4.1 Nature and Chararacteristics of Partnership

Nature of Partnership

Partnership is the relation between two or more persons who have agreed to share profits of a business carried on by all or any of them acting for all.

When two or more people join hands to set up an enterprise and share its gains and losses, they are said to be in a partnership. Section 4 of the Indian Partnership Act 1932 states partnership as the association between people who have consented to share the profits of an enterprise carried by all or any of them acting for all.

People who have entered into a partnership with one another are independently termed as ‘partners’ and comprehensively termed as ‘firm’. The name under which the trade is carried is called the ‘name of the firm’. A partnership enterprise has no distinct legal   entity apart from the partners comprising it. The term partnership, is used to mean a business structure wherein two or more individuals, come together for undertaking a lawful business and have agreed to share the profits and losses arising from it. The management and operation of the business should be performed either by all the partners or any of them, acting for all the partners.

The Partnership is the relation which subsists between individuals, who have decided to pool their money, skill and resources in business, to share profits and losses, in an agreed ratio. The members of a partnership, are jointly known as the partnership firm and severally known as partners.

In India, it is governed by the Indian Partnership Act, 1932 and is formed as per the provisions of the act. It is started through a legal agreement between partners, called as partnership deed. It lays down the terms and conditions regulating partnership, such as profit and loss sharing ratio, nature of the business, duration of business, duties and obligations of partners, capital contributed by each partner, manner of conducting business and so on.

Characteristics of Partnership

Membership: At least two persons are required to begin a partnership while the maximum number of members is limited to 100. Further, all the individuals entering into partnership must be legally competent to do so, as they have to enter into a contract to become partners. Thus, minors, insolvent and lunatic persons cannot become members, but a minor can be admitted to partnership, to share profits.

Unlimited liability: The members of a partnership have unlimited liability, i.e. they are collectively and individually liable for the firm’s debts and obligations. So, if in case business assets are not adequate to repay liabilities, personal assets of all or any partner can be claimed by the creditors to realise the outstanding amount.

Sharing of profit and loss: The main purpose of the partnership is to share profit in the agreed ratio. However, in the absence of any agreement between partners, the business profits or losses are divided equally among all the partners.

Mutual Agency: The partnership business is undertaken by all the partners or any of the partner, who acts on behalf of all the partners. So, every partner is a principal as well as an agent. Further, the acts of partners bind each other as well as the firm.

Voluntary Registration: The registration of partnership is not mandatory, but it is recommended, as it offers certain benefits, e.g. In case of any conflict among partners, any partner can file suit against other partner or if there is any dispute between firm and outside party, then also the firm can file a case against that party.

Continuity: There is a lack of continuity in partnership, like death, bankruptcy, retirement or insanity of any partner can lead the partnership to end. Although, if the remaining partners want to continue operations, they can do so by a fresh agreement.

Contractual Relationship: The relation subsisting between partners is due to the contract, which may be oral, written or implied.

Transfer of interest: Mutual consent of all the partners is a must for transferring the interest in the firm to any external party.

In a partnership, the decision making is done with the mutual consent of all the partners. They share among themselves the decision making and control of the regular business operation.

4.2 Registration of Firms

Registration of Firms                                                                                                                                                                                                                                                                                                                                    The Process of Registering a Partnership under Indian Partnership Act, 1932

The primary initiative regarding the process of registration or incorporation of partnership firm is to forward an application filling Form No. 1. As per the provision of section 58 it should include following details:

The name of the firm.

The full names and permanent resident address of the partners.

The timespan of the  firm. Business the date when each partner effuse to the firm.

The principal place of business transaction of the firm.

The names of any other places where the firm carries its functional obligations.

This undertaking is needed to be signed by all the associate partners, or by their respective agents principally given authority in their behalf.

Secondly, all partners should necessarily solicit  their signature application form or their authorised agents in their behalf in the occupancy of a witness who must be Advocate, Gazetted Officer, Advocate or Magistrate of Registered Accountant. If a partner declines to sign the application form, registration cannot happen unless that partner’s name is dribbled.

