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BOOK IV: Law of Partnership Chapter 01: Nature of Partnership A partnership is a voluntary association of two or more persons, who contribute, money, property, time, care or skill, to carry on, as co-owners, a lawful business for profit and to share the profits and losses of the business.
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BOOK IV: Law of Partnership Chapter 01: Nature of Partnership A partnership is a voluntary association of two or more persons, who contribute, money, property, time, care or skill, to carry on, as co-owners, a lawful business for profit and to share the profits and losses of the business.
THE ESSENTIAL ELEMENTS OF A PARTNERSHIP A partnership, as defined in the Act, must have three essential elements : 1. There must be an agreement entered into by two or more persons. 2. The agreement must be to share the profits of a business. 3. The business must be carried on by all or any of them acting for all.
The Tests of a True Partnership In a true partnership, all the essential elements mentioned above must be present. Section 6 of the Partnership Act lays down that 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. If all the Relevant facts taken together show that all the three essential elements are present, the group of persons doing business together will be called a partnership.
Of the three elements, the second element, viz., sharing of profits, is important but not conclusive. Sharing of profits may exist under circumstances where there is no question of partnership. As examples the following cases may be cited : (i) A creditor taking a share of profits in lieu of interest and part-payment of principal. (ii) An employee getting a share of profits as remuneration. (lii) Share of profits given to workers as bonus. (iv) Share of profits given to the widow or children of deceased partners as annuity.
Chapter 2: Rights and Liabilities of Partners The Partnership Act lays down two general rules regarding the conduct of the partners to one another. 1. “Partners are bound to carry on the business of the firm to the greatest common advantage, to be just and faithful to each other, and to render true accounts and full information of all things affecting the firm to any partner or his legal representative.”—Sec. 9. This section lays down that the relationship between partners is one of utmost good faith. Though partners are not trustees for one another, it has been held in some cases that: the relationship between them is of a fiduciary character. 2. “Every partner shall indemnify the firm for any loss caused to it by his fraud in the conduct of the business of the firm.”—Sec. 10. This rule follows logically from the rule laid down in the previous section. Since partnership implies utmost good faith, a partner must not act fraudulently against the firm. If he docs, he must make up the loss.
Subject to the general principles stated above the following rules are laid down in the Act regarding the relationship between the partners as regards the management of the business and their mutual rights and duties : • Rules regarding the conduct of the business: Subject to any agreement to the contrary, the following rules apply as regards the management of a firm : (a) every partner has a right to take part in the conduct of the business; (b) every partner is bound to attend diligently to his duties in the conduct of the business; (c) any difference arising as to ordinary matters connected with the business may be decided by a majority of the partners, and every partner shall have the right to express his opinion before the matter is decided but no change may be made in the nature of the business without the consent of all the partners; and (d) every partner has a right to have access to and to inspect and copy any of the books of the firm.—Sec. 12.
2. Mutual rights and duties: Subject to any contract to the contrary, the mutual rights and duties of partners are as follows : (a) a partner is not entitled to receive remuneration for taking part in the conduct of the business; (b) the partners are entitled to share equally in the profits earned and shall contribute equally to the losses sustained by the firm; (c) where a partner is entitled to interest on the capital subscribed by him such interest shall be payable only out of profits; (d) a partner making, for the purposes of the business any payment or advance beyond the amount of capital he has agreed to subscribe, is entitled to interest thereon at the rate of six per cent, per annum; (e) the firm shall indemnify a partner in respect of payments made and liabilities incurred by him (i) in the ordinary and proper conduct of the business, and (ii) in doing such act, in an emergency, for the purpose of protecting the firm from loss, as would be done by a person of ordinary prudence, in his own case, under similar circumstances; and (f) a partner shall indemnify the firm for any loss caused to it by his wilful neglect in the conduct of the business of the firm.—Sec. 13
3. Secret Profits: Subject to contract between the partners. (a) If a partner derives any profit for himself from any transaction of the firm, or from the use of the property or business connection of the firm or the firm name, he shall account for that profit and pay it to the firm; (b) if a partner carries on any business of the same nature as and competing with that of the firm, he shall account for and pay to the firm all profits made by him in that business.—See. 16. 4. Continuance of pre-existing terms: Subject to contract between the partners, the relationship between them is presumed to remain the same if the constitution of the firm changes for any reason, or if the firm was for a fixed period and continues to exist after the expiry of the term, or when business not included in the original contract is undertaken.—Sec. 17.
