Parntership essential and kinds of partnership

partnership essentials and kinds

1. INDIAN PARTNERSHIP ACT, 1932 BUSINESS LAW

2. SECTION-C THE INDIAN PARTNERSHIP ACT, 1932: ESSENTIALS OF PARTNERSHIP (SECTION 4,5 AND6) KINDS OF PARTNERSHIP (SECTIONS 7 AND 8) RELATION OF PARTNERS TO ONE ANOTHER (SECTION 9-17) RELATION OF PARTNERS TO THIRD PARTY (SECTION 18-30) OUTGOING AND INCOMING PARTNERS (SECTION 31-38) BUSINESS LAW

3. MODES OF DISSOLUTION OF A FIRM (SECTION 39 TO44) REGISTRATION OF A FIRM (SECTION 56 TO 59) EFFECTS OF NON-REGISTRATION OF A FIRM (SECTION 69) JUDGEMENTS: COX V HICKMANN 1860 VISHNU CHANDRA VS CHANDRIKA PRASAD AGARWAL AND ORS AIR 1983 SC 523, 1982 (2) SCALE 1078, (1983) 1 SCC 22, 1982 (14) UJ 882 SC DHULIA-AMALNER MOTOR TRANSPORT ... VS RAYCHAND RUPSI DHARAMSI AND ORS. AIR 1952 BOM 337, (1952) 54 BOMLR 294, ILR 1952 BOM 795 BUSINESS LAW

4. NEED AND ADVANTAGES Traditional business was sole owner business. So, only small size business was carried out and in carrying such business very less capital is required. The concept of sole business changed into partnership business as demand increase for big businesses. Advantages of Partnership Business Contribution of capital Contribution of labour or skills Share of risk Solves the management problems

5. ENACTMENT OF IPA, 1932 Initially, all the provisions relating to partnership and partners were contained in chapter XI , Sections 239 to 266 of the Indian Contract Act, 1872, but these sections were repealed in 1930 and a new act – the Indian Partnership Act, 1932 was passed. The Act came into force on the 1st of October 1932 , except Section 69 which came into force on the 1st of October 1933.

6. ENACTMENT OF IPA, 1932 Why need a separate Act? As In some matters ICA were not exhaustive like Eg : It is silent about minor’s position in Partnership firm, Sharing of loss was mandatory (Defect in the definition), No provision of registration

7. REASON OF SECTION 69 POSTPONED Why postponement of enforcement of Section 69 IPA The reason for postponing the enforcement of section 69 for one year was that if the partnership firm is not registered, then such firm can’t sue its partners or 3 rd party so it was necessary to give time to firms to get themselves registered before any disability could be clinched on them.

8. SECTION 1,2, 3 OF IPA, 1932 Section 1(2) It extends to whole of India including J&K after 31 Oct, 2019 (before that it exclude J&K). Section 2 is a definition part The Partnership Act is not an exhaustive code of the law of partnership. The Act itself admits this fact in its declaration of section 3. Section 3, “The unrepealed provisions of the Indian Contract Act, 1872, save in so far as they are inconsistent with the express provisions of this Act, shall continue to apply to firms.”

9. SECTION 1,2, 3 OF IPA, 1932 Section 3 application of Indian Contact Act 1872 shall continue to apply to firm unless they are inconsistent with the express provisions of this Act. Partnership is a special kind of contract and thus, the provisions of Indian Contract Act, 1872 also apply to a partnership firm unless the Indian Partnership Act provides otherwise.

10. PARENT ACT IS ICA AND IPA IS NOT RETROSPECTIVE It means Indian Contract Act is a parent Act in so far as for functioning and general principles contained therein –It follows Indian Contract Act 1872 but for any special and exceptional legal issues then follow express provisions under Indian Partnership Act 1932.

11. PARENT ACT IS ICA AND IPA IS NOT RETROSPECTIVE Its provisions cannot be given a retrospective operation. Even S ection 74 expressly provides that the Act shall not deemed to affect any right, title, interest, obligation or liability already acquired, accrued or incurred before the commencement of the Act.

12. PARTNERSHIP A partnership is an association of people who have common objectives and goals. Even a business managed or owned by two or more people is termed as ‘ partnership ’.

13. PARTNERSHIP The idea of a partnership or such collaboration is that every member or partner contributes something, which helps to achieve an aim, and is beneficial to all the members of such partnership or collaboration. A member may contribute money, labour or skill which in turn makes it easier to achieve the common objective or objectives.

14. PARTNERSHIP Partnership is an arrangement where people consent to work together and advance their mutual interests. For example, two doctors may decide to work together on the same case as partners and share the fees.

15. PARTNERSHIP The term ‘partner’ is linked to various other words. It is said to be derived from the Latin term ‘partitionem’, which means ‘portion or division’. The word ‘partner’ is also associated with the French term ‘parçener’ which means ‘joint heir’ or ‘one that shares or has a part with another’. The term can also be broken down to ‘to part’, which means ‘to divide’ or ‘to share’.

16. DEFINITION OF PARTNERSHIP Section 4 of the Indian Partnership Act 1932 defines ‘partnership’ as the “ relation between persons who have agreed to share the profit of a business carried on by all or any of them acting for all ”. 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’.

17. EXAMPLES Both, A and B are carpenters. They decide to work together. But they have an agreement under which A will keep all the profits and pay B a predetermined salary. Here, A and B are not partners. A is a goldsmith. He agrees with B to buy and provide gold to B for making ornaments. They plan to sell the ornaments and share the profit. Here, A and B are partners .

18. OTHER DEFINITIONS Under the English Partnership Act, 1890 ‘Partnership’ is defined as “the relation subsisting between persons carrying on business in common with a view to profits”. Thus in simple words, if two people agree to combine money, skill or labour in a business and to share profits thereof, their relationship is called partnership. According to Sir Fredrick Pollock , “partnership is a relationship between persons who have agreed to share the profits of a business that is carried on by one of them or all of them”.

19. ESSENTIAL FEATURES The essential features of partnership as per the definition of partnership contained in Section 4 are listed below: 1) It is the result of an agreement between two or more persons 2) it is organized to carry on a business 3) the persons concerned agree to Share the Profits of the business 5) the business is to be carried on by all or any of them acting for all

20. RELATION Partnership is actually the relation of partners and one person chooses the other as a partner only when there is a mutual trust and confidence . And if this trust and confidence is shaken, them it results into breaking of partnership. The word relation is used and not association because the word association denotes any other kind of union also eg Company is an association of persons.

21. PERSONS Section 4 uses the words “persons” which is used in plural sense so that means minimum two people are needed to create a partnership. The people who are partners in a firm must be competent to contract . If all partners are minors or if there is only one adult partner, it is not a partnership at all.

22. NUMBER OF PARTNERS The partnership Act is silent about the maximum number of partners but Section 11 of the Companies Act, 1956 provides that number of partners cannot exceed 10 persons in case of banking business and 20 in other businesses . If the number of partners exceeds the limit, the partnership becomes an illegal association . Similarly, if the number falls below two , the partnership is deemed dissolved. Now Section 464 of the Companies Act, 2013 has put a limit of 100 partners in any association or partnership firm. However the rule given under the Companies (Misc) Rules, 2014 restrict the present limit to 50.

23. NATURAL AND JURISTIC PERSON The word person also includes in itself natural persons as well as juristic persons . But in case of natural person, person must be competent to contract . Eg One natural person and another natural person can enter into partnership One natural person can enter into partnership with juristic person.

24. VALID AGREEMENT The foundation of partnership is an agreement. There can be no partnership without an agreement . 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.

25. VALID AGREEMENT The agreement to create partnership may be express or 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 writing. That agreement must be enforceable by law. Enforceable by law is not provided under IPA but it is provided under ICA under Section 10 . So, the partnership agreement must fulfil all the requirements of a valid contract. There should be free consent, competency of the parties, lawful consideration and object and not expressly declared to be void.

