THE INDIAN PARTNERSHIP ACT-1932

INTRODUCTION:-

We are well acquainted with the nature and scope of the “sole proprietorship firm and its’ business as well as the limitations concerned with the same. It is also known by us that “Its financial and managerial resources are limited” and hence It is very difficult to expand the business activities beyond a certain limit. In order to overwhelm these disadvantages, another form, i.e., partnership form of business has come into existence with new style and flavour. Two or more than two persons come together to carry on a business on mutual understanding with an intention to share the ownership, responsibilities as well as the profits and losses of the said business. It works on the principle of “Two is better than one”.

Partnership comes into existence as a result of agreement among the partners. The agreement can be either oral or written. The Partnership Act does not require that the agreement must be in writing.

MEANING

PARTNERSHIP: – means a voluntarily participation of two or more than two persons, legal entities and/or persons and legal entities to share ownership as well as the responsibilities for managing a business and the profit & losses the business generates in due course.

The partnership firm comes into existence when two or more persons come together to establish business and share its profits.

DEFINITION:-

1:- WIKIPEDIA: – A partnership is an arrangement where parties, known as business partners, agree to cooperate to advance their mutual interests. The partners in a partnership may be individuals, businesses, interest– based organisations, schools, governments or combinations.

2:- SHOPIFY BUSINESS ENCYCLOPEDIA:- A partnership is a form of business where two or more people share ownership, as well as the responsibility for managing the company and the income or losses the business generates. That income is paid to partners, who then claim it on their personal tax returns – the business is not taxed separately, as corporations are, on its profits or losses.

3:- MERRIAM WEBSTER:- a legal relation existing between two or more persons contractually associated as joint principals in a business.

4:- THE FREE DICTIONARY:-

An association of two or more persons engaged in a business enterprise in which the profits and losses are shared proportionally. 

5:- Prof. L. H. Haney:- “Partnership is the relation existing between persons competent to make contracts, who agree to carry on a lawful business in common, with a view to private gains.”

6:- Prof. Macnaughton:- “Partnership results from the desires of business to take advantages of complementary ability and to raise more capital”

7:- COLLINS DICTIONARY:- a contractual relationship between two or more persons carrying on a joint business venture with a view to profit, each incurring liability for losses and the right to share in the profits.

8:- Oxford Dictionary for the Business World:- “Partner is a person who shares or takes part in activities of another person. Partnership is an association of two or more people formed for the purpose of carrying on a business”

9:- THE INDIAN PARTENERSHIP ACT, 1932.

Section4 DEFINITION OF “PARTNERSHIP”, “PARTNER”, “FIRM” AND “FIRM-NAME”:- “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. 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-name”.

THE ESSENTIAL INGREDIANTS OF THE PARTNERSHIP:-

A partnership firm has no separate legal entity, apart from the partners constituting it. Thus, the essential features of partnership are:

1. Two or More Persons: In order to form partnership, there should be at least two persons coming together for a common goal. In other words, the minimum number of partners in a firm can be two. There is however, a limit on their maximum number. By virtue of Section 464 of the Companies Act 2013, the Central Government is empowered to prescribe maximum number of partners in a firm but the number of partners can not be more than 100. The Central government has prescribed the maximum number of partners in a firm to be 50.

2. Agreement:- Partnership is the result of an agreement (i.e. generally known as “Partnership Deed”) between two or more persons to do business and share its profits and losses. The agreement becomes the basis of relationship between the partners. It is not necessary that such agreement is in written form. An oral agreement is equally valid. But in order to avoid disputes, it is preferred that the partners have a written agreement.

3. Business:- The agreement should be to carry on some business. Mere co-ownership of a property does not amount to partnership. For example, if Nagendra and Narendra jointly purchase a plot of land, they become the joint owners of the property and not the partners. But if they are in the business of purchase and sale of land for the purpose of making profit, they will be recognised as partners.

