Define Partnership. Is sharing of profit concIusive proof of partnership?

ExpIain - "partners are agents of each other". What are the mutuaI rights and IiabiIities of
the partners? What is impIied authority of a partner? Can it be restricted? Can a partner
retire? What are its consequences? Can a partner be expeIIed? If so, when? Can minor
be admitted to the benefits of partnership? If yes, what are the rights and IiabiIities of
such a minor after attaining majority? Is the registration of a partnership firm
compuIsory? What are the consequences of non-registration? Can a partner of an
unregistered firm bring a suit against a third party to reIease the property of the
dissoIved firm? What is the procedure for registration? ExpIain various modes of
dissoIution of the Firm. What are the IiabiIities of the partners after dissoIution?

.........................................................................................................................................................

MEANING

n common, partnership is a business owned and managed by two or more people. To form a
partnership, each partner normally contributes money, valuable property or labor in exchange
for a partnership share, which reflects the amount contributed.

ExampIes -
1. A and B buy 100 bales of cotton to sell later on profit which they agree to share equally.
A and B are partners in respect of such cotton.
2. A and B buy 100 bales of cotton together for personal use. There is no partnership
between A and B.
3. A, a goldsmith, agrees with B to buy and provide gold to B to work on an ornament and
to sell and that they shall share the profit. A and B are partners.
4. A and B are carpenters working together. They agree that A will keep all the profits and
will pay B a wage. They are not partners.
5. A and B jointly own a ship. This circumstance does not make them partners.

DEFFINITION
Section 4 of Indian Partnership Act 1932 defines Partnership as foIIows,

Partnership is the relationship 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 individually called partners and collectively called a firm and
the name under which their business is carried on is called firm name.





ESSENTIAL ELEMENTS
AGREEMENT
There has to be an agreement between two or more people to enter into partnership.
The agreement is the source of the partnership. t is not necessary that the agreement
be formal or written. An agreement can be express or implied.
&SINESS
They must intend to start or do a business. A business is a very wide term and includes
any trade, occupation, or profession. Business may not be of long duration or permanent
and even a single activity may be considered a business. Thus, if two persons are not
partners, they can engage is a transaction with an intention to share profits and can
become partners in respect of that transaction.
SHARING OF PROFITS
ormally, an activity is done in partnership with a goal to make profits. Thus, for a valid
partnership to exist, the partners must agree to share the profits according to their
investment. Here, profits include losses as well.
M&T&AL AGENCY
The firm must be managed by the partners and thus when any partner acts; he acts on
behalf of the firm and thus on behalf of other partners. Therefore, a partner is considered
an agent of others. n absence of such mutual right of agency, a partnership cannot
exist.
As we can see, a partnership requires all the above ingredients to have legal validity, and so a
mere sharing of profits is not a conclusive proof of a partnership. t must have the other three
elements also. As mentioned in Section 6, merely sharing of profits arising out of a jointly owned
property does not necessarily create a partnership.

For exampIe, if two persons own a house and give it on rent, the sharing of the rent does not
create a partnership. Similarly, a payment to a person contingent upon profits also does not
necessarily create a partnership until the element of mutual agency is not present. This is the
case when profits is shared with the lender of money for business.











D&TY/LIAILITIES OF THE PARTNERS

GENERAL D&TIES

According to section 9, every partner is liable to carry on the business in the best interest of the
firm, to be just and faithful to each other, and to render true accounts and full information
affecting the firm to any partner or his legal representative. During the course of business no
partner can do any act which may be against his duty to work to greatest common advantage.

D&TY TO INDEMNIFY FOR LOSS CA&SED Y FRA&D
According to section 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.
For example, a firm of A and B enter into a contract with the government. Later on, due to B's
conduct, the govt. cancels the contract and gives it to B. Here, the contract obtained by B in his
own name will be for the benefit of the partnership. Further, if the second contract is of the
lesser value, B is personally liable to the firm for the difference.
D&TIES IMPOSED Y CONTRACT
As per Section11 any special rights and duties may be given or imposed by the contract
between the partners.
D&TY RELATING TO THE COND&CT OF &SINESS
According to section 12, every partner is bound to attend to his duties diligently. Thus, if a
partner is assigned some task, he must do it to the best of his abilities. Further, if any difference
arises in respect of ordinary business matter, it may be decided by majority. However, no
change in the nature of business can be made without the consent of all the partners.

