Unit 9

1. Indian Partnership Act

When two or more people come together as partners, they can form a partnership rm.
This partnership firm is governed by the rules and regulations of the Indian
Partnership Act, 1932. The partnership is also governed by the Indian Contract Act in
areas where the Partnership Act, 1932 is silent.

2. Meaning of Partnership

Section 4 of the Indian Partnership Act defines ‘partnership’ as

- "the relation between persons who have agreed to share the profits of business
carried on by all or any of them acting for all."

Persons who have entered into partnership with one another are called
- Individually 'partners' and collectively a 'firm' and the name under which their
business is carried on is called the firm's name.

3. Essential Characteristic of Partnership

1. Association of two or more persons -

- A person cannot become partner with himself.

- Reduction in the number of partners to one shall bring about compulsory dissolution
of the firm.
- The term 'person' does not include 'firm', since it does not have a separate legal
existence.
- Number of partners cannot exceed 10 in case of banking business or 20 in other
business.
- If membership exceeds this limit, it has to register under Companies Act, or Societies
Registration Act etc, otherwise it shall become illegal.

-2. Agreement between all the persons concerned

- Relationship of partnership arises from contract and not from status or by operation
of law.
- Partners must enter into an agreement voluntarily to form a partnership.
- The agreement may be expressed or implied.
- It may be for a fixed period or for a particular venture or at will, ie for uncertain
duration.
- Co-owners of a property or heirs of a sole proprietor, who has died, will not ipso-
facto become partners in the business, unless there is an agreement between them to
carry on business as partners.
- Partners agreement like any other contract must also satisfy all the essentials of a
valid contract.
- The agreement must be based on good faith and should be for a lawful object.
- The object of partnership agreement should not be illegal, immoral, opposed to
public policy, forbidden by law or fraudulent.

-3. Sharing the profit of a business

- It is essential that the partnership firm must be constituted to carry on some lawful
business and the business must actually be carried on.
- An agreement to carry on a business in future will not create a partnership.
- There can be no partnership unless the business is actually commenced.
- Business includes every trade, occupation and profession.
- Partner must enter into the contract with a motive to earn and distribute amongst
themselves profits of the business.
- Agreement to share losses is not essential.
- Agreement to share profits also implies an agreement to share losses.
- Sharing of profits must be distinguished from sharing of gross returns.
- The term profit implies the surplus left after providing for all expenses.

Example of sharing the profit of a business –

- A and B are joint owners a house. They let out the house on a monthly rent of Rs 300
and share the income from rent equally. A and B cannot be taken as partners since
renting the house cannot be treated as a business activity.

- If in the above example,

- A and B start a hotel in the house and agree to share the income from the hotel
between themselves, they will be taken as partners in a partnership business.

- Sharing of profits is a strong evidence of partnership but not conclusive evidence.

- Sharing of the returns arising from a particular property owned jointly by several
persons will automatically make them partners.
- They must agree to carry business with a view to earn profit.
- Member of non-profit and non-trading associations are not partners.
 4. Mutual Agency -

- Partners in a firm act in both the capacities of an agent as well as a principal.

- Active partners act as agents and conduct the business for all the partners under an
implied authority to do so by the latter.
- Partners are mutual agents for each other and principals for themselves.
- A partner has an authority to bind his co-partners by his acts done in the ordinary
course of the business of the firm.

Partner's liability is not limited to his share in the business.

- He has unlimited liability.
- It is not necessary that every partner must be actively concerned with the conduct of
the management of the business of the firm.
- Partners can transfer all their powers of management in the firm to any of them.
- This will not negate the existence of partnership.
- This means, non participation in management will not exempt one from the liability
of a partner.

