Module 5

Indian Partnership Act , 1932

Definition of partnership:

Section 4 of Indian partnership act defines partnership as, “The relation between the persons who have agreed to share the profits of business carried on by all or any of them acting for all” .

Essential elements of partnership:

• Partnership is an association of two or more persons.

• Partnership is the result of an agreement entered into by all the persons concerned.

• Partnership is organized to carry on some business.

• The agreement must be to share the profit of the business.

• Such business must be carried on by all or any of the acting for all.

Formation of a Partnership

• Based on agreement • Agreement may be express or

implied

In Writing : helpful in times of adversity

Written agreement : “Partnership Deed”

Contd…

• Essence of Partnership : Trust & Confidence

• Drafted with care and signed by all partners

• Firm should be registered and copy of the Deed to be filed with the

Partners, Firms and Firms Name

Persons who have entered into partnership with one another are called individually “Partners "and collectively “a firm”, and the name under which their business carried on is called the “firm-name”.

Test of partnership

For determining the existence of partnership this should be proved:

• There was an agreement between persons.• Agreement was to share the profits.• Business must be carried by all or any one

acting for all.

Distinction between partnership and Hindu undivided family

• Mode of creation: partnership is the result of an agreement between the members constituting the firm. No such agreement is necessary to constitute a joint family firm.

• Acquisition of interest by male issue: in partnership the male issue of a partner does

no acquire any interest in the partnership property. While in case of joint Hindu family the male issue acquires an interest there in by birth.

Contd…

• Dissolution by death: A partnership is in the absence of a contract to

the contrary , dissolved by the death of the partner while a joint Hindu family is not dissolved on the death of any member there of.

• Admission of new member: a new partner can be admitted in the firm only with the consent of other members in a joint family business a male child becomes a member just by birth.

Right to take part in management:• Right to take part in management: Every partner can take

part in management of the partnership business but in case of a joint family firm it is the manager alone who takes part.

• Implied authority: in the case of an ordinary partnership, each partner is the agent of the firm for the purposes of the business of the firm.

In joint family firm the manager and no other co-partner has an implied authority to contract debts and pledge the property.

Contd….

• Minor members: a minor cannot become a member in the partnership. In a joint family minor male becomes its member merely by birth.

• Number of members: in the case of partnership the number of

partners should not exceed 10 while in hindu joint family who carry on business the number is unlimited.

Contd..

• Effect of insolvency: on insolvency a partner ceases to be a member of firm, but insolvency of a member does not prevent him from continuing to be a member of Hindu joint family .

Partnership and co-ownership

• The co-ownership or joint ownership is the relation which exists between persons who own a property jointly. It is not necessary an outcome of an agreement.

• Partnership is an agreement between two or more person to share profits of a business carried on by all or one representing all.

Cont…

• Partnership involves community of profit and loss but co-ownership does not.

• In partnership each member acts as an agent for the other while in co-ownership the co-owners does not act as agents for each other.

• Every partner is liable to render true accounts of the business to other partner while as the obligation of the co-owner does not arise so strictly.

Partnership and company:

Applicable Law Partnership Act, 1932 Companies Act, 1956

Entity Not a separate legal entity

Separate legal entity

No .of Members Minimum – 2 & Maximum -20, Bank - 10

Public: Min–7 Max–No LimitPrivate: Min-2 Max-50

Capital No Restrictions Cannot have more than its authorized capital

Liability Unlimited Limited to the amount due on the shares held by members

Contd..

Remuneration No restrictions Restricted by Companies Act

Management Vested with the partners

Vested with the Board of Directors

Property Joint estate of all the partners

It is separate from its members

Kinds of partnership

• With regard to duration:1. Partnership at will.2. Partnership for a fixed period.

• With regard to the extend of the business:1. Particular partnership2. General partnership.

Explanation:

• Partnership at will: According to section 7 of the partnership act,

partnership at will is a partnership when:1. When fixed period has been agreed upon for

the duration of partnership.2. There is no provision made as to the

determination of partnership.

Partnership for a fixed period:

• Where a provision is made by a contract for the duration of the partnership, the partnership is called partnership for a fixed period.

Contd…

• Particular partnership:A partnership may be organized for the

prosecution of a single adventure as well as for the conduct of a continuous business.

• General partnership:Where the partnership is constituted with respect

to the business in general is called general partnership. A general partnership is different from particular partnership.

