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NATURE OF PARTNERSHIP

(Ss. 4 to 8).

QUESTION BANK.

Q.1. Distinguish between (a) a partnership firm and a Hindu Undivided Family business and (b) a partnership and a co-partner. Apr. 04.

Q.2. Define partnership. What are its essential characteristics? What do you understand by a ‘firm’ and a ‘firm name’? Nov. 04

Q.3. ‘Partnership is the relation between persons who have agreed to share the profits of business carried on by all or any of them acting for all’- Discuss.

Q.4. State the essentials of a partnership. What is the true test for determining the existance of a partnership?

Q.5. Define partnership. What are its essential characteristics?

SHORT NOTES.

1.Advantages and disadvantages in partnership and private limited company. Apr. 04.

SYNOPSIS.

1. DEFINITIONS OF ‘PARTNERSHIP’, ‘PARTNER’, ‘FIRM’ AND ‘FIRM NAME’: –

          Number of the partners: –

1. ESSENTIAL ELEMENTS OF THE PARTNERSHIP: –

1. Agreement:-

2. Business: –
3. Sharing of profits: –

4 Carrying on of business: –

III. MODE OF DETERMINING EXISTANCE OF     PARTNERSHIP (S. 6):-

1. DISTINCTION BETWEEN ‘PARTNERSHIP’ AND ‘CO- OWNERSHIP’ OR ‘JOINT-OWNERSHIP’:-
2. DISTINCTION BETWEEN ‘PARTNERSHIP’ AND ‘JOINT FAMILY’:-
3. DISTINCTION BETWEEN ‘PARTNERSHIP AND COMPANY’: –

VIII.  DURATION OF FIRM: –

Partnership at will (S. 7): –

Partnership at will: –

Where no period for-

Legal effects of partnership at will:-

Continuation after expiry of term: –

 I.       DEFINITIONS OF ‘PARTNERSHIP’, ‘PARTNER’,       ‘FIRM’ AND ‘FIRM NAME’: –

1. 4 of the Partnership Act, 1932, provides for these four definitions as ‘Partnership[1]’ is “the relationship between persons who have agreed to share the profits of a business carried on by all of any of them acting for all”.

                    Persons who have entered into a partnership with one another are individually called ‘Partners[2]’ and collectively ‘a firm[3]’, and the name under which their business is carried on is called the ‘firm name.’

Number of partners: –

It is obvious that at least two persons are necessary to constitute a partnership. However, the Act lays down a limit on the maximum number of partners. The limit is a maximum of ten partners in the banking business and twenty in the case of any other business.

II.      ESSENTIAL ELEMENTS OF THE PARTNERSHIP: –

The definition under S. 4 contains the following elements of the partnership, namely:-

1)       That it is the result of an agreement

2)       That it is organised to carry on a business

3)       That the person concerned agrees to share the profits of the business.

4)       That the business is to be carried on by all or any of them acting[4] for all.

1)       Agreement:-

S. 5 of the Act declares that the relation of partnership arises from the contract and not from status. Unlike Joint Hindu undivided family business, the partnership is created by agreement. So, mere birth or status in the family does not create a partnership[5]. Such agreement to create a partnership may or may not be written. But when the partnership agreement is in writing, it is called a ‘deed of partnership’, or ‘Agreement’ or ‘contract’.

2)       Business: –

          A partnership can only exist in lawful business, which may include every trade, occupation, and profession. S. 8 of the Act provides that a person may partner with another for a single and brief business adventure, etc. Therefore, it is irrelevant whether the business is temporary or permanent in nature. Even for brief and particular businesses, though, temporary partnerships can be created.

3)       Sharing of profits: –

          The division of profit is an essential condition of the existence of a partnership. Thus, sharing profit is prima facie evidence of the existence of a partnership. However, this Section does not insist upon an agreement for the sharing of loss; therefore, the provision for loss sharing is not essential.

4)       Carrying on of business: –

                    The definition of partnership in S. 4 concludes with the words that the business may be carried on “by all or any of them acting for all”. These words signify that the partnership business may be carried on by all the partners or any single partner who acts on behalf of others.

Cox V. Hickman[6]

The Court held that one partner’s liability for the acts of his co-partners is, in truth, the liability of a principal for the acts of his agent. Every partner in trade is, for the ordinary purposes of the trade, an agent of his Co-partners; all are, therefore, liable for the contract of the other.

III. MODE OF DETERMINING THE EXISTENCE OF PARTNERSHIP (S. 6):-

1. 6 provides that while determining whether a group of persons is or is not a firm or whether any person is or is not a partner in a firm, regard shall be had to the real relation between parties, as shown by all relevant facts into consideration (specifically in case of unregistered firm).

So, to determine the real relationship between the parties, whether it is a partnership or not, all the factors discussed above must be considered collectively; the mere existence of a profit-sharing agreement does not make a person a partner. Therefore, the following persons are not partners.

1)       Joint owner sharing returns

2)       Lender money to a firm of partners, agreeing to take profit and interest.

3)       Servant or agent getting a share in profit in addition to his payment.

4)       The widows or children of the deceased partner receive a share in the profit.

5)       A person who sells business along with goodwill is sometimes given a share in the profit of the business.

