INDIAN PARTNERSHIP ACT

Chapter 1- (b)

Partnership

“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”

Essential elements for Partnership

ContractAssociation of two or more personsCarrying on businessSharing of profitsMutual agency

Test of Partnership

Sharing of profitsThere may be business but no profitsBoth business & profits

Partners, firm, & firm name

Persons who have entered into partnership with one another are called individually ‘partners’ & collectively a ‘firm’

The name under which their business is carried on is called the ‘firm name’ A ‘firm’ is not a legal entity distinct from its members. It is merely a

collective name of the individuals composing it. A firm cannot possess property or employ servants, neither it can be a

debtor nor a creditor. It cannot sue or be sued by others The partners are free to choose any name for the firm subject to the

following rules:1. The name must not be too identical or similar to the name of another

existing firm2. The name must not contain the words like Crown, Emperor, Empress,

imperial, King, Queen, Royal, or words expressing or implying the sanction, approval or patronage of Government except when the State Government signifies its consent to the use of such words as part of the firm by order in writting

Distinction between partnership & co ownership

A partnership can come into existence only when there is an agreement among persons to carry on business with a view to share the profits thereof.

Coownership is not necessarily the result of agreement . Partnership is. Coownership does not necessarily involve community of profit or of loss.

Partnership does. One co owner can without the consent of the others, transfer his interest to

a stranger, so as to put him in the same position as regards other owners as the transfer himself was before the transfer. A partner cannot do this

One co-owner is not as such the agent real or implied of the other. One co owner has no lien on the thing owned in common for outlays or

expenses, nor for what may be due from the others as their share of common debt. A partner has

Co ownership is not necessarily existing for the sake of gain, and partnership existing for no other purpose, the remedies by the way of account & otherwise which one co owner has against the others are in many important respects different from, and less extensive than those which one partner has against his co partners.

Distinction between partnership & joint Hindu family business

The relation of partnership arises from contract & not from status; & in particular, the members of a Hindu undivided family carrying on a family business as such are not partners in such business.

Thus if two or more members of a Joint Hindu Family carry on a business inherited from their ancestors, it is not a partnership because it has been created by status or obtained by birth & not by an agreement.

In a partnership no new partner is admitted without the consent of all partners, while in the case of a joint Hindu family firm a new member is admitted just by birth

In a partnership women can be full fledged partners, while in a joint Hindu family business membership is restricted to male members only.

In partnership the maximum limit of partners is 10 for banking business & 20 for any other business but there is no such maximum limit in case of joint Hindu family business

In partnership each partner has an implied authority to bind his co partners by act done in the ordinary course of the business, there being mutual agency between various partners.In a joint family business all

Distinction between partnership & company

The main points of difference between a joint stock company & a partnership firm are as follows:

Regulating Act- a partnership firm is governed by the provisions of Indian partnership Act, 1932, whereas a company is governed by the provision of the Companies Act, 1956

Number of members- the max no of members in the case of a firm is fixed at 10 for the banking business & at 20 for any other business, but no such max no of members are fixed in the case of a public company. The max no of members must not exceed 50

Entity- A partnership firm has no separate legal entity distinct from the members composing it

Liability- In partnership, each partner has unlimited liability & is personally liable for all the debts of the firm. In a company, on the other hand, a shareholder has limited liability-

Authority of members- In partnership each partner has an implied authority to bind his co-partners by acts done within the ordinary course of business, but in a company a shareholder has no such authority.

Management-

Partnership deed

The name of the firm & names & addresses of partners who compose it Nature of business & the town and place where it will be carried on Date of commencement of partnership The duration of partnership The amount of capital to be contributed by each partner & the method of raising

finance in future if so required The ratio of sharing profit & losses Interest on partners’ capital, partners’ loan, and interest, if any to be charged on

drawings Salaries, commissions etc, if any payable to partners. The method of preparing accounts & arrangement for audit & safe custody of cash Division of task & responsibility i.e. the duties, powers & obligations of all partners Rules to be followed in case of retirement, death & admission of a partner Expulsion of partners in case of gross breach of duty or fraud A partner shall not carry on any business other than that of the firm while he is

partner The circumstances under which the partnership will stand dissolved Arbitration in case of dispute among partners

Duration of partnership

Partnership at will- where no provision is made by contract between the partners for the duration or for the determination of their partnership, the partnership is ‘partnership at will’

Particular partnership- when a partnership is formed for a particular period or for a specific venture, then it is called as a “particular partnership’

Kinds of partners

(1) General PartnersBasically all the partners of a firm are general partners. General partners we those whose liability is unlimited in the f General partners are of two types (a) Active partner, and (b) Sleeping partner. 

