LEGAL ASPECTS OF BUSINESS

LESSON 25: INDIAN PARTNERSHIP ACT, 1932 PARTNERSHIP ,FORMATION ,TEST AND REGISTRATION OF PAR TNERSHIP
Learning Objectives
At the end of this chapter, you will able to know: The Meaning and nature of partnership

2.

The true test of partnership The types of partnership The formation of partnership The registration of partnership

Two or more persons:- There must be at least two persons to form a partnership. It is obvious that a single person cannot constitute partnership. Only persons competent to contract can enter into partnerships.

Introduction
Have you ever heard of partnership? Try to answer what do you mean by partnership in general. Yes, partnership is an association between two or more persons. Let us now discuss about the legal aspects of partnership. The Rules and regulations relating to partnership are governed by the Indian Partnership Act 1932. This act contains 74 sections and it came into force on Ist December 1932 except Section 69 (relating to the effect of non registration of the firms ) which came into force on Ist October 1933. It extends to whole of India except to the state of Jammu and Kashmir

As to the maximum number of partners, there is no limitation in the partnership Act 1932 but is no limitation in the partnership Act 1932 but the Joint Stock companies Act 1956 provides that in a firm carrying banking business, the number of partners should not be more than 10 whereas in other type of business, the limit is 20 partners. It is also mentioned that in case, the number of partners in the above business are more than the prescribed limit, the partnership will be treated as illegal. 3. Carrying on of business There can be partnership if there is some business is carried under it. Sec 2(b) of the Act reads as under business includes every trade, occupation or profession. If the purpose is to carry on charitable work, it will not be partnership. Carrying on of the business means continuity of business activities is required to consider it as partnership business. A and B agrees to open a shop of fancy items and agree to carrying on of the business for sharing of profit. It is a partnership.

Definition
Section 4 Indian Partnership Act 1932 defines Partnership in the following terms: Partnership is the relation between persons who have agreed to share the profit of business carried on by all or any of them acting for all. Breaking the above definition, following essential elements of partnership are revealed:1. 2. 3. 4. 5. There must be an agreement. Between two or more persons Who agree to carry on business With the object of sharing profit The business must be carried by all or any of them acting for all or Mutual Agency.

Sec. 8, however, provides that there can be a particular partnership between partners whereby they engage in a particular adventure or undertaking, which, if successful, would result in profit. Thus there can be a partnership for production of a film, construction of a building etc. although there is single adventure but the same requires a series of transaction a and continuing relationship. 4. Sharing of profit:- The essential element of partnership is to carry on business with the object of sharing profit amongst the partners. The partners may however, agree to share profits in any ratio they like. Ex. A, B, and C entered into a contract to carry on business of manufacturing of toys. ABC decided the ratio as 40:30:30. Besides sharing of profit, in case, there is loss in the partnership, it is not essential that the partners should agree to share the losses. Sec 13(b) however, provides that the partners are entitled to share equally in profits earned and shall contribute equally to the loss sustained by the firm, unless otherwise, agreed. It means that the partners may make a contract contrary to this provision. There may be an agreement vide when only one artner may bear the whole loss. 5. Mutual Agency Business must be carried by all or any of them acting for all It means all the partners should be able to represent each other and should be represented by each other with respect to the business of partnership. Thus the fundament of a partnership is that partners carrying on the business of the firm are agents as well as principals of each other. A partner can bind the firm by has act provided: -

All the above elements must coexist in order to constitute partnership. A brief explanation of these elements is as follows: 1. An agreement :- The relationship of partnership arises from an agreement between the persons concerned not from status. Agreement as made between the persons must be valid and enforceable by law. This agreement may be oral or written. To avoid future complications and dispute amongst the persons constituting partnership, agreement in writing must be preferred. Example A & B enters into a contract to carry on business of manufacturing of tin plates; a partnership is exacted between A&B.