IV.     DISTINCTION BETWEEN ‘PARTNERSHIP’ AND ‘CO-OWNERSHIP[7]’ OR ‘JOINT-OWNERSHIP’:-

If a firm has assets, they are the joint property of partners. To this extent, partners are also co-owners. Yet co-ownership (or joint ownership) is not the same thing as a partnership.

There are the following points of differences between these two, viz.-

1)       A partnership can arise only by agreement, Co-ownership may arise in any other way.

2)       Business is necessary for the existence of partnership; co-ownership can exist without business.

3)       Partners collectively are principals and individual agents; co-owners are not such Principals or agents of one another.

4)       A co-owner can sell his share without the consent of the others.

But the partners cannot do so.

5)       A co-owner can sue for partition of the joint estate.

A partner can sue for dissolution and accounts.

V.       DISTINCTION BETWEEN ‘PARTNERSHIP’ AND
‘JOINT FAMILY[8]’:-

A joint family carrying on business has some features in common with the partnership. But S.5 of the Act expressly excludes ‘joint family’ business from ‘partnership’.

They differ on the following points: –

1)       A family cannot be created by agreement but by status. A partnership arises only by an agreement (contract).

2)       A person becomes a member of the ‘joint family’ and gets a share in assets and profits of such joint family business mere by the fact of birth in that family. However, a new partner cannot be admitted into the partnership except with the permission of all the partners.

3)       The ‘Karta’ or ‘manager’ is the only representative of the joint family. In a partnership, each partner is an agent of the firm.

4)       Every partner, being an agent of the firm, has an unlimited capacity to bind his co-partners into a liability for trade obligations. The member of a family does not have this power.

5)       The remedy of a coparcener (members of the family) is to file suit for partition.

But partners can file suit for dissolution and accounts.[9].

VI.     DISTINCTION BETWEEN ‘PARTNERSHIP AND COMPANY’: –

Many common features exist between a partnership and a company formed for business. A private company is closer to a partnership firm than a large public company. There are, however, the following points of distinction-

1)       A partnership is formed by an agreement, express or implied.

The company is formed by registration under the Companies Act 1956.

2)       Partnership need not be registered. The company must be registered.

3)       Partnership is not a ‘legal person’. But a Company is a ‘legal person’.

4)       In a company, usually, the liability of members is limited to shares. On the other hand, the liability of partners is joint and several.

5)       The shares of the company are freely transferable. However, the partner of a firm cannot sell his share without the permission of other partners.

6)       A partnership cannot have more than 20 partners. However, the company may have more than 20 members.

VIII.  DURATION OF A FIRM: –

1)       Partnership at will[10] (S. 7): –

Where no provision is made by contract between the partners for the duration of their partnership or for the determination (ending) of their partnership, the partnership is ‘partnership at will’.

          For the purpose of this section and matters relating to retirement and dissolution, partnership firms are classified into two kinds: those constituted for a fixed period and those whose duration is not specified.

Partnership at will: –

Where no period for

1. i) Duration of their partnership; or
2. ii) For the determination of their partnership is fixed in its contract, the partnership is ‘Partnership at will.’

          So, where no such period is fixed, the firm can last only as long as the members are willing to continue as partners; it is, therefore, a firm at will.

Legal effects of partnership at will:-

          Firstly, by virtue of S. 32 of the Act, a partner of a ‘firm at will’ can retire from the firm at any time by giving to his co-partners a notice of his intention to retire.

                     Secondly, by virtue of S.43, a partner of a ‘firm at will’ can dissolve the firm at any time, giving his Co-partners a notice of his intention to dissolve the firm[11].

2)       Continuation after the expiry of the term: –

          Where a partnership firm carries on its business even after the expiry of its period of duration, such implied (tacit) carrying of the firm is at will; therefore, it becomes a partnership at will.                                    *****

[1] भागिदारी. [साझेदारी।]

[2] भागिदार.       [साझेदार]

[3] भागिदारी संस्था.        [साझेदारी संगठन।]

[4] सार्वजनिक किंवा सर्वांच्या वतीने एकाने चालविणे.         [जनता या सभी की ओर से एक द्वारा संचालित।]

[5] S. K. Parthsarthy v. K. R. Naidu. AIR 2001 Mad. 399.

[6] (1860).

[7] सहमालकी.     [सह-स्वामित्व।]

[8] एकत्र कुटुंब.     [संयुक्त परिवार]

[9] In V. Malleshappa v. Smt. Akkamahadevi (AIR 2002 AP).

Facts:- The concerned business was constituted out of income and assets of joint family. The income earned by business of firm was utilised for the expenses of joint family. Majority of members except one (i.e. son-in-law) were family members. The partnership was constituted by them for the purpose of accounting and taxation.

Issue:- Whether this business is partnership or jointly family.

Held:- The business is joint family.

[10] इच्छेवर अवलंबून भागिदारी.   [इच्छा पर आधारित साझेदारी।]

[11] In Venketeshwarlu V. E. N. Rao (AIR 2002 A.P. 62)

Held: – Where no term is expressly made for the duration of partnership and there is nothing in contract to fix it, the partnership may be terminated at a moment of notice by either party. But in absence of express terms there may be implied contract as to the duration of the partnership.