LAW OF PARTNERSHIP
NATURE OF PARTNERSHIP
DEFINITION OF PARTNERSHIP
Partnership is defined in section 4 of the Partnership Act as “the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all”. The essence of the definition is that a partnership is a profit-sharing agreement of business.
Individuals who have entered into partnership with one another are called individually “partners” and collectively “a firm” and the name under which there business is carried on is called the “firm name”
ESSENTIAL ELEMENTS OF PARTNERSHIP A partnership's four vital components are:
• The partnership must be the result of an agreement between the two or more persons.
• The partnership must be structured to carry on the business.
• The persons concerned must agree to share the profits of the business
• The business is to be carried on by all or any of them acting for all.
AGREEMENT: A partnership is the result of an agreement between two or more persons. A partnership can emerge, according to Section 5, only from a agreement and not from the status. This is why a partnership is distinguished from a Hindu Undivided Family carrying on family business. The reason is that such kind of an alliance is only a development from mutual agreement. Thus, the nature of a partnership is voluntary and contractual. An agreement from which a partnership relationship arise may be express. It may also be implied from the Partnership Act done by the partners and from a consistent course of conduct being followed, showing a mutual understanding between them. This agreement may be in oral or in writing.
In CST v. K. Kelukutty,it was held that agreement is the foundation of partnership as it gives expression to the ingredients defining the partnership, specifying the business agreed to be carried on, the person who will actually carry on the business, the shares in which the profit will be divided and several other considerations which constitutes an organic partnership.
BUSINESS: A partnership can be formed only for the purpose of carrying on business. For this purpose, the term ‘business’ would usually imply every trade, occupation, and profession. The existence of a company is crucial. The motive of a business is the “acquisition of profits” that leads to the formation of a partnership. So, there can be no partnership where there is no intention to carry on a business and to share the profits obtained from the same.
SHARING OF PROFITS: The term “partnership” is derived from the word “to part”, which means to “divide”. The essential condition for the existence of partnership is the division of profit and no person can claim himself to be a partner in a business unless he has the right to share the profits of the business.
In Bansi Ram v. Jagan Nath, it was observed that though it may be true that every member who receives a part of the profits of business is not necessarily a partner therein, but no man can acquire the status of partner without a right to a part of the profits.
MUTUAL AGENCY: It is the most important principle of partnership; the business must be carried on by all the partners or by one or more acting on behalf of all other partners. A partner who carries on the business is both the principle as well as the agent of the other partners. Therefore, the real test of a partnership is a mutual agency rather than sharing of the profits.
TEST OF PARTNERSHIP Section 6 of the Act sets out to determine whether or not a group of persons is a firm and whether or not a person is a partner in a firm, consideration shall be given to the relationship between the parties as shown by all the relevant facts taken together. The real partnership test is the existence of the relationship ' Mutual Agency, ' i.e. the partners ' ability to bind other partners through their acts performed in the name of the firm and beyond by other partners ' acts. Profit sharing is a key partner component, but it is not a conclusive evidence of collaboration.
Thus the partnership can be presumed when:
• There is an agreement to share the profits of business.
• The business is carried on by all or by any of them acting for all. Agency is an essential element of partnership just sharing of profits and contribution to losses is not sufficient. In Cox v. Hickman, the House of Lords reconsidered the test for determining the existence of a partnership. The net result of their historic decision is that sharing of profit is only an apparent or prima facie test that, if nothing more is known about them, the people who are participating in the profits of business are partners. Their Lordships, in effect decided that “persons who share the profits of a business do not incur the liabilities of partners unless that business is carried on by themselves personally or by others as their real or ostensible agents.
Thus partnership depends upon “agency” and a share in the profits is only an incidence of the fact of agency.
