General Nature of a Partnership Unit 1

CPT Mercantile Law Chapter -3 The Indian Partnership Act ,1932

CA. Dipti Lunawat

INTRODUCTION TO INDIAN PARTNERSHIP ACT,1932

WHAT IS PARTNERSHIP?

ESSENTIAL ELEMENTS OF PARTNERSHIP

TRUE TEST OF PARTNERSHIP

PARTNERSHIP DISTINGUISHED FROM OTHER FORMS OF ORGANISATION

TYPES OF PARTNERSHIP

TYPES OF PARTNERS

MINOR’S POSITION IN PARTNERSHIP

Learning Objectives

Introduction

It extends to whole of India except the state of Jammu & Kashmir

It came in force on 1st October,1932 except Section 69, which came in force on 1st October , 1933

Partnership Act is not exhaustive

If partnership Act,1932 is silent, Indian Contract Act,1872 is applicable

What Is Partnership

ACCORDING TO SEC 4 OF 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 of them acting for all

Agreement

Sharing profits of business.

Business carried on by all or any of them acting for all.

Essential Elements of Partnership

AGREEMENT BETWEEN TWO OR MORE MEMBERS

MAY BE EXPRESS OR IMPLIED

IT ARISES FROM CONTRACT AND FROM STATUS

Agreement

Business includes every trade , occupation & profession.

Intention to share profits thereof

Agreement to share loss in not an essential element.

Sharing Profits of Business

Business Carried on by all or Any of Them Acting for all

CARDINAL PRINCIPLE OF PARTNERSHIP

LAW

MUTUAL AGENCY -

PARTNER IS BOTH AGENT &

PRINICPAL

EXTENSION OF LAW OF AGENCY

True Test of Partnership

• Sharing of profit is prima facia evidence

• but not a conclusive test • True test is mutual agency.

Case Law Cox vs. Hickman

SHOWN BY ALL THE RELEVANT FACTS TAKEN TOGETHER

REAL RELATION BETWEEN THE PARTIES

IN DETERMINING WHETHER A GROUP OF PERSONS IS PARTNER OR NOT

As per Section 6

Non Partnership Interest

Persons who receives profit but are not partners are regarded as non partnership interest

Examples:

Lender of Money to persons engaged or about to the engaged in any business

A Servant or agent as his remuneration

Widow or child of deceased partner

A previous owner of part of business as the consideration for the sale of goodwill or share thereof.

Distinction Between Partnership and Firms

• Persons who have entered into partnership with one another are called individually “partners” PARTNERS

• A Concrete thing signifying the collective entity for all the partners FIRM

• The name under which the business is carried on Firm name

• An abstract legal relation between the partners Partnership

Questions on partnership & True test of partnership

Questions

Question No.1

The most important element in partnership is:

a] Business

b] Sharing of Profits

c] Agreement

d] Business to be carried on by all or any of them acting for all.

Ans D

Question No.2

A firm is the name of:

a] The Partners

b] The minors in the firm.

c] The business under which the firm carries on business

d] The collective name under which it carries on business

Ans: D

Question No.3

The true test of partnership is laid in following case law?

a] Cox Vs. Hickman

b] Garner Vs. Murray

c] Mohiribibi Vs. Dharmodas Ghosh

d] None of these

Ans: A

Question No.4

The Indian partnership Act came in force on?

a] 1.9.1872 b] 1.7.1930

c] 1.10.1930 d] 1.10.1932

Ans D

Question No.5

A partnership firm comes into existence by ----- and it can be------- ?

a] Agreement and expressed

b] Agreement both implied and expressed

c] Status and by birth

d] Agreement and implied

Ans: B

Question No.6

Sharing of profits also includes sharing of losses?

a] True

b] False

c] Partly True

d] None of the above

Ans: C

Question No.7

X and Y agree to work together as carpenters but X shall receive all profit and shall pay wages to Y. The relation between X & Y is?

a] Partners b] Carpenters

c] Master and servant

d] None of the above

Ans: C

Question No.8

Cardinal law of Partnership is?

a] Business

b] Sharing of Profits

c] Agreement

d] Mutual Agency.