D&TY TO CONTRI&TE EQ&ALLY TO THE LOSSES
According to section 13(b), partners shall contribute equally to the losses sustained by the firm.
D&TY TO INDEMNIFY FOR LOSS CA&SED Y HIS WILLF&L NEGLECT
According to section 13 (f), if a partner neglects the business activity willfully, he must
compensate the firm for the loss caused. t has been long held that if a partner during the
course of business commits breach of duty, or fraud, or culpable negligence and causes harm
to the firm, even if he is not liable in law, he must be held liable to indemnify the firm in equity.
This does not mean that a partner, when acting in good faith, makes an error in judgment and
causes loss to the firm, is liable. However, this is subject to the contract among the partners.
This means that the contract may specify that a partner is a sleeping partner and may excuse
him from doing any work.

D&TY IN RESPECT OF APPLICATION OF PROPERTY OF THE FIRM
According to section 15, the property of the firm shall be held and used exclusively for the
purposes of the business. f a partner uses it for personal benefits, he shall account for and pay
such profits to the firm.
D&TY IN RESPECT OF PERSONAL PROFITS
According to section 16(a), if a partner derives any profit for himself from any transaction of the
firm or from any property or business connection of the firm, he shall account for that profit and
pay it to the firm, subject to the contract.
D&TY NOT TO COMPETE WITH THE FIRM
According to section 16(b), if a partner engages in a business in competition of the firm, he
should pay the profits to the firm. But if a partner does a private act, which is not in the scope of
the business of the firm, he is not liable to the firm for the profits.


RIGHTS OF THE PARTNERS

RIGHTS GIVEN Y CONTRACT

As per Section11 any special rights, such as right to remuneration may be given by the contract
between the partners.
RIGHT TO TAKE PART IN THE COND&CT OF &SINESS
As per section 12(a), subject to the contract between them, a partner has a right to take part in
the conduct of business. Only way to restrain a partner from getting involved in the business is
to specify it in the contract of partnership. Even courts cannot, through an injunction, restrain a
partner.
RIGHT TO HAVE ACCESS TO AND INSPECT AND COPY OOKS OF THE FIRM
As per section 12, every partner has a right to inspect the books and make a copy if he wants.
RIGHT TO SHARE IN PROFIT
As per section 13, subject to contract, a partner is entitled to an equal share of the profit.
RIGHT TO RECEIVE INTEREST ON THE CAPITAL S&SCRIED
As per section 13, subject to contract, where a partner is entitled to interest on the capital
subscribed by him, such interest shall be payable only out of profits. Further, if a partner pays
any money to the firm, beyond the amount of capital, he is entitled to 6% interest.
RIGHT TO INDEMNITY IN RESPECT OF PAYMENTS MADE AND LIAILITIES
INC&RRED
According to section 13, the firm shall indemnify a partner in respect of payments made and
liabilities incurred by him in the ordinary and proper conduct of business or in doing such act, in
an emergency, for the purposes of protecting firm from loss as would be done by a person of
ordinary prudence in his own case under similar circumstance.


IMPLIED A&THORITY OF A PARTNER

f two or more agree to carry on a business, each of them is a principal and each is an agent for
the other. Further, each is bound by the other's contract in carrying on the trade as much as a
single principal would be bound by the act of an agent. This principle has been incorporated in
section 18 of PA 1932. t says that a partner is the agent of the firm for the purposes of the
firm. ts complimentary principle is incorporated in section 25 which says that every partner is
liable jointly with all other partners and also severally for all acts of the firm done while he is a
partner. This brings us to the implied authority of the partners. Since, a partner is an agent of
the firm, his act binds every other partner and the firm.

For exampIe, if a partner A gives a check in the firm's name to a creditor and if the check is
unpaid, partner B is equally liable even though B's signature does not appear on the check. This
authority to bind the firm is called "implied authority".


ESSENTIAL CONDITIONS
1. &S&AL WAY
The act must be done to carry on the business in the usual way. Any drastic action,
which is out of ordinary, requires the consent of all the partners.
For exampIe, if a firm deals in coal, a partner has the implied authority to enter into a
contract to buy and sell coal, but not gold. The implied authority of partners is limited to
only those acts which are done in usual way and related to the business of the kind
carried on by the firm.
2. MODE OF DOING ACT TO IND FIRM
Section 22 specifies that in order to bind the firm, the act must be done in firm's name or
in any manner expressing or implying the intention to bind the firm. For example, if a
partner A obtains a loan in his name without mentioning anything about the firm, it will
not bind the firm. t must be clear from the action that it is intended as being done by the
firm.


POWER OF IMPLIED A&THORITY ALSO HAS THE FOLLOWING RESTRICTIONS

There are two kinds of restrictions - Statutory restrictions, as imposed by section 19 (2) and
Restrictions imposed by partnership deed and those imposed by the agreement between the
partners. Statutory restrictions are binding upon all the partners whether they know them or not,
while the second type of restrictions are applicable only when the partners have knowledge
about them.