KINDS OF PARTNERS
The different kinds of partners that are found in partnership act are as follows:
ACTUAL OR ACTIVE PARTNER: An individual who, through an agreement, has become a partner and genuinely participates in the daily conduct of partnership firm and carries on business on behalf of others is regarded as a real or active partner. He may be called as an agent of other partners for business purposes. All his actions in the normal course of company are binding on him and the other partners to third parties. If a real partner wishes to retire, he must give his retirement notice to the public; otherwise he will be continuously responsible for the firm’s actions.
HOLDING OUT PARTNER OR PARTNER BY ESTOPPEL: Section 28 of the Partnership Act provides that if an individual claims to be a partner by his own words or behavior, he will be prevented from denying that he is not a partner. As a holding out partner, the individual who thus becomes responsible to third parties to pay the company’s debts is known as a holding partner.
The two essential conditions for the principle of holding out are:
(a) The person to be held out must have made the representation, by words written or spoken or by conduct, that he was a partner ;
(b) The other party must prove that he had knowledge of the representation and acted on it, for instance, gave the credit.
DORMANT OR SLEEPING PARTNER: A person who is in reality a partner but actually ‘sleeps’, means he does not take actively participate in the proper conduct and management of business. Such a partner only contributes to the share capital of the firm, is bound by the activities of other partners, and shares the profits and losses of the business. A sleeping partner is not required to give a public notification of his retirement, unlike active partners. As such, after his retirement he will not be liable to third parties for the acts done.
PARTNERS IN PROFIT ONLY: When a partner agrees with the others that only the firm’s earnings would be shared and that he would not be responsible for its losses, he is regarded only as profit partners. But for the firm’s debts and obligations, he will be liable to outsiders.
INCOMING PARTNER: A person who has agreed to become a partner in an already existing firm with the assent of all the other partners is known as incoming partner. The incoming partner’s liability arises only for the acts done by the firm after his admission as partner and he will not be liable for any of the act done by the firm before he becomes partner.
OUTGOING PARTNER: A partner who goes out of a firm and the remaining partners continue to carry on the business is called as retired or outgoing partner. A retired partner continues to be liable for all the debts and obligations of firm incurred before his retirement.
MINOR AS A PARTNER: A partnership is created by an agreement, and as per Indian Contract Act, a minor cannot enter into an agreement. But under section 30 of the Indian Partnership Act, 1932, a minor ‘can be admitted to the benefits of partnership’, with the consent of all partners.
DIFFERENCE BETWEEN PARTNERSHIP AND OTHER ASSOCIATIONS
PARTNERSHIP AND JOINT HINDU FAMILY BUSINESS
PARTNERSHIP JOINT HINDU FAMILY BUSINESS
1. Partnership is created by an agreement between the parties. It comes into existence by operation of law. It carries on the business handed down from its ancestors and all members herein are called coparceners.
2. In partnership, the death of a partner results into dissolution of firm. The death of a coparcener does not dissolve the joint family business.
3. In partnership, each member has the authority to bind the other members by his acts. In joint hindu family business, only manager or karta has authority to bind other members.
4. In partnership, every member is personally liable to an unlimited extent for the debts of the firm. In joint hindu family business, only karta has unlimited liability other members are liable only up to the extent of their share.
5. It is governed by the Indian Partnership Act, 1932. It is governed by Hindu Law.
6. There can be minimum two and maximum twenty partners in a partnership firm. There is no such restriction in hindu joint family business.
1. Registration of a partnership firm is not mandatory. A company comes into existence only after the registration under companies act.
2. Minimum number of members required in partnership firm is two. Minimum 7 members are required to form a public company and 2 members are required to form a private company.
3. A partnership firm is not a separate legal entity and has no rights and obligations separate from its partners. A company is a separate legal entity and is distinct from its members.
4. In partnership, every member is personally liable to an unlimited extent for the debts of the firm. The liability of members of company is usually limited.
5. In partnership firm, a partner cannot transfer share without consent of other partners. In this shares are easily transferrable unless the articles restrict it.