(a) Active Partner A partner who takes active part in the day to day management of the business is cared an active partner. An active partner (also called working partner) may work in different capacities such as manager, organizer, adviser, controller of all the affairs of the firm. The active partner is rewarded as per agreement between the partners. 

(b) Sleeping Partner A sleeping partner is one who contributes capital, shares profits and losses of the firm but takes no part in the day to day management of the affairs of the firm. A person, who has money to invest but cannot spare time for the business, may become sleeping partner. A sleeping partner is liable for the liabilities of the business like other partners. 

Kinds of partners

(2) Special Partners Special partners are partners whose liability is limited to the extent of their capital contributed in the firm. They are only found in limited partnership. The special partners cannot take part in the management of the business of the firm. In Pakistan limited partnership is not recognized. 

(3) Other Partners The other types of partners sometimes found in a firm are as follows. (a) Secret Partner/ Silent Partner A partner who takes active part in the affairs of a business but is not known to the public as a partner is called Secret partner”. He, like other partners, is liable to the creditors of the firm to an unlimited extent He shares profits according to the agreement signed. 

(b) Nominal Partner nominal partner lends his name for the goodwill and credit worthiness to the firm. He neither contributes capital nor takes active part in the management of business. Such partners are called nominal partners. Nominal partners are liable for the debts of the firm.

Kinds of partners

(c) Minor Partner Partnership is a contract and a contract with minor is void. Under Section 30 of Partnership Act, a minor is not able to enter into a contract and so he cannot become a partner of a firm. He can, however be admitted to the benefits of a firm with the consent of other members and that too in a business which is already operating. His liability remains limited to the extent of his share in the capital. On attaining majority, he has to choose whether he has to continue as a partner or not. 

(d) Partner at Will This type of partner will continue so long the partners have mutual faith, trust and confidence among them. Where no provision is made by contract between partners for the duration.

(e) Partners In Profit Only If a partner is entitled to receive certain share of profit and is not held liable for the losses, he is known as partner in profit only. He is not allowed to take part in the management of the business. 

Kinds of partners

(f) Partner by Estoppel There is another minor type of partner which is called partner by estoppel. If person styles the character of a partner in a business before a third party (outsiders) by words or in writing or by his act, he is called a partner by estoppel. The third party mistaking him as a partner in the business advances loans on his creditability, that person would be personally responsible for the liability attaching to the position of a partner The partner by estoppel would, however, not be entitled to any right like other partners in the business. For example Mr. Hamid is a rich man and is not a partner in a firm named Three Star Carpets. Mr. Hamid makes a false statement to Mr. Rauf, that he is a partner of the firm Three Star Carpets. On this impression Mr. Rauf sells carpets worth Rs. one million to “Three Star Carpets” on credit. The firm is not able to pay the amount of Rs, one million. Mr. Rauf can recover the amount of Rs. one million from Mr. Hamid, Mr. Hamid here is a partner by Estoppel.

Kinds of partners

(g) Sub Partner- When a partner agrees to share his share of profits in a partnership firm with an outsider is called a sub-partner. Such a sub-partner has no rights against the firm nor he is liable for the debts of the firm.

Registration of firms

Time of registration- registration may take place at any time during the continuance of the partnership firm.

Procedure for registration- An application in the prescribed form along with the prescribed fees has to be submitted to the Registrar of Firms of the state in which any place of business of the firm is situated or proposed to be situated.

Effects of Non-registration

No suit in a civil court by a partner against the firm or other co partners

No suit in a civil court by firm against third parties

The firm or its partners cannot make a claim of set off or other proceeding based upon a contract

Rights of partners

Right to take part in the conduct of the business

Right to be consultedRight of access to booksRight to share profitsRight to interest on capitalRight to interest on advancesRight to indeminity

Duties of partners

Absolute dutiesQualified duties

Absolute duties

Duty to carry on the business to the greatest common advantage

Duty to be just & faithful Duty to render true accountsDuty to provide full informationDuty to indemnify for loss caused by fraudDuty to be liable jointly & severallyDuty not to assign his interest