Contract-II, Unit-3.pptx by Smt.Sowmya.K

Unit-III
Indian Partnership Act: Definitions - Nature - Mode of determining the existence of partnership - Relation of partner - Relation to partners to one another - Rights and duties of partner - Relation of partners with third parties - Types of partners , Admission of partners - Retirement - Expulsion - Dissolution of firm. Registration of firms.

1. CONTRACT-II UNIT-III By Smt.Sowmya.K M.A., LL.M Principal SBRR Mahajana Law College Mysore, Karnataka

2. Unit-III Indian Partnership Act: Definitions - Nature - Mode of determining the existence of partnership - Relation of partner - Relation to partners to one another - Rights and duties of partner - Relation of partners with third parties - Types of partners Admission of partners - Retirement - Expulsion - Dissolution of firm. Registration of firms. 2 Smt.SOWMYA.K, SBRR Mahajana Law College

3. Partnership Act, 1932 Introduction Partnership results from a contract and is governed by the Partnership Act 1932. The partnership is also governed by the general provision of the Indian Contract Act on such matters where the Partnership Act is silent. It is expressly mentioned that the provision of India Contract Act which is not repealed will be applicable on Partnership until and unless such provision is in contrary to any provision of Partnership Act, 1932. The rules of contract regarding the capacity to contract, offer, acceptance etc will also be applicable to the partnership. But the rules regarding the status of minor will be governed by the Partnership Act, 1932 since  Section 30  of the Act talks about the position of the minor. Nature of Business It is a business organization where two or more persons agreed to join together to carry out the business for the purpose of earning the profits. It is an extension of a sole proprietorship. It is better than sole proprietorship because in sole proprietorship the business is carried out by the individual with limited capital and limited skill. Due to the limited resources of a single individual carrying a sole proprietorship, a larger business requiring more resources and investment than available to the sole proprietor cannot be thought of such business. On the other hand in partnership, a number of partners join together with their capital to form an agreement and carry out a business jointly. 3 Smt.SOWMYA.K, SBRR Mahajana Law College

4. Meaning According to  Section 4  of the Partnership Act,1932 “Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any one of them acting for all”. Essential requirements of a partnership There must exist an agreement between the partners. The motive is to earn the profit and share between the partners. The agreement must be to carry out the business jointly or by any of them acting on the behalf of all. Examples: A and B buy 100 tons of oil which they agree to sell for their joint account. This forms a partnership and A and B are considered as partners. A and B buy 100 tons of oil and agreed to share it among them. It does not form a partnership as they had no intention to carry out business. Number of members Any two or more persons may form a partnership. There is no limit imposed on the minimum and the maximum number of partners under the Partnership Act,1932. According to Companies Act 2013, the maximum number of 100 must not exceed in case of partnership and minimum is 2 partners. If in any case, it exceeds the maximum limit then it will amount to the illegal association under  Section 464  of Companies Act,2013. According to  Section 11  of Companies Act the maximum number of partner in case of: Banking purpose-10 persons Other purposes- 20 persons 4 Smt.SOWMYA.K, SBRR Mahajana Law College

5. ELEMENTS OF PARTNERSHIP 1. ASSOCIATION OF TWO OR MORE PERSONS: Partnership is an association of 2 or more persons. Again, only persons recognized by law can enter into an agreement of partnership. Therefore, a firm, since it is not a person recognized in the eyes of law cannot be a partner. Again, a minor cannot be a partner in a firm, but with the consent of all the partners, may be admitted to the benefits of partnership. The partnership Act is silent about the maximum number of partners but section 464 of the Companies Act, 2013 has now put a limit of 50 partners in any association/partnership firm. 2. AGREEMENT: It may be observed that partnership must be the result of an agreement between two or more persons. There must be an agreement entered into by all the persons concerned. This element relates to voluntary contractual nature of partnership. Thus, the nature of the partnership is voluntary and contractual. An agreement from which relationship of Partnership arises may be express. It may also be implied from the act done by partners and from a consistent course of conduct being followed, showing mutual understanding between them. It may be oral or in writing. 5 Smt.SOWMYA.K, SBRR Mahajana Law College

