ALIGARH MUSLIM UNIVERSITY

Topic: Nature, concept and Kinds of Partnership

Submitted to, Submitted by,

Mr. Azmat Ali Ilma Sabeel
Assist. Prof. 18BALLB44
Dept. of law GK7939
 Content
 Introduction
 Background
 Nature
 Meaning
 Essential elements
 Kinds
 Scope of Indian Partnership Act
 Test of the existence of partnership
 Conclusion
 References
Introduction
The Indian Partnership Act, 1932 defines a partnership as a
relationship between two or more individuals who agree to
share the profits of a business run by them all or by one or
more individuals acting for them all. Individuals who have
entered into a partnership with each other are called “partners”
and collectively a “company,” and the name under which their
business is carried on is called the “company name.”

Partnership results from a contract and is governed by the

Partnership Act 1932. The partnership is also governed by the
general provision of the Indian Contract Act on such matters
where the Partnership Act is silent. It is expressly mentioned
that the provision of India Contract Act which is not repealed
will be applicable on Partnership until and unless such
provision is in contrary to any provision of Partnership Act,
1932. The rules of contract regarding the capacity to contract,
offer, acceptance etc will also be applicable to the partnership.
But the rules regarding the status of minor will be governed
by the Partnership Act, 1932 since Section 30 of the Act talks
about the position of the minor.

Illustrations

 X and Y purchase 100 bales of cotton that they agree

to sell on their shared account. For the sale of such
cotton, X and Y are partners. X and Y purchase 100
bales of cotton and agree to share. X and Y are not
partners.
  X agrees with Y, a goldsmith, to purchase and furnish
gold to Y, to be processed, sold and to share the profit
or losses that result. X and Y are partners.

Background of The Indian Partnership

Act,1932
The Indian Partnership Act, 1932 came into effect on the 1st
day of October 1932 and was passed in 1931. This Act
replaces the previous Indian Contract Act, Chapter XI, 1872.

It’s not comprehensive legislation. It is aimed at defining and

amending the law of partnership. A partnership arises from a
contract and thus the partnership agreement is not only
governed by the provisions of The Indian Partnership Act,
1932 in that context, but also by general contract law in cases
where no specific provision is made under The Indian
Partnership Act, 1932. The Indian Partnership Act, 1932
expressly provides that unrepealed provisions of the Indian
Contract Act, 1872, remain in force except in cases where it is
inconsistent with express provisions under this Act. The
provisions of the Indian Contract Act also apply for a
partnership contract, hence the provisions on offer and
acceptance, consideration, free agreement, legality, etc. On
the other hand, the minor’s position is governed by the
provisions of The Indian Partnership Act, 1932, a special
provision is contained in Section 30 of the Indian Partnership
Act, 1932.
Nature
It is a business organization where two or more persons
agreed to join together to carry out the business for the
purpose of earning the profits. It is an extension of a sole
proprietorship. It is better than sole proprietorship because in
sole proprietorship the business is carried out by the
individual with limited capital and limited skill. Due to the
limited resources of a single individual carrying a sole
proprietorship, a larger business requiring more resources and
investment than available to the sole proprietor cannot be
thought of such business. On the other hand in partnership, a
number of partners join together with their capital to form an
agreement and carry out a business jointly.

Meaning
According to Section 4 of the 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 one of them acting for all”.

Essential elements of Partnership

The essential elements of a partnership are the features that
must be present to validate a partnership:

 There must exist an agreement between the partners.

  The motive is to earn the profit and share between the
partners.
 The agreement must be to carry out the business jointly
or by any of them acting on the behalf of all.
Examples:

A and B buy 100 tons of oil which they agree to sell for their
joint account. This forms a partnership and A and B are
considered as partners.

A and B buy 100 tons of oil and agreed to share it among

them. It does not form a partnership as they had no intention
to carry out business.

Association of two or more persons

To form a partnership, there must be at least two people. All
partners must be contractually competent. Therefore, the
company is said to be dissolved if the number of partners in a
company is reduced to one.

There are no limitations on the maximum number of

companies in The Indian Partnership Act, 1932. Nevertheless,
the Indian Companies Act 2013 establishes a limit on the
number of partners in a company as follows:

 For banking business, partners must be less than equal

to 10.
 For any other enterprise, partners must be less than
equal to 20.
 The partnership becomes illegal if the number of
partners exceeds the limit.
Agreement among the Partners
Section 5 of The Indian Partnership Act, 1932 states that “The
partnership does not arise from the status of the law or the
operation of the law but is the result of the agreement”.