26. PARTNERSHIP BY CONDUCT The agreement can also be inferred from the conduct of the parties. The agreement need not be in writing except where required under the Income Tax Act if the partners desire their firm to be assessed to income tax for getting advantage of taxable income of the firm can be materially reduced or if the partners wish to get the firm registered. An agreement to create a partnership may arise from the conduct of the parties concerned as held in the case of Abdul v Century Wood Industries . (1954)

27. NO CAPITAL CONTRIBUTION NEEDED The validity of a partnership firm does not depend upon capital contribution by partners. A person can become a partner without having to make any contribution towards the capital of the firm. A person may contribute his know-how, or intellectually property rights, or skill and experience or even sheer labour in consideration of becoming a partner. As held in the case of Shivraj Reddy & Bros v S. Raghu Rao Reddy (2002)

28. MINOR POSITION A minor or person of unsound mind who are not competent to contract cannot become partners. There is nothing which prevent a person incompetent to contract from accepting any benefit and hence the partnership act permits a minor to be admitted to the benefits of partnership Under Section 30. but that itself does not make him a partner.

29. MINOR POSITION According to Section 30(5), a minor on attaining age of majority has the option to become or not to become a partner, it means that, before attaining the majority, he is not considered as a partner. Such minor has a right to such share of property and profits as may be agreed upon. Minor’s share is liable for the acts of the firm but the minor is not personally liable for any such act

30. HUF, PARTNERSHIP FIRM AND COMPANY Can HUF enter into partnership with natural person No because HUF has no separate legal entity or personality. So that is why they are not competent to form partnership. Can a partnership firm enter into a partnership with another firm A partnership firm is not a legal person so a firm is not entitled to enter into partnership with another firm but partners of the firm can enter into partnership in their individual capacity with another individual. As Section 4 uses the words “the persons entering into partnership with one another are called individually “partners” and collectively “a firm”. That means firm has no separate personality from their partners.

31. HUF, PARTNERSHIP FIRM AND COMPANY Section 25 provides for liability of partners and states that they are liable jointly as well as severally so firm has no separate legal status. That's why one partnership firm can’t enter into partnership with another partnership firm. Duli Chand v CIT ( 1956) SC A partnership firm not a legal person, so, an individual or a company can’t enter into partnership with a partnership firm.

32. HUF, PARTNERSHIP FIRM AND COMPANY Can a Company make a partnership with another company Yes Steel Bros & Co ltd v CIT (1957) SC A Company can enter into partnership with other company/s as it has legal entity but facing practical difficulties under Companies Act as in that case any stranger to company can have an access to the books, accounts and papers of the companies whereas under Companies Act they are only limited to their own members and shareholders.

33. INSOLVENT PERSON Partnership Act not mentioned about only solvent person can become a partner but Section 34 states that when a partner is adjudicated insolvent, he ceases to be a partner. It means who is not insolvent can become a partner . The main reason of such provision is to safeguard the interest of third parties when they want to enforce their rights against various partners. If a person after becoming a partner is adjudicated an insolvent, then according to Section 42 , it is a ground of dissolution of the firm also. An insolvent can’t enter into partnership because insolvent is disqualified by law.

34. PARTNERSHIP IS A CONTRACT NOT STATUS SECTION 5 Partnership is not created by status – the relationship of partnership can arise only out of a contract . Section 5 clearly states that “The relation of partnership arises from contract and not from status; and, in particular, the members of a Hindu undivided family carrying on a family business as such, or a Burmese Buddhist husband and wife carrying on business as such are not partners in such business.“

35. PARTNERSHIP IS A CONTRACT NOT STATUS SECTION 5 If the basis of relationship between certain persons is not an agreement, the association would not be a partnership. Some association may be created without an agreement. Eg the association between certain persons may arise from the status like if a Hindu Undivided Family is carrying on a family business, it is not a partnership. Or Burmese Buddhist Husband and wife carrying on business as such are not partners in such business as held in the case of Rakesh Kumar Dinesh Kumar v UG hotels & Resorts Ltd (2006)

36. PARTNERSHIP IS A CONTRACT NOT STATUS SECTION 5 Partnership does not arise by mere joint acquisition of property like in the case of co-ownership. Eg on the death of the father, the two sons inherit his joint business. They are co owner of that business not partners.

37. CASES Sanyasi Charan v Krishna Dhan ( 1919) Cal HC It was held that joint family business means an ancestral business but it doesn’t mean that the members of Joint Hindu family can’t form partnership, they can form partnership by contract only and not by status.

38. CASES If a wife entrusts her stridhan to her husband, it is not an agreement of partnership even if the husband uses the property for business. As held in the case of Pratibha Rani v Suraj Kumar (1985) There is nothing in law to prohibit a family members of HUF from forming a partnership. Moreover, grant of exclusive control to any one partner or non registration of firm for one year under partnership Act did not indicate that the partnership agreement was not genuine as held in the case of Murlidhar v The Comm. of Income Tax MP (1964)

39. CASES Rasikh Lal v CIT ( 1998) SC the Court held that the HUF is not competent to enter into a contract of partnership, therefore, if HUF enters into a partnership, then it could not be considered to be a partnership by HUF but it will be considered to be a partnership by its members in their personal capacity. S.K.P Naidu v Rama Naidu ( 2001) SC When a deed is named as a partnership deed, it can’t be said that it is a partnership because the nature of partnership can’t be determined by the mere use of the word partnership in the agreement. So there must be following elements for the existence of partnership. 2 or more persons, agreement between the partners, contractual relation (oral/writing), sharing of profit and mutual agency.

40. CARRY ON BUSINESS Created for the purpose of carrying on business: According to Section 4 of the IPA 1932, the partnership must have been created to carry on business. Business must be carried out means series of transactions. It may be any business which is not unlawful. It is not necessary that all the partners actively participate in the conduct of the business. For example, one partner may contribute skill or experience while another may contribute capital for the firm. The business may be permanent or temporary, trading or non-trading.

41. BUSINESS U/S 2(B) Section 2(b) of the Indian Partnership Act, 1932 says that ‘Business’ includes every trade, occupation and profession ” but we have not to take it literally, as every trade is a business but not every occupation or profession. So it has to be seen in practical sense means it is taken to refer to any activity which if successful would result in profit. It has two propositions: -first, there must exist a business. -secondly, the motive of the business is the “acquisition of gains” which leads to the formation of partnership. Therefore, there can no partnership where there is no intention to carry on the business and to share the profit thereof.

42. CHARITY IS NOT A BUSINESS The definition is not exhaustive and is capable of including any kind of commercial activity aimed at earning profits. Thus, a partnership does not exist between members of a religious or charitable association and the like. The main essence of partnership is to earn profit, therefore, every business has one motive i.e. to earn profit. So, if in any event, that motive is not there then it is not a business. If group of persons are combined for the purpose of charity that combination is not a partnership, because there is no business.

43. SELF CONSUMPTION GOODS Whether goods purchased for self consumption is a business? NO When the goods are purchased for the purpose of re-sale it is a business transaction but if a number of persons join together to make a bulk purchase of certain goods and divide the very goods amongst themselves to get the benefit of bulk purchase, they are not partners even each one of them gain something out of bulk purchase without any idea of selling as held in the case of Coope v Eyre . (1788) Court held that agreement between the persons was in relation to self consumption of goods, therefore, the agreement was not for the purpose of business. So there is no mutual agency, because there is no partnership.

44. BUSINESS MUST BE LAWFUL According to section 4 there must be business for partnership but that business must be lawful. It means object and consideration of the business must be lawful. According to case Usha Gopiratham v P.S. Ranganathan ( 2008), if the partnership is based on contract which is not lawful, then in such a case, the partnership will not be valid partnership.

