date of the
dissolution.

So, in this case on Mr. Naresh’s retirement, Mr. Akash would be entitled to receive the value of
Mr. Naresh’s share to the extent of ` 6 crore in the firm’s assets.

13 - Can a partner be expelled? If so, how? Which factors should be kept in mind prior to
expelling a partner from the firm by the other partners according to the provision of
Indian Partnership Act, 1932? 5)b)7m,MDTP2, 3)a)6m,Dec2022

OR

Comment on 'the right to expel partner must be exercised in good faith' under the Indian
Partnership Act, 1932. 3)a)ii)2m,Dec2020

Ans - Expulsion of partner and factors to be kept in mind:

As per Section 33 of the Indian Partnership Act, 1932, a partner may not be expelled from a
firm except

i) the power of expulsion must have existed in a contract between the partners;

ii) the power has been exercised by a majority of the partners; and

iii) it has been exercised in good faith.

If all these conditions are not present, the expulsion is not deemed to be in bona fide interest of
the business of the firm and shall be null and void.

The test of good faith as required under Section 33(1) includes three things:

i) The expulsion must be in the interest of the partnership

ii) The partner to be expelled is served with a notice

iii) He is given an opportunity of being heard.

Yes, a partner may be expelled by other partners strictly in compliance with the provisions of
section 33.

12 - A, B and C are partners in M/s ABC & Company. The firm has decided to purchase a
machine from M/s LMN & Company. Before A & B purchase the machine, C died. The
machine was purchased but thereafter A and B became insolvent and the firm was unable to
pay for machine. Explain, would the estate of C liable for the dues of M/s LMN &
Company? RTP,Dec2022

CA NIKESH AGRAWAL 44
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U2

OR

Ram, Mohan and Gopal were partners in a firm. During the course of partnership, the firm
ordered Sunrise Ltd. to supply a machine to the firm. Before the machine was delivered,
Ram expired. The machine, however, was later delivered to the firm. Thereafter, the
remaining partners became insolvent and the firm failed to pay the price of machine to
Sunrise Ltd. Explain with reasons:

(i) Whether Ram’s private estate is liable for the price of the machine purchased by the
firm?

(ii) Against whom can the creditor obtain a decree for the recovery of the price?

RTP,June2019

Ans - Liability of Partner in case of death

According to Section 35 of Indian Partnership Act, 1932, the estate of a deceased partner is
not liable for any act of the firm done after his death. The estate of the deceased partner may
be absolved from liability for the future obligations of the firm, it is not necessary to give any
notice either to the public or the persons having dealings with the firm.

In the instant case, M/s ABC & Company was having three partners A, B and C. The firm was
going to purchase a machine from M/s LMN & Company. Before A & B purchase the machine, C
died. Machine was purchased but after that A and B become insolvent and the firm was unable to
pay for machine.

On the basis of above provisions and facts of the problem given, the machine was purchased
after the death of C. Hence, the estate of C would not be liable for the dues of M/s LMN &
Company.

OR

Partnership Liability: The problem in question is based on the provisions of the Indian
Partnership Act, 1932 contained in Section 35. The Section provides that where under a
contract between the partners the firm is not dissolved by the death of a partner, the estate of
a deceased partner is not liable for any act of the firm done after his death. Therefore,
considering the above provisions, the problem may be answered as follows:

(i) Ram’s estate in this case will not be liable for the price of the Machinery purchased.

(ii) The creditors in this case can have only a personal decree against the surviving partners and
decree against the partnership assets in the hands of those partners. However, since the
surviving partners are already insolvent, no suit for recovery of the debt would lie against them.

CA NIKESH AGRAWAL 45
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U2

A suit for goods sold and delivered would not lie against the representative of the deceased
partner.

11 - Mr. A (transferor) transfer his share in a partnership firm to Mr. B (transferee).

Mr. B is not entitled for few rights and privileges as Mr. A (transferor) is entitled
therefor. Discuss in brief the points for which Mr. B is not entitled during continuance of
partnership? 3)a)i)4m,MTP1,Dec2022, RTP,June2021

Ans - As per Section 29 of Indian Partnership Act, 1932, a transfer by a partner of his interest
in the firm, either absolute or by mortgage, or by the creation by him of a charge on such
interest, does not entitle the transferee, during the continuance of the firm, to interfere in the
conduct of business, or to require accounts, or to inspect the books of the firm, but entitles the
transferee only to receive the share of profits of the transferring partner, and the transferee
shall accept the account of profits agreed to by the partners.

In the given case during the continuance of partnership, such transferee Mr. B is not entitled:

• to interfere with the conduct of the business.

• to require accounts.

• to inspect books of the firm.

However, Mr. B is only entitled to receive the share of the profits of the transferring partner
and he is bound to accept the profits as agreed to by the partners, i.e. he cannot challenge the
accounts.

10 - Can a minor become a partner in a partnership firm? Justify your answer and also
explain the rights of a minor in a partnership firm. 1)c)ii)4m,MDTP2, 3)a)ii)4m,June2022

OR

A minor admitted to the benefits of a partnership firm is entitled to certain rights and
may also have liabilities to third parties for the acts of the firm. Discuss the rights and
liabilities (before attaining majority only) of the minor under the Indian Partnership Act,
1932. 1)c)6m,Jan2025

Ans - Minor as a partner:

A minor is not competent to contract. Hence, a person who is a minor according to the law to
which he is subject may not be a partner in a firm, but with the consent of all the partners for
the time being, he may be admitted to the benefits of partnership.

CA NIKESH AGRAWAL 46
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U2

Rights of a minor in a partnership firm:

i) A minor partner has a right to his agreed share of the profits and of the firm.

ii) He can have access to, inspect and copy the accounts of the firm.

iii) He can sue the partners for accounts or for payment of his share but only when severing his
connection with the firm, and not otherwise.

(iv) On attaining majority, he may within 6 months elect to become a partner or not to become a
partner. If he elects to become a partner, then he is entitled to the share to which he was
entitled as a minor. If he does not, then his share is not liable for any acts of the firm after the
date of the public notice served to that effect.

OR

Ans – Rights are same, for liabilities before majority, refer Ans 32.