Ans: D

Question No.9

The purpose for which partnership is formed is?

a] Political purpose

b] Social purpose

c] Altruistic purpose

d] Business purpose

Ans: D

Question No.10

Ten major persons form an association to which each member contribute Rs. 10000, purpose is to distribute free medicines to poor patients. Is there a valid Partnership ?

a] True b] False c] Partly True

d] None of the above Ans: B

PARTNERSHIP Vs. ASSOCIATION

PARTNERSHIP Vs. CO-OWNERSHIP

PARTNERSHIP Vs. HINDU UNDIVIDED FAMILY

PARTNERSHIP Vs. CLUB

PARTNERSHIP Vs. JOINT STOCK COMPNAY

Partnership Distinguished from Other Forms of Organization

BASIC

• Legal Status

• Distribution of Profits

PARTNERSHIP

• A firm is not legal entity

• Distributed among the partners according to the terms of the partnership deed.

JOINT STOCK COMPANY

• A company is a separate legal entity distinct its members (Salomon v. Salomon)

• Profits become distributable among the shareholders only when dividends are declared.

Partnership Vs. Joint stock Company

BASIC

•Agency

•Extent of liability

•Property

•Transfer of shares

PARTNERSHIP

•Agency Function

•Liability of the partners is unlimited

•The firm’s property is that is the “joint estate” of all the partners

•Share cannot be transferred without the consent of all the partners.

JOINT STOCK COMPANY

•No Agency Function

•Shareholder Liability is limited .

•Property is separate from that of its members

•Share can be transferred freely

Partnership Vs. Joint stock Company

BASIC

• Management

PARTNERSHIP

• All partners are entitled to participate in the management.

JOINT STOCK COMPANY

• Members of a company are not entitled to take part in the management.

Partnership Vs. Joint stock Company

BASIC

• Number of Membership

PARTNERSHIP

• Other than banking maximum 20

• Banking firm maximum 10.

JOINT STOCK COMPANY

• Private company minimum 2 and maximum 50 members

• Public company minimum 7 and maximum no limit

Partnership Vs. Joint stock Company

BASIC

• Duration of Existence

• Audit

PARTNERSHIP

• Death, Retirement or Insolvency of a partner result in the dissolution of the firm.

• Not Compulsory

JOINT STOCK COMPANY

• A company enjoys a perpetual succession.

• Audit is Obligatory

Partnership Vs. Joint stock Company

PARTNERSHIP

Association of persons earning profits from a business carried on by

all any one them acting for all.

CLUB

Association of persons aimed at promoting non- profit making objects like health,

recreation

On the Basis of Definition

Partnership Vs. Club

PARTNERSHIP

Persons in partnership are

partners and are agent for other

partners.

CLUB

Persons in club are members and are not agent of other

members.

On the Basis of Relationship

Partnership Vs. Club

PARTNERSHIP

Partner has interest in the

property of the firm.

CLUB

A member of a club has no interest in the property of

the club.

On the Basis of Interest in the property

Partnership Vs. Club

PARTNERSHIP

A change in the partners of the firm affect its

existence.

CLUB

A change in the membership of a

club does not affect its existence.

On the Basis of Dissolution

Partnership Vs. Club

BASIS PARTNERSHIP JOINT HINDU FAMILY

Mode of creation Created by an agreement. Created by status

Death of a member Leads to dissolution Does not leads to dissolution

Management All partners can manage Right to manage is with Karta

Authority to bind Every partner can, by his act, bind the firm.

The Karta or the manager, can only bind.

Partnership Vs. Joint Hindu Family

BASIS PARTNERSHIP JOINT HINDU FAMILY

Liability Liability is unlimited Karta’s unlimited, and

others liability only to the extent of their share.

Calling for accounts on closure

Can call for the books of accounts

Cannot call for the books of accounts

Governing Law Partnership Act Hindu Law

Minor’s capacity Minor cannot become a partner, can be admitted

only for benefits. Minor can become member

Continuity Gets dissolved by death or insolvency of a partner. Continues till it is divided.

Partnership Vs. Joint Hindu Family

BASIS PARTNERSHIP CO-OWNERSHIP

Formation Arises out of a contract, express or implied.

Arise either from agreement or operation of

law, inheritance

Implied agency A agent of each other No agency function

Nature of interest Profits and losses are shared

No necessarily sharing of profits and losses.

Transfer of interest Only by the consent of other partners

Without the consent of other co- owners.

Partnership vs. Co-ownership

Basis

• Meaning

• Examples

Partnership

• Association of persons earning profits from a business carried on by all any one them acting for all.

• Partnership to run a business and earn profit thereon.

