Partnership Law

Law of Partnership

There Included Topic is:

1.Nature of Partnership

2. Rights and Liabilities of Partnership

3. Dissolution of Firms

Nature of Partnership

Definition & Characteristics:

Section 4 of the Partnership Act defines a partnership as follows: “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.” A partnership Act defined must have three essential elements. These are:

1.There must be an agreement entered into by two or more persons.

2. The agreement must be to share the profits of a business.

3. The business must be carried on by all or any of them acting for all.

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The Essential Elements of a Partnership: 

1.Voluntary Agreement

2. Sharing of Profits of Business

3. Mutual Agency

Voluntary Agreement:

The first element shows the voluntary contractual nature of partnership. A partnership can only arise as a result of an agreement between two or more persons (express or implied). Where there is no agreement there is no partnership. A partnership can be formed with more than ten persons in banking and twenty persons in other types of business. A partnership with persons exceeding the above limits must be registered under a Companies Act. Person- sec p. 260

Partnership is not created by status. Section 5 states that, 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, are not partners in such business.

Sharing of Profits of Business:

The second element states the motive underlying the information of a partnership. It also lays down that the existence of a business is essential to a partnership. Business includes any trade, occupation or profession. It two or more persons join together to form a music club, it is not a partnership, because there is no business in this case. But two or more persons join together to give musical performances to the public with a view to earning profit, which is business and partnership.

Mutual Agency:

This element is the most important feature of partnership. It states that persons carrying on business in partnership are agents as well as principals. The business of a firm is carried on by all or by any one or more of them on behalf of all. Every partner has the authority to act behalf of all and can, by his actions, bind all the partners of the firm. Each partner is the agent of the others in all matters connected with the business of the partnership. The law of partnership has therefore been called a branch of the law of agency.

True Partnership

In a true partnership, all the essential elements mentioned above must be present. Section 6 of the partnership Act lays down that 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.

Who can be a Partner?

Person: Under the Indian partnership Act, a person may be partner if he has the capacity to enter into a contract (capacity of parties, see p. 50)

Minor: A minor cannot be a partner. But in an existing partnership, a minor can be admitted into firm if all the partners of the firm agree.  

Person of unsound Mind: A person who is of unsound mind cannot become a partner.

Woman: A woman can be a partner, married or unmarried. Of course a woman cannot be a partner if she is a minor or she is of unsound mind.

Company: In a company the capacity to enter into contract is determined by the memorandum and articles of the association of the company. The liability of the members of a firm under the partnership Act, for the debts of the firm, is unlimited. But a company cannot incur unlimited liability. Therefore a company cannot become a partner of a firm.

An Alien Enemy: An alien enemy cannot enter into a contract of partnership with a citizen of Indian. (see p 56)

Partnership and Certain Similar Organizations:

 Partnership and Co-ownership:

Co-ownership means joint ownership. X and Y jointly purchase a car. They are co-owners but not necessarily partners. The distinction between co-ownership and partnership as follows:

In partnership each partner is the agent of the others but a co-owner is not the agent of the other owners. The rights of a co-owner cannot be affected by any act done by the other owners.

Partnership always arises out of agreement. Co-ownership may arise by agreement or by operation of law. (see. p 258)

A co-owner can transfer his interest to a third party without the consent of the other co-owners. A partner can transfer his interest, under certain circumstances, but the transferee can never become a partner of the business without the consent of the other partners.

A partnership always implies a business. Co-ownership may exist without any business. Joint ownership of a residential house.

Since co-ownership may exist without a business, the question of sharing profits or losses is immaterial in a co-ownership. In partnership there must be sharing of profits.

A partner has a lien on the partnership assets for moneys spent by him for the partnership. A co-owner has no lien under similar circumstance.

Partnership and a Club:

A club is an `association of persons’ formed for social purposes. It differs from a partnership in the following respects. It is not a business. There is no motive of earning profits and sharing them. A member of a club is not the agent of the other members. A member is not responsible for the debts of the club unless he participated in the transaction. The death or resignation of a member does not affect the existence of the club.

Partnership Forbidden by Law:

Number of Partners:

Section 11 of the companies Act, 1956 prohibits the formation of the partnership for the purpose of carrying on the business of banking with more than ten (10) persons and for any other purpose with more than twenty persons. If it is desired to carry on business with more than 10 or more than 20 persons for banking and non-banking business respectively, a company must be formed.

An agreement to form a partnership, for the purpose of carrying on an illegal trade or a prohibited trade, is void.

Firm, Firm name, Partner:

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”. Sec. 4, para 2.   

The Legal Status of Firm:

A firm is not an artificial person like a company. It is merely a collective name for the individual who are trading in partnership. Therefore, a firm is not a legal person or a legal entity. A partnership firm cannot be distinguished from its partners. The rights, duties, and obligation of a firm are actually the rights, duties, and obligations of the persons who own the firm.

Classes of Partners:

1.Active Partner:

An active partner is one, who actually participates in the business of the firm. A person becomes a partner only by agreement.

*Sleeping or Nominal Partner:

These partners join the firm by agreement but do not take any active part in the business. Their liabilities are same as of active partners.

*Sub-partner:

The transferee of a share of a partner’s interest in a firm is called a sub-partner. His rights and liabilities are limited.

Name of Partnership:

They must not select a name which will fraudulently imply that their business is the same as some other competing concern. They cannot use words like ‘President’, ‘Royal’, etc. This will imply that the firm is enjoying the patronage of the state. 

Classes of Partnerships:

1.Partnership at will:

A partnership is called a partnership – at – will (i) when the partnership is not for a fixed period of time and (ii) when no provision is made as to when and how the partnership will come to an end. Sec. 7.

Particular Partnership – Joint Venture:

A particular partnership is one which is formed for a particular adventure or a particular undertaking (sec. 8). Such a partnership is usually dissolved on the completion of the adventure or undertaking.

Limited Partnership:

A partnership may be formed in which the liability of all partners is limited. There must be at least one partner with unlimited liability, according to the provisions of the partnership Act of 1907 in Great Britain.  

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