4. Partnership and Joint Hindu Family Firm

Basic
Partnership Firm Joint Hindu Family Firm
Difference
Partnership is a legal relation created by an Joint family business arises by operation of law.
Mode Of agreement voluntarily entered into by The latter's basis of creation is the joint
Creation persons ownership of some property.
In case of partnership firm, no new members A person becomes a member in a joint family
Admission can be admitted into the business, except business merely by birth. He is not required to
of a member with the consent of all other existing enter any agreement. He will cease to be a
partners. member on his death.
Death of a partner will bring about
Death of a dissolution of partnership firm, in the
A joint family business will continue to operate
member in spite of the death of any of its members
absence of any agreement to the contrary.
Partnership business is conducted on the
In joint Hindu family firm, only the manager or
basis of mutual agency as between the
Authority partners. Every partner enjoys the authority
'Karta' of the family enjoys these rights.
Members have no rights to borrow or act on
to act and to bind the other partners by his
behalf of other members.
acts.
In joint Hindu family business the Karta are
liable to only the extent of their share in the
In a partnership firm, liability is always joint family properties. The liability of the debts
Liability of unlimited. They can be personally held liable of a joint family business does not extend to
members for the debts of the firm. their personal properties outside the family,
except if they had adopted/ratified those
transactions.
Rights of the The members of a joint family business have no
Partners of a firm have the right to demand,
members to inspect and copy of any accounts of the firm. right to ask for any account of the past
demand dealings, but they can ask for partition of the
accounts existing assets of the family.
 Registration of partnership is essential for
Registration maintenance of suits both against the
partners as well as outsiders
In a partnership, the number of partners is
Number of limited to 10 in case of banking business and
members to 20 in case of any other business.
A joint family business need not be registered
at all.
There is no such restriction in case of no of
members in joint family business.

5. Admission of females as members

Females cannot become members in a joint family business, though they can join
partnership business as full active partners.

6. Admission of minors as members

A minor cannot be a partner in a firm; at best he can be admitted to the benefits of an

existing partnership with the consent of all other partners.

In a joint family business, a minor male becomes a 'Coparcener' by his birth in the
family.

7. Registration of Partnership Firm

Chapter VII of the Partnership Act 1932 lays down the provisions for registration of
partnership firm.
Each State government have been empowered to direct by notification in the official
gazette for registration of partnership.

Registrar of Firms

Each State government has been empowered by Section 57 to

- appoint a Registrar of firms and define his jurisdiction, i.e. the area within which he
shall exercise his power and perform his duties.

Procedure for Registration

An application

In the prescribed form with the prescribed fee is to be filed with the Registrar of the
area in which any place of business of the firm is situated or proposed to be situated.

The application shall state the following:

- The name of the firm
 -The place or principal place of business of the firm;
- The names of any other places where the firm carries on business;
- The date when each partner joined the firm;
- The names in full and permanent addresses of the partners;

The application shall be signed by each partner or his agent specially authorized for
this purpose.

Need for registration

A partnership firm need not be registered, it is optional.

- It is an agreement between two or more persons.
- Registration provides reliable evidence and a conclusive proof of the existence of a
partnership firm.
- But registration is essential for the filing of all those suits arising from contracts or in
respect of rights conferred by the Act.

Consequences of Non-registration

- A partner of a unregistered firm cannot file a suit to enforce a right arising from
contract.
- Also no suit can be filed against past or present partners of the firm.

Time of Registration

- A partnership firm can be registered at any time, even after the partners have agreed
to dissolve it.
- But it must stand registered on the date of the institution of the suit; otherwise the
suit will be dismissed.
- Similarly, if any name of persons who are partners on that date, has not come as
partners in the Registrar of Firms, the suit gets dismissed.

Intimation to Registrar regarding changes subsequent to registration

- Any change in the name, principal place of business, branches, names and addresses
of the partners etc of a firm subsequent to registration must be intimated to the
Registrar of Partnership Firms.

8. Partnership Deed
 Partnership is created by an agreement, though it is not necessary that the agreement
should be in writing.
- It may be oral but to avoid future disputes, it is always better to have it in writing.

Partnership deed is an agreement between the partners of a firm that outlines

- the terms and conditions of partnership among the partners.