The application as mentioned above has to be sent to the Registrar at the enumerated address along with the prescribed fees. As per section 71 of Indian Partnership Act, states are authorized to make their own regulations with respect to prescribe the fee structure for registration or incorporation of partnership. However, Schedule I of Indian Partnership act states the at most or maximum prescribed fees that can be charged by the states. As per Schedule I, the maximum registration fees for a statement under section 58 is Rs.525.

When is Partnership Registered

As provided in the Section 59, a partnership is said to be registered when a registrar is well pleased with the fidelity of application filed according to section 58 and an entry of statement in the register known as Register of Firms is recorded.

Proof of Registration

According to Rule 9 under Indian Partnership Act, a documented proof of registration or incorporation for that matter is a registration certificate signed by Registrar.

Business Name of the Firm

Alteration of Particulars

Whenever an amendment or change is made in any of the understated particulars then it should be conveyed to the Registrar of firms and a satisfactory alteration is rendered in the register. The change to be rendered is sent in a stipulated form and with the stipulated fees. Following amendments or alterations are to be sent to the Registrar:

Any alteration in the name of the firm.

Any alteration in the principle place of business transaction. The alteration in name or principle place of business transaction almost requires a fresh new registration. These alterations should be sent in a stipulated form and should be rendered signature by all the partners.

Whenever the constitution of the firm is altered i.e., an old partner may retire or a new partner may be added.

Any alteration in the name of a partner or his residential/official address.

When a minor partner gains the age of maturity and he is left to the discretion whether to elect to become or not to become a partner.

When the firm is subjected to dissolution.

Advantages of Registration

The registration of a firm is done not only towards the benefit of the firm but also for those who deal with it. The following benefits are obtained from the registration of a firm:

(i) Benefits to the Firm

The firm gets an unmitigated right towards the third parties in civil suits for getting its rights discharged. In the non-existence of registration, the firm is not entitled to sue outside partners in courts.

(ii) Benefits to Creditors

A creditor can employ any partner for recuperating his money due from the firm. All partners whose names are set in the registration are personally accountable to the unknowns. So, creditors can restore their money from any partner of the firm.

(iii) Benefits to Partners

The partners can seek the help of a court of law against each other in case of disagreement among partners. The partners can sue external parties also for restoring their amounts, etc.

(iv) Benefits to Incoming Partners

A new partner can contest for his rights in the firm if the firm is registered. If the firm is not registered then he will have to rely upon the trustworthiness of other partners.

(v) Benefits of Outward-bound Partners

The registration of a firm acts as an advantage to the outward-bound partners in numerous ways. The outward-bound partners may be divided into two categories:

(i) On the demise of a partner,

(ii) On the superannuation of a partner.

On the demise of a partner his heirs are not accountable for the obligations acquired by the firm after the date of his demise. In case of a superannuation partner, he remains to be accountable up to the time he does not give public notice. The public notice is not recorded with the Registrar and he terminates his liabilities from the date of this notice. So, it is vital to get a firm registered for getting this benefit.

4.3 Types of Partners

Types of partners

There are different kinds of partners namely,

1)     Active Partner: A partner who contributes capital and actively participates in the management and day-to-day working of the business, is known as active partner. He may also be called a working partner.

2)     Sleeping Partner: A partner who contributes capital, shares profit and losses but does not participate in the management and day-to-day working of the business is known as sleeping partner.

3)     Secret Partner: A partner whose membership in the firm is not known to outsiders is known as secret partner. He also contributes capital, shares profits and losses, takes part in the workings of the business and has unlimited liability.

4)     Nominal Partner: A partner who allows the partnership firm to use his/her name but does not contribute capital or take part in the working of the business is known as nominal partner. He does not share profits and losses of the firm but he is liable to the creditor for repayment of the firm’s debts.

5)     Partner by Estoppels or by Holding-out: When a person is not a partner, but poses himself as a partner either by words or in writing or by his acts, he is called partner by estoppels or by holding-out. Such a partner shall be liable to outsiders who deal with the firm on the presumption of that person being a partner. He also does not contribute anything to the business.

6)     Minor as a partner: A minor is a person below 18 years of age. According to Indian Contract Act, a minor cannot enter into a contract. Thus, a minor cannot enter into a contract of partnership. However, a minor may be admitted to the benefits of an existing partnership with the consent of all partners. The minor is not personally liable for liabilities of the firm, but his share in the partnership, property and profits of the firm will be liable for debts of the firm.