Associations

• Association of person only for social cause ,with no motive to earn and share profit

• Members of charitable society or religious association

Partnership vs. Associations

Questions on Distinction from Other Forms Of

Organisation

QUESTIONS

Question No.11

Members of Joint Hindu family carrying on family business is called?

a] Partners b] Co-owners

c] Co- parceners d] Any of these

Ans C

Question No.12

When a coparcener takes part in the act performed or a transaction entered into by Karta?

a] Liability of Karta is limited, coparcener is unlimited

b] Liability of both Karta and coparcener is unlimited

c] Liability of both Karta and coparcener is limited

d] Liability of Karta is unlimited, coparcener is limited

Ans: D

Question No.13

Co-ownership necessarily involves?

a] Agreement b] Share of Profits or Loss

c] Carrying of business

d] None of these Ans: D

Question No.14

The maximum number of partners is mentioned in?

a] The Partnership Act

b] The General Clause Act

c] The Companies Act

d] The Societies Registration Act

Ans C

Question No.15

A partnership firm is?

a] A Legal person

b] Not a distinct entity from its partners

c] A distinct entity from its partners

d] None of the above

Ans: B

Question No.16

A partnership firm can be constituted by?

a] Two Individuals

b] Two Hindu Joint families

c] Two partnership

firms

d] Both b & c Ans D

Question No.17

Where the maximum number of partners exceeds in partnership as given by companies act, the firm becomes?

a] Unlawful partnership

b] Illegal Association

c] Limited Liability partnership

d] Large partnership

Ans B

Question No.18

A club is the form of ?

a] Partnership

b] Association for non profit

c] Sole proprietorship

d] Public Company

Ans B

Types of Partnership

On Duration

Partnership at will

Partnership for fixed period

On Extent of Business

Particular Partnership

General Partnership

Types of Partnership

• Particular business enterprise/venture or undertakings

• Comes to end on completion of task. • If carried after completion of task becomes

partnership at will.

Particular Partnership

• Partnership for General business

General Partnership

Types of Partnership

• Not for fixed period of time • No provision as when and how partnership will come

to end.

Partnership At Will

• Fixed period of time • Comes to end on after expiry of term. • If carried after term becomes partnership at will.

Particular For Fixed period

Questions on types of Partnership

Questions

Question No.19

In a partnership agreement it neither provides for duration nor determination of partnership. What kind of partnership it is ?

a] Partnership for a fixed term

b] Partnership at will

c] Particular Partnership

d] Any of these

Ans B

Question No.20

Partnership for fixed period can be dissolved ?

a] Only on expiry of fixed period

b] Before the expiry of fixed period by mutual consent of majority of all partners

c] Before the expiry of fixed period by mutual consent of all partners or on expiry of fixed period

d] Any of these

Ans C

Question No.21

A,B & C agree to carry on business with a term that partnership will be terminated by mutual agreement. This type of Partnership is?

a] Partnership for a fixed term

b] Partnership at will

c] Particular Partnership

d] Not a particular partnership

Ans: D

Question No.22

A Partnership at will can be dissolved by any partner ?

a] oral notice to all partners

b] notice in writing to any one partner

c] written notice to all partners

d] written notice to majority of partners

Ans C

Question No.23

If after completion of particular venture, the firm continues to carry on, then it becomes?

a] Partnership for a fixed term

b] Partnership at will

c] Illegal Partnership

d] Void Partnership

Ans B

Types of Partners

Active OR

Ostensible

Sleeping OR

Dormant Nominal partner

Partners in Profits only Sub Partner Incoming

Partners

Outgoing Partner

Partner by Holding Out or

Estoppel

Types of Partners

ACTIVE PARTNER OR OSTENSIBLE PARTNER

• Person who takes active part in the conduct of business

SLEEPING OR DORMANT PARTNER

• Person who does not takes active part in the conduct of business

NOMINAL PARTNER

• Partner who lends his name to the firm , without having any real interest .

Types of Partners

PARTNERS IN PROFITS ONLY

• Share the profits only without being liable for losses

SUB PARTNER

• A person with whom a partner agrees to share profit

INCOMING PARTNER

• A person who is admitted as a partners into an already existing firm with the consent of all the existing partners

Types of Partners

• A partner who leaves a firm in which the rest of the partners continue to carry on business.

OUTGOING PARTNER OR

RETIRING PARTNER

• Any one who by words or conduct represents himself, or knowingly permits himself, to be represented as a partner in a firm (when in fact he is not) he is liable, like a partner in the firm to anyone who on the faith of such representation has given credit to the firm.