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He act within the scope of his authority His acts are done in the name of he firm They are done for the purpose of the business of the firm

Example. ABC inters into an agreement to form partnership for carrying on business of rice. D, an outsider makes a deal with B. B has acted as agent of the firm. D can file a suit against ABC in case of default. The rules laid in Cox v/s Hickman (1860) are an authority in this behalf. The facts of the case are as follows:S and S was iron merchant in partnership. They became financially embarrassed and made a compromise with their creditors. The creditors were empowered to carry on business as trustee, to proportionately divide the income amongst the creditors and return the business after discharge of debt. Cox was of the trustee who never acted. The other trustee purchased coal from Hickman and failed to pay the price. Hickman sued all the trustees including Cox. The court observed that the creditors working as trustee, although dividing the profit of the business in a ratable proportion were not partners because they were not empowered to represent each other. It was holding that Cox was not liable to pay Hickman for Coke. ] Do you know how you would identify the partnership? What is the true test to identify the partnership? Let me now know first your views on it. Yes, It is the mutual agency, which makes a true partnership. Let us now elaborate further over it. Test of Partnership The all elements as discussed above must co-exist in order to constitute partnership Sec 6 of Indian Partnership Act provides that in determining whether a group of persons is or is not a firm or whether a person is or in 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 Thus all incidents of relations of the partnership are to be examined as shown in written agreement, verbal agreement or conduct. We can explain be position by the following examples. Example (i) A&B jointly buy a mine and lease it out. They make a partnership agreement that they will divide the lease rent in a ratio of 50:50 between themselves. In this case A&B are having understanding that they are partners but in the eyes of low it is not partnership.

partnership or for the determination of their partnership, the partnership is, partnership at will. It means the partnership is made without specifying any period and is at the sweet will of the partners. Any partner may dissolve such a partnerships by giving a notice to that effect to all the other partners. 2. Particular Partnership:- When a partnership is to formed for a particular period or for a particular venture, in a such a case the partnership is automatically dissolved at expiry of fixed term or on the completion of the venture e.g. A&B have formed a partnership for manufacture of a particular film, the partnership is automatically dissolved on completion of the venture provided they dont enter into a contract to continue this partnership for future.

LEGAL ASPECTS OF BUSINESS

We have discussed the distinction of partnership vide which the important elements for the formation ware discussed in detail. However to make it more clear, we give below the important points for execution of partnership. 1. 2. 3. 4. 5. 6. 7. It is executed by a agreement between the partners It has no separate entity apart from its members. It is simply a collection of members Maximum number of person allowed 10 in banking firm and 20 in non banking firm Carrying on business is necessary for existence of partnership The liability of partnership is unlimited an the partners are jointly/personally liable. Every partner is agent of the other partner as well as the firm Every partner has a right to take part in the management of the affairs of the firm

Now, we will discuss how the partnership comes into formation. What legal formalities are there in the formation of partnership? Formation of Partnership A partnership is formed by an agreement between the partners. The rights and obligations of the partners towards each other and towards the firm can be determined by an oral or written agreement. To avoid future dispute it is always advisable to have partnership expressed in writing. Partnership Deed A partnership agreement put to writing and is termed as partnership deed. Before starting of the business the partners are drafting the deed in proper manner so that the business may run smoothly by and if there is any dispute the same may be settled according to the terms of partnership deed. What should be the exact contents, it depends on the circumstances but generally the partnership deed must contain the following clauses 1. 2. 3. 4. Name and address of the firm and nature of business to be carried on. Name and address of the partners Date of commencement and duration of partnership The capital and any other contribution made by partners
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How many types of partnership are there? Type of Partnership Sec 4 of the Act provides that persons who have entered into a partnership with one another are called individually partners and collectively a firm and the name under which their business is carried is called the firm name The formation of the partnership of type of partnership means, there is an agreement between parties to form the firm that too as per provision of Partnership Act. The Partnership can be classified as under:1. Partnership at will:- Sec 7 Where no provision is made by a contract between the partners for duration of their

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5. 6. 7. 8. 9.

The ratio to share profit and losses amongst the partners. Rules as to interest on loans and capital, their salary, commission, etc. Method and arrangement of keeping accounts Division of task and obligation of partners Rules to be followed in case of admission, expulsion / retirement or death of a partner.