The partnership is established by an agreement between two

or several persons, i.e. a partnership agreement. An agreement
may be either express (oral or written) or implied. Therefore,
a partnership does not exist by status but by agreement. Rights
and Duties of partners are defined as per agreement.

Case law

Usha Gopirathnam vs P.S. Ranganathan

Said that the word “entitled” used in the clause would not be
construed to mean “in place of deceased partner”. Unless the
heir or representative of the deceased partner exercised his
option pursuant to use of expression “entitled to, no inference
could be drawn as to existence of partnership. Heir of
deceased partner, the court ruled did not automatically
become partners.

Existence of Business Activity

The business has to be ongoing and legally binding. The
partnership’s main motto is to operate and make profits.
Partnerships are therefore not considered for people who work
together for social or charitable work.

Business should be lawful

Case law

Mahadeodas vs Gherulala Parekh

A partnership where the partners agree to engage in forward
contracts without any intention of actual delivery but only to
deal in differences, the agreement is merely wagering. such a
partnership is valid because the wagering agreements though
they have been merely declared void, they not illegal,
immoral or opposed to public policy. Wagering agreements
would be void if the business if forbidden by law, immoral or
opposed to public policy within the meaning of Section 23 of
the Indian Contract Act.

Sharing of Profits
The main goal of a company is to earn a profit. These profits
are shared in a pre-decided ratio among the partners.

If a person is not entitled to share income, he cannot be called

a partner. But a partner is not liable according to an agreement
to share the losses.

Case law

Cox vs Hickman
In this case it was laid down that that the person sharing the
profit of a business do not always incur the liability of
partners unless the real relation between them is that of
partners.
The principal laid down in this case forms the basis of the
provisions of S.6 of the Indian Partnership Act, which gives a
caution that the presence of only some of the essentials of
partnership does not necessarily result in partnership. For
determining the existence of Partnership regard must be had
to the real relation between the parties, after taking all the
relevant facts into account.

Mutual Agency
Relations with a mutual agency means that all or any partner
must conduct a company’s business. A partner is an agent of
the other partner and can thus bind another partner through his
act. A partner is also principally responsible for the actions of
the other partners of the company.

Kinds of Partnership
Partnership at Will
If there is no clause to establish a partnership at the expiry of
such a partnership, it is referred to as a partnership at will. In
accordance with Section 7 of The Indian Partnership Act,
1932, two conditions have to be met for a partnership to be a
partnership at will and they are:

 There is no agreement on a fixed period for the

existence of a partnership.
 No provision is made for establishing a partnership.
If a partnership has been established and continues to operate
beyond the fixed period, the partnership will become a
partnership at will after the end of that term.
Particular Partnership
According to Section 8 there can be “particular partnership”
between partners whereby they engage in particular
adventures or undertaking.

A partnership can be formed for ongoing business or for a

particular purpose. If the partnership is only formed to carry
out one company or complete one undertaking, it is known as
a particular partnership.

The partnership will be dissolved after the completion of the

said venture or activity. The partners may, however, come to
an agreement to continue the said partnership. But in the
absence of this, when the task is complete, the partnership
ends.

Case law

K. Jaggaiah vs Kokumanu
In this case the plaintiff and two defendants joined together
and obtained a contract for the maintenance of a road. There
was to be held to be partnership in the road building activity.
Such activity though arising out of a single contract was
spread over a particular period and the firm had to employ
certain workers, supervise the work, prepare the bills and
finalise the work and get the approval from the government
and finally receive the bills, and all that meant carrying on of
business.
Partnership for a Fixed Term
Now, during the establishment of a partnership, the partners
may agree on the duration of this arrangement. This would
mean that the partnership was established for a fixed period of
time.

Therefore, such a partnership will not be called a partnership

at will, it will be a partnership for a fixed term. The
partnership ends after the expiration of such a duration.

However, there may be cases where the partners continue

their business even after the expiry of the duration. They
continue to share profits and there is a component of a mutual
agency. Then in such a case, the partnership will be at will.

General Partnership
When the purpose of forming the partnership is to carry out
the business in general, it is said to be a general partnership.

Unlike a particular partnership, in a general partnership, the

scope of the business to be carried out is not defined, so all the
partners are accountable for all the actions of the partnership.

Scope of Indian Partnership Act

The scope of a partnership is primarily a matter of partners’
intentions. The application of the powers it chooses to
exercise at any time is not restricted except prohibition on
illegal, immoral or fraudulent behaviour that applies equally
to individuals.
 If consent is given by the constituent company’s
partners, a partner may itself be a member of another
company.
1. If the contract appears to be authorized or ratified by
all partners, there usually is no further question as to its
validity.
The cases where the partnership contract validity issue arises
is where one partner made the contract without specific
authority from his co-partners. Their implicit scope of
partnerships may be divided into non-trading and commercial
classes. Partners of either type can exercise certain powers in
partnership. A partner can thus retain a lawyer to safeguard
the interests of the company.