45. LAWFUL BUSINESS If a firm starts a business which is lawful on its initial stage but subsequently becomes unlawful, then, according to Section 41 of IPA, 1932, it is a ground of dissolution of firm and that dissolution is compulsory. But where more than one separate advantages or undertakings are carried on by firm and one of them becomes unlawful, then firm is not dissolved for those businesses which are lawful. ( Section 24 ICA )

46. BUSINESS IF OPPOSED TO PUBLIC POLICY THEN VOID But if agreement is illegal or opposed to public policy then its void and unenforceable under section 23 of ICA. Eg where partnership between two persons to carry on business of transport service obtaining permit in contravention of Motor Vehicle Act then a claim on the basis of settlement of accounts of such partnership is illegal and void and unenforceable as held in the case of AVV Naidu v KVT Nadar (1963)

47. BUSINESS MUST BE PRESENT AND CARRY ON BUT NOT FUTURE BUSINESS Services rendered jointly also constitute a partnership. For example, if two advocates may agree to jointly plead a case and divide the fees, they are partners in respect to that case. But an agreement to carry on business in the future is not a partnership. Business must be in existence. An agreement to carry on business at a future time does not result in present partnership. As held in the case of R.R Sarna v Reuben (1946)

48. SHARING OF PROFITS Sharing of Profits: According to Section 239 of ICA 1872 which earlier provided that there must be sharing of losses but in IPA 1932, Section 4 provides that sharing of profit is must but sharing of losses is not necessary. The purpose of a partnership is to carry on business for the sake of profit and to share the same. The word Partnership is derived from the word “to part” means “to divide”. The division of profits is an essential condition of the existence of a partnership

49. SHARING OF 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 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 profit-sharing ratio.

50. SHARING OF PROFITS Thus, it is obvious that the partners have an interest in sharing the profits so earned from the business of the firm. Division of profits is an important element in a partnership. So clubs and societies which do not aim at making profits are not partnerships.

51. SECTION 13 Section 13 provides for equal share of profits as well as equal share of losses but section 13 is subject to the contract between the partners. That means: If the contract between the partners provides that any partner is exempted to share the loss, than that is a valid contract. If the contract between the partners provides that any partner doesn’t share the profit, than that is not a valid contract of partnership because Section 4 provides that for making a valid partnership, there must be sharing of profit.

52. SHARING OF PROFIT The word partnership is derived from the word ‘part’ which means to divide or share. So, division of profit is an essential condition for the existence of partnership firm. Every person who receives a part of profit of business is not necessarily a partner in the firm but no man acquires the status of partner without the right of sharing of profit.

53. EXAMPLES Sharing of profit is one of the essential elements of every partnership but every person who shares the profit need not always be a partner. Eg, I may pay a share of profits to the manager of my business instead of paying him fixed salary so that he takes more interest in the progress of my business such person can be my servant or agent but not my partner. Similarly, share of profit may be paid by a business man to money lender by way of payment of loan and advances such money lender does not become a partner.

54. CASES- GRACE VS. SMITH whether sharing of profits is the sole test of partnership - There was a time when sharing of profits and losses was used as a test to determine whether a partnership existed or not. If a person shared the profits and incurred liabilities too, he was deemed a partner as held in Grace vs. Smith [1775 2 WM Blacks 998]. Court held that “every man who has a share of the profits of a trade, ought also to bear his share of the loss”.

55. GRACE VS. SMITH In this case, 4 members were engaged in a business, one was the sleeping partner who contributed major portion and sharing 50% of profit. But business was run by other partners. In this case, a third party filed a suit against the sleeping partner also. He took the defence that he is not a partner. Problem arose to prove whether sleeping partner was a partner and only proof was that of the entries in the account of sleeping partner.

56. GRACE VS. SMITH Court in this case for the first time held that in the absence of any explanation for the payment, then sharing of profits becomes an evidence for a person being liable as a partner. Reasons- Only partners share the profit and not strangers. If a person has shared the profit, then the money have been withdrawn from firm which if not would have been shared, then it must be in the accounts of the firm.

57. CASES- WAUGH V CARVER In the case of Waugh v Carver 1793 again the same principle was confirmed which was given in the case of Grace v Smith . After the decision in Waugh v Carver case, it was the law of the land that any person who shares the profit is a partner. But the following problem arose: When the money lender is sharing the profit Agent working in a firm bought shares by bringing business as a salary When children were granted a share of profit of deceased partner Sale of goodwill by a partner in consideration of share of profit.

58. CASES In all the above mentioned instances, all the persons are sharing profits but they are not really partners. So, holding them liable as a partner will be unjust and unfair, but according to Grace v Smith, they are liable.

59. COX V HICKMAN This was the state of the law up to the year 1864. the test was again examined when in Cox v Hickman the house of lords reconsidered the test of determining the existence of a partnership. The net result of this historic decision is that no man is a partner unless he has the right to share the profits of the business. But every man who received profits is not necessarily a partner.

60. COX V HICKMAN Cox v Hickman (1860) Smith and his son were iron merchants in partnership. They became financially embarrassed and therefore, made a compromise with their creditors. Under the compromise the property of the firm was assigned to few creditors headed by Cox selected as trustees. They were empowered to carry on the business to divide the net income among the creditors in a rateable proportion and after the debts had been discharged, the business was to be returned to Smith and son. Hickman, plaintiff supplied the large quantity of material to one of the trustee and gave him a bill of exchange for the price. The bill remaining unpaid, Hickman brought an action against the trustees, including Cox for the price.

61. COX V HICKMAN House of lords rejected the test of sharing of profits laid down in the case of Grace v Smith and held that whether a person is a partner or not or a group of persons is a firm or not, sharing of profits is a good evidence to prove that they are partners but such sharing of profits is not a conclusive proof that a person is a partner.

62. COX V HICKMAN Therefore, in relation to evidence of sharing of profits it should be kept in mind that it is not a sole method to decide whether a person is partner or not. In each case one has to determine the law and why profit is given to one person and at that time, we have to find out the real relationship between the partners. So, house of lords substituted a new test i.e. real relation existing between the persons and this test is adopted by IPA,1932 in Section 6 .

63. COX V HICKMAN In this case House of Lords held that although the creditors were sharing the profits and business was being managed by the trustees, still the relationship between the Smith and son on the one hand and the creditors on the other was of debtor and creditor and not that of the partners. So Cox could not be held liable.

64. COX V HICKMAN Thus sharing of profits is only a prima facie evidence of the existence of a partnership. The conclusive test is that of mutual agency. It was held that the conclusive test for partnership is mutual agency because it is possible that every man who gets a share in the profits might not be liable for the losses of the firm or might not be a partner. So the persons sharing the profits of a business do not always incur the liability of partners unless the real relation between them is that of partners.

65. PRESENT POSITION However, Now, a person does not become a partner merely because he shares the profits of the business. Similarly, sharing of losses is not a must for a partnership. Sharing profits and contributing to losses are indications or prima facie evidence of a partnership but not the conclusive test of partnership. It is possible that a partner may be paid salary or a fixed sum periodically in lieu of profits. The section does not insist upon sharing of losses. Thus loss sharing is not essential as held in the case of Walker west Developments v F.J Emmett (1978)

66. EXAMPLE For example, a servant or agent may receive a share of profits instead of his salary or as a bonus. Similarly, a person who sells his business and goodwill may be given a share of profits as consideration for sale. An employee of the firm may loan some money to the firm. But these persons do not ipso facto become partners in the firm due to such participation.

67. CASES In the case of Mollow vs. Court of Wards [1872 LR 4 PC 419], a Hindu Raja loaned some money to a company. In return, he was given a certain percentage of profit and also allowed to exercise control on some aspects of the business. But the Raja was not empowered to direct the transactions of the company. It was held that although sharing of profits is a very strong test, the relationship of partnership depends on the real intention and conduct of the parties.

68. NO NEED OF EQUAL SHARING The partners can decide the ratio or proportion of share in profits and losses through an agreement between them. A partner may get more percentage of the profits than the other(s) based on factors like contribution of capital, special skills or taking a more active part in the daily functioning of the firm.

69. MUTUAL AGENCY Mutual Agency: The word agency is not defined in IPA and not even defined in ICA but Section 182 of ICA defines the words ‘principal’ and ‘agent’ so the relation between principal and agent is called agency. According to agency, principal is liable for the act of the agent but agent is not liable for the act of the principal. In mutual agency both persons are principal as well as agents, it means act of one person is the act of other. Before 1932, there was no provision like mutual agency but after the commencement of IPA, 1932, partners have mutual agency

70. MUTUAL AGENCY-PRINCIPAL AND AGENT Section 4 of the Act states that the business of the partnership must be carried on by all or any of them acting for all. Thus if the person carrying on the business acts not only for himself but for others also, so that they stand in the position of principals and agents, they are partners. This is the principle of Cox v Hickman . Thus, there must be a relationship of mutual agency amongst all the partners.

