UNIT 1:GENERAL NATURE OF PARTNERSHIP

Introduction:
 It came into force on 1st October, 1932.
 It is applicable to whole of India.
 Prior to the passing of the Act, the law of partnership was included in Charter
XI of the Indian Contract Act.
 Where the Partnership Act is silent on any point, the general principles of the
law of contract apply. The partnership is a specialized branch of the Contract
Act.

Definition of Partnership
According to Section 4 of the Partnership Act “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.”

Meaning of Partners and Firm:

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”.

Essential Elements of Partnership::

1) There must be an association of two or more persons :

There must be at least two persons to form a partnership. For maximum number of
partners, partnership act is silent. But Section 464 of The Companies Act 2013 specifies
it as 50. Any persons recognized by law weather natural or artificial can enter into
partnership agreement. Hence 2 companies can be partners. But a firm cannot enter into a
contract for partnership though their partners can become partners.

2)
  All such persons must be competent to contract. According to Indian Contract Act
every person except the following:
(i) Minor
(ii) Person of unsound mind
(iii) Person disqualified by any law to which they are subject (alien, insolvents
etc)

2) There must be an agreement:

 A partnership arises only as a result of an agreement. Such an agreement may be
express or implied. Implied in the sense that it may be a voluntary act by the
persons. Agreement can be oral or in writing but partnership deed must be in writing
 Partnership is thus created by contract; it does not arise by operation of law or from
status
 Agreement must be valid
Partnership agreement like any other contract, so it must satisfy all the essentials of
a valid contract. In other words, the parties must be ‘competent’, i.e. capable of
entering into an agreement, their consent must be free and there should be a lawful
consideration and object.

3) There must be a business:

 The existence of a business is essential in a partnership. “Business” includes every
trade, occupation and profession. If two or more persons join together to form a
‘dramatic club’ it is not a partnership because there is no business in this case.
Similarly, if A and Bare co- owners of a building and let it to a tenant for rent and
divide the net rents between themselves. A and B are not partners because letting a
house is not a business. But if A and B agree to convert the building into a hotel and
to share the profits equally, there is a “business” here and hence A and B are
partners in respect of such business.
 The business must be lawful.
 The business may consist of a single adventure or a single undertaking. Section 8 of
the Indian Partnership Act provides:
“A person may become a partner with another person in particular adventures or
undertakings.” e.g. Two solicitors are engaged for a single case and they agree to
share the profits. They would be partners.

4) Sharing of profits:
 The element draws out the most essential feature and basis of partnership. The
object of partnership undoubtedly is to earn “profit”.
 Sharing of losses :
The agreement to share profit is essential, but it should be noted that an agreement
to share the losses is not essential. Where nothing is said as to the sharing of losses,
it is implied in a partnership deed.
It may, however, be agreed that as between the partners anyone or more of them
shall not be liable for losses. But the reverse is not just possible. So where persons
agree to share the profits of a money- lending business, they become partners, but
where one of them, so called partner is not to receive profits, he is not a partner. E.g.
A and B agree to work together as carpenters, but that A shall receive all profits and
shall pay wages to B, A and B are not partners. When
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profit is made, it must be distributed (in absence of any agreement) equally, or in the
agreed ratio.
 A person, who receives the profits of a business, is not necessarily a partner. The
persons who receive the profits but are not the partners are referred as under:
1. Retired partner
After retirement if the settlement of accounts is not done then the retired
partner may get share in profits. But he is not treated as partner.
2. Money-lenders receiving profits:
A money-lender is a person who lends money on interest. Sometimes, a
money-lender receives, in addition to or in place of his interest, a portion of
the profits of a business. In such cases, he cannot be said to be a partner only
on the ground that he receives the profits of the business.
3. Employee or agent receiving profits:
Sometimes, an employee or an agent of a business agrees to receive, in
addition to or in place of his regular remuneration, a portion of the profits of
the business. In such cases, he cannot be said to be a partner only on the
ground that he receives the profits of the business.
4. Widow or child of a deceased partner:
Sometimes, the widow or a child of deceased partner receives a portion of
profits as annuity. In such cases, they cannot be said to be the partners of the
firm only on the ground that they receive the profits of the business.
5. Seller of goodwill:
Sometimes, a person who sells his business along with its goodwill, is given
a share in the profits of the business he has sold. In such cases, that person
does not become a partner in the business only on the ground that he
receives the profits of the business.
6. Minor:
Minor receives share in profits but is not considered as partner.