09 - M/s ABC Associates is a partnership firm since 1990. Mr. A, Mr. B and Mr. C were
partners in the firm since beginning. Mr. A, being a very senior partner of aged 78 years
transfers his share in the firm to his son Mr. Prateek, a Chartered Accountant. Mr. B and
Mr. C were not interested that Mr. Prateek join them as partner in M/s ABC Associates.
After some time, Mr. Prateek felt that the books of accounts were displaying only a small
amount as profit despite a huge turnover. He wanted to inspect the book of accounts of
the firm arguing that it is his entitlement as a transferee. However, the other partners
believed that he cannot challenge the books of accounts. Can Mr. Prateek, be introduced as
a partner if his father wants to get a retirement? As an advisor, help them resolve the
issues applying the necessary provisions from the Indian Partnership Act, 1932.

4)b)6m,June2022

Ans - Introduction of a Partner (Section 31 of the Indian Partnership Act, 1932):

Subject to contract between the partners and to the provisions of Section 30, no person shall be
introduced as a partner into a firm without the consent of all the existing partners.

In the instant case, Mr. Prateek can be introduced as a partner with the consent of Mr. B and
Mr. C, the existing partners.

ii) Rights of Transferee of a Partner’s interest (Section 29):

A transfer by a partner of his interest in the firm, either absolute or by mortgage, or by the
creation by him of a charge on such interest, does not entitle the transferee, during the
continuance of the firm, to interfere in the conduct of business, or to require accounts, or to

CA NIKESH AGRAWAL 47
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U2

inspect the books of the firm, but entitles the transferee only to receive the share of profits of
the transferring partner, and the transferee shall accept the account of profits agreed to by
the partners.

Hence, here Mr. Prateek, the transferee in M/S ABC Associates cannot inspect the books of the
firm and contention of the other partners is right that Mr. Prateek cannot challenge the books
of accounts.

08 - X, Y and Z are partners in a Partnership Firm. They were carrying their business
successfully for the past several years. Due to expansion of business, they planned to hire
another partner Mr A. Now the firm has 4 partners X, Y, Z and A. The business was
continuing at normal pace. In one of formal business meeting, it was observed that Mr. Y
misbehaved with Mrs. A (wife of Mr. A). Mr. Y was badly drunk and also spoke rudely with
Mrs. A.

Mrs. A felt very embarrassed and told her husband Mr. A about the entire incident. Mr. A
got angry on the incident and started arguing and fighting with Mr. Y in the meeting place
itself. Next day, in the office Mr. A convinced X and Z that they should expel Y from
their partnership firm. Y was expelled from partnership without any notice from X, A and
Z.

Considering the provisions of the Indian Partnership Act, 1932, state whether they can
expel a partner from the firm. What are the criteria for test of good faith in such
circumstances? 4)b)6m,MTP2,Dec2021

OR

X, Y and Z are partners in a Partnership Firm. They were carrying their business
successfully for the past several years. Spouses of X and Y fought in ladies club on their
personal issue and X's wife was hurt badly. X got angry on the incident and he convinced Z
to expel Y from their partnership firm. Y was expelled from partnership without any notice
from X and Z. Considering the provisions of the Indian Partnership Act, 1932, state
whether they can expel a partner from the firm. What are the criteria for test of good
faith in such circumstances?

4)b)6m,MTP1,June2021, 4)b)6m,MTP2,June2019, 4)b)6m,June2018

Ans - According to Section 33 of Indian Partnership Act, 1932, a partner may not be expelled
from a firm by a majority of partners except in exercise, in good faith, of powers conferred by
contract between the partners. It is, thus, essential that:

i) the power of expulsion must have existed in a contract between the partners;
CA NIKESH AGRAWAL 48
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U2

ii) the power has been exercised by a majority of the partners; and

iii) it has been exercised in good faith.

If all these conditions are not present, the expulsion is not deemed to be in bonafide interest of
the business of the firm.

The test of good faith as required under Section 33(1) includes three things:

- The expulsion must be in the interest of the partnership.

- The partner to be expelled is served with a notice.

- He is given an opportunity of being heard.

If a partner is otherwise expelled, the expulsion is null and void.

According to the test of good faith as required under Section 33(1), expulsion of Partner Y is
not valid as he was not served any notice and also he was not given an opportunity of being heard.
Also the matter of fight between A and Y was on personal reasons, hence not satisfying the test
of good faith in the interest of partnership. Since the conditions given under above provisions
are not satisfied, the expulsion stands null and void.

OR

If a partner is otherwise expelled, the expulsion is null and void. Thus, according to the test of
good faith as required under Section 33(1), expulsion of Partner Y is not valid.

07 - A, B, and C are partners of a partnership firm ABC & Co. The firm is a dealer in
office furniture. A was in charge of purchase and sale, B was in charge of maintenance of
accounts of the firm and C was in charge of handling all legal matters. Recently through an
agreement among them, it was decided that A will be in charge of maintenance of accounts
and B will be in charge of purchase and sale. Being ignorant about such agreement, M, a
supplier supplied some furniture to A, who ultimately sold them to a third party. Referring
to the provisions of the Partnership Act, 1932, advise whether M can recover money from
the firm.

What will be your advice in case M was having knowledge about the agreement?
4)b)6m,MTP2,June2021, 4)b)6m,MTP1,June2020, 4)b)6m,MTP1,June2019,
4)b)6m,MTP1,Dec2018

Ans - According to Section 20 of the Indian Partnership Act, 1932, the partners in a firm may,
by contract between the partners, extend or restrict implied authority of any partners.

CA NIKESH AGRAWAL 49
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U2

Notwithstanding any such restriction, any act done by a partner on behalf of the firm which falls
within his implied authority binds the firm, unless the person with whom he is dealing knows of
the restriction or does not know or believe that partner to be a partner.

The implied authority of a partner may be extended or restricted by contract between the
partners. Under the following conditions, the restrictions imposed on the implied authority of a
partner by agreement shall be effective against a third party:

1. The third party knows above the restrictions, and

2. The third party does not know that he is dealing with a partner in a firm.

Now, referring to the case given in the question, M supplied furniture to A, who ultimately sold
them to a third party and M was also ignorant about the agreement entered into by the partners
about the change in their role. M also is not aware that he is dealing with a partner in a firm.
Therefore, M on the basis of knowledge of implied authority of A, can recover money from the
firm.

But in the second situation, if M was having knowledge about the agreement, he cannot recover
money from the firm.

06 - State the legal consequences of the following as per the provisions of the Indian
Partnership Act, 1932:

i) Retirement of a partner

ii) Insolvency of a partner RTP,Dec2019

Ans - (i) RETIREMENT OF A PARTNER (SECTION 32):

(1) A partner may retire:

(a) with the consent of all the other partners;

(b) in accordance with an express agreement by the partners; or

(c) where the partnership is at will, by giving notice in writing to all the other partners of his
intention to retire.