Crown, Emperor, Empress, Empire, Imperial, King, Queen, Royal, or words expressing or implying t es n t o ,a p o a o p t o a eo , h a c i n p r v l r a r n g 5f [Government], except 6, [when the State Government] signified 7[its] consent to the use of such words as part of the firm name by order in writing Section 59- Registration When the Registrar is satisfied that the provisions of section 58 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.. Section 60- Recording of alterations in firm name and principal place of business (1) When an alteration is made in the firm name or in the location of the principal place of business of a registered firm, a statement may be sent to the Registrar accompanied by the prescribed fee, specifying the alteration and signed and verified in the manner required under section 58. (2) When the Registrar is satisfied that the provisions of subsection (1) have been duly complied with, he shall amend the entry relating to the firm in the Register of Firms is accordance with the statement, and shall file it along with the statement relating to the firm filed under section 59. Section 61- Noting of closing and opening of branches When a registered firm discontinued business at any place or begins to carry on business at any place, such place not being its principal place of business, any partner or agent of the firm may send intimation thereof to the Registrar, who shall make a note of such intimation in the entry relating to the firm in the Register of Firms, and shall file the intimation along with the statement relating to the firm filed under section 59. Section 62- Noting of changes in names and addresses of partners When any partner in a registered firm alters his name or permanent address, any partner or agent of the firm may send an intimation of the alteration to the Registrar, who shall deal with it in the manner provided in section 61. Section 63- Recording of changes in and dissolution of a firm (1) When a change occurs in the constitution of a registered firm any incoming, continuing or outgoing partner, and when a registered firm is dissolved any person who was a partner immediately before the dissolution, or the agent of any such partner or person specially authorized in this behalf, may give notice to the Registrar of such change or dissolution, specifying the date thereof; and the Registrar shall make a record of the notice in the entry relating to the firm in the Register of Firms, and shall file the notice along with the statement relating to the firm filed under section 59. (2) Recording of withdrawal of a minor-When a minor who has been admitted to the benefits of partnership in a firm attains majority and elects to become or not to become a partner, and the firm is then a registered firm, he, or his agent specially authorised in this behalf, may give notice to the Registrar that he has or has not become a partner, and

LEGAL ASPECTS OF BUSINESS

10. Whether a partner is allowed to carry competing business. 11. The circumstances under which the partnership will stand dissolved. 12. In case of dispute which course of action shall be followed e.g. Court, arbitrations etc. Registration of Partnership Registration of firm means the recording of the firm name along with the prescribed particulars, in the Register of the firms, kept. in the office of the Registrar of Firms. The registration provides a reliable evidence and conclusive proof of the existence of a partnership firm. Section 56- Power to exempt from application of this Chapter The 3[State Government of any State], may, by notification in the Official Gazette, direct that the provisions of this Chapter shall not apply to 4[that State] or to any part thereof specified in the notification. Section 57- Appointment of Registrars (1) The State Government may appoint Registrars of Firms for the purposes of this Act, and may define the areas within which they shall exercise their powers and perform their duties. (2) Every Registrar shall be deemed to be a public servant within the meaning of section 21 of the Indian Penal Code (45 of 1860). Section-58- Application for registration (1) 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 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 authorized in this behalf. (2) Each person signing the statement shall also verify it in the manner prescribed. (3) A firm name shall not contain any of the following words, namely-