4. Mutual Agency:– The business of a partnership concern may be carried on by all the partners or any of them acting for all. This statement has two important implications:-

First:- every partner is entitled to participate in the conduct of the affairs of its business and

Second:- that there exists a relationship of mutual agency between all the partners. Each partner carrying on the business is the principal as well as the agent for all the other partners. He can bind other partners by his acts and also is bound by the acts of other partners with regard to business of the firm. Relationship of mutual agency is so important that one can say that there would be no partnership, if the element of mutual agency is absent.

5. Sharing of Profit:- Another important element of partnership is that, the agreement between partners must be to share profits and losses of a business. Though the definition contained in the Partnership Act describes partnership as relation between people who agree to share the profits of a business, the sharing of loss is implied. Thus, sharing of profits and losses is important.

If some persons join hands for the purpose of some charitable activity, it will not be termed as partnership.

6. Liability of Partners:– Each partner is liable jointly with all the other partners and also severally to the third party for all the acts of the firm done while he is a partner. Not only that the liability of a partner for acts of the firm is also unlimited. This implies that his private assets can also be used for paying off the firm’s debts.

AGREEMENT:- PARTNERSHIP DEED

Partnership comes into existence as a result of agreement among the partners. The agreement can be either oral or written. The Partnership Act does not require that the agreement must be in writing. But wherever it is in writing, the document, which contains terms of the agreement is called ‘Partnership Deed’. It generally contains the details about all the aspects affecting the relationship between the partners including

1:-the objective of business,

2:-contribution of capital by each partner,

3:-ratio in which the profits and the losses will be shared by the partners and entitlement of partners to interest on capital and

4:-interest on loan, etc.

The clauses of partnership deed can be altered with the consent of all the partners. The deed should be properly drafted and prepared as per the provisions of the ‘Stamp Act’ and preferably registered with the Registrar of Firms.

Contents of the Partnership Deed.

The Partnership Deed usually contains the following details:

• Names and Addresses of the firm and its main business;

• Names and Addresses of all partners;

• Amount of capital to be contributed by each partner;

• The accounting period of the firm;

• The date of commencement of partnership;

• Rules regarding operation of Bank Accounts;

• Profit and loss sharing ratio;

• Rate of interest on capital, loan, drawings, etc;

• Mode of auditor’s appointment, if any;

• Salaries, commission, etc. , if payable to any partner;

• The rights, duties and liabilities of each partner;

• Treatment of loss arising out of insolvency of one or more partners;

• Settlement of accounts on dissolution of the firm;

• Method of settlement of disputes among the partners;

• Rules to be followed in case of admission, retirement, death of a partner; and

• Any other matter relating to the conduct of business.

Normally, the partnership deed covers all matters affecting relationship of partners amongst themselves. However, if there is no express agreement on certain matters, the provisions of the Indian Partnership Act, 1932 shall apply.

Types of Partners.

In a partnership firm you can find different types of partners. Some may actively participate in the business while others prefer not to keep themselves engaged actively in the business activities after contributing the required capital. Also there are certain kinds of partners who neither contribute capital nor actively participate in the day-to-day business operations. Let us learn more about them:-

 a) Active partners – The partners who actively participate in the day-to-day operations of the business are known as active or working partners. They contribute capital and are also entitled to share the profits of the business. They are also liable for the debts of the firm.

b) Dormant partners – Those partners who do not participate in the day-to-day activities of the partnership firm are known as dormant or sleeping partners. They only contribute capital and share the profits or bear the losses, if any.

c) Nominal partners – These partners only allow the firm to use their name as a partner. They do not have any real interest in the business of the firm. They do not invest any capital, or share profits and also do not take part in the conduct of the business of the firm. However, they remain liable to third parties for the acts of the firm.

d) Minor as a partner -You learnt that a minor i.e., a person under 18 years of age is not eligible to become a partner. However in special cases a minor can be admitted as partner with certain conditions. A minor can only share the profit of the business. In case of loss his liability is limited to the extent of his capital contribution for the business.