Statutory restrictions
n the absence of any usage or custom of trade to the contrary, a partner is not allowed
to -
Refer a dispute to arbitration.
Open a banking account on behalf of the firm in his own name.
Compromise or relinquish any claim or portion of the claim by the firm.
Withdraw a suit or proceeding filed on behalf of the firm.
Admit any liability in a suit or proceeding against the firm.
Acquire immovable property on behalf of the firm.
Transfer immovable property belonging to the firm.
Enter into partnership on behalf of the firm.

ContractuaI Restrictions

As per section 20, Partners may, by contract, put additional restrictions or give
additional powers to the partners. However, any act which falls under the implied
authority but is restricted by the contract, will bind the firm unless certain conditions are
satisfied. A firm can avoid its liability in such case, if the person dealing with the partner
knows the restriction or the person dealing with the partner does not know or does not
believe that the partner is a partner in the firm.


ADMISSION OF PARTNERS (SECTION 23)

Since a partner is an agent of the firm and can bind the firm by his acts, an admission or
representation by him concerning the affairs of the firm, is evidence against the firm. This is
incorporated in section 23, which says that an admission or representation made by a partner
concerning the affairs of the firm is evidence against the firm if it is made in ordinary course of
business.
The key factor in this is that the admission or representation must be made in ordinary course of
business. This will also not include the representation by which a partner increases his scope of
authority. For example, if a partner executes a bill of exchange for payment of his personal
debts and on inquiry he makes a false statement that the other partners have authorized him,
the said bill of exchange will not bind the firm.



INCOMING PARTNERS

The mutual relations of the partners is based on the principle that they have to be just and fair to
each other and are bound to carry on the business of the firm to the greatest common
advantage. Thus, it is important for each partner to have trust in each other. Therefore, section
31 lays down a general principle that a partner cannot be introduced into a firm without the
consent of all the existing partners. However, the existing partners may, by contract, authorize a
partner to introduce a new partner. A contract may also be made that upon death of a partner, a
new partner may be nominated in his place. f there are only two partners and one of them dies,
there is no question of nominating a new partner because the partnership ends as soon as the
partner dies.
Also, a new partner is not liable for any act of the firm done before he became a partner.


O&TGOING PARTNERS

n many situations, a partner may have to leave the partnership. A partner may leave in the
following ways

With the consent of aII other partners
According to section 32(1) (a), a partner may retire with he consent of all the other
partners.
With an express agreement by partners
Section 32 (1)(b) provides that a partner may retire with an express agreement by
partners. This means that if there is a provision in the contract deed of partnership that
allows a partner to retire, a partner can retire using that agreement.
y giving notice to aII other partners in case of partnership at wiII
According to section 32(1)(c), a partner may retire where the partnership is at will, by
giving notice in writing to all the other partners of his intention to retire.
y ExpuIsion (Can a partner be removed? How?)
O According to section 33 (1) a partner may not be expelled by any majority of the
partners, save in exercise of good faith of powers conferred by contract between
the partners. Thus, to expel a partner by majority of the partners, the following
two conditions must be satisfied

O Such a power must be conferred by contract between the partners. This means,
the contract of partnership must clearly give this power to the partners otherwise,
a partner cannot be expelled.

The power to expel a partner conferred under the contract must be exercised in good
faith. Thus, if majority of the partners try to expel a partner with evil intention and without
any reasonable cause, it is not possible.
1. On insoIvency of a partner - According to section 34(1), where a partner in a firm is
adjudicated an insolvent he ceases to be a partner on the date on which the order of
adjudication is made, whether or not firm is thereby dissolved.
2. y Death - Upon death of a partner, his association with the firm ends and he ceases to
be a partner. His estate will not be liable for the acts of the firm after his death.
According to section 42(c), subject to the contract between the partners, a firm is
dissolved by the death of a partner. This means that partners may by contract that by
death of a partner the firm will not be dissolved but if there is no such contract, the firm
will be dissolved.

LIAILITY OF A RETIRED PARTNER
The liability of a retired partner may be of two types - For acts done before retirement and for
acts done after retirement.
1. Acts before retirement
The general rule is that a partner is liable for all acts done before retirement even after
he is retired. However, a retiring partner may be discharged of his liabilities for act before
retirement by an agreement between the retiring partner and the remaining partners.
The agreement should specify that all such liabilities will be borne by the remaining
partners. A notice to this effect must also be given to the creditors.
2. Acts after retirement
The general principle is that a retired partner is not liable for the acts of the firm done
after his retirement. However, he must give a public notice of his retirement to escape
liabilities.

