introduction to partnership

8/4/2019 Introduction to Partnership

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Mercantile Law (Partnership Act)

6. Introduction to Partnership

DEFINITIONS AND NATURE

DEFINITIONS [2, 4]is the relation between person who have agreed to share the profits of a

partnership

partners

firm

firm name

act of a firm

business

third party

prescribed

business carried on all or any of them acting for all.

Persons who have entered into partnership are individually called

partners.

Persons who have entered into partnership are collectively called firm. A

firm is not a separate legal entity distinct from its members. The suit

against the firm is suit against all the partners thereof.

the name under which the business of partnership is carried on.

means any act or omission by all the partners, or by any partner or agent of

the firm which gives rise to a right enforceable by or against the firm. includesevery trade, occupation and profession.

used in relation to firm or to a partner therein means any person who is not a

partner in the firm.

means prescribed under rules made under the Partnership Act, 1932.

All other expressions shall have the same meanings as defined under Contract Act, 1872.

TEST OF PARTNERSHIPA partnership may be formed by oral or by written agreement or an agreement of

partnership can be inferred from the conduct of the parties.

In the definition of partnership, notice that sharing of loss is not necessary for constituting

a partnership. It may also be noted that an agreement to carry on business at a future time

does not result in partnership unless that time arrives and the business is commenced.

Illustration

Facts: Ahmad and Baqir, two chartered accountants, agree to carry on practice in common

at the office of Ahmad under the name Ahmad and Baqir for a period of seven years. The

terms of agreement entered into between them provide that Baqir should manage the office

and supervise the clerical work and that he should draw a fixed allowance of Rs.20,000 per

month in lieu of profits. It is further agreed that losses, if any, shall be borne by Ahmad

alone, and that after seven years Ahmad would be entitled to the office and all the otherequipments, and Baqir would not have any right, or claim, in respect of them. Are Ahmad

and Baqir partners?

Solution: Yes, Ahmad and Baqir are partners. In a partnership, partners are free to agree to

any term as regards sharing of profits. Again, sharing of loss is not necessary for becoming a

partner. So also, partners may agree that on the dissolution of their partnership all the

assets will belong to one partner only.


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CA Module B

This definition contains five elements which constitute a partnership, namely:

1. There must be a contract;

2. between two or more persons;

3. who agree to carry on a business;

4. with the object of sharing profits; and

5. the business must be carried on by all or any of them acting for all (i.e. there must bemutual agency).

MODE OF DETERMINING EXISTENCE OF PARTNERSHIP [6]As must be clear from the above discussion of various elements of partnership, there is no

single test of partnership . For example, in one case there may be sharing of profits but

may not be any business, in the other case there may be business but there may not be

sharing of profits, in yet another case there may be both business and sharing of profits but the

relationship between persons sharing the profits may not be that of principal and agent. And in

either case, therefore, there is no partnership. Thus, all the afore-mentioned essential elements

must co-exist to constitute a 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 together.

Illustration

Facts: Majid is the sole proprietor of a firm. He admits Sajid as a partner on the following

terms: (1) Sajid is not to bring any capital. (2) Sajid is not responsible for any loss. (3) Sajid is

to receive Rs 10,000 per annum in lieu of profits. (4) Sajid is not to enter any contracts on

behalf of the firm. Discuss the legal position of Sajid.

Solution: Sajid is a partner with Majid because to constitute a partnership neither

contribution of capital nor active participation in management of the business is essential.

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.

Illustration

Facts: Jazib and Ghalib jointly purchased a tea shop and incurred additional expenses for

purchasing pottery and some other materials to furnish the shop. The money was

contributed half and half and then the rented out the shop. The rent has to be shared equally by

them. Are Jazib and Ghalib partners?

Solution: They are only co-owners and not partners as they never carried on any business. The

receipt by a person of a share of the profit of a business, or of a paymentcontingent upon the earning of profits or varying with the profits earned by a business, does

not of itself make him a partner with the persons carrying on the business.