4.4 Rights and Duties of Partners under Indian Partnership Act

GENERAL DUTIES OF PARTNERS (SECTION 9):

There are three sub-sections of section 9 which provides three different duties of the partners under the Indian Partnership Act.

Sub-section 1 of section 9 provides that it is the duty of partners to act for the greatest common advantage of the fir Therefore, the partner should work to secure maximum profits for the firm. A partner should not secure secret profits at the expense of the firm.

There was a partnership in a sugar refinery firm. One of the partners was skilled in buying and selling sugar. Therefore, he was entrusted with the task of buying and selling sugar. However, the partner sold the sugar from his own stock and thus, gained profit. When the partners discovered this fact, they brought an action to recover profits earned by the partner. It was held by the court that the partner cannot make secret profits and therefore, the firm was held entitled for profits earned by the partner.

Sub-section 2 of section 9 provides that it is the duty of the partners to be just and faithful to each other.

Sub-section 3 of section 9 provides that the partners are bound to disclose and provide full information about the things that affect the firm to any partner or his legal representatives. This means that a partner should not conceal things from other co-partners in relation to the business of the firm. 

It was held by the court that if a partner is in possession of some extra information then he is bound to deliver it to the co-partners. If the partner enters into a contract with other co-partners without furnishing them the material details which is known to him but not his co-partners then such a contract is voidable.

DUTY TO INDEMNIFY FOR LOSS CAUSED BY FRAUD (SECTION 10):

Every partner shall indemnify the firm for ant loss caused to it by his fraud in the conduct of the business of the firm. The liability to indemnify for fraud cannot be excluded by entering into an agreement to the contrary because entering into any such agreement is opposed to public policy.

DUTY TO BE DELIGENT [SECTION 12(b)]

Every partner is bound to act diligently.

And section 13(f) states that a person should indemnify the firm for any loss caused to the firm because of his willful neglect in the conduct of the business of the firm. Although a partner cannot be made liable for mere errors of judgment or acts done in good faith.

There was a partnership between the plaintiff and the defendant. The defendant was the managing director of the firm and therefore, the conduct of dissolution was left on him. Plaintiff advised the defendant to dispose of certain bales of cotton. However, the defendant said that the same would only be done after the dissolution. Meanwhile, the prices of cotton fell and very less amount was realised by selling the cotton as compared to which could have been otherwise realised.

NOTE: An action for indemnity under this head can be brought only by the firm or partners on behalf of the firm. A partner cannot bring an action for indemnity in his personal capacity.

DETERMINATION OF RIGHTS AND DUTIES OF PARTNERS BY CONTRACT BETWEEN THE PARTNERS (SECTION 11):

All partners are free to form their own terms and conditions with respect to functioning in their partnership deed. These are governed by the existing contract between them which may be expressed or implied by the course of dealing.

Sub-section (1) of section 11 provides that, subject to the provisions of the Act, the mutual rights and duties of the partners of a firm may be determined by contract between the partners and such contract may be express or may be implied by a course of dealing. It further provides that the mutual rights and duties which may have been agreed upon between the partners may be subsequently varied by the consent of all the partners and such consent may be expressed or may be implied by a course of dealing. This section incorporates the general principle that the mutual rights and duties of the partners may be determined by a contract between themselves.

They may themselves decide that how much investment or labor is to be put by whom, or whether a partner will be entitled to any remuneration, apart from sharing the profits, or what will be the profit-sharing ratio, etc.

Sub-section (2) of section 11 clearly provides that, notwithstanding anything contained in section 27 of the Indian Contract Act, the contract between the partners may provide that a partner shall not carry on any business other than that of a firm while he is a partner.

Although according to section 27 of the Indian Contract Act, agreement in restraint of trade is void, but such an agreement entered into between the partners as stated above will be valid.

DUTY TO SHARE LOSSES [SECTION 13(b)]:

All partners are liable to contribute equally to the losses sustained by the firm.

DUTY TO USE THE PROPERTY OF THE FIRM PROPERLY (SECTION 15):

This section provides that property of the firm should be held and used by the firm only for the business of the firm.