e) Partner by estoppel – If a person falsely represents himself as a partner of any firm or behaves in a way that somebody can have an impression that such person is a partner and on the basis of this impression transacts with that firm then that person is held liable to the third party. The person who falsely represents himself as a partner is known as partner by estoppel. Take an example. Suppose in Ram-Hari & Co firm there are two partners. One is Ram, the other is Hari. If Rahim- an outsider represents himself as a partner of Ram Hari & Co and transacts with Mohammad then Rahim will be held liable for any loss arising to Muhammad. Here Rahim is partner by estoppel.

f) Partner by holding out – In the above example, if either Ram or Hari declares that Gopal is a partner of their firm and knowing this declaration Gopal remains silent then Gopal will be liable to those parties who suffer losses by transacting with Ram Hari & Co with a belief that Gopal is a partner of that firm. Here Gopal is liable to those parties who suffer losses and Gopal will be known as partner by holding out.

Section5 of the Indian Partnership Act, 1932 establishes that PARTNERSHIP NOT CREATED BY STATUS.

The relation of partnership arises from contract and not from status; and, 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.

Section6 of Indian Partnership Act, 1932 deals with MODE OF DETERMINING EXISTENCE OF PARTNERSHIP.

In determining whether a group of persons is or is not a firm, or whether a person is or is not a partner in a firm, regard shall be had to the real relation between the parties, as shown by all relevant facts taken together.

Explanation I : The sharing of profits or of gross returns arising from property by persons holding a joint or common interest in that property does not of itself make such persons partners.

Explanation II : The receipt by a person of a share of the profits of a business, or of a payment contingent upon the earning of profits or varying with the profits earned by a business, does not itself make him a partner with the persons carrying on the business; and, in particular, the receipt of such share or payment –

 (a) by a lender of money to persons engaged or about to engage in any business;

(b) by a servant or agent as remuneration;

(c) by the widow or child of a deceased partner, as annuity, or

(d) by a previous owner or part-owner of the business, as consideration for the sale of the goodwill or share thereof, does not of itself make the receiver a partner with the persons carrying on the business.

Section7 PARTNERSHIP-AT-WILL.

Where no provision is made by contract between the partners for the duration of their partnership, or for the determination of their partnership, the partnership is “partnership-at-will”.

[1]9. In a case of the Hon’ble Supreme Court held that the material question is whether the partnership deed Ex.B1, is at will. Clause (3) specifies the shares of the partners and clauses (4) and (5) read thus The business of the firm has been started on the 1st of July, 1962 and the partnership will be brought to an end at will the partnership will continue till there are two partners, even in the case of one or several partners withdraw themselves or die, the partnership will continue between the two partners, will remain owners of all the capital, on condition that they should pay back to the withdrawing partners and to the heirs of the deceased partners, only the amount of their rights according to the last inventory. Referring to the above clause 5, the Hon’ble Supreme Court has taken a view that the firm is not a partnership at will. Since there is a provision in the partnership deed that partnership shall continue so long as there are two partners and that is the basis on which the Supreme Court took the view that since there is a provision of duration of partnership, it is not a partnership at will.