PARTNERSHIP WITH A MINOR

A minor is not considered capable of giving consent and thus any contract with a minor is void
ab initio. Therefore, a contract of partnership with a minor is also void. n other words, a
partnership cannot be done with a minor and a minor cannot become a partner of a firm.
However, a minor can be admitted to the benefits of the partnership as per section 30 (1), by
the consent of all the partners. t was held that to admit the minor to the benefits of partnership it
is necessary to have an agreement between the partners and the minor. Since the property and
money of the minor can be used for the firm, an agreement is necessary between the partners
and someone on behalf of the minor.





RIGHTS AND LIAILITIES OF A MINOR

To such share of the property and of the profits of the the firm as may be agreed upon.
To access, copy, and inspect the records of the firm.
His share is liable for the acts of the firm but he is not personally liable for them.
May sue the partners for his share of profits of the firms when severing his connection
with the firm.
As per Section 30(5), he has a right of election to become or not to become the partner
of the firm after becoming a major. Upon attaining the age of majority, the minor can,
within six months , give public notice that he has elected to become or not to become a
partner of the firm. f he fails to give such notice, he will be become partner of the firm at
the expiry of six months.



DIFFERENCE ETWEEN AILMENT AND PLEDGE

Pledge is a special kind of Bailment. Thus, all Pledges are Bailments but the reverse is
not true.
aiIment PIedge
Bailment can be for many reasons ranging for
reward to gratuitous.
A pledge is bailment done for a specific type of
purpose, which is to secure a loan or
performance of a promise.
The bailee does not get a right to sell the
goods.
A Pawnee has a right to sell the goods in case
of default.
The bailee only gets a right of lien over the
goods.
A Pawnee gets a right of retainer and a special
interest in the goods, which is more that just
the lien.
The bailee can use the goods bailed. The Pawnee has no right to use the goods.
The bailee is not responsible for the loss,
destruction, or deterioration if he uses the
goods with reasonable care.
The Pawnee is absolutely liable for the upkeep
of the goods.






CONSEQ&ENCES OF NOT REGISTERING
1. Suits between partners and Firm
A per Section 69 (1) unless a firm is registered and the party is shown as a partner, no
suit can be filed by or on behalf of any partner against the firm.
2. ar to cIaim set off and other proceedings - According to section 69(3), suit cannot
be filed for claim of set off or other proceedings to enforce a right arising from a
contract.
Exception
According to section 69(3)(a), the provisions of section 61(1) and (2) shall not affect the
enforcement of any right to sue for the dissolution of the firm, or for accounts of the dissolved
firm or any right or power to realize the property of dissolved firm. Thus, a partner of a
dissolved firm can sue a third party for releasing the property of the firm.


PROCED&RE FOR REGISTRATION

As per section 58, registration of a firm can be done any time by sending a statement in
prescribed form by post or delivering to the registrar of the area in which any place of business
of the firm is situated or proposed to be situated. The form should also be accompanied with
the prescribed fee. The form must contain -
1. the firm name
2. place or principal place of the business of the firm.
3. the names of any places where the firm carries on business.
4. the date when each partner joined the firm.
5. the names in full and permanent address of the partners.
6. the duration of the firm.
The statement must be signed by all of the partners or by their agents specially authorized in
this behalf. Each person signing the statement shall also verify it in the manner prescribed.
There is a restriction on the name of the firm that it cannot contain certain words such as Crown,
Emperor, Empress, King etc. that give an impression that the firm is associated with the govt.

When the registrar is satisfied that the provisions of section 58 have been fulfilled, he shall
record an entry in the Register of Firms and shall file the statement.






DISSOL&TION OF THE FIRM
As per section 39, the dissolution of the partnership between all the partners of a firm is called
the dissolution of the firm. The firm is dissolved when all the partners stop carrying on the
partnership business.