(2) 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, and such agreement may be implied by a course of dealing
between the third party and the reconstituted firm after he had knowledge of the retirement.

CA NIKESH AGRAWAL 50
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U2

(3) Notwithstanding the retirement of a partner from a firm, he and the partners continue to be
liable as partners to third parties for any act done by any of them which would have been an act
of the firm if done before the retirement, until public notice is given of the retirement:
Provided that a retired partner is not liable to any third party who deals with the firm without
knowing that he was a partner.

(4) Notices under sub-section (3) may be given by the retired partner or by any partner of the
reconstituted firm.

(ii) Insolvency of a partner (Section 34)

(1) The insolvent partner cannot be continued as a partner.

(2) He will be ceased to be a partner from the very date on which the order of adjudication is
made.

(3) The estate of the insolvent partner is not liable for the acts of the firm done after the date
of order of adjudication.

(4) The firm is also not liable for any act of the insolvent partner after the date of the order of
adjudication,

(5) Ordinarily but not invariably, the insolvency of a partner results in dissolution of a firm; but
the partners are competent to agree among themselves that the adjudication of a partner as an
insolvent will not give rise to dissolution of the firm.

05 - Mahesh, Suresh and Dinesh are partners in a trading firm. Mahesh, without the
knowledge or consent of Suresh and Dinesh borrows himself Rs. 50,000 from Ramesh, a
customer of the firm, in the name of the firm. Mahesh, then buys some goods for his
personal use with that borrowed money. Can Mr. Ramesh hold Mr. Suresh & Mr. Dinesh
liable for the loan? Explain the relevant provisions of the Indian Partnership Act,1932.

3)b)6m,MTP1,Dec2019

Ans - Implied authority of a partner

Yes, as per sections 19 and 22 of the Indian Partnership Act,1932 unless otherwise provided in
the partnership deed, every partner has an implied authority to bind every other partner for
acts done in the name of the firm, provided the same falls within the ordinary course of business
and is done in a usual manner. Mahesh has a right to borrow the money of Rs. 50,000/- from
Ramesh on behalf of his firm in the usual manner. Since, Ramesh has no knowledge that the
amount was borrowed by Mahesh without the consent of the other two partners, Mr. Suresh and
Mr. Dinesh, he can hold both of them (Suresh and Dinesh) liable for the re-payment of the loan.

CA NIKESH AGRAWAL 51
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U2

04 - What is the provision related to the effect of notice to an acting partner of the firm
as per the Indian Partnership Act, 1932? 3)a)i)2m,June2019

Ans - Effect of notice to an acting partner of the firm (6 Marks)

According to Section 24 of the Indian Partnership Act, 1932, notice to a partner who habitually
acts in the business of the firm of any matter relating to the affairs of the firm operates as
notice to the firm, except in the case of a fraud on the firm committed by or with the consent
of that partner.

Thus, the notice to one is equivalent to the notice to the rest of the partners of the firm, just
as a notice to an agent is notice to his principal. This notice must be actual and not constructive.
It must further relate to the firm’s business. Only then it would constitute a notice to the firm.

03 - Mr. M, Mr. N and Mr. P were partners in a firm, which was dealing in refrigerators.
On 1st October, 2018, Mr. P retired from partnership, but failed to give public notice of
his retirement. After his retirement, Mr. M, Mr. N and Mr. P visited a trade fair and
enquired about some refrigerators with latest techniques. Mr. X, who was exhibiting his
refrigerators with the new techniques was impressed with the interactions of Mr. P and
requested for the visiting card of the firm. The visiting card also included the name of Mr.
P as a partner even though he had already retired. Mr. X. supplied some refrigerators to
the firm and could not recover his dues from the firm. Now, Mr. X wants to recover the
dues not only from the firm, but also from Mr. P. Analyse the above case in terms of the
provisions of the Indian Partnership Act, 1932 and decide whether Mr. P is liable in this
situation. 3)b)ii)3m,Dec2018

Ans - A retiring partner continues to be liable to third party for acts of the firm after his
retirement until public notice of his retirement has been given either by himself or by any other
partner. But the retired partner will not be liable to any third party if the latter deals with the
firm without knowing that the former was partner.

Also, if the partnership is at will, the partner by giving notice in writing to all the other partners
of his intention to retire will be deemed to be relieved as a partner without giving a public notice
to this effect.

Also, as per section 28 of the Indian Partnership Act, 1932, where a man holds himself out as a
partner, or allows others to do it, he is then stopped from denying the character he has assumed
and upon the faith of which creditors may be presumed to have acted.

In the light of the provisions of the Act and facts of the case, Mr. P is also liable to Mr. X.

CA NIKESH AGRAWAL 52
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U2

02 - Ram & Co., a firm consists of three partners A, B and C having one third share each
in the firm. According to A and B, the activities of C are not in the interest of the
partnership and thus want to expel C from the firm. Advise A and B whether they can do
so quoting the relevant provisions of the Indian Partnership Act, 1932. RTP,Dec2018

Ans - It is not possible for the majority of partners to expel a partner from the firm without
satisfying the conditions as laid down in Section 33 of the Indian Partnership Act, 1932. The
essential conditions before expulsion can be done are:

(i) the power of expulsion must have existed in a contract between the partners;

(ii) the power has been exercised by a majority of the partners; and

(iii) It has been exercised in good faith.

The test of good faith includes:

(a) that the expulsion must be in the interest of the partnership;

(b) that the partner to be expelled is served with a notice; and

(c) that the partner has been given an opportunity of being heard.

Thus, in the given case A and B the majority partners can expel the partner only if the above
conditions are satisfied and procedure as stated above has been followed.

01 - A, B and C are partners in a firm called ABC Firm. A, with the intention of deceiving
D, a supplier of office stationery, buys certain stationery on behalf of the ABC Firm. The
stationery is of use in the ordinary course of the firm’s business. A does not give the
stationery to the firm, instead brings it to his own use. The supplier D, who is unaware of
the private use of stationery by A, claims the price from the firm. The firm refuses to
pay for the price, on the ground that the stationery was never received by it (firm).
Referring to the provisions of the Indian Partnership Act, 1932 decide:

(i) Whether the Firm’s contention shall be tenable?

(ii) What would be your answer if a part of the stationery so purchased by A was delivered
to the firm by him, and the rest of the stationery was used by him for private use, about
which neither the firm nor the supplier D was aware?