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the Registrar shall deal with the notice in the manner provided in sub-section (1). Section 64- Rectification of mistakes (1) The Registrar shall have power at all times to rectify any mistake in order to bring the entry in the Register of Firms relating to any firm into conformity with the documents relating to that firm filed under this Chapter. (2) On application made by all the parties who have signed any document relating to a firm filed under this Chapter, the Registrar may rectify any mistake in such document or in the record or note thereof made in the Register of Firms. Section 65- Amendment of Register by order of Court A court deciding any matter relating to a registered firm may direct that the Registrar shall make any amendment in the entry in the Register of Firms relating to such firm which is consequential upon its decision; and the Registrar shall amend the entry accordingly. Section 66- Inspection of Register and filed Documents (1) The Register of Firms shall be open to inspection by any person on payment of such fee as may be prescribed. (2) All statements, notices and intimations filed under this Chapter shall be open to inspection, subject to such conditions and on payment of such fee as may be prescribed. Section 67- Grant of Copies The Registrar shall on application furnish to any person, an payment of such fee as may be prescribed, a copy, certified under his hand, of any entry or portion thereof in the Register of Firms. Section 68- Rules of Evidence (1) Any statement, intimation or notice recorded or noted in the Register of Firms shall, as against any person by whom or on whose behalf such statement, intimation or notice was signed, be conclusive proof of any fact therein stated. (2) A certified copy of an entry relating to a firm in the Register of Firms may be produced in proof of the fact of the registration of such firm, and of the contents of any statement, intimation or notice recorded or noted therein. What is the effect of non-registration? Is it mandatory? No, it is not mandatory. But there would be some serious effects if the firm is not registered as covered under Section 69. Section 69- Effect of non-registration (1) No suit to enforce a right arising from a contract or conferred by this Act shall be instituted in any court by or on behalf of any person suing as a partner in a firm against the firm or any person alleged to be or to have

been a partner in the firm unless the firm is registered and the person suing is or has been shown in the register of firms as a partner in the firm. (2) No suit to enforce a right a rising from a contract shall be instituted in any court by or on behalf of a firm against any third party unless the firm is registered and the persons suing are or have been shown in the register of firms as partners in the firm. (3) The provisions of sub-sections (1) and (2) shall apply also to a claim of set-off or other proceeding to enforce a right arising from a contract, but shall not affect(a) The enforcement of any right to sue for the dissolution of a firm or for accounts of a dissolved firm, or any right or power to realise the property of a dissolved firm, or The powers of an official assignee, receiver or court under the Presidency-towns Insolvency Act, 1909 (3 of 1909) or the Provincial Insolvency Act, 1920 (5 of 1920) to realise the property of an insolvent partner. To firms or to partners in firms which have no place of business in 10[the territories to which this Act extends], or whose places of business in 11[the said territories], are situated in areas to which, by notification under 12[section 56], this Chapter does not apply, or To any suit or claim of set-off not exceeding one hundred rupees in value which, in the Presidency-towns, is not of a kind specified in section 19 of the Presidency Small Cause Courts Act, 1882 (5 of 1882), or, outside the Presidency-towns, is not of a kind specified in Schedule II to the Provincial Small Cause Courts Act, 1887 (9 of 1887), or to any proceeding in execution or other proceeding incidental to or arising from any such suit or claim.

LEGAL ASPECTS OF BUSINESS

(b)

(4) This section shall not apply(a)

(b)

Section 70- Penalty for furnishing false particulars Section 70 lays down that if any person who signs any statement, amending statement, notice or intimation under this Chapter containing any particular which he knows to be false or does not believe to be true, or containing particulars which he knows to be incomplete or does not believe to be complete, shall be punishable with imprisonment which may extend to three months, or with fine, or with both. Section 71- Power to make rules Section 71 states that The State Government may by notification in the Official Gazette make rules describing the fees which shall accompany documents sent to the Registrar of Firms, or which shall be payable for the

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inspection of documents in the custody of the Registrar of Firms or for copies from the Register of Firms: It is also provided that such fees shall not exceed the maximum fees specified in Schedule I. The State Government may make rules(a) Prescribing the form of statement submitted under section 58, and of the verification thereof; (b) Requiring statements, intimations and notices under sections 60, 61, 62 and 63 to be in prescribed form, and prescribing the form thereof; (c) Prescribing the form of the Register of Firms, and the mode in which entries relating to firms are to be made therein, and the mode in which such entries are to be amended or notes made therein; (d) Regulating the procedure of the Registrar when disputes arise; (e) Regulating the filing of documents received by the Registrar; (f) Prescribing conditions for the inspection of original documents; (g) Regulating the grant of copies; (h) Regulating the elimination of registers and documents; (i) Providing for the maintenance and form of an index to the Register of Firms; and (j) Generally, to carry out the purposes of this Chapter. (3) All rules made under this section shall be subject to the condition of previous publication. Every rule made by the State Government under this section shall be laid, as soon as it is made, before the State Legislature. Attempt the following problems for a better understanding: 1. X, a publisher, agrees to publish at his own expense, a book written by Y and to pay Y half the net profits. Is there a partnership between X and Y?

