Answer to the Question Number 5

Essential Elements of Partnership.

1. Partnership. "Partnership" is 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
Partnership Act 1932, Section 4). Partnership arrangements can be of several types. In
general, all partners in a partnership business share liabilities and profits equally. The
relation of partnership arises from contract and not from status. Partners are liable to
carry out business in a partnership to the greatest common advantage, to the just and
faithful to each other and to render true accounts and full information of all things
affecting the firm to any partner or his legal representative.

2. There are three major elements which are essential to define it as a Partnership.
Those are:

a. There must be an agreement entered into by two or more persons.

b. The agreement must be to share the profits of the business.
c. The business must be carried on by all or any of them acting for all.

3. These three elements are briefly described below:

a. Voluntary Agreement: The first and foremost element of a partnership

is an agreement. This agreement may be well expressed or implied. Without an
agreement, there is no existence of a partnership. This mutual and voluntary
agreement should be made by at least two persons. Point to be noted that, only
the persons competent/eligible to contract can enter into a contract of
partnership. There could even be a partnership between two companies (if
authorized by its Memorandum of Association) (Steel bros & Co. Ltd. Vs
Commissioner of Income Tax). Though there is no restriction is imposed or
mentioned in the Partnership Act for the highest number of persons, The
Companies Act (Bangladesh), 1994 should be taken into cognizance in this
regard. According to The Companies Act, a partnership consisting of more than
10 persons for a banking business and more than 20 persons for any other
business would be considered as illegal (Part 2, Section 4). However, if a
partnership consists of more than the specified number of persons, the
partnership must have to be registered under a Companies Act. According to
Section 5 of the Partnership Act, the relation of partnership arises from contract
and not from status. This particular section also states that, in particular, the
members of a 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.

Example: If A and B form a partnership and suddenly A dies leaving C as heir

than C will inherit the stock in trade of the business along with the goodwill but
will not become partner of B automatically. There must be an agreement
(express/implied) between B and C to become a partner as in Habib Bux v.
Samuel Fitz Co., (1925) 23 All. L.J. 961.

b. Sharing of Profit of the Business: The second element of a partnership

is that there must be a business and the object of the business should be sharing
of profits amongst all the partners. So, there will be no partnership where the
business is carried on with a philanthropic motive and not for making profit out of
it or where only one of the persons is entitled to the whole of the profits of the
business. This sharing of profit can be varied as agreed. However, sharing of
losses is not mandatory for a partnership (Raghunandan vs Harmasjee, 1926).
Though a partner may not share in the losses of the business, yet his liability
towards the outsiders shall remain unlimited generally. The manner of sharing
profit/loss should be expressly stated in the partnership agreement. Otherwise,
profits/losses should be distributed equally among all the partners as per the
Partnership Act (Section 13).

Example: If A and B join together to form a platform to introduce people of

Bangladesh to several new places of tourist attraction, it will not be a partnership
as no intention of business is there. But if these two person form a tour guide
platform with an aim to provide support to tourists and earn profit by doing so,
there is a business, profit and hence a partnership.

c. Mutual Agency: The third and most important element is mutual

agency. It defines that the business must be carried on by all the partners or any
of them acting for them all. As such, every partner in a partnership plays a dual
role of an agent and principal at the same time for himself and other partners. So,
one of the partners can bind by his acts the other partners and can be bound by
 the acts of other partners. This element enables every partner to carry on the
business on behalf of others.

Example: Let us consider that A, B and C forms a partnership. A commits to

purchase a land from Z keeping B and C uninformed for their partnership
business and make a deed with Z in such condition that, 10% advance will be
paid on signing of the deed and rest 90% will be paid to Z upon registration of the
land. If the land is registered accordingly, Z will have a claim against B and C as
well though B and C were unaware of such deed.

Why the partners are unlimitedly liable for the debts of the firm?

1. Unlimited Liability. When each owner of a business can be held personally

liable for the debts of the organization, it is called unlimited liability. It is the legal
obligation of company founders and business owners to repay the debt and other
financial obligation of their companies in full. This legal obligation generally exists in
businesses that are sole proprietorships or general partnerships. In a partnership, if
there is an incident of insolvency of the firm the credits can claim their outstanding on
firms asset which is contributed jointly by the partners or they can even claim upon the
personal assets of the partners.

Example: Let us consider that, A and B create a partnership where both of them
invest BDT 1,00,000 each. In course of business, the partnership incurs a debt of BDT
10,00,000. In this case, A and B will be liable for the entire BDT 10,00,000 even though
they only invested BDT 2,00,000. This means that a creditor could legally seize the
personal assets of A and B in order to pay the debts of the partnership.

Answer to the Question Number 6

Differences between a COMPANY and a PARTNERSHIP BUSINESS in

Bangladesh.

Se Point of Company Business Partnership Business

r Difference
1. Mode of Creation Company requires registration Firm registration is not
under The Companies Act compulsory.
(Bangladesh), 1994 to
commence.
2. Legal Status Body corporate and has a legal Unincorporated association of
personality distinct from that of its individuals.
 members.
3. Number of For private company, fifty. For Not more than 10 persons for
members public company, unlimited. a banking business and not
more than 20 persons for any
other business.
4. Management Managed by directors or Every member may take part
managing director or managers. in its management.
Members have no right to take
part in the management.
5. Liability of Limited unless an unlimited one. Unlimited.
members
6. Transferability Non transferable without the
of Freely transferable in general.
share consent of other partners.
7. Agent Shareholder is not an agent. Each partner is an agent of
the company.
8. Powers Limited to those allowed by Unlimited and can to anything
memorandum. which the partners agreed
upon.
9. Insolvency Issue Winding up of an insolvent Insolvency of the firm means
company does not make the the insolvency of all the
members insolvent. partners.

What do you mean by ‘corporate veil’? How Salomon V A Salomon & Co Ltd case
developed the doctrines relating to corporate veil and company being a separate entity?