6. 3. BUSINESS: In this context, we will consider two propositions. First, there must exist a business. For the purpose, the term ‘business’ includes every trade, occupation and profession. The existence of business is essential. Secondly, the motive of the business is the “acquisition of gains” which leads to the formation of partnership. Therefore, there can be no partnership where there is no intention to carry on the business and to share the profit thereof. 4. AGREEMENT TO SHARE PROFITS: The sharing of profits is an essential feature of partnership. There can be no partnership where only one of the partners is entitled to the whole of the profits of the business. Partners must agree to share the profits in any manner they choose. But an agreement to share losses is not an essential element. It is open to one or more partners to agree to share all the losses. However, in the event of losses, unless agreed otherwise, these must be borne in the profit-sharing ratio. Example 1: Co-owners who share amongst themselves the rent derived from a piece of land are not partners, because there does not exist any business. Example 2: No charitable institution or club may be floated in partnership [A joint stock company may, however, be floated for non-economic purposes]. Example 3: X and Y buy certain bales of cotton which they agree to sell on their joint account and to share the profits equally. In these circumstances, X and Y are partners in respect of such cotton business. 6 Smt.SOWMYA.K, SBRR Mahajana Law College

7. 5. BUSINESS CARRIED ON BY ALL OR ANY OF THEM ACTING FOR ALL: The business must be carried on by all the partners or by anyone or more of the partners acting for all. This is the cardinal principle of the partnership Law. In other words, there should be a binding contract of mutual agency between the partners. An act of one partner in the course of the business of the firm is in fact an act of all partners. Each partner carrying on the business is the principal as well as the agent for all the other partners. He is an agent in so far as he can bind the other partners by his acts and he is a principal to the extent that he is bound by the act of other partners. It may be noted that the true test of partnership is mutual agency rather than sharing of profits. If the element of mutual agency is absent, then there will be no partnership. KD Kamath & Co. The Supreme Court has held that the two essential conditions to be satisfied are that: there should be an agreement to share the profits as well as the losses of business; and the business must be carried on by all or any of them acting for all, within the meaning of the definition of ‘partnership’ under section 4. The fact that the exclusive power and control, by agreement of the parties, is vested in one partner or the further circumstance that only one partner can operate the bank accounts or borrow on behalf of the firm are not destructive of the theory of partnership provided the two essential conditions, mentioned earlier, are satisfied. 7 Smt.SOWMYA.K, SBRR Mahajana Law College

8. Kinds of partnership The various types of partnership are based on two different criteria. With regard to the duration of the term of partnership: 1. Partnership at will when no fixed period is prescribed for the expiration of partnership then it is a partnership at will. According to  Section 7  two conditions need to be fulfilled: No agreement about the determination of the  fixed period of partnership No clause with respect to the determination of partnership. 2. Partnership for a fixed period  When the partners fixed the duration of the partnership firm then after the expiration of the fixed period the partnership comes to an end. When the partners decided to continue with the partnership even after the expiry of the fixed period then it becomes a partnership at will. On the basis of the extent of the  business carried by a partnership a. Particular Partnership (Section 8) When the partnership is created for completing any project or undertaking. When such an undertaking or project have been completed then partnership comes to an end. The partners have a choice to continue with the firm. b. General Partnership  When the partnership is created for the purpose of carrying out the business. There is no particular task that has to be completed. The task is general in nature. 8 Smt.SOWMYA.K, SBRR Mahajana Law College

9. Scope of Partnership Act (Section 5) The partnership arises from the contract but not from the status. The intention of partners is a question of the partnership. the partners may exercise any of its power at time but must not exercise in the pursuance of illegal, fraudulent or misconduct. If any of the partners have made the contract without the consent of all other partners then the question as to the validity of such contract arises. If all the partners have accepted or ratified the contract then no question as to the validity of such contract arise. With the consent of all the partners, the partnership can become a member of another firm. 9 Smt.SOWMYA.K, SBRR Mahajana Law College

