Indian Partnership Act An Overview (Contract of Partnership)

MEANING OF PARTNERSHIP

“When two or more persons carry on business to share profits and losses equally or in proportion of capitals, it is called partnership business. The persons are called ‘Partners’ and the business is called ‘Partnership Firm’.

Section 4 of the Indian Partnership Act, 1932 defines “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”.

FEATURES OF PARTNERSHIP

Association of two or more persons– To constitute partnership, there must be atleast two persons. The maximum number of persons is 10 if the firm carries on banking business and the maximum number of persons in respect of other business. The partnership gets dissolved if the number comes down to 1 i.e. the number of partners is reduced to one.

Agreement- Partnership is the result of an agreement. Section 5 says that, the relation of partnership arises from contract and not from status. The contract must fulfil the essentials of a valid contract viz. free consent, lawful consideration, legality of object etc. under Section 10 of the Indian Contract Act, 1872.

Partnership not created by status (Sec. 5)– According to Section 5, 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.

Sharing of Profits– The term “Partnership” is derived from the word ‘to part’, which means “to divide”. Thus dividing or sharing of profits is an essential feature of partnership and is contained in the partnership agreement.

In Cox v. Hickman, (1860) it was laid down that the persons sharing the profits of a business do not always incur the liability of partners unless the real relation between them is that of partners.

Mutual Agency- The expression ‘mutual agency’ denotes “business carried on by all or any of them acting for all.” In simple words, “all act for one and every one acts for all”. Thus, an act of partner is binding on the firm just like an act of an agent is binding on the principal.

KINDS OF PARTNERS

Active Partner– An active partner is one, who takes active part in the conduct of the business. He becomes partner by an agreement and his acts are binding on the firm.

Sleeping Partner- A Sleeping Partner is one, who invests capital and share profits or losses along with other partners, but does not take an active part in the conduct of the business in the firm. He is not known to the outsiders as a partner of the firm. He has a right to examine the accounts of the firm.

Nominal Partner- A nominal partner is one, who allows the firm to use his name to gain benefit. He neither invests capital nor claims share in the profits or takes part in the business. He is not a partner in reality. However, he is liable/answerable for all acts of the firm as if he were a partner.

Partner by Estoppel or Holding Out- The expression ‘estoppel’ is derived from the French word ‘estoup’, which means “Shut the mouth”. It is based on the principle of equity and good conscience. It (estoppel) is enshrined in the Latin maxim “Allegans contraria audi erdus”, which means “a man alleging contradictory facts ought not to be heard”. The object of the principle of estoppel is to prevent fraud and to manifest good faith among the parties. Holding out is a branch of the principle of estoppel.

Minor Partner- According to Section 3 of the Indian Majority Act, 1875, a minor is a person who has not completed the age of 18 years. The minority extends to 21 years if a guardian of minor’s person or property is appointed (under the Guardians and Wards Act 1890). In England, a person below the age of 21 years was a minor till 1969. With the passing of the Family Reforms Act, 1969, the age of minority is reduced to 18 years.

RIGHTS AND DUTIES OF PARTNERS

Rights of Partners- If the partnership agreement is silent as to (does not contain) the rights of the partners, the following provisions as laid down in the Partnership Act are applicable:

1. Right to take part in conduct of the business (Sec 12(a)- Section 12(a) of the Partnership Act confers on every partner a right to take active part in the conduct of the business.

2. Right to be consulted (Sec 12(c)- Section 12(c) of the Act insists/imposes that every partner has to be consulted and heard in all matters pertaining to the business. The business matters are divided into two categories namely ordinary matters and fundamental matters. The former can be settled by majority opinion of the partners, while the latter can be settled only with the consent of all the partners.

3. Right to access to books (Sec 12(d)- Section 12(d) says that every partner has a right to have access to inspect and take copies of any books and accounts of the firm.

