BUSINESS LAW (Spring Term’20)

Instructor: Misha Zaheer

PARTNERSHIPS (1)
Relevant Law: The Partnership Act, 1932
1. WHAT IS A PARTNERSHIP?
Section 4 of the Partnership Act defines a partnership as follows:
A partnership is the relation between two or more persons who have agreed to share the
profits of a business carried on by all or any of them, acting for all.
Persons who have entered into a partnership with each other are individually called ‘partners’
and collectively ‘a firm’.
2. ESSENTIAL ELEMENTS OF A PARTNERSHIP

2.1. Two or More Persons

There must be atleast two (competent) persons to form a partnership. The Partnership Act
is silent on the maximum number of partners, however, the law relating to companies
provides that the maximum number of partners incase of a banking business is 10 and
incase of a non-banking business is 20. Firms with number of members beyond these
limits must be registered as corporate bodies.

2.2. Agreement

There must be an agreement to form a partnership. This can be express or implied.

Section 5 of the Act provides:

The relation of partnership arises from contract and not from status.

One cannot acquire an interest in a partnership on the basis of birth in a particular family
etc. Hence, partnerships are voluntary and contractual in nature.

2.3. Business

‘Business’ includes every trade, occupation and profession. A business must exist for
there to be a partnership. Where two or more persons agree to share the income of a joint
property e.g. rent from a building, this does not amount to a partnership. Similarly, an
association created for charitable or religious purposes cannot be regarded as a
partnership because there does not exist any business.

2.4. Sharing of Profits*

There must be a sharing of profits. Unless otherwise agreed, this implies a sharing of
losses as well.

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Remember, sharing of profits is prima facie evidence of a partnership, not conclusive

evidence. Everyone who shares profits will not necessarily be a partner, for e.g. a
manager who receives a particular share in the profits as part of his remuneration is
simply an employee, not a partner.

2.5. Mutual Agency*

There must exist mutual agency relationship between all partners. Mutual agency means that
each partner is both an agent and a principal. An agent in the sense that he has the capacity to
bind other partners by acts done and principal in the sense that he is to be bound by acts done
by the other partners. Section 18 of the Act reads:
…a partner is the agent of the firm for the business of the firm.
Additionally, Section 4 reads:
…carried on by all or any of them, acting for all.
So, if there is a firm of X, Y and Z:
When X does an Act – X is the agent and Y/Z are the principals;
When Y does an Act – Y is the agent and X/Z are the principals; and,
When Z does an Act – Z is the agent and X/Y are the principals.
*Note: it is this mutual agency that distinguishes a partnership from co-ownership and a
simple agreement for sharing of profits.
3. NATURE OF A FIRM

A partnership firm is not a person in the eyes of law. It has no separate legal entity apart from the
partners constituting it. Thus, the firm itself cannot enter into a contract; it is the partners that
contract on behalf of the firm.

4. TEST OF PARTNERSHIP

A group of persons shall be regarded as a partnership if the real relation between partners shows
the presence of all essential elements of a partnership. Section 6 of the Act reads:

Mode of determining existence of partnership. 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 parties, as shown by all relevant facts taken together.

Explanation 1. The sharing of profits or of gross returns arising from property by persons
holding joint or common interest in that property does not of itself make such persons partners.

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Explanation 2. The receipt by a person of a share of the profits of business, or of payment

contingent upon the earning of profits or varying with the profits earned by a business, does not
itself make him a partner with persons carrying on the business;

And in particular, the receipt of such share or payment:

(a) by a lender of money to persons engaged or about to engage in any business,

(b) by a servant or agent as remuneration,
(c) by the widow or child of a deceased partner, as annuity, or
(d) by a previous owner or part owner of the business, as consideration for the sale of
the goodwill or share thereof,

does not of itself make the receiver a partner with the persons carrying on business.
If there is an express contract, real relation will be ascertained from the terms of the partnership
contract, otherwise real relation will be ascertained from all relevant factors such as contract of
parties, books of accounts, statements of employees etc.
Example: X and Y jointly purchase a building; they then contribute capital equally to convert
the building into a hotel. They let the hotel out on rent of Rs. 1 lac per month and share the rental
income equally. Are X and Y partners? No. X and Y are co-owners, not partners. There is no
mutual agency relationship i.e. there is no capacity of either X or Y to bind the other [See:
Govind Nair v. Maga].
Therefore, partnerships can be presumed to exist where (a) there is an agreement to share the
profits of a business and, (b) the business is carried on by all or any of the partners, acting for all
partners.
Note: even when exclusive power is vested in one partner under an agreement, a partnership will
still exist.
5. PARTNERSHIP VS. COMPANY