71. MUTUAL AGENCY-PRINCIPAL AND AGENT 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.

72. MUTUAL AGENCY-PRINCIPAL AND AGENT Mutual agency means that every partner has a dual role – that of a principal and of an agent. Every partner is an agent of the other partners and can bind other partners by his acts done on behalf of the firm in all matters that are within the scope and object of the partnership. Similarly, every agent is also the principal for the other partners in the firm and in turn, is bound by their acts.

73. MUTUAL AGENCY U/S 18 Section 18 stresses the necessity of mutual agency again and states that a partner is an agent of the firm for the purpose of business of the firm. Section 2 (a) defines that ‘an act of the partner is the act of the firm. The act of the partner is binding on the firm just like an act of an agent is binding upon the principal. The foundation or basis of the law of partnership is agency. The law of partnership is undoubtedly, a branch of the law of the principal and agent. Every partner is both – an agent and principal for the other partners. For example, a notice to partner serves as a notice to the firm. The acts of a partner during the ordinary course of business bind the other partners and they are liable for the same.

74. MUTUAL AGENCY U/S 20 Subject to limitations under Section 20 of the Act, one partner can always bind the other partner(s) in any matter that falls within the scope of partnership. Partners are not agents for each other outside of the firm or for other purposes. Whether there was a partnership or not is a mixed question of fact and law, depending upon the varying circumstances in different cases.

75. MUTUAL AGENCY But mutual agency has to be read with Section 19 and 22 of the IPA, 1932. It provides that act of the agent (partner) is the act of the firm. When that act is done with the intention to bind the firm i.e. If any act is done which partner has no authority eg compromise the claim or withdraw the suit, then the firm is not liable. According to Section 12 , every partner has a right to take part in the conduct of the business. But sometimes, a partner becomes a sleeping partner i.e. Who is not participating in the conduct of the business of the firm. That agreement is valid because Section 12 is subject to contract between the partners.

76. MUTUAL AGENCY So, it is clear that there are two types of partners- sleeping and active partners Active partners does all the acts for the firm but the act of the active partners makes the sleeping partners liable as Section 25 provides that every partner is liable jointly as well as severally for all the acts of the firm. If active partner wants to retire, he has to give public notice, otherwise he becomes liable by way of holding out but this public notice is not required for sleeping partner.

77. MUTUAL AGENCY 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 and Co v CIT 1971, the SC has held that the two essential conditions to be satisfied are that 1)there should be an agreement to share the profits as well as the losses of business; and 2)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 facts of the case is that the exclusive power and control by the 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 are satisfied.

78. SECTION 6 Section 6 MODE OF DETERMINING EXISTENCE OF PARTNERSHIP 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. Explanation I : The sharing of profits or of gross returns arising from property by persons holding a joint or common interest in that property does not of itself make such persons partners.

79. SECTION 6 Explanation II : The receipt by a person of a share of the profits of a business, or of a payment contingent upon the earning of profits or varying with the profits earned by a business, does not itself make him a partner with the persons carrying on the business; and, in particular, the receipt of such share or payment – (a) by a lender of money to persons engaged or about to engage in any business (b) by a servant or agent as remuneration, (c) by the widow or child of a deceased partner, as annuity, or (d) by a previous owner or part-owner of the business, as consideration for the sale of the goodwill or share thereof, does not of itself make the receiver a partner with the persons carrying on the business.

80. SECTION 6 Section 6 provides that: Whether a person is partner or not? Whether a group of persons is a firm or not? In testing whether a person is a partner or not, we have to see the real relationship. That means we have to find out all the relevant facts taken together to determine what is the real relationship between them: The facts and circumstances of each case Terms of the contract Intention of the parties

81. COX V HICKMAN The principle laid down in Cox v Hickman forms the basis of the Section 6 which emphasis on real intention between the parties as shown by all the relevant facts together to determine whether the persons are partners or not. In determining whether a group of persons is or is not a firm or whether a person is or 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.

82. COX V HICKMAN Explanation 1 makes it clear that the persons having a joint or common interest in the property do not become partners merely because they share profits or gross returns arising from property. We have to see the intention of the parties. If their intention shows that they want to create a partnership, then they have to fulfil all the essentials of Section 4 and they have to show intention to form a partnership

83. SECTION 6 Explanation 2 mentioned for particular instances that merely because a person receives a share of the profits of a business or a payment contingent or varying upon the profits earned by the business, he does not become a partner. In determining whether a group of persons is a firm or not, mere participation in profits of the business or receiving the payment out of the profit is not enough. It doesn’t render the receiver of profit in itself liable as a partner.

84. EXAMPLE A employ B in his firm but A has no money to pay B’s salary. So they made an arrangement by contract that A will give 10% share of profit to B. B is not a partner because their real relationship is of employer and employee and not of partners.

85. PERSONS HAVING A JOINT OR COMMON INTEREST IN THE PROPERTY The persons who have joint interest or common interest in the property are not partners. They may be joint owners also. So sharing of the profits by them or gross returns arising from property by them does not make them partners. As joint ownership is not a business. So when two persons purchase a tea-shop and also purchase the pottery and utensils by spending the equal amount of money, but thereafter they lease out the shop and share the rent equally, they do not become partners as held in the case of Govind Nair v Maya (1948). But when the co-owners of the land jointly invest the money in raising the crop and jointly look after the cultivation and borrow the money for this purpose and share the profits, they are partners. Chettyar Firm v Chettyar Firm (1933)

86. MONEY LENDER SHARING THE PROFIT If money lender gives credit to the firm but on the condition that he will share certain %age of profit of business, then the money lender is not liable as a partner A lender of money to the persons who are engaged or about to engage in any business does not become partner only because he receives the share or payment. Badley v Consolidated Bank (1888)

87. SERVANT OR AGENT SHARING PROFITS Sometimes an agent or servant are given a share of the profit of the business as an incentive or salary, so that he takes more interest in the business, so such a person does not thereby become a partner in the firm. Eg an agent in car showroom sharing certain %age of sale. Sometimes a servant or agent of a business is allowed in addition to or in place of his regular remuneration a portion of profits of the business, but that does not make him a partner in the business. Munshi Abdul Latif v Gopeshwar Chattoraj (1933)

88. WIDOW OR CHILD OF DECEASED PARTNER On the death of a partner the surviving partners sometimes agree to give a share in the profits to the widow or to the child of the deceased partner in accordance with the agreement between the partners. Such a widow or child does not of itself become a partner in the firm. Holme v Hammond There is no bar to the widow or the son of a deceased partner to enter into partnership after the death of the deceased, but a clear agreement to that effect has to be proved. CIT v Kesharmal Keshardeo (1968)

89. SELLER OF GOODWILL A person who sells his business along with the goodwill is sometimes given a share in the profits of the business he has sold, as a consideration for sale of goodwill but such a person does not of itself become a partner in the business only because he is sharing the profit in the firm and their relationship is of the buyer and seller and not of partners. Pratt v Strick (1932) A doctor sold the goodwill of medical practice and entered into an agreement with the buyer of the goodwill that he would help such buyer to introduce patients for 3 months and he would be entitled to half the share of profits and incur half the expenses. It was held that the doctor had not become a partner with the person to whom the goodwill was sold.

90. SECTION 6 Thus sharing of profit is an essential element to constitute a partnership. But is it only a prima facie evidence and not conclusive evidence. Although the right to participate in profits is a strong test of partnership, and there may be cases where, upon a simple participation in profits, there is a partnership, yet whether the relation does or does not exist must depend upon the whole contract between the parties. Where there is an express agreement between partners to share profit of a business and the business is being carried on by all or any of them acting for all, there will no difficulty in the light of provisions of section 4 in determining the existence or other wise of partnership

91. SECTION 6 But the task becomes difficult when either there is no specific agreement or the agreement is such as does not specifically speak of partnership. In such a case for testing the existence or otherwise of partnership relation, section 6 has to be referred. Which says” regard must be had to the real relation between the parties as shown by all the relevant facts taken together such as written or verbal agreement, real intention and conduct of the parties, other surrounding circumstances etc. are to be considered while deciding the relationship between the parties and ascertaining the existence of partnership

92. SECTION 6 In the end, the existence of mutual agency which is the cardinal principle of partnership law, is very much helpful in reaching a conclusion in this regard. Each partner carrying on the business is the principal as well as an agent of other partners. So, the act of one partner done on behalf of firm, binds all the partners. If the elements of mutual agency relationship exist between the parties constituting a group formed with a view to earn profits by running a business, a partnership may be deemed to exist.

