Indian Partnership Act
The Partnership Agreement and the Partnership Deed
The partnership agreement is the contract between the partners; the partnership deed is that agreement written down. The Act requires no writing, and an oral firm is perfectly valid. But a deed is needed to register the firm, to be assessed as a firm for tax, and above all to settle, years later, what the partners actually agreed. Since most of Chapter III applies only 'subject to contract between the partners', the deed is where the real rules of a firm live. This note covers the agreement, the deed, its clauses, stamping, registration and modification.
The twenty clauses of a partnership deed, oral against written, stamping and registration, and how the deed is changed
1. Agreement and Deed
Term | Meaning |
|---|---|
Partnership agreement | The contract by which persons agree to carry on a business and share its profits; it may be express or implied, oral or written |
Partnership deed | The written instrument recording that agreement, signed by all the partners |
Legal effect | The relation arises from the agreement, not from the deed; the deed is evidence of the agreement and the source of the firm's internal rules |
2. Oral or Written
§ Why writing matters even though it is not required • Validity. An oral partnership is valid, and may even be inferred from conduct under Section 6. • Registration. Section 58 requires a statement signed by all partners; in practice a deed is filed with it, and the Registrar's entry rests on written particulars. • Tax. To be assessed as a firm and to claim deduction of interest and remuneration, the partnership must be evidenced by an instrument specifying the partners' shares. • Proof. Without writing, disputes about shares, salaries, admission and retirement turn on memory, books of account and correspondence. • Banks and counterparties routinely ask for the deed before opening accounts or granting credit. |
3. The Essential Clauses
Clause | What it settles | Default if silent |
|---|---|---|
Name of the firm | The firm name and its use | Subject to s. 58(3) and the law of passing off |
Nature of business | What business is carried on; this fixes implied authority | Determined from the actual business carried on, s. 19 |
Principal place and branches | Where the business is carried on | Relevant for registration under s. 58 |
Date and duration | Commencement; fixed term, at will, or a particular venture | Partnership at will under s. 7 |
Capital contribution | How much each partner brings, and in what form | No obligation to contribute more later |
Profit and loss sharing | The ratio in which profits and losses are divided | Equally, whatever the capital: s. 13(b) |
Interest on capital | Whether payable, and at what rate | Not payable; only out of profits if agreed: s. 13(c) |
Interest on drawings | Whether charged on withdrawals | Not chargeable |
Remuneration | Salary or commission to working partners | Not payable: s. 13(a) |
Management and duties | Who does what; restrictions on authority | Every partner may take part: s. 12(a) |
Bank operation | Who signs, and whether jointly | Implied authority applies, subject to s. 19(2) |
Accounts and audit | Books, year, inspection, audit | Books kept at the place of business; every partner may inspect: s. 12(d) |
Admission of a partner | Consent and terms for a new partner | Only with the consent of all: s. 31 |
Retirement | Notice and settlement of accounts | Consent, agreement, or notice where at will: s. 32 |
Expulsion | The power and how it is exercised | No power to expel without a clause: s. 33 |
Death and insolvency | Whether the firm continues | Dissolution subject to contract: ss. 34, 35, 42 |
Goodwill | Valuation and treatment on exit or dissolution | Goodwill is property of the firm: ss. 14, 53, 55 |
Restrictive covenants | Restraint on competing business | Valid if reasonable: ss. 11(2), 36(2), 54 |
Dissolution | Events and method of winding up | Sections 39 to 55 apply |
Arbitration | Disputes referred to arbitration | Otherwise a civil suit, subject to s. 69 |
4. Stamping and Registration of the Deed
§ Two different things Stamp duty. A partnership deed is chargeable with stamp duty under the law of the State in which it is executed; the amount varies, and may depend on the capital. Consequence of not stamping. An unstamped or insufficiently stamped deed is not admissible in evidence until the duty and penalty are paid. Registration of the deed under the Registration Act is not compulsory merely because it is a partnership deed; it becomes necessary if the deed itself creates or transfers an interest in immovable property of the prescribed value. Registration of the firm under Chapter VII is a different exercise altogether: a statement filed with the Registrar of Firms under Section 58, with the consequences of Section 69 if it is not done. |
5. Modifying the Agreement
i. Section 11. Subject to the provisions of the Act, the mutual rights and duties of partners may be determined by contract, and such contract may be varied by consent of all the partners.
ii. Consent may be implied. It may be express, or implied by a course of dealing, as where partners act for years on an altered profit-sharing ratio.
iii. Record it. A supplementary deed should record the change, and the Registrar should be informed under Sections 60 to 63 where the change is of a kind that must be recorded.
iv. Tax. For deduction of interest and remuneration, the revised deed must be in place before the payments to which it relates.
6. Express Terms and Implied Rights
Area | If the deed speaks | If the deed is silent |
|---|---|---|
Profit sharing | As agreed | Equally: s. 13(b) |
Interest on capital | As agreed | None: s. 13(c) |
Remuneration | As agreed | None: s. 13(a) |
Interest on advances | As agreed | Six per cent a year on advances beyond capital: s. 13(d) |
Management | As agreed | Every partner may take part: s. 12(a) |
Ordinary decisions | As agreed | By a majority, after all partners are heard; a change in the nature of the business needs unanimous consent: s. 12(c) |
Expulsion | Only if a power is conferred | No power exists: s. 33 |
- The limit of freedom. Terms binding third parties, such as a restriction on a partner's authority, operate against an outsider only if he knows of them: Section 20.
7. Frequently Asked Questions
Is a partnership deed compulsory?
No. An oral partnership is valid; but a deed is needed for registration of the firm, for tax purposes and to prove the terms.
Must a partnership deed be registered under the Registration Act?
Not merely because it is a partnership deed; registration becomes necessary only if the deed creates or transfers an interest in immovable property.
Can a partnership deed be changed?
Yes, by consent of all the partners under Section 11; consent may be express or implied by a course of dealing, and the change should be recorded.
What happens if the deed is silent on remuneration?
No partner is entitled to remuneration for taking part in the business, under Section 13(a).