The smooth and successful running of a partnership firm requires clear understanding
among its partners regarding the various policies governing their partnership.
- The partnership deed serves this purpose.

It specifies the various terms such as

- Profit/loss sharing, salary, interest on capital, drawings, admission of a new partner,
etc. in order to bring clarity to the partners.

Though issuing a partnership deed is not mandatory,

- But it's always better to enter into a partnership deed to avoid any possible disputes
and litigation among the partners.
- The agreement can be made between two or more partners. It must be stamped and
signed by all the partners.

9. What does partnership deed contains

The partnership deed contains the following details:

a. Business of the firm: Business to be undertaken by the partners of the firm.

b. Duration of Partnership: Whether the duration of the partnership firm, is for
limited period or for a specific project.
c. Sharing of profit/loss: Ratio of sharing profits & losses firm among partners
d. Salary and commission: Details of the salary, and commission if any, payable
to partners
e. Capital contribution: Capital contribution to be made by each partner and the
interest on said capital to be paid to partners
f. Partner's Drawings: Policy regarding the drawings from the firm allowed to
each partner and interest if any to be paid by partner, to firm on such drawings
g. Partner's Loan
h. Duties & Obligations of partners
i. Admission, Death & Retirement of partner
j. Accounts & Audit
 The above elements are general clauses and there may be some other clauses which
can be added to the partnership deed.

10.Position of a minor

A partnership firm not formed with a minor as the only other member.

The relation of partnership arises from a contract.

The only concession that Section 30 gives is that

- A minor may be admitted to the benefits of an existing firm.

11.Duration of Partnership

Fixed partnership
- Partnership will be carried on for a particular period of time.

Partnership at will -
- Where no provision is made by any contract, then such partnership can be dissolved
by any partner, giving a notice in writing to all other partners.

Particular partnership
- They are started for a particular adventure or undertaking, such as construction of a
bridge.
- The partnership will come to an end after the completion of the venture.

12.Classes of Partners

Active/Managing Partner

An active partner mainly takes part in the day-to day running of the business and
- Also tokes active participation in the conduct and management of the business firm

He carries the daily business activities on behalf of other partners.

He may act in different capacities such as manager, advisor, organizer and controller
of affairs of the firm.

Furthermore, subject to the clause in the partnership deed,

- The active partner can draw remuneration from the firm.
If at all he wishes to retire from the partnership firm he must give a public notice about
his decision.

He gives a public notice in order to absolve himself from liability and acts done by the
other partner.

Sleeping Partner

A sleeping partner is also known as a form dormant partner.

This partner does not participate in the day-to-day functioning activities of the
partnership firm.

A person who has sufficient money or interest in the firm, but cannot devote his time
to the business, can act as a sleeping partner in the firm.

However, he is bound by all the acts of the other partners.

A sleeping partner like any other partner brings share capital to the firm.

He also continues to share the profits and losses of the firm.

If a dormant partner makes a decision to retire from the partnership firm, then it is not
mandatory for him to give a public notice for the same.

Nominal Partner

A nominal partner does not have any real or significant interest in the partnership firm.

In simple words,
- He is only lending his name to the firm and does not have a voice in the management
of the firm.

On the strength of his name,

- The firm can promote its sales in the market or can get more credit from the market.

Example of Nominal Partner

- A partnership is executed between the partner and the celebrity or a business tycoon
for the sake of value addition to the firm and also for promoting branding by using the
person's fame and goodwill.
This partner does not share any profit and losses in the firm
- Because he does not contribute any capital to the firm.

However, a nominal partner is liable to the outsiders and third parties for the acts done
by other partners.

Partner in Profits only

This partner of a firm will only share the profits of the firm and
- won't be liable for any losses of the firm.

Moreover, a partner who is in "partner in profits only"

- Deals with any of the third parties or outsiders then he will be liable for the acts of
profit only and not any of the liability.

He is not allowed to take part in management of the firm.

Such kinds of partners are associated with the firm for their goodwill and money.