10. Kinds of Partners There are basically six types of partner: Active/managing partner : The partner who takes participation in the conduct of the business daily. This partner is also called an ostensible partner. Sleeping/Dormant : He does not participate in the conduct of the business but he is bound by the conduct of all the partners. Nominal partner : He is a partner to the firm only by his name. In reality, he has no significant or real interest in the firm. Partner in profit only : The partner who agrees to share the profit but does not suffer losses. He is not liable for any liabilities in case of dealing with the third party. Minor partner : A minor cannot be a partner according to the Indian Contract Act, but he can be admitted to get the benefit of all the partners gives the consent. His will share the profit equally but his liability will be limited in case of loss of the firm. Partner by estoppel:  it means when the person is not a partner but he has represented himself by conduct, or words to another person to be the partner then he cannot deny afterwards. Even though he is not a partner but he becomes the partner by holding out or by estoppel. Smt.SOWMYA.K, SBRR Mahajana Law College 10

11. Relation of partner with one another All the partners have a right to create their own terms and condition with regard to the affairs of the business in the partnership deed. The Indian Partnership Act has prescribed the provision to govern the relation of partners and this provision is applicable in case when there is no deed. The  various rights  of the partners are explained below: Right to determine the relationship by contract (Section 11) The partnership deed determines the general administration of the partnership like what will be the profit-sharing ratio, who will do what work etc. The partnership contains the rights and duties of the partners. Such a deed can be made either expressly or by necessary implication. For example, if one partner looks into sales daily and other partners do not object to it, his conduct will be presumed as the right of all the partners in the absence of written agreement. So it can be concluded that all partners create a right for their own. Section 27 of the Indian Contract Act,1872 Agreement in restraint of trade is void All the agreements which restrain the person from carrying any lawful profession, trade or business are void. But  Section 11  of the Partnership Act states that the partners can restrain each other from carrying a business other than the firm. but such restraint must contain in the partnership deed. Smt.SOWMYA.K, SBRR Mahajana Law College 11

12. Rights of the Partners Right to participate in the conduct of business  (Section 12(a)): each partner has a right to participate in the conduct of the business.  A partner right to participate in business is curtailed in a case where some of them only participate in the business affairs of the firm. this right can be curtailed only when the partnership deed states so. Rights to access and inspect books and accounts (Section 12(d)) : This right is also given to the active and dormant partner. Each partner has a right to access and inspect the book of account of the firm. In case of death of a partner, his legal heir can inspect the copies of accounts. Right to be indemnified : The partners have a right to be indemnified for the decision taken in the course of the business. But such a decision is to be taken in the case of urgency and should be of such nature that the ordinarily prudent person would take. Rights to express   his opinion (Section 12(c)) : Each partner has a right to express his opinion with regard to the business affairs. They also have the right to participate in the decision-making process. Rights to get interested on capital or advances : Generally, partners are not entitled to get any interest on the capital that they invest .but when they agree to give interest, then such interest would be paid from the capital. They are also entitled to 6%interest on the advances made towards the business of the firm. Right to share profit and loss : The partners share the profit and losses equally in the absence of any deed. But when there is a partnership deed prescribing the ratio of profit and losses it will be shared in accordance with the partnership deed. Smt.SOWMYA.K, SBRR Mahajana Law College 12

13. Relations of partners to third parties Section 18 to 22  of the Act talks about the relation of partners third parties Section 18  prescribes that the partners are an agent of the firm for the purpose of conducting the affairs of the business. The partners act as the principal and agent as well. when he performs the act in his own interest he is the principal and when he does in the interest of another partner then he is an agent. He is not an agent for the dealings or the transactions between the partners themselves. Section 19  states that any act which is performed by the partners in the usual course of its business binds the firm itself. The authority to bind the firm is implied authority Section 20  states that partners can make a contract to restrict or expand the implied authority of a partner. Section 21  states that if any act is done by any partners in case of an emergency which a prudent man would do, then such acts need to bind the firm. Section 22  specifies that if any act is done by any partner then it must be done in the name of the firm or in such manner which binds the firm. Smt.SOWMYA.K, SBRR Mahajana Law College 13

