LAW OF PARTNERSHIP

BYDR.VIDHI AGRAWAL

INTRODUCTION

If only one person starts the business, we call that business sole proprietorship and if a group of persons start the business, that can be either partnership business, or a company or a cooperative form of organisation. Sole Proprietorship. A sole proprietorship (or one-man business or sole trader or individual proprietorship or individual entrepreneurship) is a form of business organisation in which an individual introduces his own capital, uses his own skill and intelligence in the management of its affairs and is entitled to receive all the profits and assumes all the risks of ownership.

MEANING AND NATURE OF PARTNERSHIP

1. 2. 3. 4. 5.

Introduction and Introductory Case. Partnership is a time-honoured form of business organisation and one that is still much in use in India. The law relating to partnership in India is contained in the Indian Partnership Act, 1932. Prior to the enactment of this Act. The sections quoted in this chapter refer to the Partnership Act, 1932, unless otherwise specified. Meaning. A partnership is defined as the relationship between persons who have agreed to share profits of a business carried on by all, or by any of them acting for all. Partnership is an association of two or more than two persons. Partnership must be the result of an agreement between two or more persons. The agreement must be to carry on some business. The agreement must be to share profits of the business. Business must be carried on by all or any of them acting for all.

OTHER LEGAL CHARACTERISTICS OF PARTNERSHIP FORM OF ORGANISATION

1. 2. 3. 4. 5.

Unlimited liability
No separate legal entity Utmost good faith Restriction on transfer of interest Unanimity of consent Formation of Partnerships. All the essential elements of a valid contract must be present in a partnership as it is based on an agreement. Partners, Firm and Firm Name (s.4). 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.

PARTNERSHIP DISTINGUISHED FROM SOME OTHER ORGANISATIONS PARTNERSHIP AND CO-OWNERSHIP

Partnership 1. It arises from contract.

Co - ownership It may, besides contract, arise by status, e.g., and A B inherit a house from their father.

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2. 3. It always implies a business It involves sharing of profits and losses. It may exist without any business. It does not always involve the sharing of profits or losses because it may exist without any business.

4.
5. 6.

Each partner is the agent of other.

A partner cannot transfer his interest without the consent of all other partners. A partner can claim a share in the surplus assets of the firm, but not a share in the properties of the firmin specie .

A co-owner is not the agent of the other coowners. A co-owner may transfer his interest to a third party without the consent of other coowners. A co-owner can claim division of the joint property in specie .

Partnership and Club. A club is an association of persons with the objective of promotion of some beneficial or social object such as promotion of health or

providing recreation for its members.

PARTNERSHIP AND COMPANY

i. ii. iii. iv. v. vi. vii. viii.

Legal status Mutual agency Liability of members Transfer of interest Duration of existence Minimum membership Maximum membership Audit Illegal Partnership. A partnership can be formed for genuine business purposes which are not illegal or prohibited by law. Section 11 of the Companies Act, 1956, defines an illegal association. Duration of Partnership. The duration of partnership may or may not be fixed. It may be constituted even for a particular adventure.

REGISTRATION OF FIRMS [SS.58-59]

Application for Registration. Section 58 lays down the procedure for registration of partnership firms. A partnership firm may be registered at any time by post, or delivering to the Registrar of Firms of the area in which any place of business of the firm is situated or proposed to be situated, a statement in the prescribed form and accompanied by the prescribed fee. Registration of Firms is Optional. The Act does not provide for compulsory registration of firms. It is optional and there is no penalty for nonregistration.

PARTNERSHIP DEED OR AGREEMENT OR ARTICLES OF PARTNERSHIP

A Partnership can be Formed Either by Oral or Written Agreement. In France and Italy, the law requires all partnership agreements to be in writing. But in England, USA and India, written agreement is not compulsory. The partnership deed is required to be stamped according to the provisions of the Stamp Act, 1899. The partnership contains clauses on the following. (i) Name of the firm. (ii) Names and addresses of the partners. (iii) Nature of partnership business. (iv) The town and place where the business will be carried on etc. Partnership Agreements and Contract Law. Section 3 Free consent Legal purpose Capacity Writing Right to select ones partner

RELATIONS OF PARTNERS TO ONE ANOTHER

i. ii.

