January 28, 2019

FORMATION OF PARTNERSHIP (INDIAN PARTNERSHIP ACT, 1932)

INTRODUCTION

HISTORY OF INDIAN PARTNERSHIP ACT, 1932

The Indian Partnership Act, 1932 passed by the Legislation received its assent on 8^th April 1932 and came into force on 1^st October 1932(except section 69 dealing with registration of partnership). The principles of the partnership were first brought under the Indian Contract Act, 1872 under Chapter XI(section 239-266) in an arranged form based on the usage and custom of traders and commercial people of India according to English principles of law. With the development of trade and commerce in India, it was felt that these sections were insufficient and hence a need for a separate partnership act was felt. Thus The Indian Partnership Act came up and section 239-266 of The Indian Contract Act,1872 containing the partnership laws were repealed(these were based on the rules included in the report of the Indian Law Commission presided over by Lord Romilly in 1866. The present partnership act is based on the English Partnership Act, 1890 with modifications. With some regulations the act was made applicable in the following states of India over years:

Dadar and Nagar Haveli^[1]
Pondicherry^[2].
Goa, Daman, and Diu by^[3].

The act is subsequently not applicable to Jammu and Kashmir by the virtue of section 3 and Schedule III of 1951. Also now section 73 and schedule II have been repealed by the Repealing Act,1938.

WHAT IS PARTNERSHIP?

As per section 4 of The Indian Partnership Act, 1932 partnership can be defined as the relationship between persons who have agreed to share profits of the business carried on by all or any of them acting for all.

Persons who have entered into a 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”^[4]. In other words, we can say that a partnership is a legal relationship between two or more people who carry out the business as co-owners. The partners have specified and joint liabilities and duties. The partners are both a principal as well as an agent The partners of the firm are the real owners and the firm does not have a separate legal entity. This was also observed in the case Malabar Fisheries Co. v. I.T, Commissioner, Kerala^[5].

FORMATION OF PARTNERSHIP

For the formation of a partnership under The Indian Partnership Act,1932 the following are the basic necessities:

There should be at least 2 persons to form a partnership.
There must be an agreement between these two or more persons. This agreement can be oral or written or by conduct^[6]. The partnership can be oral was seen in the landmark case of Niadar Mal Jagdish Parshad vs Commissioner Of Income-Tax, where the partnership was formed by an oral agreement and the firm later applied for registration but the application was rejected.

There are certain restrictions in keeping the firm name like the restriction of usage of words like an emperor, supreme, empress and other descriptive names, restriction on keeping names of existing firms or names similar to existing firms, keeping fraudulent names etc.
Also known as the cardinal principle of partnership law each partner must act as a principal and an agent to the partnership firm. This was seen in Holme v Hammond case,(1872)^[7].
The agreement must be there for carrying out a legal business or profession.
The parties must be competent to enter into a partnership that is they should be a major person, a person of sound mind and should not be barred by law to entered in such form of agreement. But as per section 30 of Indian Partnership Act,1932 a minor can be admitted as a partner to enjoy the benefits of partnership but will not be liable for the losses incurred^[8].
The agreement must be there to share all the profits and losses of the business in a particular predefined ratio. If no ratio is decided it is assumed that the profit and losses will be shared equally by all the partners.
For formation of a partnership, all the partners should be jointly and severally liable for all the losses that take place.
The partnership starts not when an agreement is made but after the business starts^[3].
A partner in the firm should perform functions other than advancing money and taking interest along with profits to become a partner. It was seen in the case Laxmibai v. Roshan Lal^[9].

There should be the relevance of share of profits. In M. Young Legal Associates Ltd. v. Lees^[10], Lees and other partners intended to enter into a contract of partnership. The provisions for payment to Lees of a fixed sum and for him not to be required to contribute capital to the firm

pointed to the absence of a partnership. It was held that Lees was a partner in Z, a firm of solicitors even in absence of a contribution on his part to its capital.
All the elements of a valid contract under the Indian Contract Act,1872 must be present in a contract of partnership. Eg free consent, lawful consideration etc.

ROLE OF PARTNER IN THE FORMATION OF PARTNERSHIP

A partner must perform several duties to ensure the formation of a partnership without any constraint.

As per section 11(2) of The Indian Partnership Act,1932 a partner shall not carry on any business other than that of the firm while he is a partner.
Every partner has a right to take part in the conduct of the business.^[11]
Every partner must perform his duties diligently and should not conduct fraudulent activities.
Every person has the right to express his opinions in decision making and in case of dispute the decision of the majority of partners will be considered.

PARTNERSHIP DEED

A partnership deed is a written document which outlines the rights and duties of the partners at the time of partnership. It is a document which is created to avoid unnecessary disputes, unpleasantness, and harassment among the partners regarding any issue. The formation of a partnership deed is not mandatory and is prepared only for the smooth functioning of the firm. The unregistered partnership deed cannot be enforced as a valid agreement in view of section 9 of the Partnership act, but it can act as evidence at the time of the dissolution of the firm. A partnership deed usually contains the following:

Name of the firm.
Address of the firm.
Address of any other office of the firm.
Names, addresses, and occupations of the partners.
The object of the firm that is the nature of the business and the date of commencement.
The capital invested by each partner.
The proportion of sharing profit and loss of the firm.
Arbitration clause.
Duration of the partnership.
Period of the accounting year.
The appointment of the auditor and his remuneration.
The name of the active partners and the dormant partners.
Remuneration to the active partners.
Interest on capital if any.
Interest on advances made by the partners if any.
Periodical drawing by the partners for their expenses.
Nomination of representative to be a partner on the death of a partner.
Bank accounts and the persons capacity to operate them.
Powers, rights, duties, and liabilities of the partners in the management and the affairs of the firm.
Meeting of partners.
Signature of all the partners with date and the signature and addresses of witnesses attesting the signatures of partners.

REGISTRATION OF PARTNERSHIP

It is not compulsory under Indian Law to get a partnership firm registered but a registered firm enjoys various benefits over a non registered partnership firm.

In a registered partnership partner have a right to file a case against the firm or co-partners or any other 3rd party and can claim against any 3rd party in the court for the repayment or damages. A number of steps are to be followed to get a firm registered and avail the benefits of a registered firm.

Thus Indian Partnership Act plays a vital role in governing partnership firms and their smooth functioning. The partnership is one of the most important forms of business organization and it’s easy formation as laid by the laws under the Partnership act helps people form a partnership firm with any hindrance and conduct business for their living. More and more encouragement should be made to partnership firms for registration and also the partners should know their rights and duties.

^[1] Regulation VI of 1963

^[2]Regulation VII of 1963

^[3]Regulation XI of 1963

^[4] Section 4, Indian Partnership Act,1932.

^[5] AIR 1980 SC 176.

^[6]State Bank of India Vs M/s.Simko Engineering Works(2005)

^[7] LR 7 Ex.218: 41 LJ Ex 157

^[8] C.I.T. v. Shah Mohandas Sadhuram, AIR 1966 SC 15

^[9] William v. Jones (1826) 5 B&C 108

^[10] AIR 1972 Raj 288.

^[11] (2006) 1 WLR 2562

^[12] section 12(a) Indian Partnership Act,1932.