14. Duties of partners The rights and duties are correlated with each other. When the rights are given to the partners then there must be some which the partners should perform..the various duties of partners are as follows: Duty to act diligently (Section 12(b)) : It is the duty of the partners to act with due care and diligence because his actions will affect all other partners. If his willful act causes a loss or injury to other partners he is entitled to pay compensation to the affected partners. Duty to indemnify fraud (Section 10) : whenever any fraud is committed by partners then every partner is liable to indemnify the firm for losses because the firm is liable for the wrongful acts of the partners. If the fraud causes the losses to other partners he is entitled to indemnify for the loss caused. Duty to use the firm property exclusively for the purpose of business (Section 15) : The partners can use the firm property for the purpose of the business but not for its personal purpose. The partner must use the property in a lawful manner. they must not earn a person gains from such property. Duty to hand over personal gains (Section 16) : All the partners should act towards achieving the common goal. they must not engage in other profession or engage in any competitive business venture. If they earn any personal gains from the conduct of business then they should hand over to all the partners. General duties (Section 9) : It is the duty of all partners to make all the efforts to achieve a common goal, to render a true account and provides all the information affecting a firm to partners, or his representative Smt.SOWMYA.K, SBRR Mahajana Law College 14

15. STATUS OF A MINOR Section 30  states the legal provision related to the minor according to  Section 18  of the Indian Contract act 1872, no person below the age of 18 years can enter into the contract which implies that no minor can enter into a contract. But  Section 30  states that the minor cannot be a partner in a partnership firm but he can be admitted to benefit from the partnership firm. The minor will be liable to get only the benefits from the partnership but is not liable for any losses or liability. The minor can be admitted to the partnership only with the consent of all the partners. There are various rights that are granted to the minor. Various rights are as follows: Right to inspect the books of account Rights to share the profits from the firm Rights to sue any partner or all for his share of benefit or profit He has a limited liability which means his personal assets may not be disposed of to pay the firm debts A minor has a right to become a partner on attaining the age of 18 years. Liabilities of a minor A minor has Limited liability. If minor is declared as insolvent his share will be kept in the possession of official liquidator. If after attaining the age of 18 years he decided to become the partner then he has to give public notice within 6 months of attaining the majority. If notice not given then minor will become liable for all the acts of others until the notice is given When a minor partner becomes the major he will be liable for the acts of all partners to the third parties. If he decided to become a full-time partner then he will be considered as a normal partner and will take part in the conduct of the business. Smt.SOWMYA.K, SBRR Mahajana Law College 15

16. Liabilities Liability of partners for the acts of the firm (Section 25) : All the partners is jointly and severally liable for the acts of the firms. He is liable only for those acts which are done at the time he is a partner. Liability of a firm for the wrongful act of partner (Section 26) :   When any wrongful act or omission is done by any of its partners in the ordinary course of its business or with the consent of others partners then the firm is liable to the same extent as a partner. Liability of a firm for the misapplications by partner (Section 27) : when any partner acting as an agent receives the money from the third party and misapplies it or the firm receives the money and money are misappropriated by any of its partners then the firm is liable to pay for the loss suffered. Smt.SOWMYA.K, SBRR Mahajana Law College 16