[2]In accordance with the Bombay High Court (A) Partnership Act (9 of 1932) section 7 partnership at will provision in deed as to retirement of partner is not provision for determination of their partnership within meaning of section 7. Section 7 makes it clear that two conditions must be satisfied before it can be said that a particular partnership is a partnership at will or to put it differently the deed of partnership must not contain any provisions whether express or implied as to (a) the duration of their partnership or (b) for the determination of their partnership. If these two provisions are absent or cannot be implied then the partnership will be at the will. Whether they are called conditions or exceptions the fact remains that there should be no provision in the contract for determination of their partnership. What section 7 refers to is not a provision far the duration of the partnership but a provision for the duration of their partnership. This means that the deed of partnership must contain a provision for the duration of the partnership consisting of all the partners concerned that is to say a partnership in which each of the existing partners is partner. Similarly, the determination is to be of their partnership and not a partnership from which one of the partners has been excluded. The retirement of a partner merely severs the partnership between the retiring partner and the continuing partners leaving the partnership amongst the continuing partners unaffected and the firm continues with the changed constitution comprising the continuing partners. It follows that any provision in a partnership deed as to the retirement of a partner whether conditional or otherwise, whether at a moment s notice or of a specified period and whether on taking accounts or without taking accounts, cannot be considered to be a provision for determination of their partnership within the meaning of section 7. AIR 1968 Guj. 157, Followed: AIR 1961 SC 1225, Relied on .

Section69 EFFECT OF NON-REGISTRATION.

(1) No suit to enforce a right arising from a contract or conferred by this Act shall be instituted in any Court by or on a behalf of any persons suing as a partner in a firm against the firm or any person alleged to be or to have been a partner in the firm unless the firm is registered and the person suing is or has been shown in the Register of Firms as a partner in the firm :

Provided that the requirement of registration of firm under this sub-section shall not apply to the suits or proceedings instituted by the heirs or legal representatives of the deceased partner of a firm for accounts of the firm or to realise the property of the firm.

(2) No suit to enforce a right arising from a contract shall be instituted in any court by or on behalf of a firm against any third party unless the firm is registered and the persons suing are or have been shown in the Register of Firms as partners in the firm.

(2A) No suit to enforce any right for the dissolution of a firm or for accounts of a dissolved firm or any right or power to realise the property of a dissolved firm shall be instituted in any Court by or on behalf of any person suing as a partner in a firm against the firm or any person alleged to be or have been a partner in the firm, unless the firm is registered and the person suing is or has been shown in the Register of Firms as a partner in the firm : Provided that the requirement of registration of firm under this sub-section shall not apply to the suits or proceedings instituted by the heirs or legal representatives of the deceased partner of a firm for accounts of a dissolved firm or to realise the property of a dissolved firm.

(3) The provisions of sub-sections (1), (2) and (2A) shall apply also to a claim of setoff or other proceedings to enforce a right arising from a contract but shall not affect (a) the firms constituted for a duration upto six months or with a capital upto two thousand rupees; or; (b) the powers of an official assigned, receiver or Court under the Presidency Towns Insolvency Act, 1909, or the Provincial Insolvency Act, 1920, to realise the property of an insolvent partner.

(4) This section shall not apply (a) to firms or partners in firm which have no place of business in the territories to which this Act extends, or whose places of business in the said territories are situated in areas to which, by notification under section 56 this Chapter does not apply, or (b) to any suit or claim of set-off not exceeding one hundred rupees in value which, in the presidency towns, is not of a kind specified in section 19 of the Presidency Small Cause Courts Act, 1882, or outside the Presidency towns, is not of a kind specified in the Second Schedule to the Provincial Small Cause Courts Act, 1887, or to any proceeding in execution or other proceeding incidental to or arising from any such suit or claim. [3]In Sheth Loonkaran Shethiya v. Ivan E. John and relevant portion reads as under:-

Section 69 is mandatory in character and its effect is to render a suit by a plaintiff in respect of a right vested in him or acquired by him under a contract which he entered into as a partner of an unregistered firm, whether existing or dissolved is void. In other words, a partner of an erstwhile unregistered partnership firm cannot bring a suit to enforce a right arising out of a contract falling within the ambit of section 69 of the Partnership Act.

Limitations of Partnership form of Business Organisation in spite of all these advantages as discussed above, a partnership firm also suffers from certain limitations.