Kinds of partners:

• Active partner – Actively participates in the conduct of the business

• Sleeping Partner – Doesn’t take active part

• Nominal Partner – A partner who lends his name to the firm without having any real interest in it.

• Sub – Partner – When a partner agrees to share his profits derived from the firm with a third person, a sub – partnership may arise. The third person is called as sub partner.

Contd…• Partner in profit only: the partner sharing

profit of the business without making himself responsible for loses of the business.

• Incoming partner: a person who is admitted as a partner in an existing firm is called incoming partner.

• Out coming partner: the partner leaving the existing firm due to retirement etc is called out going partner.

Rights of the partner:

• Right to take part in the conduct of the business.

• Right to express his opinion

• Right to have access to and to inspect and have copy of any of the books of the firm

Contd..• Right to share equally in the profits earned, and shall

contribute equally to the losses sustained by the firm

• Entitled to interest on the capital subscribed

• Right to be indemnified

• No partner is entitled to receive any remuneration in addition to his share of profits of the firm for taking part in the business of the firm unless otherwise an express agreement is there.

Duties of a partner:

To carry on the business of the firm to the greatest common benefit

To be just and faithful to each other in their mutual dealings

To render true accounts and full information of all things, affecting the firm, to any partner or to his legal representative

Contd…• A Duty to indemnify the Firm for Any Loss, Caused by Fraud.

• A Duty of a Partner to attend Diligently to His Duties.

• A Duty of a Partner to indemnify the Firm for Any Loss, Caused by His Willful Neglect.

• A Duty of a Partner to account for Private Profits

• A Duty of a Partner to account for Profit in Competing Business

• No Remuneration to Partners

Contd..

• A Duty of a Partner to account for Private Profits

• A Duty of a Partner to account for Profit in Competing Business

• No Remuneration to Partners

Authority of a partner:

• Express authority of a partner: when the partner is expressly authorized by an agreement of all the partners to do certain act on behalf of the firm, it is called authority of a partner.

• Implied authority of a partner: a partnership firm is also liable for the acts done by the partner within the scope of his implied authority. Ordinarily the acts done by the partner which are incidental to or usually done in the course of the proper conduct of the business come within the scope of his implied authority.

A minor:

• Sec 30(1), A person who is a minor according to law to which he is subject may not be a partner in a firm, but with the consent of all the partners for the time being, he may be admitted to the benefits of partnership.

Position of the minor:• A minor can only be admitted to the benefits of an already existing

partnership

• During his Minority

• Rights Right to receive agreed share of profits and property Have access to and inspect and copy the accounts of the firm If share in profits is not given, can sue (can do if he wants to sever his

connection)

• Liabilities Only to the extent of share in profits and properties (not personally liable)

Position of the minor:

• On Attaining MajorityWithin six months should give notice whether he

is joining the partnership or not.

If notice not given he shall become a partner

• Dissolution of a firm: The dissolution of partnership between all the partners of a firm is called the ‘dissolution of the firm’.

DISSOLUTION OF A FIRM

Kinds of dissolution

• Dissolution by agreement:- A firm may be dissolved with the consent of all the partners or in accordance with a contract between the partners

• Dissolution on the happening of certain contingencies:- Subject to contract between the partners a firm is dissolved –a) if constituted for a fixed term, by the expiry of that term;b) if constituted to carry out one or more adventures or undertakings, by the completion thereof;c) by the death of a partner; and d) by the adjudication of a partner as an insolvent.

Dissolution by operation of law:

• When all or all partners but one are adjudged insolvent

• When the business of the firm becomes unlawful.

Dissolution by notice:

• Partnership at will may be dissolved by any partner giving notice in writing to all other partners of his intention to dissolve the firm.

Dissolution by court:

• A partner becoming unsound mind.• Permanent incapacity of the partner.• Misconduct of the partner affecting business.• A partner selling or transferring his interest.• When a business cannot be carried on save at

a loss.

Registration

• Section 58 lays down that the registration of a firm may be effected at any time by sending by post or delivering to the Registrar, a statement in the prescribed form and accompanied by the prescribed fee

Stating the following particulars:

The name of the firm

The place or principal place of business of the firm

The name of any other places, where the firm carries on business

Contd..

The date when each partner joined the firm

The names in full and permanent addresses of the partners

The duration of the firm