4. Right to Indemnity (Sec 13(e)- The term ‘Indemnity’ means “Promise to make good the loss”. According to Section 13(e), every partner has a right to claim indemnity from the firm (or to be indemnified by the firm). This right is available against payments made by him for conduct of the business and for acts done in emergency to save the firm from losses.

5. Right to claim remuneration, profits and interest on capital- Sections 13(a), 13(b) and 13(c&d) of the Partnership Act, confer on partner right to claim remuneration, profits and interest on capital respectively.

DUTIES OF A PARTNER

Section 11 of the Act empowers the duties (and rights) to be incorporated in the partnership agreement. In the absence of such arrangement (i.e. the duties are not contained in the agreement), the following provisions as laid down in the Partnership Act are applicable:

1. Duty to carry on business for common advantage (Sec 9)- The very ideal of partnership business is ‘mutual agency’ i.e. “every one acts for all and all act  for one”. Every partner has a duty to strive hard for the growth and progress of the firm for the common advantage and should not resort to personal/secret profits.

2. Duty to render true accounts (Sec 9)- Section 9 imposes on every partner duty to act in utmost good faith. Where a partner is entrusted with the conduct of business and to maintain the account, he has a duty to render true and current accounts. He must also permit/allow the other partners to inspect the accounts and to take copies thereof.

3. Duty to indemnify loss (Sec 10)- Every partner shall indemnify the firm for any loss caused to it by his fraud in the conduct of the business of the firm. This duty is absolute and no partner is exempted in this regard.

4. Duty to attend diligently (Sec 12(b)- Every partner to the best of his knowledge and skill must attend diligently to his duties in the conduct of the business of the firm.

5. Proper use of Firm’s property (Section 15 and 16(a)- Section 15 imposes duty on every partner that the property of the firm shall be held and used by the partners exclusively for the purposes of the business. Further, Section 16(a) says that “if a partner derives any profit for himself from any transaction of the firm or from the use of the property or business connection of the firm or the firm name, he shall account for that profit and pay it to the firm.

DISSOLUTION OF PARTNERSHIP FIRM

According to Section 39 of the Indian Partnership Act, 1932 “Dissolution of a firm means complete break down or extinction of relationship between all the partners of a firm.”

Dissolution of Partnership

Dissolution of Partnership is different from the Dissolution of firm. Where there is a breakdown of the relation between one or more partners and the firm, it is called dissolution of partnership”. The firm continues to exist even after the dissolution of partnership of one or more partners provided atleast two partners continue to exist in the firm.

If the relationship of all partners except one partner with the firm comes to an end, it is called the dissolution of the firm. In dissolution of partnership two or more partners survive and continue the business.

Modes of Dissolution of Partnership Firm- Partnership firm may be dissolved under the following modes:

Without the Order of the Court

By Agreement- Partnership firm comes into existence out of an agreement between/among the partners. According to Section 40 of Indian Partnership Act, the firm may be dissolved with the consent of all the partners or in accordance with a contract between them.

Compulsory Dissolution– According to Section 41, a firm may be dissolved compulsorily.

It may be dissolved under the following cases:

If the number of partners is reduced to one, the firm is to be dissolved compulsorily.

In case the partners become bankrupt, the firm stands dissolved.

If the business is declared illegal by an act of Government or Legislation, the firm is dissolved. Example- Ban on arrack business.

Dissolution by the Court

1. Insanity- Where a partner has become insane (unsound mind) the Court may order dissolution of the firm against a suit by any partner.

2. Permanent Incapacity- Where a partner has been incapacitated from performing his duties as partner, any other partner/partners may sue for dissolution.

3. Where a partner is found guilty of misconduct, any other partner may sue for dissolution.

4. If the firm is running at losses, any partner may sue in the court for order of dissolution.

DOWNLOAD INDIAN PARTNERSHIP ACT, 1932 – Partnership_Act_1932

 

Written by: Sanah Sethi is a final year law student at Amity Law School, having interest in corporate laws.