 Just because a person is sharing profits, he is not a partner. But if a person is a

partner, he will definitely get share in profits.

5) Agency:
 Again this last element is most crucial of partnership. The business of a firm is
‘carried on by all or by anyone of them acting for all’. The underlying and
fundamental principle herein which constitutes partnership is the idea of ‘agency’.
The other partners are bound by the acts of one of them only on the principle of
agency. This is the cardinal principle of partnership law.

 It means every partner is a

Agent of the firm Principal for other partners acts

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That is to say, each partner is an agent binding the other partners who are his
principals and each partner is again a principal, who in turn, is bound by the acts of
the other partners. An act of one partner in the course of business of the firm is in
fact an act of all partners.

 Example :
A, Band C are partners in a business. D an outsider, deals with the firm through A.
As between A and D, A is the principal. But as between A, Band C, A is the agent
of Band C. As such A, B and C can all sue D. D can also sue A, Band C.
Furthermore, A is accountable to Band C because he is, in this transaction, an agent
of Band C.

 PARTNERSHIP DISTINGUISHED

A) PARTNERSHIP AND JOINT HINDU FAMILY FIRM (HINDU UNDIVIDED

FAMILY):

Partnership HUF
1. It arises from agreement 1. It arises by status.

2. Governed by Indian Partnership Act, 1932. 2. It is governed by Hindu Law.

3. Maximum partners can be 50. 3. No such limit is applicable here.

4. A person can be admitted by the 4. A male person becomes a member
consent of the other existing partners. merely by his birth.
5. A minor can be admitted only to the 5. A male minor becomes a member merely
benefits of the firm. by his birth.
6. Each partner is implied authority to bind the 6. Only Karta has such authority.
firm for the actions done by him in the
daily course of business.

7. Unlimited liability. 7. Karta’s liability is unlimited and the

coparcener’s liability is limited to their share
in the family property
8. Each partner has the right to ask for the books 8. The coparceners have no such right
of accounts and also for the profits and
losses.
9. In case of death of a partner, 9. HUF continues to operate even after death
partnership is dissolved unless of a coparcener.
otherwise agreed.

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B) PARTNERSHIP AND CO-OWNERSHIP:
Co-ownership means joint ‘ownership X and Y jointly purchase a plot. They are co- owners but not
necessarily partners. The distinction between the two is as under:

Partnership Co-ownership
1. It arises from an agreement. 1. It may arise from agreement or
operation of law.
2. It is formed to carry on business. 2. It may or may not involve carrying on a
business.
3. It involves profit or loss. 3. It may or may not involve profit or
loss
4. Partners have a mutual agency 4. Co-owners do not have a mutual
relationship. agency agreement.

5. Maximum partners can be 50. 5. No such limit is applicable here.

6. A partner cannot transfer his share to a 6. A co-owner can transfer his share to a
stranger without the consent of any other stranger without the consent of other
business. owners.

7. A partner has no right to claim partition of 7. A co-owner has the right to claim
property. partition of property.

C) PARTNERSHIP AND JOINT STOCK COMPANY:

Partnership Company
1. A firm does not enjoy separate legal 1. It has a separate legal existence.
entity i.e. separate legal existence.
2. The liability of the partner is unlimited. 2. Limited to the value of shares held by the
members.
3. It does not enjoy a long lease of life because of 3. It enjoys a perpetual existence.
dissolution due to different reasons.

4. Maximum partners can be 50. 4. In case of private limited company,

Minimum members-2, maximum
members -200
In case of public limited company,
Minimum members -7, maximum
members - no limit
In case of One person Company
(OPC)- only 1.
Partnership Company
5. A partner cannot transfer his share without the 5. A member can transfer his share as and
consent of other partners. when he wishes to.