17. REGISTRATION OF PARTNERSHIP FIRM Section 58  explains the procedure of the registration of a partnership firm. Making an application to Registrar : Any of its partners can send an application along with the prescribed fee and copy of partnership deed o the registrar of the area in which any place of business is proposed to be situated or is situated. Such a statement shall be signed by all of its partners. Such a statement should contain: Name of the firm Principal place of business Any other place where the business is carried on Duration of partnership firm Name and address of all partners of a firm The date on which each partner joined the firm Verification : Each partner who has signed the statements needs to be verified. The  name of the firm  shall not contain any name resembling the name of Crown, Emperor, king, Royal, Emperors’, or any other words implying or expressing the sanction of the government. Section 59  states that when the Registrar is satisfied that the conditions of  Section 58  are complied with then he shall record an entry of the statement in a register called the Register of Firms, and shall file the statement. Smt.SOWMYA.K, SBRR Mahajana Law College 17

18. Non- registration of partnership firm In India, it is not compulsory to register the partnership and no penalty is being imposed for non-registration but if we talk about English law it is compulsory to register partnership firm and if it is not registered then the penalty is imposed. Non-registration leads to a certain disability in accordance with Section 69 of the Act. Effect of non-registration (Section 69) No suit can be initiated in civil court by the firm or other co-partners against the third party In case of breach of contract by the third party; the suit cannot be brought in any civil suit. The suit must be filed by the one whose name is registered as a partner in a register of the firm. No partners can claim a relief of set-off. Any action which is brought out by the third party against the firm having a value of Rs 100 cannot be set off by the firm or any of its partners. An aggrieved person cannot sue against firms or other partners Generally, no action can be brought against the firm or the partners but there is an  exception to it. In a case when the firm is dissolved it can bring a suit for the realization of his share in the firm’s property . Smt.SOWMYA.K, SBRR Mahajana Law College 18

19. Introduction or Admission of partner (Section 31) A new partner may be admitted into partnership firm only with the consent of all the partners.  A new partner admitted will not be liable for any acts of other partners or firms before his admission. The liabilities of new partner commences from the date when he is admitted as a partner in a partnership firm. After the admission of a new partner, the new firm is liable for the debts of the old firm and the creditor has to discharge the old firm and accept a new firm as its debtor. It can be called as a novation .  It can be done only when the creditor gives the consent to it. Smt.SOWMYA.K, SBRR Mahajana Law College 19

20. Retirement of partner (Section 32) Section 32 of Act talks about the retirement of partners. When the partner withdraws from the partnership by dissolving it then it is dissolution but not a retirement. Any partner may retire: When there is a partnership at will, by serving a notice to all the existing partners When there is an express agreement among the partners When the consent of all the partners is given Liabilities of retired partner A retired partner continues to be liable for the acts of firms and other partners till he or any other partners give public notice about his retirement. When the third party does not know that he was a partner and deals with the firm; then in such case a retired partner is not liable. if it is a partnership at will then there is no requirement to give public notice about his retirement. The outgoing partner may enter into an agreement to not carry similar business or activities within a specified period of time. Smt.SOWMYA.K, SBRR Mahajana Law College 20

21. Expulsion of partner (Section 33) A partner can be expelled only when below three conditions are satisfied: Expulsion of the partner is necessary for the interest of the partnership Notice is served to the expelled partner An opportunity of being heard is given to the expelled partner If the above three conditions are not fulfilled then such expulsion will be considered as null and void. Insolvency of a partner (Section 34) When a partner is declared as insolvent by the court, it leads to the following consequences: He ceases to be the partner of a partnership firm from the date of adjudication His estate which is in possession of official liquidator ceases to be liable for any acts of the firm whether the partnership subsequently dissolves or not Partnership ceases to be liable for any act of insolvency partner Smt.SOWMYA.K, SBRR Mahajana Law College 21

22. Liability of estate of a deceased person (Section 35) Generally, the partnership comes to end on the death of a partner but if there is a contract between partners to continue with the partnership on the death of a partner then surviving partner continues with the business after clearing the deceased partner estate from any liability for the future acts of the firms. Liability of outgoing partner (Section 36) The outgoing partner is restricted to perform acts like: Using the name of the firm Representing himself as a partner Make the customer of the firm in which he was a partner as its own. The outgoing partner may enter into an agreement not to carry similar business or activities within a specified period of time. After the specified period, the outgoing partner is allowed to carry on a similar business or advertise it. Smt.SOWMYA.K, SBRR Mahajana Law College 22