5.

A advanced some money to B and C, two merchants. The merchants agreed to carryon the business subject to the control of A in several respects. A was to receive a commission of 20% on all the profits. Is it a partnership agreement between A, Band C?

LEGAL ASPECTS OF BUSINESS

[Hint: A is not a partner. The object of the agreement is to give maximum security to A for the returns on his money - Mallow March & Co. v. The Court of Wards [1872] LR 2 CP 419.] 6. A, a contractor, undertook a contract of loading and unloading railway wagons. He appointed H-to manage the work. It was agreed that B would receive 75%of the profits as his remuneration and would bear all the losses, if any. Is it a partnership agreement?

[B. Com. (H), 1999] [Hint- No, B is an agent of A, not his partner - Munshi Abdul Latif v. Gopeshwar Chattoraj AIR 1933 Calcutta 204.] ) 6. A, B and C are partners of an unregistered firm. D owes this firm Rs. 1,000 on a con-tract. The firm filed a suit against D. The suit is dismissed for non-registration of the firm. The firm is registered later on. Can the firm now successfully bring the suit against D? [B. Com. (H), 1986]

[Hint - Yes, after registration, the firm can file a fresh suit. The provision is - before a suit is filed in the court, registration must have been effected.] 7. A and B purchased a taxi to ply it in partnership. They plied the taxi for a year. When A, without the consent of B, disposed of the taxi, B brought an action to recover his share in sale proceeds. A resisted Bs claim on the ground that the firn1 was not registered.

Will B succeed in his claim? [B. Com. (H), 1982] [Hint - B will succeed in his claim because partner of an unregistered firm can sue for his share on dissolution of the firm.] 8. An unregistered firm filed a suit against a debtor to recover Rs. 500. The court dismissed firms application on the ground of non-registration. Can the firm get its registration now and file a fresh suit against the debtor to recover the amount? [B. Com. (H.), 2000] [Hint: Yes, the partners can get the firm registered and then file a fresh suit against the debtor.] 9. A, B and C were partners in a firm. A died. Z, who did know about the death of A, made a deal with the firm. The firm committed a default in meeting out the deal. Z sued upon As estate, B and C for compensation of his damages. Is As estate liable for the damages?

[Hint. No partnership, mere profit-sharing is not conclusive test of partnership.] 2. Two trading firms, each having twelve partners join hands and make a partnership form having twenty-four partners. Is it a valid entity?

[Hint. No, its an illegal association as per section 11 of the companies Act, as the number of members exceeds 20] 3. A and B separately tender for a contract to cut and remove bamboos form a certain jungle. They mutually agree that each one of them shall be entitled to a certain share of bamboos, no matter whosoever is granted the contract. Is it a partnership agreement? A agreed with B, a goldsmith, to buy and deliver gold to B, where B will make ornaments out of it and sell them, and they shall share the resulting profit and losses. Is it a partnership agreement?

[Hint. No] 4.

[Hint - No, As estate is not liable for the dealings of the firm after A death.] 10. A, a holding out partner in the firm of X & Y is adjudicated as insolvent. The firm caused heavy losses to Z by breaching a contract. Z sued X, Y and A for the damages. Is A liable to share such damages? [Hint - No, A partner by holding out who is an insolvent, cannot be held liable for the claims on the firm.]

[Hint. Yes.]

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References

LEGAL ASPECTS OF BUSINESS

Kapoor, N.D. (2003), Elements of Mercantile Law, Sultan Chand and Sons, New Delhi. http://www.indialawinfo.com/bareacts/soga.html M.C. Kucchal ( 2002), Business Law, Vikas Publishing House Pvt. Ltd, Delhi. P.C. Tulsian (2002), Business Law, Tata Mc. Graw Hill Pvt. Ltd, Delhi. Aggarwal, Rohini (2003), Students Guide to Mercantile and Commercial Laws, Taxmanns, New Delhi

Notes

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