6.There is mutual agency amongst the 6. There is no mutual agency

partners amongst the members

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7. Distribution of profits is compulsory as per 7. No such compulsion of distributing the
the partnership deed profits.
8. The ownership & management lies with 8. Ownership is with shareholders and
all the partners. the management is with board of
directors

9. Property of the firm is the joint property of all 9. The property of company is not the joint
the partners. property of the members.
10. The creditors of the firm can proceed against 10. The creditors of a company can
the partners jointly and severally. proceed only against the company.

11. No compulsory Audit 11. Its compulsory

D) A PARTNERSHIP AND CLUB:

A club is an ‘association of persons’ formed for social purpose and not for the purpose of any ‘gain’
or ‘profit’. It differs from the partnership in the following respects:

Partnership Club

1. Business oriented objects 1. Not aimed at making profits entirely.

2. Maximum partners can be 50. 2. No such limit is applicable here.

3. Does not enjoy long lease of life 3. Enjoys a long lease of life
4.There is mutual agency amongst the 4. There is no mutual agency amongst the
partners members

 CLASSES OR TYPES OF PARTNERS :

Partners can be classified as shown below:

1. Active/Actual Partner :
 A partner who is actively engaged in the conduct of the business of the partnership
is known as ‘active partner’.
 When an active partner retires from the firm, he has to give a public notice.
Otherwise, he will be liable on the principle of ‘holding out’.
 He is liable for acts of firm

2. Sleeping or Dormant Partner :

 A ‘Sleeping partner’ is one who does not take any active part in the business.
 Such partner joins the firm by agreement and invests capital and shares in the profit
of the business like the other partners.
 A sleeping partner need not give public notice of his retirement from the firm.
 He is liable for acts of firm

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3. Nominal Partner :
 A partner, who simply lends his name to the firm, without having any real interest in
it, is called a nominal partner.
 He neither invests nor shares in the profits or takes part in the management of the
business.
 He, along with other partners, is liable to outsiders for all the debts of the firm.
 Difference between sleeping and nominal partner: A nominal partner is known to the
outside world as a partner of the firm but in reality does not share in the profit of the
firm. A dormant partner on the other land, even though not known as a partner to the
world at large but in fact shares in the profits of the business.

4. Partner for profits only :

 Partners may agree that a particular partner shall get a share of the profits only but
he will not be called upon to contribute towards the losses. Such a partner is known
as ‘partner for profits only’.
 This is simply an, inter-se agreement binding the partners only. Hence,he continues
to be liable to third parties for all acts of the firm.

5. Sub-Partner :
 When a partner agrees to share his profits divided from the firm with a third person,
that third person is known as ‘sub-partner’.Such a sub- partner is in no way
connected with the firm.
 He cannot represent the firm and bind the firm by his acts. He has no right against
the firm nor is he liable for the acts of the firm.

6. Partner by Holding Out or by Estoppel :

 To hold a person liable as a partner by holding out, it is necessary to establish the
following :
1. He represented himself or knowingly permitted himself to be represented as
a partner.
2. Such representation occurred by words spoken or written or by conduct.
3. The other party on the faith of that representation gave credit to the firm.
 Once he poses himself as a partner, though he is not a partner, he is estopped from
saying that he is not a partner in a firm.
 Example:
X carried on business as RS. & Co. employed a person named RS. to act as manager
of the business. It was held that RS. is a partner by the principal of estoppel.

7. Incoming 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 partner”.

8. Outgoing Partner:
A partner who leaves a firm in which the rest of the partners continue to carry on business is
called an outgoing partner.

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 CLASSES OF PARTNERSHIP :
Partnership can be classified as under:

1. Particular Partnership :
 When a partnership is started for a particular purpose or period, it
ends only when the purpose or period is completed.
 If the partnership is carried even after the completion of the target
then it is deemed to be partnership at will.

2. Partnership at will:
 When no provision is made by contract between the partners for
the duration of their partnership, or for the determination
(termination) of their partnership, the partnership is “Partnership at
will”.
 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, then from the date of the communication of the notice. The notice must be served on all other
partners. The notice once given cannot be withdrawn unless all the other partners consent. The fact that
one of the partners receiving the notice is of unsound mind does not affect the validity of the notice