How to test the existence of a partnership?

All the elements mentioned above must be present in a
partnership. Although profit sharing is strong evidence of the
existence of a partnership, the true test is the element of the
agency. For this reason, a creditor who advances money on
the understanding that he would have a share in business
profits instead of interest is not a partner. Similarly, an
employee receiving a share of profits as a part of his
remuneration, or the seller of the business goodwill receiving
a portion of the profits, is not a partner. The element of the
partnership, namely the agency, is absent in all these cases. A
creditor or an employee or the seller of the goodwill cannot
bind the firm by their actions, they can be called partners.
Thus, in the absence of a definite partnership agreement, in
order to determine the existence of a partnership, the Court
must take into account all relevant circumstances, such as the
conduct of the parties; manner of doing business; who
controls the property; manner of holding accounts; manner in
which profits are distributed; evidence of employees and
correspondence.

To sum up, for determining the existence of a partnership, the

following must be considered:

There must be an agreement- oral or written

Having formulated the provisions of Section 4, the Supreme
Court observed that a partnership agreement is a basis for a
partnership and also refers to the other ingredients defining
the partnership establishing the agreed undertaking, the person
actually engaged in the business, the shares in which the profit
is shared and several other considerations. A partnership
agreement, therefore, identifies the firm and a separate and
distinct partnership may be created in each partnership
agreement. That is not to say that a firm is a corporate entity
or in that sense enjoys a legal personality. However, each
partnership is a separate relationship. The partners can be
different, but the nature of the enterprise can be the same, the
enterprise can be different and yet the partners can be the
same. It may be intended to form two separate partnerships
and therefore two separate companies or simply to extend a
partnership originally established for the purpose of carrying
on one enterprise to another. The partners’ intention must be
decided in accordance with the terms and circumstances of the
agreement, including evidence that the company’s
management, finance, and other incidents have been
interlaced or interlocked.
Partnership Agreement does not need to be expressed, but it
can be inferred from the parties’ conduct. The firm rule is that
once the parties to the partnership are clearly described in the
instrument, there is no scope for further investigation to be
carried out by some process or casuistry if any of the parties
have an obligation to others to introduce into the partnership
arena those others to whom any of the parties may be legally
accountable and to treat them as part of the partnership. If the
parties to an agreement have not agreed on the start date of the
partnership, it cannot be said that they have become partners.

 The agreement must be to share the profits;

 The profits must come from the undertaking, and

 The undertaking must be carried on by all or any of

them acting for all

Partnership not created by status

The partnership is based on a contract and not on status: in
particular, members of an undivided Hindu family carrying on
family business, or a Buddhist Burmese husband and wife
carrying on business as such, are not partners.
Conclusion
All members’ joint efforts result in the successful completion
of tasks and that task or job can be easily done. Work division
leads to increased work efficiency among different partners. If
some work is done through the consent of all members and
some profits are earned, then they are shared between the
various partners. And likewise, if there is some loss then it is
borne by all members and not just one has to take
responsibility or compensate for it. The partnership is,
therefore, a good way to do business in my view than a single
person owned company.

A partnership is one of the oldest business forms. While

limited liability companies have replaced partnership
enterprises in complex enterprises, professional and small
companies continue to prefer partnerships in India and
overseas.The Indian Partnership Act, 1932 provides for a
common type of company that is the most prevalent in India,
but over time, due to its inherent disadvantages, a common
form of partnership has lost its charm, the main aspect of
which, is the unlimited liability for business debts and the
legal consequences for all partners regardless of their
holdings, since the company is not a legal entity.General
partners are also jointly and severally liable for tortious acts of
co-partners. Each partner has the exposure of appropriating
and liquidating their personal assets to meet partnership dues.
These are statutory positions that cannot be altered by contract
inter-se, although unscrupulous partners sometimes resort to
subterfuges to avoid personal liability.
References
1. DR. RK Bangia , Principles of Mercantile Law,
Allahabad law Agency.
2. https://www.advocatekhoj.com/library/bareacts/partner
ship/index.php?Title=Indian%20Partnership%20Act,%
201932
3. http://www.legalservicesindia.com/article/158/Indian-
Partnership-Act,1932.html
4. https://www.lawnotes.in/Indian_Partnership_Act,_193
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