A partner cannot make use of the property for his personal purpose and if he does so, then he will be accountable to all the co-partners. He could be made liable for the losses caused because of any such use. Although this duty can be avoided by entering into an agreement to the contrary.

DUTY TO ACCOUNT FOR THE PROFIT (SECTION 16):

Basically, Section 16 runs in two parts.  If a partner derives any profits for himself from any transaction of the firm or derives any profit from the use of property or business connection of the firm or the firm name then he shall account for that profit and pay it to the firm.[4] If a partner carries on any business of the same nature as of the firm and competing with that of the firm then he shall account for and pay to the firm all profits made by him in that business.[5]

NOTE: This duty arises because of the fiduciary relationship between the partners.

Rights of Partners under Indian Partnership Act

Now let’s discuss the rights of partners under the Indian Partnership Act. Mutual Rights of the partners generally depend upon the provisions of the agreement. But subject to their agreement, the law confers following rights on partners:

RIGHT TO TAKE PART IN THE CONDUCT OF THE BUSINESS [SECTION 12(a)]:

Every partner has the right to take part in the business of the firm. This is because partnership business is a business of the partners and their management powers are generally coextensive.

NOTE: The above-mentioned provisions of law will be applicable only if there is no contract to the contract between the partners.

A partner in order to undermine the position of the managing partner wrote to the principals to not supply motor vehicles to the firm and to the banker’s to not to honour the cheques of the firm. The Delhi High Court provided an injunction against the partner saying that the partner’s act was to damage the business of the firm.[6]

RIGHT TO BE CONSULTED [SECTION 12(c)]:

This section provides for resolving disputes relating to the ordinary course of business between the partners by the majority. It states that every partner shall have the right to express an opinion before the matter is decided.

NOTE: The aforesaid majority rule will not apply where there is a change in the nature of the firm. In such a case, the unanimous consent of the partners is needed.

RIGHT TO ACCESS TO BOOKS [SECTION 12(d)]:

Every partner whether active or sleeping is entitled to have access to any of the books of the firm and to inspect and take out of copy thereof.

NOTE: None of them (any partner) is authorised to use the gained information against the interest of the firm.

RIGHT TO REMUNERATION [SECTION 13(a)]:

This section provides that no partner in a firm is entitled to claim remuneration for taking part in the conduct of business. However, the remuneration can be provided to certain partners along with the share in profits if they have entered into an agreement to that effect or when such remuneration is payable under the continued usage of the firm.

Where, the assessed firm is engaged in the business of trading in cotton and food grains. In respect of previous year relevant to the assessment year 1997-98, the firm paid remuneration of Rs. 2,53,000 to Sri Ch. Ekambaram who served as a working partner representing his HUF. Remuneration paid to working partner as authorized by the partnership deed is allowable whereas in the instant case, Ch. Ekambaram is not a partner in his individual capacity and hence he cannot be treated as a working partner. The audit party was of the opinion that remuneration paid to the working partner is not allowable as deduction.[7]

RIGHT TO SHARE PROFITS [SECTION 13(b)]:

The partners are entitled to share the profits and losses equally. Right to share profits is not affected by the fact that the partners have contributed unequally in the firm, possess different skills, have laboured unequally in the firm.

Where there was no satisfactory evidence to show that in what proportion the partners were to divide the remuneration. It was held by the Punjab and Haryana High Court that the partners were entitled to share equal profits irrespective of the fact that they had been paid separately and had done unequal work.[8]

RIGHT TO INTEREST ON CAPITAL [SECTION 13(c)]:

A partner is generally not entitled to claim on the capital. But if there is an express agreement between partners that allows interest on capital then, such an interest will be paid only out of the profits of the firm. Interest is not provided to the partner on capital except when there is an express agreement or a usage to the effect, because a partner is deemed to be an adventurer rather than the creditor.

RIGHT TO INTEREST ON ADVANCES [SECTION 13(d)]:

Taking the earlier provision, a little forward section 13(d) provides that a partner is entitled to get the interest of six percent per annum for the advances made by him to the firm beyond the capital he had agreed to subscribe.