23. DISSOLUTION OF A FIRM The term 'dissolution' stands for discontinuation. Section 39 to 44  deals with the Dissolution of a firm. Sometimes circumstances arise when the firm gets dissolved. Sometimes a firm is dissolved voluntary or by the order from the court. Meaning of Dissolution of Firm – According to Section 39 Dissolution of a firm means the dissolution of partnership between all the partners of a firm. In such a situation, the business of the firm is discontinued, its assets are realized, the liabilities are paid off and the surplus (if any) is distributed among the partners according to their rights. Modes of Dissolution(Section 40-41) 1) Dissolution by mutual agreement [Section 40]: - A firm may be dissolved by mutual agreement among all the partners. Even a firm for a fixed duration may be dissolved by mutual agreement. 2) Compulsory dissolution [Section 41]: A firm is compulsorily dissolved in the following two circumstances: ( i ) If all the partners, or all but one partner of the firm are declared insolvent; [The reason is that there must be at least two persons to continue a firm and such persons must be competent to contract]. (ii) If some event takes place which makes it unlawful for the firm's business to be carried on. Example A a resident of India and Y a resident of Pakistan, are partners in a firm. War breaks out between India and Pakistan. In such a situation, on outbreak of war, the business of the firm becomes unlawful to be carried on. 3) Dissolution on the happening of contingent event (S.42 ) A firm may be dissolved on the happening of any of the following contingent event ( i ) Expiry of Fixed Period (ii) On achievement of specific task (iii) Death of Partner (iv) Insolvency of Partner (v) Resignation of Partner 4.Dissolution by notice(S.43) Smt.SOWMYA.K, SBRR Mahajana Law College 23

24. 5. Dissolution by Court (S 44) The court may order for the dissolution of the firm on the following grounds:- ( i ) Insanity of Partner On the application of any of the partner, court may order for the dissolution of the firm if a partner has become of an unsound mind. Lunacy of a partner does not itself dissolve the partnership but it will be a ground for dissolution at the instance of other partners. It is not necessary that the lunacy should be permanent. In the case of a dormant partner the court may not order dissolution even on the ground of permanent insanity, except in special circumstances. (ii) Incapacity of Partner If a partner has become permanent in capable of discharging his duties and obligations then court may order for the dissolution of firm on the application of any of the partner. where a partner is imprisoned for a long period of time the court may dissolve the partnership was held in case of Whitwell v. Arthur (iii) Misconduct of Partner If any partner other than partner suing is responsible for any loss to the firm, which amounts to misconduct and prejudicially affects the carrying on of business then the court may order for the dissolution of the firm. In Carmichael v. Evans a partner of the firm was convicted on account of travelling without ticket in Rail, the court ordered the firm to be dissolved on petition by other partners as such act of the partner was detrimental to the interest of the firm. Similarly, in Abbot v. Grump the court ordered the firm to be dissolved on account of adultery committed by one partner against the wife of the other partner. Dissolution was ordered as such act of adultry would adversely affect the mutual trust and confidence among partners. (iv) Constant breach of agreement by partner The court may order for the dissolution of the firm if the partner other than the suing partner is found guilty for constant breach of agreement regarding the conduct of business or the management of the affairs of the firm and it becomes impossible to continue the business with such partner. (v) Transfer of Interest When any of the partner other than the suing partner transfers whole of its share to the third party for permanently. (vi) Continuous Losses The court may order for dissolution if the firm is continuously suffering losses and there is no more capital available for the future growth of the firm. (vii) Just and Equitable The court may order for dissolution on any other ground which court think is just, fair and equitable. e.g. loss of total confidence between the partners was held in Abbot v. Crump where adulterous act has been committed by one partner with another partners wife was held to be valid ground for the dissolution of firm by the court. Smt.SOWMYA.K, SBRR Mahajana Law College 24