1.
Introduction
Prior to the Partnership Act, 1932 the law of partnership was covered by the
Indian Contract Act, 1872. Due to rapid growth in trade and commerce and
growing industrialization, a need was felt to have a separate law on partnership.
This led to the enactment of the Indian Partnership Act, 1932 . It extends to the
whole of India. It came into force on the 1st day of October, 1932, except section
69, which came into force on the 1st day of October, 1933.
2. What is Partnership
Section 4 of the Indian Partnership Act, 1932, lays down that “Partnership is the
relation between persons who have agreed to share the profits of a business
carried on by all or any one of them acting for all.”
• Persons who have entered into partnership with one another are
called individually “Partners” and collectively “a firm”.
• The name under which their business is carried on is called the “firm
name”.
• A firm is a collective name of partners. It is a physical unit. It is concrete.
While partnership is merely an abstract legal relation between the
partners. Partnership is an invisible tie, which binds the partners
together, and the firm is the visible form of those partners who are thus
bound together
2.1 What are the Essential Elements of Partnership?
All the following elements must be present if an association of persons is to be
called a partnership:
1. Association of two or more persons
There must be at least two persons to form a partnership. As far as t he maximum
number of partners, in a firm is concerned, the Partnership Act is silent.
However, section 464 of the Companies Act, 2013 lays down that where the firm
is carrying any business, the number of partners should not exceed 50 (It can be
increased upto 100). If the number of maximum partners exceeds this limit, the
partnership becomes an illegal association of persons.
The partnership between Family Members can be termed as a partnership only
after they agree to draft an agreement and contract, then only they will be
governed under the provisions of the Indian Partnership Act. Only if the business
was governed by an agreement and contract, then a partnership shall be
recognised as a valid partnership, which was held in Lakshmiah v Official
Assignee of Madras wherein Court ruled that if there is any specific agreement
which governs the partnership principles then it doesn’t matter whether it is made
between a joint family or it is the collaboration of family members.
Therefore, the above ground must be fully satisfied to register a firm or
partnership under the provisions of the act.
2. Agreement between persons
According to Section 5 of Partnership Act, the relation of partnership arises from
contract and not from status. Thus, the members of a Hindu Joint Family carrying
on a business, or the co-owners of a business are not ‘partners’ because HUF and
co-ownership are created by operation of law and not by contract. The
agreement of partnership may be expressed or implied.
3. Business
Partnership can be formed only for the purpose of carrying on some
business. Section 2(b) of Partnership Act says that the term ‘business’
includes every trade, occupation or profession. Thus, an association created
primarily for charitable, religious and social purposes are not regarded as
partnership. Similarly, when two or more persons agree to share the income of a
joint property, it does not amount to partnership; such relationship is terme d as
co-ownership.
4. Sharing of Profits
The division of profits is an essential condition of the existence of a partnership.
The sharing of profits is only a prima facie evidence of the existence of
partnership, and this is not the conclusive test of it.
5. Business carried on by all or any of them acting for all (Mutual
Agency)
The underlying or cardinal principle which governs partnership is the mutual
agency relationship amongst the partners. It means each partner is the agent of
the firm as well as of the other partners. The business of the firm may be carried
on by all the partners or by any of them acting for all. Thus, a partner is both an
agent and a principal. He can bind the other partners by his acts and is also
bound by the acts of the other partners. The law of partnership is regarded as an
extension of the general law of agency.
2.2 Who can be become partners of a firm?
According to the definition of partnership in section 4, a partnership is an
agreement. All those persons who are competent to contract can become
partners. As per section 11 of Contract Act, a person is competent to contract if
he is a major, of sound mind and is not disqualified from contracting by any law.
Thus a partner must fulfil the conditions of section 11. However, a minor u/s 30
of the Partnership Act, can be admitted to the benefits of the partnership firm
with the consent of all the partners.
KD Kamath & Co.: It was held by the Supreme Court that the two essential
conditions need to be satisfied in relation to the partnership:
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.
If the above-said conditions are satisfied and even if the exclusive power and
control was vested in one partner or if the bank account can be operated by only
one partner, then also there will be a partnership between the parties.
Satranjan Das Gupta v. Dasyran Murzamull (SC): It was held that there was no
partnership between the parties because of the following conditions:
1. Parties have not retained any record of terms and conditions of the
partnership.
2. Partnership business has maintained no accounts of its own, which
would be open to inspection by both the parties.
3. No account of the partnership was opened with any bank.
4. No written intimation was conveyed to the Deputy Director of
Procurement with respect to the newly created partnership
2.3 Duration of partnership.
The various types of partnership are based on two different criteria, with regard
to the duration of the term of partnership,
(1) A fixed term (Partnership for a fixed period)
(2) A single adventure or undertaking (Particular Partnership)
(3) An undefined time (Partnership-At-Will).
Unless otherwise agreed, where the partnership is for a fixed term, it terminates
on the expiration of that term.
A partnership entered into for a single undertaking is dissolved by the expiry of
that undertaking.
Where no fixed term has been agreed upon for the duration of the partnership. It
is a partnership at will. It can continue as long as the partners want and are
terminated when any partner gives a notice of withdrawal from partnership to
the firm.
2.4 Conclusion:
Partnership is a very common type of business which is prevailing in the
country. It has many advantages for the company. This Act is a complete Act as it
covers all the aspect related to the partnership. To check the validity of
partnership, the above all essentials and grounds must be compiled, in order to
form a partnership and get it registered under the provisions of the Indian
Partnership Act 1932.
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2.4 The Tests of a True Partnership
According to Sec. 4, there are 4 essential elements of partnership:
1. That it is the result of an agreement, between two or more persons.
2. That it is formed to carry on a business.
3. That the persons concerned agree to share the profits of the business.
4. That the business is to be carried on by all or any of them acting for all.