Illustration

Facts: Raheem, a clerk in Kareems business, entered into a verbal agreement with Kareem

for a share of profit and loss in the proportion of one-sixth to Raheem and five-sixth to

Kareem. It was further agreed that the building in which the business was carried on should


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Mercantile Law (Partnership Act)

remain the property of Kareem. Raheem alleges that he is a partner and claims dissolution of

the firm and an account of assets. Kareem denies the partnership, and alleges that

Raheem is only a clerk. Decide.

Solution: In view of the surrounding circumstances of the case it is evident that Raheem is

only a clerk. It is an established fact that sharing of profits is not the sole test of partnership.

In particular, the receipt of such share or payment by the following persons does not of

itself make them a partner with the persons carrying on the business:

(a) a lender of money to persons engaged or about to engage in any business;(b) a servant or agent as remuneration;(c) the widow or child of a deceased partner, as annuity;(d) a previous owner or part owner of the business, as consideration for the sale of the

goodwill or share thereof.

TYPES OF PARTNERSHIP [7, 8]

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.

Particular partnership

When a partnership is formed for a particularperiod or for a specific venture, e.g. for

working a coal mine, or producing a film, it is

called a particular partnership.

DIFFERENCES BETWEEN PARTNERSHIP AND CO-OWNERSHIP

Difference

1. Contract

Partnership

Formation of contract is

essential for this.

Co-ownership

It is not necessarily the result of

agreement.

2.

3.

4.

5.

6.

7.

8.

9.

Profitsharing

Transfer of

interest

Agent

Lien

Purpose

Limit on

number

business

Partition

It involves sharing of profit.

A partner cannot transfer his

interest in partnership without

the consent of other partners. A

partner is real or apparent

agent of other partners.

A partner has lien on common

goods.

The purpose of partnership

business is sharing of gain.

There is a maximum limit on

number of partners.

It must involve carrying on of a

business.

A partner has no right to

demand partition of business in

specie and he can only sue his

co-partners for the dissolution

of the firm and accounts.

Itdoes not necessarily involve

sharing of profit or loss.

A co-owner can transfer his interest

in property, without the consent of

others.

A co-owner is not agent of other co-

owners.

A co-owner has no lien on the things

owned in common.

Co-ownership does not necessarily

exist for the sake of gain.

There is no maximum limit.

It does not necessarily involve the

carrying on of a business.

A co-owner is entitled to demand

partition of joint property in specie


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CA Module B

PARTNERS

NUMBER OF PARTNERSIn partnership the maximum limit of partners is 10 for banking business and 20 for any

other business. The minimum limit is 02.

KINDS OF PARTNERS

Active / ostensible or

actual partners

Sleeping or dormant

partners

Silent partners

Partner in profits

only

Sub-partner

Partner by estoppel

or holding out

Partners taking an active part in business, they are full fledged

partners and liable for all acts of firm. They must give public

notice of their retirement to free themselves from liability.

They do not take an active part in business, and are liable to

third parties for all acts of the firm. However, they are not

required to give public notice of their retirement.

Not involved in management but are fully liable to third parties for

all acts of the firm.

They do share profits but not losses however their liability to

third parties is unlimited as well.

When a partner agrees to share his share of profits in a

partnership firm with an outsider, such an outsider is called a

sub-partner. Such a sub-partner is has no rights against the firm nor

he is liable for the debts of the firm.

They are also called quasi partners or nominal partners. They are

liable to third party who gave credit to the firm on the faith of

representation made by such partners.

SCOPE

APPLICATION OF CONTRACT ACT [3]The provisions of Contract Act, 1872 shall continue to apply to firms so far as they are not

inconsistent with the provisions of Partnership Act, 1932.

PARTNERSHIP NOT CREATED BY STATUS [5]The relation of partnership arises from contract and not from status. In particular, the

members of 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.

NON APPLICATION OF CERTAIN RELATIONSHIP [6A]The Partnership Act, 1932 shall not apply to a relationship created by any agreement

between a banking company and a person or group of persons providing for

sharing of profit and losses arising from or relating to the provisions by a banking

company of finance to such person or group of persons.

The above implies that having a PLS bank account or investment in banking mutual funds

does not constitute partnership.

introduction to partnership

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