4)b)6m,MTP2,Dec2018, 4)b)6m,MTP1,June2018

Ans - The problem in the question is based on the ‘Implied Authority’ of a partner provided in
Section 19 of the Indian Partnership Act, 1932. The section provides that subject to the

CA NIKESH AGRAWAL 53
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U2

provisions of Section 22 of the Act, the act of a partner, which is done to carry on, in the usual
way, business of the kind carried on by the firm, binds the firm. The authority of a partner to
bind the firm conferred by this section is called his ‘Implied Authority’ [Sub-Section (1) of
section 19]. Furthermore, every partner is in contemplation of law the general and accredited
agent of the partnership and may consequently bind all the other partners by his acts in all
matters which are within the scope and object of the partnership. Hence, if the partnership is
of a general commercial nature, he may buy goods on account of the partnership.

Considering the above provisions and explanation, the questions as asked in the problem may be
answered as under:

(i) The firm’s contention is not tenable, for the reason that the partner, in the usual course of
the business on behalf of the firm has an implied authority to bind the firm. The firm is,
therefore, liable for the price of the goods.

(ii) In the second case also, the answer would be the same as above, i.e. the implied authority of
the partner binds the firm.

In both the cases, however, the firm ABC can take action against A, the partner but it has to
pay the price of stationery to the supplier D.

CA NIKESH AGRAWAL 54
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U2

CA NIKESH AGRAWAL 55
BUSINESS LAWS QUESTION BANK CHAPTER:4

Chapter: 4 – Indian Partnership Act, 1932

Unit – 3- Registration & Dissolution of a Firm
(Covers All RTP, MTP, PYQ, ICAI SM, MDTP till Jan 2025)

CA NIKESH AGRAWAL
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U3

18 – "Dissolution of a partnership firm may occur by mutual agreement with the consent of
the majority of partners, while compulsory dissolution requires an order from the court."
Discuss this statement with reference to the relevant provisions of the Indian Partnership
Act, 1932. 5)b)ii)3m,Jan2025

Ans - Dissolution by Agreement (Section 40 of the Indian Partnership Act, 1932):

Section 40 gives right to the partners to dissolve the partnership by agreement with the
consent of all the partners or in accordance with a contract between the partners. ‘Contract
between the partners’ means a contract already made.

Hence, the statement ‘dissolution of a firm by the consent of the majority of the partners is not
correct unless otherwise provided in a contract between them.

(iii) Compulsory dissolution (Section 41):

A firm is compulsorily dissolved by the happening of any event which makes it unlawful for the
business of the firm to be carried on or for the partners to carry it on in partnership.

Hence, the statement ‘compulsory dissolution requires an order from the court’ is not correct.

17 – State the circumstances, in which a Court may, at the suit of the partner, dissolve a
partnership firm under the provisions of the Indian Partnership Act, 1932.
5)b)7m,MDTP10, 5)b)7m,MDTP8, 5)b)7m,MDTP3, 5)b)7m,MTP2,Jan2025, 5)b)7m,Sept2024,
5)b)7m,MTP2,June2024, 6)b)4m,June2022, RTP,June2020, 6)b)4m,Dec2018, RTP,Dec2018

Ans – DISSOLUTION BY THE COURT (SECTION 44): Court may, at the suit of the
partner, dissolve a firm on any of the following ground:

(a) Insanity/unsound mind: Where a partner (not a sleeping partner) has become of unsound
mind, the court may dissolve the firm on a suit of the other partners or by the next friend of
the insane partner. Temporary sickness is no ground for dissolution of firm.

(b) Permanent incapacity: When a partner, other than the partner suing, has become in any way
permanently incapable of performing his duties as partner, then the court may dissolve the firm.
Such permanent incapacity may result from physical disability or illness etc.

(c) Misconduct: Where a partner, other than the partner suing, is guilty of conduct which is
likely to affect prejudicially the carrying on of business, the court may order for dissolution of
the firm, by giving regard to the nature of business. It is not necessary that misconduct must
relate to the conduct of the business. The important point is the adverse effect of misconduct
on the business. In each case nature of business will decide whether an act is misconduct or not.

CA NIKESH AGRAWAL 57
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U3

(d) Persistent breach of agreement: Where a partner other than the partner suing, wilfully or
persistently commits breach of agreements relating to the management of the affairs of the
firm or the conduct of its business, or otherwise so conduct himself in matters relating to the
business that it is not reasonably practicable for other partners to carry on the business in
partnership with him, then the court may dissolve the firm at the instance of any of the
partners. Following comes in to category of breach of contract:

• Embezzlement,

• Keeping erroneous accounts

• Holding more cash than allowed

• Refusal to show accounts despite repeated request etc.

(e) Transfer of interest: Where a partner other than the partner suing, has transferred the
whole of his interest in the firm to a third party or has allowed his share to be charged or sold
by the court, in the recovery of arrears of land revenue, the court may dissolve the firm at the
instance of any other partner.

(f) Continuous/Perpetual losses: Where the business of the firm cannot be carried on except at
a loss in future also, the court may order for its dissolution.

(g) Just and equitable grounds: Where the court considers any other ground to be just and
equitable for the dissolution of the firm, it may dissolve a firm. The following are the cases for
the just and equitable grounds-

(i) Deadlock in the management. (ii) Where the partners are not in talking terms between them.
(iii) Loss of substratum. (iv) Gambling by a partner on a stock exchange.

16 - When does dissolution of a partnership firm take place under the provisions of the
Indian Partnership Act, 1932? Explain. 5)b)7m,MDTP6, RTP,Sept2024,
5)c)MTP2,Sept2024, 6)b)4m,MTP1,June2023, 6)b)4m,MTP2,June2022,
6)b)4m,MTP1,Dec2021, 6)b)4m,MTP2,June2021, RTP,Dec2020, RTP,Dec2019,
6)b)4m,MTP1,June2019

Ans - Dissolution of Firm: The Dissolution of Firm means the discontinuation of the jural
relation existing between all the partners of the Firm. But when only one of the partners retires
or becomes in capacitated from acting as a partner due to death, insolvency or insanity, the
partnership, i.e., the relationship between such a partner and other is dissolved, but the rest
may decide to continue. In such cases, there is in practice, no dissolution of the firm. The

CA NIKESH AGRAWAL 58
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U3

particular partner goes out, but the remaining partners carry on the business of the Firm. In the
case of dissolution of the firm, on the other hand, the whole firm is dissolved.

The partnership terminates as between each and every partner of the firm.