93. SECTION 6 Santiranjan Das Gupta v Dasuram Murzamull 1973 SC , held that there is no partnership between the parties as: -parties have not retained any record of terms and conditions of partnership - Partnership business has maintained no accounts of its own, which would be open to inspection by both the parties. No account of the partnership was opened with any bank no written intimation was conveyed to the Deputy Director of Procurement with respect to the newly created partnership

94. SALARIED PARTNER If any partner takes amount as a salary from the firm, he is called a salaried partner. According to Section 13 , no partner has the right to receive remuneration to take part in the conduct of the business but Section 13 is subject to contract between the partners. That means if the contract provides that any partner can receive the salary for taking part in the business then that contract will prevail.

95. SALARIED PARTNER The concept of salaried partner found recognition in the case of Stekel v Ellice (1973). Then in the case of March v Stacey (1963) and Ellis v Joseph Ellis & Co (1905) Court held that a true partner who in addition is paid a fixed wage for doing specific work does not thereby become a workman and relationship could not become master and servant. But we have to see from contract he may or may not be a partner depending on the facts of the case. What must be done is to look at the substance of the relationship between the parties. Whether or not there is a partnership depends on what the true relationship is?

96. SALARIED PARTNER A person who occupies the position of a partner remains a partner whatever be the mode in which profits are shared with him and a person who occupies the position of a servant or agent will remain so whatever be the mode in which remuneration is paid to him. Thus the position which is granted to the person in question in the business set up is the most important factor in determining whether that person is a partner or not.

97. SALARIED PARTNER De Mclares Morrison v S. Verschoyle ( 1901) An assistant in a firm of brokers, received over and above his salary, a share in the profits. With the knowledge of the partners he occasionally signed for and on behalf of the firm, on delivery orders which came from buyers in favour of the firm; he also occasionally signed letters of the firm dealing with mere matters of detail and also made firm business offers to customers on behalf of the firm and initialled alterations, if any, in the contracts of the firm. He committed a fraud upon a customer of the firm misusing the position which was allowed to him. The firm was sued for the fraud and would have been held liable if he occupied the position of a partner. The court held that he was not a partner.

98. MEANING AND NATURE OF FIRM Section 4 further provides that 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’. Thus a firm is a collection of the partners. It is not a legal person or a separate legal entity having any independent or distinct existence. It is nothing but partners bracketed together under one name. When a partner dies or becomes insolvent the firm is dissolved. The asset of the firm are the joint property of the partners and the partners are personally liable for all the business obligations of the firm.

99. MEANING AND NATURE OF FIRM SC in the case of CAG v kamlesh Vadilal Mehta (2003) held that a firm or partnership is not a legal entity separate and distinct from partners and is only a compendious (comprehensive)description of individuals who compose the firm. Same partners may constitute more than one distinct and separate firms but firms have no juristic personality. So its partners are its real repersentative. A suit against a firm merely means a suit against all the partners of that firm.

100. FIRM NAME The name in which the partners of a firm carry on their business is called the ‘firm name’. The selection of name is entirely depends on partners but it should not be misleading, it should not be identical or closely resemble with the name of another firm or with the trade mark of the goods of another firm.

101. DIFFERENCES Partnership Co-ownership It arise only by agreement It may arise in any other way, may be by status, or by operation of law such as inheritance Business and sharing of profit is necessary It can exist without engaging in any business There exist mutual agency between partners Act of one co- owner does not bind others A partner cannot transfer his share to outsider without the consent of the other partners Co-owner can sell his share without the consent of the others The profit and losses must have to be shared as per agreement Co-ownership does not necessarily involve sharing of profits and losses

102. DIFFERENCES Partnership HUF Relationship arises from contract A HUF cannot be created by contract but by status means relationship arises by birth in the family A new partner cannot be admitted into a partnership except with the consent of all the partners Members in HUF gets an equal share and profits by mere birth in family. It is a mutual agency i.e. Partners represent the other partners. Every partner is agent of the other. Manager or Karta of the HUF is only representative of the family and contract by Karta is binding upon the members of the family Partners must be competent to contract so a minor can’t be a partner but can be admitted to the benefits of the partnership Members are not required to be competent i.e. A minor can be a member of HUF

103. DIFFERENCES Liability of partners is unlimited The liability of karta is only unlimited but Members are liable to the extent of their share in HUF means limited liability Liability of partners are joint and several Liability of members is personal or limited to his share Remedy of a partner is dissolution of firm Remedy of coparcener is a suit for partition Death of a partner leads to dissolution of partnership Death of a member does not give rise to dissolution of family business. All partners take part in the conduct of business of the firm This right is vested on the karta of HUF It is governed by IPA, 1932 It is governed by Hindu Law In partnership partners should not exceed 50 Members of HUF have no limit In partnership each partner has a defined share as per their agreement In HUF no member has definite share, its fluctuating one as it is capable of being enlarged by deaths in the family and diminished by births in the family

104. DIFFERENCES Partnership Company The members of the Partnership are called partners The members of the company are called shareholders It’s business is governed by Indian Partnership Act,1932 It’s business is governed by Indian Companies Act, 2013 Partnership firm is created by contract between 2 or more persons Company is created by law i.e. By registration It is regulated by State Govt It is regulated by Central Govt Registration is not mandatory Registration is mandatory as per Companies Act 2013 It has no separate legal entity from its partners. A common seal is not required It is a separate legal entity from the shareholders of the company. There must be a common seal Liability of the members is unlimited Liability of members is limited to their shares A partner cannot transfer his share to outsider without the consent of the other partners The shares of the company are freely transferable Management is to be done by active partners as per the agreement Management is to be done by Board of Directors

105. DIFFERENCES Partnership Company Every partner is an agent of the other partners as well as of the firm A member is not an agent of the other members or of the company, his actions do not bind either. Profits of the firm shared according to agreement No compulsion of distribution of profit its only done when dividends are declared Firm’s property is not separate from its partners Company’s property is different from its members property A partnership firm can be dissolved at any time if all the partners agree. A company being a legal person is either wind up by the National Company Law Tribunal or its name is struck off by the Registrar of Companies. Unless there is a contract to the contrary, death, retirement or insolvency of a partner results in the dissolution of the firm A company enjoys a perpetual succession Minimum number of partners is two and max in case of banking is 10 and other than banking is 20 after Companies Act 2013 its 100 then according to Companies Rules 2014 its 50 In private company min is 2 and max is 200 and in public min is 7 and there is no limit for max. A private company can be formed by one person called as one person company A partnership firm get dissolve by death of the partner or become insolvent A company is different from its members, members come and go but company is not affected by it

106. DIFFERENCES Partnership LLP Governed by Indian Partnership Act,1932 Governed by Limited Liability Partnership Act, 2008 Registration of partnership firm is not mandatory Registration of LLP is mandatory It has no separate legal entity apart from its partners, individually called partners and collectively called firm LLP is separate legal entity Liability of the partners is unlimited Liability of the partners is limited to the extent of which the capital is contributed by them It can be started by any name of their choice There must be use of the word ‘LLP’ at the end of its name Maintenance and audit of books of account is not mandatory Maintenance and audit of books of account is mandatory The partnership is defined as a relation of persons joined for earning profits, carried out business by all or any of them acting for all LLP has combined features of a partnership and a body corporate

107. KINDS OF PARTNERSHIPS With regards to duration : -Partnership at Will -Partnership for a fixed period With regard to extent of the business: -Particular Partnership -General Partnership

108. PARTICULAR PARTNERSHIP According to section 8 “Particular partnership” A person may become a partner with another person in particular adventures or undertakings. A partnership may be organized for a single adventure as well as for the conduct of a continuous business. Where a person becomes a partner with another person in any particular adventure or undertaking the partnership is called particular partnership. A partnership constituted for a single adventure or undertaking is subject to any agreement dissolved by the completion of the adventure or undertaking

109. PARTICULAR PARTNERSHIP Merely a single isolated transaction of purchase and sale by number of persons does not mean carrying on of the business. It is not necessary that the business should consist of a long and permanent undertaking but which involve carrying on business. A partners may engage in a single adventure or a single undertaking that may involve the carrying on business.