RIGHT TO BE INDEMNIFIED [SECTION 13(e)]:

This section provides the right to indemnity under two circumstances.

A partner is entitled to recover for any expenses incurred by him in the ordinary and proper conduct of the business.

When a partner has incurred expenses in an emergency in order to protect the firm from loss; provided that the partner must have acted in a reasonable manner.

NOTE: The right to be Indemnified is not lost with the dissolution of the firm.

RIGHT TO STOP ADMISSION OF A NEW PARTNER (SECTION 30)

Every partner has the right to prevent the introduction of a new partner in the firm without the consent of all the existing partners.

RIGHT TO RETIRE [SECTION 32 (1)]:

Every partner has the right to retire with the consent of all the other partners and in the case of a partnership being at will, by giving notice to that effect to all the other partners.

RIGHT NOT TO BE EXPELLED (SECTION 33):

Every partner has a right to continue in the partnership. He cannot be expelled from the firm by ant majority of the partners unless conferred by partnership agreement and exercised in good faith and for the benefit of the firm.

RIGHT TO DISOLVE THE FIRM (SECTION 40):

A partner has a right to dissolve the partnership with the consent of all partners.

RIGHTS AND DUTIES OF THE PARTNERS AFTER A CHANGE IN THE CONSTITUTION OF THE FIRM (SECTION 17):

Before going into rights and duties, we should first know how a change may take place in the constitution of the firm. It may occur in one of the four ways; Where,

A new partner/partners come in,

Some partner/partners go out,

The partnership concerned carries on business other than the business for which it was originally formed,

The partnership business is carried on after the expiry of the term fixed for the purpose.

Section 17 lays down the rule, Where-

Change occurs in constitution of a firm- The mutual rights and duties remain the same as they were immediately before the change.

Firm constituted for a fixed term but continues to carry on business- The mutual rights and duties remain the same as the were before the expiry of the term.

Firm constituted to carry out certain adventures but carries out other adventures- The mutual rights and duties of the partners in respect of the other adventures are the same as those in respect of the original adventures.

Key Takeaways:

4.5 Implied Authority of a Partner

Implied Authority of a Partner

Section 19(1) and 22 read together provide that the act of a partner which is done to carry on, in the usual way, business of the kind carried on by the firm, binds the firm, provided that the act is done in the firm name or in any manner expressing or implying an intention to bind the firm. Such an authority of a partner to bind the firm is called the implied Authority of a partner.

Therefore the test, to judge whether a transaction entered into by a partner comes within his implied authority is quite simple. For successful application of this test the following three conditions must be fulfilled. Absence of even one condition will vitiate the transaction and will not come under the ambit of implied authority of a partner. These conditions are :

1. The nature of the transaction—Is to carry on business of the kind carried on by the firm?

2. The manner in which the transaction has been transacted—Is it done in the usual way?

3. In whose name the transaction has been done-ls it done in the name of the firm ? Or is the intention to bind the firm clear?

Every partner has an implied authority to bind the firm by the following acts :

(1) He may sell the goods of the firm.

(2) He may purchase on the firm’s behalf goods of the kind usually employed in the firm’s business.

(3) He may receive payment of the firm’s debts and give receipt for them.

(4) He may engage servants for the partnership business.

(5) Accept, make and issue negotiable instrument (cheques, bills of exchange, promissory notes) in the firm’s name.

(6) Borrow money on the firm’s credit and pledge the firm’s goods to effect that purpose.

(7) Buy goods on credit for the firm.

(8) Engage and instruct an advocate in a suit by or against the firm for a trade debt. (A trading firm is one which carries on the business of buying and selling of goods).

4.6 Incoming And Outgoing Partners

Incoming  Partners

Incoming partner is the partner who is joining the partnership firm by contract or is added to the firm. They are the new partners who get admitted to the firm. Such admission is subject to any procedure/method that the firm at its will and understanding adopts to include new members. It is significant to note that a new partner can be admitted into a firm with the consent of all the partners. Incoming Partner: A new partner can be introduced into a firm in the following ways:

1. With the consent of all existing partners.

2. In accordance with a contract between the partners.

3. In accordance with the provisions of section 30. (minors)                                                                     Liability of an Incoming Partner

Every partner is liable for all the acts of the firm done while he is a partner. It is clear that as a general rule, the liability of an incoming partner begins from the date of his joining the field.