Dissolution of a Firm may take place (Section 39 - 44)

a) as a result of any agreement between all the partners (i.e., dissolution by agreement);

b) by the business of the Firm becoming unlawful (i.e., compulsory dissolution);

c) subject to agreement between the parties, on the happening of certain contingencies, such as:
(i) effluence of time; (ii) completion of the venture for which it was entered into; (iii) death of a
partner; (iv) insolvency of a partner.

d) by a partner giving notice of his intention to dissolve the firm, in case of partnership at will
and the firm being dissolved as from the date mentioned in the notice, or if no date is
mentioned, as from the date of the communication of the notice; and

e) by intervention of court in case of: (i) a partner becoming the unsound mind; (ii) permanent
incapacity of a partner to perform his duties as such; (iii) Misconduct of a partner affecting the
business; (iv) willful or persistent branches of agreement by a partner; (v) transfer or sale of
the whole interest of a partner; (vi) improbability of the business being carried on save at a loss;
(vii) the court being satisfied on other equitable grounds that the firm should be dissolved.

15 - Subject to agreement by partners, state the rules that should be observed by the
partners in settling the accounts of the firm after dissolution under the provisions of the
Indian Partnership Act, 1932. 5)b)i)4m,MDTP5, 5)b)i)MTP1,Sept2024, 6)b)4m,Dec2023,
6)b)4m,MTP2,June2023, 6)b)4m,MTP2,Dec2022, 6)b)4m,MTP1,June2022,
6)b)4m,June2021, 6)b)4m,MTP1,Dec2018

Ans - Mode of Settlement of partnership accounts: As per Section 48 of the Indian

Partnership Act, 1932, in settling the accounts of a firm after dissolution, the following rules
shall, subject to agreement by the partners, be observed:-

(i) Losses, including deficiencies of capital, shall be paid first out of profits, next out of capital,
and, lastly, if necessary, by the partners individually in the proportions in which they were
entitled to share profits;

(ii) The assets of the firm, including any sums contributed by the partners to make up
deficiencies of capital, must be applied in the following manner and order:

(a) in paying the debts of the firm to third parties;

CA NIKESH AGRAWAL 59
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U3

(b) in paying to each partner rateably what is due to him from capital;

(c) in paying to each partner rateably what is due to him on account of capital; and

(d) the residue, if any, shall be divided among the partners in the proportions in which they were
entitled to share profits.

14 - The Indian Partnership Act does not make the registration of firms compulsory, yet
the consequences or disabilities of non-registration have a persuasive pressure for their
registration. Still, there are come cases where non-registration of firm does not affect
certain rights. Explain with reference to the provisions of the Indian Partnership Act,
1932. 1)c)6m,MDTP9, 5)b)7m,MDTP7, 1)c)6m,June2024, 6)c)4m,MTP1,June2020

Ans - The Indian Partnership Act, 1932 does not make the registration of firms compulsory nor
does it impose any penalty for non-registration. However, under Section 69, non-registration of
partnership gives rise to a number of disabilities. Although registration of firms is not
compulsory, yet the consequences or disabilities of non-registration have a persuasive pressure
for their registration.

Exceptions: Non-registration of a firm does not, however affect the following rights:

1. The right of third parties to sue the firm or any partner.

2. The right of partners to sue for the dissolution of the firm or for the settlement of the
accounts of a dissolved firm, or for realization of the property of a dissolved firm.

3. The power of an Official Assignees, Receiver of Court to release the property of the insolvent
partner and to bring an action.

4. The right to sue or claim a set-off if the value of suit does not exceed ` 100 in value.

5. The right to suit and proceeding instituted by legal representatives or heirs of the deceased
partner of a firm for accounts of the firm or to realise the property of the firm.

13 - P, Q and R formed a partnership agreement to operate motor buses along specific

routes for a duration of 12 years. After operating the business for four years, it was
observed that the business incurred losses each year. Despite this, P is determined to
continue the business for the remaining Period. Examine with reference to the Indian
Partnership Act, 1932, can P insist to continue the business? If so, what options are
available to Q and R who are reluctant to continue operating the business?

3)a)i)4m,MDTP9, 3)a)i)4m,MDTP8, 3)a)i)4m,MTP2,Jan2025, RTP,Jan2025,

3)a)i)4m,June2024
CA NIKESH AGRAWAL 60
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U3

Ans - Section 40 of the Indian Partnership Act, 1932, gives right to the partners to dissolve
the partnership by agreement with the consent of all the partners or in accordance with a
contract between the partners. ‘Contract between the partners’ means a contract already made.

Also, according to section 44, the Court may, at the suit of a partner, may dissolve a firm on
various grounds including where the business of the firm cannot be carried on except at a loss (in
future also).

In the instant case, P wants to continue the partnership business despite the losses incurred
over the past four years and Q and R are reluctant to continue operating the business due to
continuous losses.

Here, P can insist on continuing the business if the partnership agreement does not specifically
provide such a right to one or more partner / partners since Section 40 specifies that with the
consent of all the partners or in accordance with a contract between the partners the firm can
be dissolved.

Options available to Q and R

Mutual Agreement to Dissolve the Partnership: Q and R can propose to P that the partnership
be dissolved by mutual agreement. If P agrees, the partnership can be dissolved amicably.

Dissolution by the Court: If P does not agree to dissolve the partnership mutually, Q and R can
approach the court for an order under Section 44.

12 - "Dissolution of partnership doesn't mean dissolution of firm". Do you agree with this
statement? State any three situations where court can dissolve the partnership firm.

5)b)7m,MDTP9, 5)b)7m,June2024, 6)b)4m,Dec2019, 3)a)2m,June2018

Ans - Dissolution of partnership doesn’t mean dissolution of firm. According to Section 39 of

the Indian Partnership Act, 1932, the dissolution of partnership between all partners of a firm is
called the 'dissolution of the firm'.

Thus, the dissolution of firm means the discontinuation of the legal relation, the dissolution of
firm means the discontinuation of the legal relation existing between all the partners of the
firm. But when only one or more partners retires or becomes incapacitated from acting as a
partner due to death, insolvency or insanity, the partnership, the relationship between such a
partner and other is dissolved, but the rest may decide to continue.

In such cases, there is in practice, no dissolution of the firm. The particular partner goes out,
but the remaining partners carry on the business of the firm, it is called dissolution of

CA NIKESH AGRAWAL 61
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U3

partnership. In the case of dissolution of the firm, on the other hand, the whole firm is
dissolved. The partnership terminates as between each and every partner of the firm.

Important note: Different mode of presentation to an answer

Dissolution of partnership doesn’t mean dissolution of firm. This statement can be proved with
the help of some points of distinction between both of them, which are as follows:

Dissolution of Firm Vs. Dissolution of Partnership

Basis of Difference Dissolution of Firm Dissolution of Partnership

Continuation of It involves discontinuation of It does not affect continuation of

business business in partnership. business. It involves only
reconstitution of firm.