6. It is governed by the Indian Partnership Act, 1932. It is governed by Companies Act, 2013.
7. In partnership firm every member may take part in management of affairs. The affairs of company are managed by its directors.
PARTNERSHIP AND CO-OWNERSHIP
1. Partnership is always a result of an agreement. A co-ownership is not always the result of an agreement it may arise by status or operation of law.
2. Partnership necessarily involves working for profit. Co-ownership not necessarily involves working for profit.
3. A partner cannot transfer his rights to third party without the consent of other partners. A co-owner can freely transfer his rights to third party without the consent of the co-owner.
4. Partnership always implies business. A co-ownership can exist without any business.
5. A partner is an agent of other partners. A co-owner is not an agent of others.
RIGHTS OF PARTNERS IN A PARTNERSHIP FIRM
Partners have following rights in a partnership firm:
1. RIGHT OF PARTICIPATION IN BUSINESS[Sec 12(a)] All of a partnership firm’s partners have the right to participate in the firm’s business as a partnership business is a partner’s business, and their management powers are usually coextensive. If a specific partner’s management power are interfered with and the person was wrongfully prevented from participating, under such conditions the Court of Law may intervene. The court may, and will restrict the other partners by injunction from doing so. Other remedies are a dissolution suit for accounts, and so on for a partner who has been illegally deprived of the right to engage in management.
2. RIGHT TO EXPRESS OPINION[ Sec 12(c)] All partners are allowed to engage in business management and to be consulted before any business decisions are made, differences of opinion between partners may arise from time to time. For conflict resolution purposes, this clause provides that if the difference of view refers to normal firm matters, it may be decided by majority opinion provided that each partner was given the opportunity to express their opinions before the choice was made. But the clause also provides that the majority opinion cannot make any change in the nature of the business.
In Highley v. Walker, a partnership consisting of three members, two of the partners resolved to introduce into the partnership works a son of one of these partners, with a view to his learning the business. The third partner objected to this being done. It was held that the difference between the partners was as to an ordinary matter connected with the partnership business; therefore the decision of majority was binding.
3. RIGHT TO ACCESS BOOKS AND ACCOUNTS [ Sec 12(d)] Every partner of the firm, regardless of whether they are an active or a sleeping partner, is entitled to have access to any of the books of the partnership firm. If necessary the partner has the right to inspect and take a copy of the same. However, this right must be exercised bonafide. In Taylor v. Rundell, it was held that all the books, accounts and papers of the firm have to be so kept that they are accessible to all partners or their legal representative.
4. RIGHT TO REMUNERATION [ Sec 13(a)]
This section does not confer any right to remuneration upon partners for taking part in the conduct of business. The theory behind this provision is that the business of the firm is the partners own business. Although, this rule may always vary by an express agreement, or by a course of dealings, in which case the partner will be entitled to remuneration.
In V.D. Dhandwatey v. CIT, the Supreme Court observed that “ section 13(a) of the act says that subject to the contract between the partners, a partner is not entitled to receive remuneration for taking part in the conduct of the business. From that provision it follows that by agreement one of the partners in a partnership firm, can be remunerated for attending to partnership work.
5. RIGHT TO PROFITS [Sec 13(b)]
All the partners are entitled to share equally in the profits earned, and shall contribute equally to the losses sustained by the firm. So in absence of an agreement to the contrary all the partners are entitled to an equal share in the profits and are also bound to share losses equally.
In Mansha Ram v. Tej Bhan, it was argued that because the contribution of one partner in the capital of firm was little over three times than that of the other partners and that this ratio has been maintained from the very inception of the partnership to its end and that, therefore, an agreement should be deduced that profits would be distributed in the proportion of their capital contribution. The court rejected the contention and said that, “whether partners have contributed money equally or unequally, whether they are or not on a parity as regards skill etc, whether they have agreed or have not labored equally for the benefit of the firm, there shares will be considered as equal, unless
some agreement contrary to that have been entered into.”