Rights of Partners To take part in the conduct of the firms business [s.12(a)]. To express his opinion on any matter, but in case of difference of opinion regarding ordinary matters of the business, he is bound by the majority decision [s.12(c)]. To have access to and inspect and copy any of the books of the firm [s.12 (d)]. To share equally in the profits [s.13 (b)]. To do, in an emergency, all such acts as are reasonably necessary to protect the firm from loss. To be indemnified by the firm in respect of liabilities incurred by him in the ordinary course of business [s.13 (e)].

iii.

iv. v.

vi.

DUTIES OF PARTNERS.

Section 9 provides for general duties of partners. (i) They are bound to be just and faithful to each other. (ii) Every partner shall indemnify the firm for loss caused to it. (iii) To attend diligently to his duties in the conduct of the firms business without any remuneration [s.13 (a)]. (vii) Not to assign his share in the partnership. (iv) If restrained by an agreement with other partners,a partner has a duty not to carry on any business other than that of the firm while he is a partner. (v) If a partner carries on any business competing with that of the firm,he shall account for and pay to the firm all profits made by him in that business. (VI) To account forany profit including secret profit,derived by a partnerfrom any transaction of the firm,or from the use of the property. (vii) Not to assign his share in the partnership.

TYPES OF PARTNERS
1. 2. 3. 4. 5. 6. 7. 8. 9.

Actual, active or ostensible partner

Sleeping or dormant partner

Nominal partner Partner in profits only Sub-partner Partner by estoppel or holding out Working partner Incoming partner Outgoing partner

EXAMPLES.

(i) A partner retires from a firm but does not give notice of his retirement. He is a partner by holding out. (ii) Kulkarni induces Sarabhai to believe that he (Kulkarni) is a partner of a firm known as K & Co. Sarabhai believing that Kulkarni is a partner, gives credit to K & Co. Kulkarni will be responsible for compensating Sarabhai. Kulkarni will not be heard to say that he is not a partner of K & Co. Minor as a Partner. Partnership, being a contract, a minor cannot enter into partnership, he being incapable of contracting. An agreement with or by a minor is void ab initio.

DISSOLUTION

i.
ii. iii. iv. v. i. ii. iii. iv. v. vi.

Dissolution of Firm and Dissolution of Partnership Dissolution of partnership By the expiry of term By the completion of adventure By the death of a partner By the insolvency of a partner By the retirement of a partner Dissolution of Firm By mutual consent By agreement By the insolvency of all the partners but one By business becoming illegal Partners becoming alien enemies By notice of dissolution of partnership at will Dissolution by Court (s.44). Settlement of Accounts (s.48).

DISSOLUTION OF THE FIRM THROUGH COURT

1. When a partner becomes of unsound mind 2. Permanent incapacity of a partner 3. Misconduct of a partner affecting the business. 4.Persistent disregard of partnership agreement by a partner 5.Transfer of interest or share by a partner 6. Business working at a loss 7. Where just and equitable

RIGHTS OF A PARTNER ON DISSOLUTION

i. ii.

iii. iv. v.

vi.
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ii.

Right to have business wound up. Section 46 Rights to have the debts of the firm settled out of the property of the firm. Section 49 Right to personal profits earned after dissolution. Section 50 Rights to return of premium on premature dissolution. Section 51 Right where partnership contract is rescinded for fraud or misrepresentation. Section 52 Rights to restrain partners from use of firm property. Section 53 Liabilities of a Partner on Dissolution Liability for acts of partners done after dissolution and public notice. The first step in the process of dissolution is to give a public notice of dissolution. Continuing authority of partners for purposes of winding up. The commencement of dissolution does not at once terminate the authority of the partner.