Let us discuss all these limitations.

a) Unlimited Liability: All the partners are jointly as well as separately liable for the debt of the firm to an unlimited extent. Thus, they can share the liability among themselves or any one can be asked to pay all the debts even from his personal properties.

b) Uncertain Life: The partnership firm has no legal entity separate from its partners. It comes to an end with the death, insolvency, incapacity or the retirement of any partner. Further, any dissenting member can also give notice at any time for dissolution of partnership.

c) Lack of Harmony: You know that in partnership firm every partner has an equal right to participate in the management. Also every partner can place his or her opinion or viewpoint before the management regarding any matter at any time. Because of this sometimes there is a possibility of friction and quarrel among the partners. Difference of opinion may lead to closure of the business on many occasions.

d) Limited Capital: Since the total number of partners cannot exceed 20, the capital to be raised is always limited. It may not be possible to start a very large business in partnership form and

e) No transferability of share: If you are a partner in any firm you cannot transfer your share of interest to outsiders without the consent of other partners. This creates inconvenience for the partner who wants to leave the firm or sell part of his share to others.

The Hon’ble Supreme Court in case of [4]Prem Ballabh Khulbe v/s. Mathura Datt Bhatt has held that partnership itself does not create a fiduciary relation between the partners or make any one of them a trustee from the other or for his representatives. The relation may however arise on the death of one of them or be created by other special circumstances. 

The Calcutta High Court in case of [5]Tilokram Ghosh and Ors. v/ s. Smt. Gita Rani Sadhukhan and Ors. has held that Section 37 of the Partnership Act has to be read with Section 88 of the Trust Act which provides that the continuing partners are trustees for the estate of the deceased partner.

The Punjab and Haryana High Court in case of [6]P.S. Nagaranjan vs Robert Hotz on 23 June, 1954 has held that in a case where the surviving partner carries on the business of the firm and continues to do so then though the suit for accounts may be barred, a suit for share of the profits under Section 37 of the Partnership Act is maintainable and does not fall under Article 106 of Limitation Act, 1908 corresponding to Article 5 of the Limitation Act, 1963.

The Hon’ble Supreme Court in case of [7]Shreedhar Govind Kamerkar vs Yesahwant Govind Kamerkar And Anr on 12 December, 2006 held that the rights and liabilities of the partners in respect of the partnership property would be discharged only when the firm is finally wind up and the properties of the firm are distributed. Supreme Court in case of S. V. Chandra Pandian and Ors. (supra) held that during the subsistence of the partnership a partner would be entitled to a share in the profits and after its dissolution to a share in the residue, if any on settlement of accounts.

The Hon’ble Supreme Court in case of [8]Mohd. Laiquiddin & Anr vs Kamala Devi Misra (Dead) By Lrs. & … on 5 January, 2010 has held that when there are only two partners constituting the partnership firm, on the death of one of them, the firm is deemed to be dissolved despite the existence of a clause which says otherwise. It is held by the Supreme Court in the said judgment that under the Partnership Act, 1932, property which is brought into the partnership by the partners when it is formed or which may be acquired in the course of the business becomes the property of the partnership and a partner is, subject to any special agreement between the partners, entitled upon dissolution to a share in the money representing the value of the property.

The Hon’ble Supreme Court in case of [9]V. Subramaniam vs. Rajesh Raghuvandra Rao has held that the partners of a firm are the co-owners of the property of the firm, unlike shareholders in a company who are not co-owners of the property of the company. 

The Hon’ble Supreme Court in the case of [10]Malabar Fisheries Co. Vs. Commissioner of Income Tax has held that rights of the Partnership Firm and its partners in the property of the firm are not extinguished after dissolution of the firm. Supreme Court in the cases of V. Subramanium Vs. R.R. Rao (supra) and [11]N. Kaderavalli Saheb Vs. N. Gundu Sahib has held that the partners are the real co-owners of the property acquired by the partnership firm. Even if the partnership firm is dissolved, partners continued to be the co- owners of the property during the life time and after demise of the partners, legal heirs of such partners continued to be the owners of such property. The principles of law laid down by the Supreme Court in the cases of V. Subramanium Vs. R.R. Rao (supra) and N. Kaderavalli Saheb Vs. N. Gundu Sahib (supra) apply to the facts of this case.