110. PARTICULAR PARTNERSHIP Thus persons can be partners in the working out of a coal-mine, construction of a building or production of a film (Eg contract with labour, purchasing raw material etc.) because although that may be a single adventure but same requires a series of transactions and continuous relationship as held in the case of K Juggiaha v Venkatanant narayana (1984)

111. GENERAL PARTNERSHIP Where a partnership is constituted with respect to the business in general, it is called a general partnership. A general partnership is different from a particular partnership. In case of a particular partnership the liability of the partners extends only to that particular adventure or undertaking but it is not so in the case of general partnership

112. PARTNERSHIP FOR A FIXED PERIOD Where a provisions is made by a contract for the duration of the partnership, the partnership is called “partnership for a fixed period”. It is a partnership created for a particular period of time. Such a partnership comes to an end on the expiry of the fixed period.

113. PARTNERSHIP FOR A FIXED PERIOD Partners for free to decide as to how long partnership between them shall continue. It can be for a fixed term like 2 years/ 5 years or for completion of certain adventure or undertaking eg production of film, or on determination of partnership on the happening of certain event like firm runs into losses. When the partners have not decide about any duration then its is partnership at will.

114. PARTNERSHIP AT WILL According to Section 7 “Where no provision is made by contract between the partners for the duration of their partnership, or for the determination of their partnership, the partnership is "partnership-at-will".” A partnership is deemed to be a partnership at will in two situations: When no provision is made in the partnership agreement as to its duration and When there is no provision in the partnership agreement as to its determination (coming to an end) of partnership. If provision of its duration or for its determination is there then it is not a partnership at will. It can be express or implied.

115. PARTNERSHIP AT WILL If the duration is for fixed term but it continue even after that without specifying the time duration subsequently then it becomes partnership at will. Arunachalam & co v M Sadasivam (1985) In partnership at will there is no fixed duration nor any determination, it can be ended at the sweet will of any of the partners : According to Section 43 (1 and 2), “(1) Where the partnership is at will, the firm may be dissolved by any partner giving notice in writing to all the other partners of his intention to dissolve the firm. (2) The firm is dissolved as from the date mentioned in the notice as the date of dissolution or, if no date is so mentioned, as from the date of the communication of the notice.”

116. PARTNERSHIP AT WILL So section 43 provides that it can be dissolved by giving written notice to all but it must show that there must be an intention to dissolve the firm. Effect of notice : 1)if date is mentioned in the notice, then firm is dissolved from that date. 2)if there is no date mentioned in the notice, then from the date of communication of the notice. According to Section 32(1)(c), “ where the partnership is at will, by giving notice in writing to all the other partners of his intention to retire.”

117. PARTNERSHIP AT WILL Although a partnership at will could be dissolve by a mere notice but that does not debar a partner from filing a suit for dissolution. In such a case, the service of the summons will deemed to be the communication of notice for dissolution and the firm shall stand dissolved when the summons served. Banarsi Das v Seth Kanshiram 1963 SC if there are more than one defendant then date of dissolution of the firm will be regarded to be the one on which the last summon was served.

118. PARTNERSHIP AT WILL Whether the partnership is at will or not depends on the contract between the partners. Karumuthu T Chettiar v E M Muthappa Chettiar (1961) SC The duration of a partnership maybe expressly provided in the contract but even where there is no express provision, the courts have held that the partnership not be at will if duration be implied.

119. PARTNERSHIP AT WILL Where a partnership was constituted for carrying on a specific job and it was stated that the partnership would continue till completion of the job, it was held that the partnership was not at will. The partnership had to be there till the completion of the job. Deoki Prasad v Anar Dai Poddar ( 1999)

120. PARTNERSHIP NOT AT WILL When the partnership is not at will neither a person can retire nor can he seek dissolution of the partnership firm, just by giving a notice to other partners as held in the case of Moss v Elphick(1910) Abott v Abott (1936) the partnership agreement between a father and 5 sons provided that the death or retirement of any partner shall not terminate the partnership and if any partner wants he shall be considered as having retired. One of them contended that its partnership at will so by giving notice it can be dissolve. Held that its not partnership at will, single partner can not dissolve it by giving notice, he can retire or cease to be a partner.

121. CHARACTERISTICS Characteristics (i) Number of Partners : A minimum of two persons are required to start a partnership business. (ii) Contractual Relationship : The relation between the partners of a partnership firm is created by contract. The partners enter into partnership through an agreement which may be verbal, written or implied. If the agreement is in writing it is known as a ‘Partnership Deed’. (iii) Competence of Partners : Since individuals have to enter into a contract to become partners, they must be competent enough to do so. Thus, minors, lunatics and insolvent persons are not eligible to become partners. However, a minor can be admitted to the benefits of partnership i.e. he can have a share in the profits. (iv) Sharing of Profit and Loss : The partners can share profit in any ratio as agreed. In the absence of an agreement, they share it equally.

122. CHARACTERISTICS v) Unlimited Liability : The partners have unlimited liability. They are liable jointly and severally for the debts and obligations of the firm. Creditors can lay claim on the personal properties of any individual partner or all the partners jointly. Even a single partner may be called upon to pay the debts of the firm. Of course, he can get back the money due from other partners. The liability of a minor is, however, limited to the extent of his share in the profits, in case of dissolution of a firm. (vi) Principal-Agent Relationship : The business in a partnership firm may be carried on by all the partners or any one of them acting for all. This means that every partner is an agent when he is acting on behalf of others and he is a principal when others act on his behalf. It is, therefore, essential that there should be mutual trust and faith among the partners in the interest of the firm. (vii) Transfer of Interest : No partner can sell or transfer his interest in the firm to anyone without the consent of other partners.

123. CHARACTERISTICS (viii) Legal Status : A partnership firm is just a name for the business as a whole. The firm means partners and the partners mean the firm. Law does not recognize the firm as a separate entity distinct from the partners. (ix) Voluntary Registration : Registration of partnership is not compulsory. But since registration entitles the firm to several benefits, it is considered desirable. For example, if it is registered, any partner can file a case against other partners, or a firm can file a suit against outsiders in case of disputes, claims, disagreements, etc. (x) Dissolution of Partnership : Dissolution of partnership implies not a complete closure or termination of partnership business, but it includes any change in the existing agreement among the partners due to a change in the number of partners. Different from dissolution of firm as it means termination of partnership firm between all the partners of the firm completely

124. ADVANTAGES OF PARTNERSHIP FIRM Advantages of Partnership Firm (i) Easy to Form : The partnership, can be easily organized. There are no complicated legal formalities involved in the establishment of partnership business. The partners enter into a partnership agreement and start business. (ii) Favorable Credit Standing : The partnership enjoys a better credit rating in the eyes of creditors. As the liability of each partner in the organization is unlimited the financial institution can safely advance loans to the firms. (iii) Large Capital : In case of sole proprietorship, the capital is limited to the savings of one owner or his borrowing capacity. Partnership can bring more capital to the business by the joint efforts of the partners. The partnership is normally in strong position to raise capita and expand the business. (iv) Greater Management Ability : As there are many partners involved in the operation of a business, the firm can distribute the duties and responsibilities to each partner for which one is best qualified and suited. Division of labour and specialization, thus, can promote efficiency of the firm.