RECONSTITUTION OF A FIRM • Introduction of a New Partner. (Sec. 31) A new partner can be introduced only with the consent of all the partners. The share of profits which a new partner is entitled to get is fixed at the time he becomes a partner. He is liable for all the debts of the firm after the date of his admission but he is not responsible for any act of the firm done before he became a partner, unless otherwise agreed. These rules do not apply to a minor becoming a partner under Section 30.
RIGHTS OF AN OUTGOING PARTNER 1. By a special agreement among the partners, an outgoing partner may be prevented from carrying on a similar business within a specified period or within specified local limits. Such an agreement is valid and is an exception to the general rule that agreements in restraint of trade are void.—Sec. 36(2). 2. If there is no restraining agreement, an outgoing partner may carry on a business competing with that of the firm and he may advertise such business. But, subject to contract to the contrary, he may not (a) use the firm name (b) represent himself as carrying on the business of the firm or (c) solicit the custom of persons who were dealing with the firm before he ceased to be a partner.—Sec. 36(1).
3. Where any member of a firm has died or otherwise ceased to be a partner, and the surviving or continuing partners carry on the business of the firm with the property of the firm without any final settlement of accounts as between them and the outgoing partner of his estate, then, in the absence of a contract to the contrary, the outgoing partner or his estate is entitled at the option of himself or his representatives to such share of the profits made since he ceased to be a partner as may be attributable to the use of his share of the property of the firm or to interest at the rate of six per cent per annum on the amount of his share in the property of the firm; 4. A continuing guarantee given to a firm or to a third party respect of the transactions of a firm, is, in the absence of agreement to the contrary, revoked as -to future transactions from the date of any change in the constitution of the firm.—Sec. 38.
DISSOLUTION OF FIRMS What is Dissolution? Dissolution of a firm means the end of a firm by the break up of the relation of partnership between all the partners. Dissolution is to be distinguished from reconstitution of a firm. In the latter case, the partnership continues but there is a change in the number of partners. In the former case there is complete severance of jural relations between all the partners.
THE GROUNDS OF DISSOLUTION • A firm may be dissolved on any one of the following grounds : 1. By agreement. A firm may be dissolved any time with the consent of all the partners of the firm. Partnership is created by contract, it can also be terminated by contract.—Sec. 40. . 2. By notice. 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. The firm is dissolved as from the date mentioned in the notice as the date of dissolution, or, if no date is mentioned, as from the date of communication of the notice.—Sec. 43. • 3. On the happening of Certain Contingencies. (Sec. 42). Subject to contract between the partners, a firm is dissolved — (a) if constituted for a fixed term, by the expiry of that term; (b) if constituted to carry out one or more adventures or undertakings, by the completion thereof; (c) by the death of a partner; and (d) by the adjudication of a partner as an insolvent.
4. Compulsory Dissolution. A firm is dissolved— (a) by the adjudication of all the partners or of all the partners but one as insolvent, or (b) by the happening of any event which makes the business of the firm unlawful. • But if a firm has more than on undertaking, some of which become unlawful and some remain lawful, the firm may continue to carry on the lawful undertakings.—Sec. 41.
5. Dissolution by the Court. At the suit of a partner, the court may dissolve a firm on any one of the following grounds : (Sec. 44). (a) If a partner becomes insane. (The suit for dissolution in this case can be filed by the next friend of the insane partner or by any other partner). ( b ) If a partner becomes permanently incapable of performing his duties as a partner. Permanent incapacity may arise from an incurable illness like paralysis. If curable, then don’t. (c) If a partner is guilty of conduct which is likely to affect prejudicially the carrying on of the business, regard being had to the nature of the business. (d) If a partner wilfully and persistently, commits breach of the partnership agreement regarding management, or otherwise conducts himself in such a way that it is not reasonably practicable for the other partners to carry on business in partnership with him.
(e) If a partner has transferred the whole of his interest in the firm to an outsider or has allowed his interest to be sold in execution of a decree. Only the transfer of the entire interest of the partner gives ground for action. The transfer of, a part of the partner’s interest does not provide any ground for dissolution. (f) If the business of the firm cannot be carried on except at a loss. Since the motive, with which partnerships are formed, is acquisition of gain, the courts have been given discretion to dissolve a firm in cases where it is impossible to make profits. (g) If the court considers it just and equitable to dissolve the firm.' This clause gives a discretionary power to the court to dissolve a firm in cases which do not come within any of the foregoing clauses but which are considered to be fit and proper cases for dissolution.