Winding up It involves winding up of the firm It involves only reconstitution and

and requires realization of requires only revaluation of assets
assets and settlement of and liabilities of the firm.
liabilities.

Order of court A firm may be dissolved by the Dissolution of partnership is not

order of the court. ordered by the court.

Scope It necessarily involves It may or may not involve

dissolution of partnership. dissolution of firm.

Final closure of the It involves final closure of books It does not involve final closure of
books of the firm. the books of the firm.

Dissolution By the Court (Section 44 of the Indian Partnership Act, 1932):

Court may, at the suit of the partner, dissolve a firm on any of the following grounds:

(a) Insanity/unsound mind: Where a partner (not a sleeping partner) has become of unsound
mind, the court may dissolve the firm on a suit of the other partners or by the next friend of
the insane partner. Temporary sickness is no ground for dissolution of firm.

(b) Permanent incapacity: When a partner, other than the partner suing, has become in any way
permanently incapable of performing his duties as partner, then the court may dissolve the firm.
Such permanent incapacity may result from physical disability or illness etc.

(c) Misconduct: Where a partner, other than the partner suing, is guilty of conduct which is
likely to affect prejudicially the carrying on of business, the court may order for dissolution of
CA NIKESH AGRAWAL 62
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U3

the firm, by giving regard to the nature of business. It is not necessary that misconduct must
relate to the conduct of the business. The important point is the adverse effect of misconduct
on the business. In each case nature of business will decide whether an act is misconduct or not.

(d) Persistent breach of agreement: Where a partner other than the partner suing, wilfully or
persistently commits breach of agreements relating to the management of the affairs of the
firm or the conduct of its business, or otherwise so conduct himself in matters relating to the
business that it is not reasonably practicable for other partners to carry on the business in
partnership with him, then the court may dissolve the firm at the instance of any of the
partners. Following comes in to category of breach of contract:

➢ Embezzlement,

➢ Keeping erroneous accounts

➢ Holding more cash than allowed

➢ Refusal to show accounts despite repeated request etc.

(e) Transfer of interest: Where a partner other than the partner suing, has transferred the
whole of his interest in the firm to a third party or has allowed his share to be charged or sold
by the court, in the recovery of arrears of land revenue due by the partner, the court may
dissolve the firm at the instance of any other partner.

(f) Continuous/Perpetual losses: Where the business of the firm cannot be carried on except at
a loss in future also, the court may order for its dissolution.

(g) Just and equitable grounds: Where the court considers any other ground to be just and
equitable for the dissolution of the firm, it may dissolve a firm. The following are the cases for
the just and equitable grounds-

(i) Deadlock in the management.

(ii) Where the partners are not in talking terms between them.

(iii) Loss of substratum.

(iv) Gambling by a partner on a stock exchange.

11 - X and Y were partners in a firm. The firm was dissolved on 12th June, 2022 but no
public notice was given. Thereafter, X purchased some goods in the firm’s name from Z. Z
was ignorant of the fact of dissolution of firm. X became insolvent and Z filed a suit
against Y for recovery of his amount. State with reasons whether Y would be liable under
the provisions of the Indian Partnership Act, 1932? Rtp,June2024, RTP,June2023

CA NIKESH AGRAWAL 63
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U3

Ans - By virtue of provisions of Section 45 of the Indian Partnership Act, 1932, notwithstanding
the dissolution of a firm, the partners continue to be liable as such to third parties for any act
done by any of them which would have been an act of the firm, if done before the dissolution,
until public notice is given of the dissolution.

In the instant case, X and Y were partners in a firm which was dissolved but no public notice was
given. After dissolution, X purchased some goods in the firm’s name from Z who was ignorant of
the fact of dissolution of firm. X became insolvent and Z filed a suit against Y for recovery of
his amount.

Following the provisions of Section 45, X and Y are continuing liable against third party even
after dissolution of firm until public notice is given. As in the given problem, X became insolvent,
therefore, Y will be liable to Z.

10 - "Indian Partnership Act does not make the registration of firm's compulsory nor does
it impose any penalty for non-registration." In light of the given statement, discuss the
consequences of non registration of the partnership firms in India. Also, explain the rights
unaffected due to non registration of firms.

5)b)7m,MTP1,Jan2025, 3)a)6m,MTP1,Dec2023, 4)b)6m,Dec2022, 6)b)4m,MTP2,Dec2021,

RTP,June2021, 6)b)4m,MTP1,June2021, 3)b)4m,Dec2020, 3)b)4m,MTP1,Dec2019,
6)b)4m,June2019, 3)b)4m,June2018

Ans - The Indian Partnership Act, 1932 does not make the registration of firm’s compulsory nor
does it impose any penalty for non-registration. However, under Section 69 of the Indian
Partnership Act, 1932, non-registration of partnership gives rise to a number of disabilities.
These disabilities briefly are as follows:

(i) No suit in a civil court by firm or other co-partners against third party: The firm or any other
person on its behalf cannot bring an action against the third party for breach of contract
entered into by the firm, unless the firm is registered and the persons suing are or have been
shown in the register of firms as partners in the firm.

(ii) No relief to partners for set-off of claim: If an action is brought against the firm by a third
party, then neither the firm nor the partner can claim any set-off, if the suit be valued for more
than ` 100 or pursue other proceedings to enforce the rights arising from any contract.

(iii) Aggrieved partner cannot bring legal action against other partner or the firm: A partner of
an unregistered firm (or any other person on his behalf) is precluded from bringing legal action
against the firm or any person alleged to be or to have been a partner in the firm. But such a

CA NIKESH AGRAWAL 64
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U3

person may sue for dissolution of the firm or for accounts and realization of his share in the
firm’s property where the firm is dissolved.

(iv) Third party can sue the firm: In case of an unregistered firm, an action can be brought
against the firm by a third party.

Following are the Rights unaffected due to non-registration of firms: Non-registration of a firm
does not, however effect the following rights:

1. The right of third parties to sue the firm or any partner.

2. The right of partners to sue for the dissolution of the firm or for the settlement of the
accounts of a dissolved firm, or for realization of the property of a dissolved firm.

3. The power of an Official Assignees, Receiver of Court to release the property of the insolvent
partner and to bring an action.

4. The right to sue or claim a set-off if the value of suit does not exceed ` 100 in value.

5. The right to suit and proceeding instituted by legal representatives or heirs of the deceased
partner of a firm for accounts of the firm or to realise the property of the firm.