125. ADVANTAGES OF PARTNERSHIP FIRM (v) Union of Business Ability : There is a old age saying that two heads are better than one. In case of partnership, the partner mutually consults each other about the lay out, production procedure, marketing channels, etc. and as a result, a wise course of procedure results. (vi) Profit Incentive : The profits are shared by the partners as per agreement. They are encouraged to do more work to earn more profit. Higher the profits, higher will be the partners share. (vii) Advantages of Secrecy : The partners can keep the business secrets to themselves.

126. ADVANTAGES OF PARTNERSHIP FIRM (viii) Retention of a Skilled Worker : If an employee in the partnership business is found to be a man of outstanding talent and ability, he with the mutual consultation of other partners can be given a status of a partner in the business. (ix) Brake on Hasty Decisions : As liability of partners is unlimited, the partners, therefore, tend to be careful in taking business decisions. They adopt sound practices in the conduct of business. There is a brake on hasty decisions. (x) Special Protection to Minor : A death or lunacy of a partner may not cause dissolution of the partnership. His minor can be admitted only to the benefits of partners with the consent of other partners.

127. ADVANTAGES OF PARTNERSHIP FIRM (xi) Increase in the Spirit of Co-operation : The success of business depends upon mutual trust and cooperation of the partners. The partners are fully aware that a sight difference can cause the end of partnership. This increases the spirit of working together. (xii) Tax Advantage : The profits of a registered firm, after payment of tax, are divided among the partners. Thus the partners of registered firm get the benefit of lower assessment. (xiii) Ease of Dissolution : The partnership can also be legally dissolved by mutual consent of the partners or in accordance with a contract by the partners. There are no formal documents required to be drawn up as in the case of a company.

128. DISADVANTAGES OF PARTNERSHIP FIRM Disadvantages of Partnership Firm The partnership form of organization suffers from certain disadvantages also. These in brief are as follows. (i) Unlimited Liability of Partners : One of the basic defects of partnership is that the partners are personally and jointly responsible for all the debts of the firm. In case the business suffers losses and the business assets are not sufficient to satisfy the claimants on liquidation, the personal property of one or more than one partners can be sold under the Court order for the clearance of the debts of the business. The rich and wealthy persons, therefore, avoid to be enlisted in partnership because each individual partner in liable for the firm’s debt. (ii) Limited Life of Firm : The duration of the partnership is always uncertain. If partner dies, injured, withdraws, or a new partner is admitted into the business, or their arises difference, the partnership may come to an end. There are possibilities of the dissolution of the firm due to internal differences.

129. DISADVANTAGES OF PARTNERSHIP FIRM (iii) Frozen Investment : It is very easy for a partner to invest money but it is most difficult to withdraw the investment from the business. A person who wishes to withdraw investment has to consult his partners. The funds remain difficult to transfer and as such remain a frozen investment which creates lack of interest. (iv) Disputes Among the Partners : The partners should be like minded, have a common objective, be large hearted, have a cool temperament, should not unnecessarily cause friction and confusion among the partners. In case of dispute among the partners, quick action should be taken by all the partners for the remedial measures.

130. DISADVANTAGES OF PARTNERSHIP FIRM (v) Possibility of Misuse of Resources : It is known to each and every partner that the resources of the firm are owned jointly. There can and does arise the misuse of resources by a partner/partners. (vi) Divided Control : In a partnership, the work of the business is divided among the partners according to their ability, choice and taste. Divided control - and responsibility sometimes creates confusion and delay in making decisions. The lack of efficiency on the part of one partner can upset the whole structure of the business and ultimately lead to dissolution of the firm.

131. DISADVANTAGES OF PARTNERSHIP FIRM vii ) Implied Authority : Implied authority is the authority vested in a partner to bind the firm with any of his acts done in connection with the business of the firms. In partnership form of organization, each partner binds other partners by his acts done on behalf of the firm: Thus the other partners may have to pay for the follies of a fellow partner.

132. PARTNERSHIP DEED Partnership is the result of an agreement. No particular formalities are required for an agreement of partnership. It may be in writing or formed verbally. But it is desirable to have the partnership agreement in writing to avoid future disputes. The document in writing containing the various terms and conditions as to the relationship of the partners to each other is called the ‘partnership deed’. Where the partnership comprises immovable property the instrument must be in writing, stamped under Stamp Act 1899 and registered under the Registration Act.

133. PARTNERSHIP DEED Partnership deed may contain the following information:- -name of the partnership firm - name of all the partners - nature and place of the business of the firm - date of commencement of partnership - duration of partnership - capital contribution of each partner

134. PARTNERSHIP DEED - profit sharing ratio of the partners - admission and retirement of a partner -Rates of interest on capital and loans etc - provisions for settlement of accounts in the case of dissolution of the firm - provisions for salaries or commissions, payable to the partners, if any -provisions for expulsion of a partner in case of gross breach of duty or fraud A partnership firm may add or delete any provisions as per the need of the firm

135. KINDS OF PARTNERS BUSINESS LAW

136. SECTION 4 According to Section 4 , ‘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’. When analyzed, the definition tells us that in order that persons may become partners, it is essential that: (i) There must be at least two persons (ii) There must be a relationship arising out of an agreement between two or more persons to do a business (iii) The agreement must be to share the profits of a business (iv) The business must be carried on by all or any of them acting for all

137. ELEMENTS All these four elements must be present before a group or an association can be held to be partners. In other words, it can be said that all the afore-stated four elements must co-exist before a partnership can be said to come into existence. If any one of them is not proved to be present, there cannot be a partnership. The first element relates to the voluntary contractual nature of partnership; The second gives the motive which leads to the formation of firms, i.e. the acquisition of gains; The third shows that the persons of the group who conduct the business The fourth shows all the persons have mutual agency and are therefore liable for the act of each other having dual position as principal and agent.

138. KINDS OF PARTNERS The list is not exhaustive, the Partnership Act does not restrict any unique kind of partnership that the partners want to define for themselves. The following kinds of partners generally exist in a partnership: Active or ostensible partner Nominal partner Sub partner Outgoing partner Sleeping or dormant partner Partner in profits only Incoming partner Partner by holding out Minor admitted to the benefits of partnership

139. ACTUAL, ACTIVE OR OSTENSIBLE PARTNER These are the types of partners who invest money into the business of the firm, actively participate in the functioning and management of the business and share its profits or losses. Section 12(a) lays down that “Subject to contract between the partners, every partner is entitled to take part in the conduct of the business of the firm”.

140. ACTUAL, ACTIVE OR OSTENSIBLE PARTNER Such partners actively participates in the firm’s business, binds himself and other partners by all his acts done in the usual course of partnership business. Such partners acts as an agent of other partners for all acts done in the ordinary course of business. Such partner must give a public notice of his retirement from the firm in order to absolve (free) himself from liability for the acts of the other partners done after his retirement.

141. SLEEPING OR DORMANT PARTNER These partners invest money in the firm’s business and take their share of profits but do not participate in the functioning and management of the business. But even then their liability is unlimited. The Act specially provides that in Section 18, “ … A partner is the agent of the firm for the purposes of the business of the firm”. and Section 25, “every partner is liable jointly will all the other partners and also severally, for all acts of the firm done while he is a partner”.

142. SLEEPING OR DORMANT PARTNER They share profit and losses as agreed or equally, and are liable to the third parties for all acts of the firm. They are not required to give public notice of their retirement from the firm as they are not known to third parties. A sleeping partner can retire from the firm without giving any public notice to this effect. His liability for the acts of the firm ceases soon after retirement. Such partner has no duties to perform but is entitled to have access to books and accounts of the firm and he can have a copy of them.

143. NOMINAL PARTNER A person who lends his name to the firm, without having any real interest in it, is called a nominal partner. T hese partners do not invest or participate in the management of the firm but only give their name to the business or firm. But are liable to third parties for all the acts of the firm as per Section 18 and 25 Unlike a sleeping partner, they are known to the outsiders as partners in the firm, whereas actually they are not. They require to give public notice at the time of being separate from the firm.

144. PARTNER IN PROFITS ONLY A partner who is entitled to share in the profits of a partnership firm without being liable to share the losses, is called a partner in profits only. Thus, a person who has sufficient capital but is not prepared to take risk may be admitted to the partnership by the other partners. Inspite of his specific position, he continues to be liable to the third parties for all acts of the profits only, he will share none of the liabilities.