MODES OF DISSOL&TION
DISSOL&TION Y AGREEMENT
According to section 40, a firm may be dissolved either with the consent of all the
partners or in accordance with a contract between the partners.
COMP&LSORY DISSOL&TION
According to section 41, a firm will be compulsorily dissolved if
1. All the partners or all but one of the partners become insolvent - This happens
because if a partner becomes insolvent, he becomes incompetent to contract
and so he ceases to be a partner as per section 34(1). Thus, if all or all but one
partners become insolvent the firm will compulsorily dissolved because for a
partnership, at least two partners are required.
2. f the business of the firm becomes unlawful - t is possible that due to legislation,
the business may become unlawful. For example, liquor sales may become
unlawful in a particular state. n such a case, a partnership that sells liquor will be
dissolved.
DISSOL&TION &PON CONTINGENCIES
According to section 42, subject to the contract, a firm is dissolved on the happening of
following contingencies -
3. y Expiry of fixed term - A firm is dissolved, if it is constituted for a fixed term,
which that term expires.
4. On compIetion of adventures or undertakings - n many cases, a partnership
is started with a specific goal to accomplish or for a particular task. Upon
completion of such task, the partnership gets dissolved.
5. y the death of a partner - Subject to the contract between the partners, a
partnership gets dissolved if a partner dies.
6. y the adjudication of a partner as an insoIvent - f a partner becomes
insolvent and if there is no provision in the contract to keep the partnership alive
in such case between the solvent partners, the partnership is dissolved.
DISSOL&TION Y NOTICE OF PARTNERSHIP AT WILL
According to section 43, a partnership at will can be dissolved any time by any partner
by giving a notice of such intention to other partners.
DISSOL&TION Y CO&RT
According to section 44, the court may dissolve a partnership if -
7. A partner becomes of unsound mind - n such a case, the next friend of the
person with unsound mind may request the court to dissolve the firm.
8. A partner becomes permanentIy incapabIe - At the suit of a partner, the court
may dissolve the firm on the ground that a partner other than the one suing has
become permanently incapable of performing the duties of partnership.
9. a partner is guiIty of conduct IikeIy to affect prejudiciaIIy the carrying on of
business - At the suit of a partner the court may dissolve a firm on the ground
that a partner other than the one suing, is guilty of conduct which is likely to affect
the business prejudicially. For example, in partnership of doctors, if one doctor is
guilty of immorality towards some patients, it is possible for the court to dissolve
the partnership upon suit of other partners.
n CarmichaeI vs Evans 1856, a partner was convicted of traveling without ticket
and the court dissolved the firm on this ground.
10. wiIIfuI or persistent breach of agreements reIating to the business or
management of the affairs of the firm - f a partner willfully or persistently
commits breach of the agreements related to the firm, or the conduct of its
business, or conducts such that it is not reasonably practical for other partners to
carry on the business, the court may dissolve the firm upon suit by other
partners.
11. transfer of the whoIe interest in the firm by a partner to a third party - At the
suit of a partner the court may dissolve a firm on the ground that a partner other
than the one suing, has in any way transferred the whole of his interest in the firm
to a third party.
12. perpetuaI Ioss - At the suit of a partner, the court may dissolve the firm on the
ground that the business of a firm cannot be carried on without incurring loss. t is
indeed impractical to run a business that is continuously going in the loss. Thus,
if a partner of such a business desires, he can request the court to dissolve the
firm.
13. Just and EquitabIe cause - As per section 44(g), the court may dissolve the firm
on any just and equitable ground upon request by a partner. This gives very wide
powers to the court because the court has to decide whether there is a just and
equitable ground for dissolving a firm.













CONSEQ&ENCES OF DISSOL&TION
LIAILITIES OF THE PARTNERS FOR ACTS DONE AFTER DISSOL&TION
As per section 45, until public notice is given of the dissolution, partners remain liable for
their acts as they were before dissolution. t is therefore essential to give notice of
dissolution if the partners want to escape liability for the acts of the firm.
RIGHT OF PARTNERS TO HAVE &SINESS WO&ND &P AFTER
DISSOL&TIONS
Upon dissolution of the firm, every partner is entitled, as against other partners, to have
the property of the firm applied in payments of debts and other liabilities of the firm and
to have the surplus distributed to the partners as per the contract.
CONTIN&ING A&THORITY OF PARTNERS FOR P&RPOSE OF WINDING
Each partner continues to enjoy implied authority but for the acts done in the process of
winding up of the business.
SETTLEMENT OF ACCO&NTS
Upon dissolution, the accounts of the firm will be settled as per the agreement of the
partners.
PAYMENT OF DETS
Where there are any joint debts, the property of the firm will be first applied to clear
those debts and then it will be applied to any separate debts due to a partner.
RESTRAIN THE &SE OF NAME OF THE FIRM
Every partner has a right to restrain another from using the name of the firm, subject to
any contract between them. However, if the goodwill of the firm is sold, the buyer may
use the name of the firm for his business.
RESTRAIN IN TRADE
Subject to contract, the partners of the firm may be restrained from doing the same
business as the firm after the dissolution as long as the conditions of the restrain do not
violate section 27 of CA 1872.