09 - Explain about the registration procedure of a partnership firm as prescribed under

the Indian Partnership Act, 1932. 3)a)6m,June2023, RTP,June2019

Ans - Application for Registration (Section 58 of the Indian Partnership Act, 1932): The
registration of a firm may be effected at any time by sending by post or delivering to the
Registrar of the area in which any place of business of the firm is situated or proposed to be
situated, a statement in the prescribed form and accompanied by the prescribed fee, stating-

a) The firm’s name

b) The place or principal place of business of the firm,

c) The names of any other places where the firm carries on business,

d) the date when each partner joined the firm,

e) the names in full and permanent addresses of the partners, and

f) the duration of the firm.

The statement shall be signed by all the partners, or by their agents specially authorised in this
behalf.

1) Each person signing the statement shall also verify it in the manner prescribed.

CA NIKESH AGRAWAL 65
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U3

2) A firm name shall not contain any of the following words, namely:-

‘Crown’, ‘Emperor’, ‘Empress’, ‘Empire’, ‘Imperial’, ‘King’, ‘Queen’, ‘Royal’, or words expressing or
implying the sanction, approval or patronage of Government except when the State Government
signifies its consent to the use of such words as part of the firm name by order in writing.

Registration (Section 59): When the Registrar is satisfied that the provisions of section 58
(above mentioned provisions) have been duly complied with, he shall record an entry of the
statement in a register called the Register of Firms and shall file the statement.

The Firm when registered shall use the brackets and word (Registered) immediately after its
name.

08 - G, I and S were friends and they decided to form a partnership firm and trade in a
particular type of chemicals. After three years of partnership, a law was passed which
banned the trading of such chemicals. As per the provisions of the Indian Partnership Act,
1932 can G, I and S continue the partnership or will their partnership firm get dissolved?

RTP,Dec2022

Ans - Compulsory dissolution of a firm (Section 41)

A firm is compulsorily dissolved by the happening of any event which makes it unlawful for the
business of the firm to be carried on or for the partners to carry it on in partnership.

In this case, the firm is carrying on the business of trading in a particular chemical and a law is
passed which bans the trading of such a particular chemical.

The business of the firm becomes unlawful and so the firm will have to be compulsorily dissolved
in the light of Section 41 of the Indian Partnership Act, 1932.

07 - P & Co. is registered as a partnership firm in 2018 with A, B and P as partners

dealing in sale and purchase of motor vehicles. In April 2019, A dies. Now only B and P
continue the firm and same business with same firm name P & Co.

In the month of December 2019, firm felt the need of expansion of business and sharing
the burden of expenditure and investment. They thought of hiring a new partner with a
mutual consent with each other. Hence in December 2019, the firm took a new partner S in
the firm P & Co.

The firm has supplied large amount of material to one of the clients Mr. X for business
purposes. In spite of regular reminders, X failed to pay the debts due to the firm.

CA NIKESH AGRAWAL 66
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U3

In January 2020, firm filed a case against X in the name and behalf of P & Co. without
fresh registration. With reference to Indian Partnership Act, 1932, discuss if the suit
filed by the firm is maintainable? 4)b)6m,MTP1,Dec2022

Ans - Consequences of Non-registration of partnership firm (Section 69 of the Indian

Partnership Act, 1932):

Non-registration of partnership gives rise to a number of disabilities. Though registration of

firm is not compulsory, yet the consequences or disabilities of non-registration have a persuasive
pressure for their registration. Following are the consequences:

a) No suit in a civil court by firm or other co-partners against third party: The firm or any other
person on its behalf cannot bring an action against the third party for breach of contract
entered into by the firm.

b) No relief to partners for set-off of claim: If an action is brought against the firm by a third
party, then neither the firm nor the partner can claim any set-off, if the suit be valued for more
than ` 100 or pursue other proceedings to enforce the rights arising from any contract.

c) Aggrieved partner cannot bring legal action against other partner or the firm: A partner of an
unregistered firm (or any other person on his behalf) is precluded from bringing legal action
against the firm or any person alleged to be or to have been a partner in the firm.

d) Third-party can sue the firm: In case of an unregistered firm, an action can be brought
against the firm by a third party.

In the instant case, since the fresh registration has not been taken after introduction of new
partner S, the firm P & Co. will be considered as unregistered firm. Hence the firm which is not
registered cannot file a case against the third party. Hence the firm P & Co. cannot sue X.

06 - M/s XYZ & Company is a partnership firm. The firm is an unregistered firm. The firm
has purchased some iron rods from another partnership firm M/s LMN & Company which is
also an unregistered firm. M/s XYZ & Company could not pay the price within the time as
decided. M/s LMN & Company has filed the suit against M/s XYZ & Company for recovery
of price. State under the provisions of the Indian Partnership Act, 1932;

a) Whether M/s LMN & Company can file the suit against M/s XYZ & Company?

b) What would be your answer, in case M/s XYZ & Company is a registered firm while M/s
LMN & Company is an unregistered firm?

c) What would be your answer, in case M/s XYZ & Company is an unregistered firm while
M/s LMN & Company is a registered firm? RTP,June2022

CA NIKESH AGRAWAL 67
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U3

Ans - According to provisions of Section 69 of the Indian Partnership Act, 1932 an unregistered
firm cannot file a suit against a third party to enforce any right arising from contract, e.g., for
the recovery of the price of goods supplied. But this section does not prohibit a third party to
file suit against the unregistered firm or its partners.

a) On the basis of above, M/s LMN & Company cannot file the suit against M/s XYZ & Company
as M/s LMN & Company is an unregistered firm.

b) In case M/s XYZ & Company is a registered firm while M/s LMN & Company is an unregistered
firm, the answer would remain same as in point a) above.

c) In case M/s LMN & Company is a registered firm, it can file the suit against M/s XYZ &
Company.

05 - MN partnership firm has two different lines of manufacturing business. One line of
business is the manufacturing of Ajinomoto, a popular seasoning & taste enhancer for food.
Another line of business is the manufacture of paper plates & cups. One fine day, a law is
passed by the Government banning Ajinomoto’ use in food and to stop its manufacturing
making it an unlawful business because it is injurious to health. Should the firm compulsorily
dissolve under the Indian Partnership Act, 1932? How will its other line of business (paper
plates & cups) be affected? RTP,Dec2021

Ans - According to Section 41 of the Indian Partnership Act, 1932, a firm is compulsorily
dissolved;

a) by the adjudication of all the partners or of all the partners but one as insolvent, or

b) by the happening of any event which makes it unlawful for the business of the firm to be
carried on or for the partners to carry it on in partnership.

