Mercantile Law (Partnership Act)

6. Introduction to Partnership
DEFINITIONS AND NATURE
DEFINITIONS [2, 4]
partnership partners firm firm name act of a firm business third party prescribed is the relation between person who have agreed to share the profits of a business carried on all or any of them acting for all. Persons who have entered into partnership are individually called partners. Persons who have entered into partnership are collectively called firm. A firm is not a separate legal entity distinct from its members. The suit against the firm is suit against all the partners thereof. the name under which the business of partnership is carried on. means 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. includes every trade, occupation and profession. used in relation to firm or to a partner therein means any person who is not a partner in the firm. means prescribed under rules made under the Partnership Act, 1932.

All other expressions shall have the same meanings as defined under Contract Act, 1872.

TEST OF PARTNERSHIP
A partnership may be formed by oral or by written agreement or an agreement of partnership can be inferred from the conduct of the parties. In the definition of partnership, notice that sharing of loss is not necessary for constituting a partnership. It may also be noted that an agreement to carry on business at a future time does not result in partnership unless that time arrives and the business is commenced. Illustration Facts: Ahmad and Baqir, two chartered accountants, agree to carry on practice in common at the office of Ahmad under the name Ahmad and Baqir for a period of seven years. The terms of agreement entered into between them provide that Baqir should manage the office and supervise the clerical work and that he should draw a fixed allowance of Rs.20,000 per month in lieu of profits. It is further agreed that losses, if any, shall be borne by Ahmad alone, and that after seven years Ahmad would be entitled to the office and all the other equipments, and Baqir would not have any right, or claim, in respect of them. Are Ahmad and Baqir partners? Solution: Yes, Ahmad and Baqir are partners. In a partnership, partners are free to agree to any term as regards sharing of profits. Again, sharing of loss is not necessary for becoming a partner. So also, partners may agree that on the dissolution of their partnership all the assets will belong to one partner only.

CA Module B This definition contains five elements which constitute a partnership, namely: 1. There must be a contract; 2. between two or more persons; 3. who agree to carry on a business; 4. with the object of sharing profits; and 5. the business must be carried on by all or any of them acting for all (i.e. there must be mutual agency).

MODE OF DETERMINING EXISTENCE OF PARTNERSHIP [6]

As must be clear from the above discussion of various elements of partnership, there is no single test of partnership . For example, in one case there may be sharing of profits but may not be any business, in the other case there may be business but there may not be sharing of profits, in yet another case there may be both business and sharing of profits but the relationship between persons sharing the profits may not be that of principal and agent. And in either case, therefore, there is no partnership. Thus, all the afore-mentioned essential elements must co-exist to constitute a partnership. In determining whether a group of persons is or is not a firm, or whether a person is or is not a partner in a firm, regard shall be had to the real relation between the parties, as shown by all relevant facts together. Illustration Facts: Majid is the sole proprietor of a firm. He admits Sajid as a partner on the following terms: (1) Sajid is not to bring any capital. (2) Sajid is not responsible for any loss. (3) Sajid is to receive Rs 10,000 per annum in lieu of profits. (4) Sajid is not to enter any contracts on behalf of the firm. Discuss the legal position of Sajid. Solution: Sajid is a partner with Majid because to constitute a partnership neither contribution of capital nor active participation in management of the business is essential. The sharing of profits or of gross returns arising from property by persons holding a joint or common interest in that property does not of itself make such persons partners. Illustration Facts: Jazib and Ghalib jointly purchased a tea shop and incurred additional expenses for purchasing pottery and some other materials to furnish the shop. The money was contributed half and half and then the rented out the shop. The rent has to be shared equally by them. Are Jazib and Ghalib partners? Solution: They are only co-owners and not partners as they never carried on any business. The receipt by a person of a share of the profit of a business, or of a payment contingent upon the earning of profits or varying with the profits earned by a business, does not of itself make him a partner with the persons carrying on the business. Illustration Facts: Raheem, a clerk in Kareems business, entered into a verbal agreement with Kareem for a share of profit and loss in the proportion of one-sixth to Raheem and five-sixth to Kareem. It was further agreed that the building in which the business was carried on should