PARTNER BY HOLDING OUT OR

ESTOPPEL

Types of Partners

A introduces B to a money Lender M as a partner in his business. B in fact is not partner. But he did not denied. M advanced loan to A . A cannot repay. Now M is asking B to pay. Here B is partner by estoppel.

Types of Partner

PARTICULARS ACTUAL PARTNER

SLEEPING PARTNER

NOMINAL PARTNER

PARTNERS IN PROFITS ONLY

SUB PARTNER

PARTICIPATION IN BUSINESS

ACTIVE PARTICIPATION

NOT ACTIVE PARTICIPATION

LENDS ONLY NAME

ONLY SHARE PROFITS

NO RELATION

LIABILITY TO THIRD PARTY

LIABLE LIABLE LIABLE

LIABLE

NOT LIABLE

PUBLIC NOTICE FOR RETIREMENT

YES NO YES YES NO

Questions on Types of Partners

Questions

Question No.24

Active partner is one who?

a] Takes part in the business of firm

b] Takes part in co curricular activities

c] Actively share profits

d] Makes a show of authority

Ans A

Question No.25

Who does not take active part in conduct of business?

a] Dormant partner

b] Sub partner

c] Both a & b

d] Partner by estoppel

Ans C

Question No.26

Dormant partner is liable to third party for the acts of firm?

a] Only if his existence is known to third party

b] Whether or not his existence is known to third party

c] Only if he undertakes to be liable to third party

d] Only if the other partners so desires

Ans B

Question No.27

All Partners are liable to third party except ?

a] Ostensible Partner

b] Nominal Partner

c] Sleeping Partner

d] Sub Partner

Ans D

Minor’s Position in Partnership

With the consent of all partners a minor can be admitted only to

benefits of firm.

POSITION BEFORE ATTAINING MAJORITY

POSITION AFTER ATTAINING MAJORITY

Minor’s Position Before Majority

RIGHTS

• Share Profits & Property of firm

• Access & Inspect account book

• Sue for his share of property

LIABILITIES

• Only for his share in property & profits

• No personal liability • Cannot be declared

insolvent

Minor’s Position After Majority

6 MONTHS OF ATTAINING MAJORITY OBTAINING KNOWLEDGE OF ADMITTED TO BENEFITS OF

FIRM

PARTNER NOT A PARTNER

Minor’s Not Elected as Partner & Public Notice

FAILS TO GIVE PUBLIC NOTICE

DEEMED AS PARTNER

PUBLIC NOTICE WITHIN SIX MONTHS

NOT A PARTNER

Minor as Partner After Majority

LIABLE TO THIRD PARTY

•DATE OF ADMISSION

SHARE SAME AS MINOR

• PROPERTY & PROFITS

Minor Not Partner After Majority

RIGHTS SAME AS MINOR

• DATE OF PUBLIC NOTICE

NOT LIABLE FOR ANY

ACTS

• AFTER DATE OF NOTICE

SUE PARTNERS

• SHARE OF PROFITS & PROPERTY

Questions on Minor’s Position in Partnership

Questions

Question No.28

A valid partnership can be formed with one major partners and other minors admitted only to the benefits of the firm?

a] True

b] False

Ans: B

Question No.29

A minor is ------ ?

a] Servant of a firm

b] Representative of Firm

c] Entitled to carry on business of firm

d] Entitled to benefits of firm

Ans: D

Question No.30

A minor must give public notice if he?

a] Elects to become partner

b] Does not elect to become partner

c] Become partner for benefits of Firm

d] Not at all required in any case

Ans: B

Question No.31

If a minor choses to become a partner on attaining majority he will be liable for the debts of firm?

a] From date of attaining majority

b] From date of his admission to benefits of firm

c] From date of his election to become a partner of firm

d] From date of attaining majority or election, whichever is earlier

Ans B

Question No.32

Which of the following statement is true about minor’s position as a partner? • 1. He cannot become a full fledged partner in new firm • 2.He can become a full fledged partner in new firm • 3.He has to bear all liabilities like other partners • 4. He can become a partner on becoming a major

a] 1&2 b] 2&3 c] 3& 4

d] 1 & 4 Ans D

Question No.33

A minor when admitted to the benefits of the partnership?

a] Is confined to his share of profits and property in the firm

b] Is same as that of any other partner in the firm

c] Is similar as that of any other partner in the firm

d] Is unlimited

Ans: A