However, where more than one separate adventure or undertaking is carried on by the firm, the
illegality of one or more shall not of itself cause the dissolution of the firm in respect of its
lawful adventures and undertakings.

Here, MN has to compulsorily dissolve due to happening of law which bans the usage of
ajinomoto. Else the business of the firm shall be treated as unlawful.

However, the illegality of ajinomoto business will in no way affect the legality or dissolution of
the other line of business (paper plates & cups). MN can continue with paper plates and cup
manufacture.

CA NIKESH AGRAWAL 68
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U3

04 - A, B and C are partners in a firm. As per terms of the partnership deed, A is

entitled to 20 percent of the partnership property and profits. A retires from the firm and
dies after 15 days. B and C continue business of the firm without settling accounts. What
are the rights of A’s legal representatives against the firm under the Indian Partnership
Act, 1932? RTP,June2020. RTP,June2018

Ans - Retirement / Death of Partner: Section 37 of the Indian Partnership Act, 1932 provides
that where a partner dies or otherwise ceases to be a partner and there is no final settlement of
account between the legal representatives of the deceased partner or the firms with the
property of the firm, then, in the absence of a contract to the contrary, the legal
representatives of the deceased partner or the retired partner are entitled to claim either.

(i) Such shares of the profits earned after the death or retirement of the partner which is
attributable to the use of his share in the property of the firm; or

(ii) Interest at the rate of 6 per cent annum on the amount of his share in the property.

Based on the aforesaid provisions of Section 37 of the Indian Partnership Act, 1932, in the given
problem, A shall be entitled, at his option to:

(i) the 20% shares of profits (as per the partnership deed); or

(ii) interest at the rate of 6 per cent per annum on the amount of A’s share in the property.

03 - P, X, Y and Z are partners in a registered firm A & Co. X died and P retired. Y and
Z filed a suit against W in the name and on behalf of firm without notifying to the
Registrar of firms about the changes in the constitution of the firm. Is the suit
maintainable? RTP,June2019

Ans - As regards the question whether in the case of a registered firm (whose business was
carried on after its dissolution by death of one of the partners), a suit can be filed by the
remaining partners in respect of any subsequent dealings or transactions without notifying to the
Registrar of Firms, the changes in the constitution of the firm, it was decided that the
remaining partners should sue in respect of such subsequent dealings or transactions even
though the firm was not registered again after such dissolution and no notice of the partner was
given to the Registrar.

(i) The test applied in these cases was whether the plaintiff satisfied the only two requirements
of Section 69 (2) of the Act namely,

(ii) the suit must be instituted by or on behalf of the firm which had been registered.

CA NIKESH AGRAWAL 69
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U3

02 - Mr. A. Mr. B and Mr. C were partners in a partnership firm M/s ABC & Co., which is
engaged in the business of trading of branded furniture. The name of the partners was
clearly written along with the firm name in front of the head office of the firm as well as
on letter-head of the firm. On 1st October, 2018, Mr. C passed away. His name was
neither removed from the list of partners as stated in front of the head office nor from
the letter-heads of the firm. As per the terms of partnership, the firm continued its
operations with Mr. A and Mr. B as partners. The accounts of the firm were settled and
the amount due to the legal heirs of Mr. C was also determined on 10th October, 2018.
But the same was not paid to the legal heirs of Mr. C. On 16th October, 2018, Mr. X, a
supplier supplied furniture worth ` 20,00,000 to M/s ABC & Co. M/s ABC & Co. could not
repay the amount due to heavy losses. Mr. X wants to recover the amount not only from
M/s ABC & Co., but also from the legal heirs of Mr. C.

Analyses the above situation in terms of the provisions of the Indian Partnership Act, 1932
and decide whether the legal heirs of Mr. C can also be held liable for the dues towards
Mr. X.

Ans - Generally, the effect of the death of a partner is the dissolution of the partnership, but
the rule in regard to the dissolution of the partnership, by death of partner, is subject to a
contract between the parties and the partners are competent to agree that the death of one will
not have the effect of dissolving the partnership as regards the surviving partners unless the
firm consists of only two partners. In order that the estate of the deceased partner may be
absolved from liability for the future obligations of the firm, it is not necessary to give any
notice either to the public or the persons having dealings with the firm.

In the light of the provisions of the Act and the facts of the question, Mr. X (creditor) can have
only a personal decree against the surviving partners (Mr. A and Mr. B) and a decree against the
partnership assets in the hands of those partners. A suit for goods sold and delivered would not
lie against the representatives of the deceased partner. Hence, the legal heirs of Mr. C cannot
be held liable for the dues towards Mr. X.

01 - A & Co. is registered as a partnership firm in 2015 with A, B and C partners. In

2016, A dies. In 2017, B and C sue X in the name and on behalf of A & Co., without fresh
registration. Decide whether the suit is maintainable. Whether your answer would be same
if in 2017 B and C had taken a new partner D and then filed a suit against X without fresh
registration? RTP,June2018

Ans - As regards the question whether in the case of a registered firm (whose business was
carried on after its dissolution by death of one of the partners), a suit can be filed by the
remaining partners in respect of any subsequent dealings or transactions without notifying to the
CA NIKESH AGRAWAL 70
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U3

Registrar of Firms, the changes in the constitution of the firm, it was decided that the
remaining partners should sue in respect of such subsequent dealings or transactions even
though the firm was not registered again after such dissolution and no notice of the partner was
given to the Registrar.

The test applied in these cases was whether the plaintiff satisfied the only two requirements of
Section 69 (2) of the Act namely,

(a) the suit must be instituted by or on behalf of the firm which had been registered;

(b) the person suing had been shown as partner in the register of firms. In view of this position
of law, the suit is in the case by B and C against X in the name and on behalf of A & Co. is
maintainable.

Now, in 2017, B and C had taken a new partner, D, and then filed a suit against X without fresh
registration. Where a new partner is introduced, the fact is to be notified to Registrar who shall
make a record of the notice in the entry relating to the firm in the Register of firms.
Therefore, the firm cannot sue as D’s (new partner’s) name has not been entered in the register
of firms. It was pointed out that in the second requirement, the phrase “person suing” means
persons in the sense of individuals whose names appear in the register as partners and who must
be all partners in the firm at the date of the suit.

CA NIKESH AGRAWAL 71
BUSINESS LAWS QUESTION BANK CHAPTER – 4: U3

CA NIKESH AGRAWAL 72