Sub-Partner

A sub-partner is a partner who associates someone else in his share of the firm.

He gives a part of his share to the person.

It is to be noted that, the relationship is not between the sub-partner and the
partnership firm but is between him and the partner.
- Therefore, a sub-partner is a non-entity of the firm and he does not hold any liability
towards the firm.

Such a partner cannot represent himself as a partner in the original firm.

Furthermore,
- He doesn't reserve any right in the original firm nor he is liable for acts done by
partners of the firm.

He can only claim his agreed share of profits from the partner who has contracted him
to be a sub-partner.

Partner by Estoppels or Holding out

 A partner by estoppel is a partner who displays by his words, actions or conduct that
he is the partner of the firm.

In other words,
- even though he is not the partner in the firm but he has represented himself in such a
manner which depicts that he has become a partner by estoppel or partner by holding
out.

It is to be noted that,

- though he does contribute in capital or management of the firm but on the basis of
his representation in the firm he is liable for the credits and loans obtained by then
firm.

There are two essential conditions of establishing a 'holding out':

- Firstly, the person who is held out must have made a representation of words, actions
or conduct that he is a partner in the firm.
- Secondly, the other party must substantially prove that he had knowledge of such
representation and he acted on it.

Limited Liability Partnership (LLP)

- Unlike general partnership, limited liability partnership is a corporate form of

business organization.
- In such a type of partnership, the liabilities are limited to each partner in accordance
with the contribution made by them in the business.
- Furthermore, the personal property or assets of the partner cannot be attached to pay
back the liability of the firm.
- It is pertinent to note that this organization is not governed under Partnership act,
1932, but is governed under Limited Liability Partnership Act, 2008.
- In a limited liability partnership some or all except one partner have a limited
liability in accordance with the extent of capital contributed by them.
- It is to be noted that, in partnership all the partners cannot have limited liability.

13.Reconstruction of a firm

Any change in the relations of the partners will result in the reconstitution of the
partnership firm.

Events that leads to reconstitution of firm are

1. Admission of a partner.

2. Retirement of a partner.

3. Expulsion of a partner.

4. Insolvency of a partner.

5. Death of a partner

6. Transfer of partner's interest to an outsider.

Admission of a partner

- Sec. 31 says a new partner cannot be admitted without the consent of all the partners
unless otherwise agreed upon.

- When the new partner is admitted, he is not liable to any debts of the firm, before he
comes in as a partner.

The new partner cannot be held responsible for the acts of the old partners unless it is
proved the reconstituted firm has assumed the liability to pay the debts, and that the
creditor has agreed to accept the reconstituted firm as his debtor and to discharge the old
firm from liability.

Retirement of a partner

- A partner may retire from the firm under the following three conditions

1. in accordance with an express agreement

2. with the consent of all other partners

3. where the partnership is at will by giving notice in writing to all other partners of his
intention to retire.

- A retiring partner may carry on business competing with that of the firm and may
advertise such business.

Liability of the retiring partner

- The other partners may, by an agreement, discharge him from all liabilities.
- Creditors may also at their option grant him complete release either by an express or an
implied agreement.

Expulsion of a partner

- Sec 33 says ordinarily a partner cannot be expelled from a partnership firm.

- However, such expulsion can be made if all the following condition are satisfied

1. There is express agreement by the partners.

2. Power is exercised by majority of the partners in good faith.

3. The partner, who has been expelled, was given reasonable notice and opportunity to
explain his position and to remove the cause of his expulsion.

- A partner who is irregularly expelled, will ot cease to be partner.

- By law court he may get himself reinstated.

Insolvency of a partner

- Sec 34 says, where a partner in a firm is adjudicated insolvent, he ceases to be partner on

such date, whether or not the firm is thereby dissolved.

Death of a partner

- As per Sec 35, the partnership firm may not be dissolved on the death of a partner, if there
is a contract between the partners.

- The estate of the deceased partner is not liable for any act of the firm dome or liability
incurred after his death.