Mercantile Law (Partnership Act) remain the property of Kareem. Raheem alleges that he is a partner and claims dissolution of the firm and an account of assets. Kareem denies the partnership, and alleges that Raheem is only a clerk. Decide. Solution: In view of the surrounding circumstances of the case it is evident that Raheem is only a clerk. It is an established fact that sharing of profits is not the sole test of partnership. In particular, the receipt of such share or payment by the following persons does not of itself make them a partner with the persons carrying on the business: (a) a lender of money to persons engaged or about to engage in any business; (b) a servant or agent as remuneration; (c) the widow or child of a deceased partner, as annuity; (d) a previous owner or part owner of the business, as consideration for the sale of the goodwill or share thereof.

TYPES OF PARTNERSHIP [7, 8]

Partnership at will

Where no provision is made by contract between the partners for the duration of their partnership, or for the determination of their partnership.

Particular partnership

When a partnership is formed for a particular period or for a specific venture, e.g. for working a coal mine, or producing a film, it is called a particular partnership.

DIFFERENCES BETWEEN PARTNERSHIP AND CO-OWNERSHIP

Difference 1. 2. 3. 4. 5. 6. 7. 8. Contract Profit sharing Transfer of interest Agent Lien Purpose Limit on number business Partnership Formation of contract essential for this. It involves sharing of profit. A partner cannot transfer his interest in partnership without the consent of other partners. A partner is real or apparent agent of other partners. A partner has lien on common goods. The purpose of partnership business is sharing of gain. There is a maximum limit on number of partners. It must involve carrying on of a business. A partner has no right to demand partition of business in specie and he can only sue his co-partners for the dissolution of the firm and accounts. is Co-ownership It is not necessarily the result of agreement. It does not necessarily involve sharing of profit or loss. A co-owner can transfer his interest in property, without the consent of others. A co-owner is not agent of other coowners. A co-owner has no lien on the things owned in common. Co-ownership does not necessarily exist for the sake of gain. There is no maximum limit. It does not necessarily involve the carrying on of a business. A co-owner is entitled to demand partition of joint property in specie

9.

Partition

CA Module B

PARTNERS
NUMBER OF PARTNERS
In partnership the maximum limit of partners is 10 for banking business and 20 for any other business. The minimum limit is 02.

KINDS OF PARTNERS
Partners taking an active part in business, they are full fledged Active / ostensible or partners and liable for all acts of firm. They must give public actual partners notice of their retirement to free themselves from liability. They do not take an active part in business, and are liable to Sleeping or dormant third parties for all acts of the firm. However, they are not partners required to give public notice of their retirement. Not involved in management but are fully liable to third parties for Silent partners all acts of the firm. They do share profits but not losses however their liability to Partner in profits third parties is unlimited as well. only When a partner agrees to share his share of profits in a partnership firm with an outsider, such an outsider is called a sub-partner. Such a sub-partner is has no rights against the firm nor Sub-partner he is liable for the debts of the firm. They are also called quasi partners or nominal partners. They are liable to third party who gave credit to the firm on the faith of Partner by estoppel representation made by such partners. or holding out

SCOPE
APPLICATION OF CONTRACT ACT [3]
The provisions of Contract Act, 1872 shall continue to apply to firms so far as they are not inconsistent with the provisions of Partnership Act, 1932.

PARTNERSHIP NOT CREATED BY STATUS [5]

The relation of partnership arises from contract and not from status. In particular, the members of Hindu undivided family carrying on a family business as such, or a Burmese Buddhist husband and wife carrying on business as such are not partners in such business.

NON APPLICATION OF CERTAIN RELATIONSHIP [6A]

The Partnership Act, 1932 shall not apply to a relationship created by any agreement between a banking company and a person or group of persons providing for sharing of profit and losses arising from or relating to the provisions by a banking company of finance to such person or group of persons. The above implies that having a PLS bank account or investment in banking mutual funds does not constitute partnership.