The Hon’ble Gujarat High Court in the case of [12]Parmanand Vasani Vs. State of Gujarat  has held that on dissolution of the firm, the partnership assets would devolve upon its partners or the representatives of the partners as tenants-in-common. 

[13]There is a clear distinction between ‘retirement of a partner’ and ‘dissolution of a partnership firm’. On retirement of the partner, the reconstituted firm continues and the retiring partner is to be paid his dues in terms of Section 37 of the Partnership Act. In case of dissolution, accounts have to be settled and distributed as per the mode prescribed in Section 48 of the Partnership Act. When the partners agree to dissolve a partnership, it is a case of dissolution and not retirement.

Difference between Partnership and Sole proprietorship form of Business Organisation.

The “Sole proprietorship form of business organisation” and the “Partnership form of business organisation”, both of these forms have their own features, advantages and limitation. Let us compare them to find out the difference between them.

Sr. Nos.	Basis of Differences	Sole Proprietorship	Partnership
1.	Formation	No agreement is required to start the business. It is formed at any time whenever desired by the sole proprietor.	It can be formed only on the basis of an agreement among the partners.
2.	Governing Act	There is no specific Act that governs a sole proprietorship business.	It is governed by Indian Partnership Act, 1932.
3.	No. of members	Only one member.	Minimum two and maximum 10 in banking and 20 in other businesses.
4.	Capital	Capital is arranged by sole proprietor alone.	Capital is provided by partners in an agreed ratio.
5.	Decision-making	Decision-making is very quick because there is no need to consult any one else for taking decision.	It takes time to decide upon important matters because all the partners must be consulted for taking decision.
6.	Sharing of profit and loss	The question of sharing of profits or losses does not arise. The sole proprietor alone takes all profits and bears all losses.	Profits and losses are shared by partners as per agreement
7.	Ownership and Management	This is completely owned, controlled and managed by the sole proprietor.	Owned, controlled and managed by partners.

CONCLUSION:- Punjab and Haryana High Court in case of Mansha Ram (supra) has held that a partner is not a trustee of the other partner, but it cannot be denied that the partners stand in fiduciary relation to one another and in such a case equity will never permit the surviving partner to trade, or to utilize the property of the other for his exclusive personal profit. The Hon’ble Supreme Court in the case of Shreedhar Govind Karmekar Vs. Yesahwant Govind Kamerkar & Ors.(supra) has held that if affairs of Partnership firm are completely wound up, the right of the legal heirs of the partners is continued in the profit and the assets of the said firm.

[14]A partnership firm must have at least two partners. When there are only two partners and one has agreed to retire, then the retirement amounts to dissolution of the firm.

That only a registered Partnership Firm and its’ partners can bring a suit to enforce a right arising out of a contract.

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[1] AIR 1991 SC 1020

[2] AIR 1976 Bombay 405

[3] (1977) 1 SCC 379

[4] 1967 AIR 1342, 1967 SCR (2) 298

[5] AIR 1989 Cal 254, (1989) 1 CALLT 54 HC

[6] AIR 1954 P H 278

[7] Appeal (civil)  5720 of 2006 Arising out of SLP (Civil) No.8368 of 2005

[8] CIVIL APPEAL NOS. 6933-6934 OF 2002

[9] Civil Appeal No. 7438 of 2000 decided on March, 20, 2009

[10] 1980 AIR 176, 1980 SCR (1) 696

[11] AIR 1994 AP 126

[12] AIR 1994 Guj 206, (1994) 2 GLR 163

[13] Pamuru Vishnu Vinodh Reddy v. Chillakuru Chandrasekhara Reddy and Others, (2003) 3 SCC 445.

[14] Erach F.D. Mehta v. Minoo F.D. Mehta, (1970) 2 SCC 724