6. RIGHT TO INTEREST [ Sec 13(c) (d)]
If a partner makes an advance to the partnership firm in addition to the amount of capital to be contributed by him, the partner is entitled to claim interest thereon at 6 per cent per annum. While the interest on capital account ceases to run on dissolution, the interest on advances keeps running even after dissolution and up to the date of payment. It can be noted that the Partnership Act makesa distinction between the capital contribution of a partner and the advance made by him to the firm. The advance by the partner is regarded as loans which should bear interest while the capital interest
takes interest only when there is an agreement to this effect.
7. RIGHT TO BE INDEMNIFIED [ Sec 13(e)]
It provides that the firm is bound to indemnify a partner in respect of payments made and liabilities incurred by him:
• In the ordinary and proper conduct of business.
• In doing an act, in an emergency for the purpose of protecting the firm from loss, as would be done by a person of prudence in his own case and under similar circumstance.
8. RIGHT TO DISSOLVE THE FIRM [Sec 40]
With the consent of all other partners, a partner of a partnership firm has the right to dissolve the partnership. However, if the partnership is at will, any partner may dissolve the company by not ifying all the other partners in writing of its intention to dissolve the firm.
DUTIES OF PARTNERS IN A PARTNERSHIP FIRM
1. General duties[sec 9]
Each partner has the following mutual responsibilities, such as carrying on the company for the biggest common advantage, having a responsibility to be fair and loyal to one another, render true accounts, and giving complete data about all things that affect the firm etc. to any partner or
his legal representative.
2. Duty to indemnify for fraud[sec 10]
This section is another aspect of the basic duty of the partner. It provides that where a partner falters from the path and the loss is caused to the firm, he will be exclusively liable for the same. The purpose of this rule is to induce the partner to deal honestly with the customers of the firm.
3. Duty to act diligently[sec 12(b), 13(f)]
Every partner must perform his duties towards the firm as diligently as possible because if he is not functioning diligently affects other partners as well. He is liable to indemnify others if his willful neglect causes losses to the firm. Thus if a partner wants to participate in business he will have to exercise due diligence.
4. Duty to use the firm’s property properly[sec 15, 16]
Partners can use the firm’s property exclusively for its business, and not for any personal purpose, because they all own it collectively. Hence, they must be careful while using these properties.
5. Duty to not earn personal profits or to compete
Each partner must function according to commonly shared goals of the firm. They should not make any personal profit and must not engage in any competing business venture. They should hand over personal profits made to their firm.
LIABITY OF PARTNERS IN A PARTNERSHIP FIRM
a). INCOMING PARTNER [Sec 31(2)]
All new partners’ liabilities start from the date of his entry to the firm as a partner. This is unles she assumes responsibility for the firm's commitments prior to admission.
Thus, the new firm may agree to assume liability for the old firm's debts after the admission of a new partner, and the creditors may recognize the new firm as their debtor, releasing the old firm. It is essential to remember that to make the transaction operational, the approval of the creditor is essential. The technical word for substituted liability in a agreement is Novation. Consequently, a mere partnership agreement cannot function as a novation unless the creditors give their permission.
b). OUTGOING PARTNER [Sec 32(2)]
A retired partner remains responsible to the third party for the firm's actions until such moment as he or other firm members give a public notice of his retirement. However, if the third party deals with the firm without knowing that he was a partner in the firm, then he will not be liable to the third party.
However, the retired partner remains responsible for the company's actions performed prior to such a partner's retirement. This liability is valid unless an agreement is reached between him, the third party involved and the reconstituted firm's associates. Such an agreement can also be implied by the course of dealings between the third party and the reconstituted firm post announcement of the retirement of a partner. If the partnership is at will, then it can relieve a partner without giving a public notice. To do so, the partnership needs to give a written notice to all the partners of his intention to retire.
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By: Aayushi Devpura
"Special Student Columnist"