145. SUB-PARTNER Where a partner agrees to share his profits in the firm with a third person, that third person is called a sub partner. All sub-partners is not the partner in firm. He is partner of a partner. Such a sub-partner has no rights or duties towards the firm and does not carry any liability for the debts of the firm. He can neither participate in partnership business nor check the accounts of such partner and to claim share. Also he cannot bind the firm or other partners by his acts. The only right he has to share the profits in property at the time of winding-up.

146. SUB-PARTNER A partner may associate anybody else in his share in the firm. He gives a part of his share to the stranger. The relationship is not between the sub-partner and the firm but between him and the partner. The sub-partner is a non-entity for the partnership. He is not liable for the debts of the firm.

147. INCOMING PARTNER OUTGOING PARTNER A person who is admitted as a partner into an already existing firm with the consent of all the existing partners is called as ‘incoming partners’. Such a partner is not liable for any act of the firm done before his admission as a partner but subject to the contract. A partner who leaves a firm in which the rest of the partners continue to carry on business is called a retiring or outgoing partner. Such a partner remains liable to third parties for all acts of the firm until public notice is given of his retirement.

148. PARTNER BY ESTOPPEL OR HOLDING OUT Partnership by holding out is also known as partnership by estoppel. Where a man holds himself out as a partner, or allows others to do it, he is then stopped from denying the character he has assumed and upon the faith of which creditors may be presumed to have acted. A person may himself by his words or conduct have induced others to believe that he is a partner or he may have allowed others to represent him as a partner. The result in both the cases is identical. It is only the person to whom the representation has been made and who has acted thereon that has right to enforce liability arising out of ‘holding out’.

149. PARTNER BY ESTOPPEL OR HOLDING OUT If the behaviour of a person arouses misunderstanding that he is a partner in a firm (when actually he is not), such a person is estopped from later on denying the liabilities for the acts of the firm. Such person is called partner by estoppel and is liable to all third parties. Similarly, if a person who is declared to be a partner (when actually he is not) does not deny the fact that he is a partner, he being held out as a partner is responsible for all liability of the business. The law relating to partners by holding out is contained in Section 28 of the Act, which lays down thus:

150. PARTNER BY ESTOPPEL OR HOLDING OUT Anyone who by words, spoken or written or by conduct represents himself, or knowingly permits himself to be represented to be a partner in a firm, is liable as a partner in that firm to anyone who has on the faith of any such representation given credit to the firm, whether the person representing himself or represented to be a partner does or does not know that the representation has reached the person so giving credit.

151. PARTNER BY ESTOPPEL OR HOLDING OUT Eg X and Y are partners in a partnership firm. X introduced A, who is a manager in the firm, as his partner to Z. A remained silent. Z a trader believing A as partner supplied 100 TV sets to the firm on credit. After the expiry of credit period, Z did not get amount of TV sets sold to the partnership firm. Z filed a suit against X and A for the recovery of price. Here, A is also liable for the price because he becomes a partner by holding out. The rule as to holding out is based on the doctrine of estoppel as contained in Section 115 of the Indian Evidence Act. Holding Out means, “to represent”. Strangers, who hold themselves out or represent themselves to be partners in a firm, whereby they induce others to give credit to the partnership are called “Partners by Holding Out”.

152. PARTNER BY ESTOPPEL OR HOLDING OUT The rule given in section 28 is also applicable to a former partner who has retired from the firm without giving proper public notice of his retirement. In such cases a person who, even subsequent to the retirement, give credit to the firm on the belief that he was a partner, will be entitled to hold him liable. An active partner who fails to give public notice at the time of retirement is liable as partner by holding out. In case of ‘Partnership by Estoppel’, the representation is made by partners about a stranger within his knowledge and hearing and he does not contradict it. He is then held liable as a partner. Eg A partnership firm consisting of P Q R and S. S retires from the firm without giving public notice and his name continues to be used on letter heads. S is also liable as a partner by holding out to the creditors who have lent on the faith of his being a partner.

153. EFFECTS OF HOLDING OUT The Holding Out partner becomes personally and individually liable for the acts of the firm. But he does not become a partner in the firm and is not entitled to any rights or claim upon the firm. An outsider, who has given credit to the firm thinking him to be a partner, can hold him liable as if he is a partner in that firm. As the liability of the partners is joint and several he can be held liable to pay the entire amount. But under the doctrine of subrogation as well as on the basis of quasi-contract, he can recover the amount so paid from the partners of the firm.

154. EXCEPTIONS OF HOLDING OUT The doctrine of Holding Out is not applicable in the following cases: (a) It does not apply to cases of torts committed by partners. A person, therefore, cannot be held liable for the torts of another simply because that other person held himself to be his partner. (b) It does not extend to bind the estate of a deceased partner, where after a partner’s death the business of the firm is continued in the old firm name. Section 28(2) (c) It also does not apply where the Holding Out partner has been adjudicated insolvent. Section 45

155. MINOR’S POSITION IN PARTNERSHIP In view of Section 11 of the Indian Contract Act, 1872, and the decision of the Privy Council in Mohri Bibi v. Dharmo Das Ghose 1903 , a minor’s agreement is altogether void and not enforceable. An agreement is an essential ingredient in a partnership; it follows that a minor cannot enter into an agreement of partnership, as he is incompetent to enter into a contract. On the same principle, a minor cannot be clothed with all the rights and obligations of a full-fledged partner through a guardian.

156. MINOR’S POSITION IN PARTNERSHIP Section 5 states “The relation of partnership arises from a contract...” The minor is incompetent to contract and, therefore, partnership cannot come into existence if the parties to a contract of partnership consist of one major and one minor. The only provision that Section 30 makes is that with the “consent of all the partners for the time being, a minor can be admitted into the benefits of partnership to which a minor is going to be admitted”. A partnership firm cannot be formed with a minor as partner. The only fact is that in an existing firm a minor can be admitted only for profits with the consent of all partners.

157. RIGHTS OF MINOR He is entitled to his agreed share and can inspect books of account of the firm Section 30(2) . He can bring a suit for account and his share when he intends to sever his connections with the firm, but not otherwise. Section 30(4) A minor who was admitted to the benefits during his minority within six months of his attaining the age of majority or when he comes to know of his being so admitted (whichever date is later), he has to elect whether he wants to become a partner, or sever his connection with the firm. He may give public notice of his election to continue or repudiate, but if he fails to give any public notice within the period stated above, he will be deemed to have elected to become a partner in the firm. Section 30(5)

158. LIABILITIES OF MINOR Share in Liability: A minor partner’s liability is confined only to the extent of his share in the firm. Section 30(3) provides that a minor’s share is liable for the acts of the firm. But a minor is not personally liable in any such act. Thus, he is neither personally liable nor is his private estate liable for the acts of the firm. Personal Liabilities: Where a minor on attaining majority, elects to become a partner, he becomes personally liable as other partners to the third parties for all the acts of the firm done since he was admitted to the benefits of partnership.

159. ELECT TO BECOME MINOR Election by Minor: A minor who was admitted to the benefits during his minority within six months of his attaining the age of majority or when he comes to know of his being so admitted (whichever date is later), he has to elect whether he wants to become a partner, or sever his connection with the firm. He may give public notice of his election to continue or repudiate, but if he fails to give any public notice within the period stated above, he will be deemed to have elected to become a partner in the firm. Section 30(5)

160. POSITION IF ELECT TO BECOME A PARTNER If he becomes or elects to become a partner, his position will be as under: (a) His rights and liabilities will be similar to those of a full-fledged partner. (b) He will be personally liable for all the acts of the firm done since he was first admitted to the benefits of the partnership. (c) His share of profits and property remains the same as was before, unless altered by agreement

161. POSITION IF ELECT NOT TO BECOME A PARTNER If he elects not to become a partner, then: (a) His rights and liabilities shall continue to be those of a minor up-to the date of his giving public notice. (b) His share shall not be liable for any acts of the firm done after the date of the public notice. (c) He is entitled to sue the partners for his share of the property and profits in the firm. Section 30(8)