Nothing can prevent a partner from agreeing to be liable for the acts done before his admission. It the partner makes such an agreement with his co-partners, the creditors can make him liable if they can show the incoming partner had agreed with them expressly or impliedly, for being liable towards them for the acts done before admission.

Outgoing Partners

Outgoing Partner is the partner who is leaving the partnership firm. It can be because of death, expansion, retirement etc. Outgoing Partner under Indian Partnership Act .A partner who is going to leave a particular firm purposely or to he/she might be died or expelled by a firm. Then it is process of outgoing partner. Sec 32 to 38 of the Indian Partnership Act deals with different ways in which a partner may become a outgoing partner with their rights and liabilities.                                            A partner may cease to be a partner in the following ways:

Retirement of a partner- sec 32 deals with retirement, it says they may retire under following circumstances:

With the consent of all other partners.

With the express agreement of the partners.

If it is partnership by will, then by giving notice of retirement to all other partners

Outgoing partner by notice- In case of partnership at will, a partner may retire from the partnership by giving notice of his intention to retire to all the other partners. The need of such a notice is required when all the other partners either do not agree to the retirement of a partner or they are not available to give their consent for the retirement of a partner.

Expulsion of partner- sec 33 of the Indian partnership Act deals with the removal of the partner, it says that a partner can be removed when certain conditions are fulfilled-

Notice is give to remove the partner

If removal is necessary for the interest of the partnership

An opportunity of listening to the expelled partner

Insolvency of the partner- An insolvent is not allowed to continue as a partner. Therefore a person who is adjudicated insolvent ceases to be a partner on the date on which order of adjudication is made. Whether on the adjudication of partner as insolvent, the firm is also dissolved or not depends on a contract between the partners.

Death of a partner- A firm is dissolved, but if other partners so agree, the firm may not be dissolved, and the business of the firm may be continued with the remaining partners.

Rights of Outgoing Partners-

Right to carry on a competing business- sec 36(1) of the Indian partnership Act deals with it. It imposes certain restrictions-

Cannot use the firm name

Cannot represent himself as a member of the partner

Right of outgoing partner in certain cases to share future profits- sec 37 deals with the rights of an outgoing partner in certain cases to share subsequent profits. It says that if any member of the firm dies or ceases to be the partner of the firm and the other partner carries on the business without any final settlement of account between them; then the outgoing partner is entitled to share his profits made by the firm, since he ceased to be a partner.

Liabilities of Outgoing Partner-

A retired partner continues to be liable to third party for acts of the firm till such time that he or other members of the firm give a public notice of his retirement.

If the partnership is at will, then it can relieve a partner without giving a public notice.

4.7 Mode of Dissolution of Partnership

Mode of Dissolution of Partnership                                                                                   Section 39 of the Indian Partnership Act 1932 states the dissolution of partnership firm ceases the existence of the organization.

After this, the partnership firm cannot enter into any transaction with anybody. It can only sell the assets to realize the amount, pay the liabilities of the firm and discharge the claims of the partners.

However, the dissolution of a firm may be without or with the intervention of the court. It is noteworthy here that the dissolution of partnership may not necessarily result in the dissolution of the firm.

But, dissolution of partnership firm always results in the dissolution of the partnership.

1. Dissolution by Agreement

A firm may be dissolved if all the partners agree to the dissolution. Also, if there exists a contract between the partners regarding the dissolution, the dissolution may take place in accordance with it.

2. Compulsory Dissolution

In the following cases the dissolution of a firm takes place compulsorily:

3. When certain contingencies happen

The dissolution of the firm takes place subject to a contract among the partners, if:

4. Dissolution by Notice

When the partnership is at will, the dissolution of a firm may take place if any one of the partners gives a notice in writing to the other partners stating his intention to dissolve the firm.

5. Dissolution by Court

When a partner files a suit in the court, the court may order the dissolution of the firm on the basis of the following grounds:

Key Takeaways-

References:

• “Introduction to business” by Amit Shah, Carl McDaniel and Lawrence J Gitman
• “Introduction to business” by Hastings, Paul G.