Distinction Partnership Company

1. Legal entity A firm does not have a A company has a separate

separate legal existence legal existence from its
members

2. Liability Liability of partners is Liability of members is

unlimited limited to the extent of the
value of shares held by them

3. Tenure A partnership does not haave a A company has a perpetual

long lease of life. Death, existence. A company will be
sickness or retirement of a company until it is wound up
partners may affect its

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existence i.e. lead to its

dissolution

4. Number of members Minimum number of partners Minimum number of members

is 2. Maximum number of
partners is 10 in the case of
banking business and 20
incase of non-banking
business
is 7. No limit on the maximum
number of members of a
company

5. Transfer of interest A partner cannot transfer his A member may transfer his
share without the consent of share as and when he wishes
other partners

6. Agency Each partner represents the There is no mutual agency

other partners and has the among members of a company
capacity to bind the others by
his actions

7. Distribution of profits Profits are to be distributed in No compulsion for profits to

compliance with the be distributed. Members get
partnership deed their due share when
dividends are declared

8. Management Management lies with all Member cannot participate in

partners the management of a company
until they have been appointed
by the directors

9. Property Property of the firm is the Property of the company is

joint property of all partners property of the company, not
of its members

6. PARTNERSHIP DEED

A partnership is formed by agreement. The law does not require that such agreement be in
writing but it is desirable that such be in writing. The document that contains the terms of a
partnership, as agreed on amongst the partners, is called a Partnership Deed. This deed is
required to be duly stamped and signed by all partners. The deed may contain various provisions
such as the name of the firm, names and addresses of all partners, nature and place of business,
date of commencement of partnership, duration of partnership, amount of capital contributed by
each partner, profit sharing ratio, interest on capital, interest on loan advanced by a partner to the
firm, salary payable to any partner, settlement of accounts in case of death/retirement of a partner
or dissolution of the firm. The terms laid down in the partnership deed may be varied by the
consent of all partners.

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Note: a Partnership at Will is one where there is no provision for the duration of the partnership;
such a partnership may be dissolved by any partner by giving a notice in writing to all other
partners of the intention to dissolve the partnership. A ‘Particular Partnership’ is one that is
formed for a specific venture or for a particular period; such a partnership comes to an end on the
completion of the venture or upon expiry of the period.

7. REGISTRATION OF A PARTNERSHIP

Registration means getting the partnership registered with the Registrar of Firms of the area in
which the place of business of the firm is situated.

Registration of a firm is not compulsory; it can be affected at any stage i.e. at formation of the
partnership or at any time after that. However, according to Section 69(2) no suit can be filed on
behalf of an unregistered firm in a court. The effects of non-registration of a firm are as under:

(a) No suit by a partner against the firm or any other partner - If a partner is not paid his share of
profits, he will not be able to claim this through the court if his firm is unregistered;

(b) No suit by the firm against a third party - If an unregistered firm has sold some goods to a
customer it cannot file a suit against the customer for recovery of the price of goods. (Note:
lack of registration does not disable the third party from filing a suit against the partnership,
third parties will still be able to sue the firm);

(c) No right to claim ‘set off’ in excess of Rs. 100 - If an unregistered firm owes a third party Rs.
10,000 and the third party owes the firm Rs. 1000 and the third party files a suit against the
firm for recovery of the Rs. 10,000, the firm will not be able to claim an adjustment of the
Rs. 1000 against the Rs. 10,000.

8. TYPES OF PARTNERS

Active Partner: one who takes an active part in the conduct of the business. Such a partner is
liable to third parties for all acts of the firm, along with the other partners. Insanity or personal
incapacity of such a partner may be a ground for the dissolution of the firm.

Sleeping or Dormant Partner: one who does not take active part in the conduct of the business.
Such a partner is liable to third parties for all acts of the firm, along with the other partners.
Insanity or personal incapacity of such a partner will not be a ground for the dissolution of the
firm.

Nominal Partner: one who lends his name to the firm, without having any real interest in the
firm. He does not take part in the conduct of the business of the firm. He neither contributes to
the firm nor shares the profits. Such a partner is liable to third parties for all acts of the firm,
along with the other partners. Insanity or personal incapacity of such a partner will not be a
ground for the dissolution of the firm.

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Partner in Profits Only: one who shares the profits of the firm only, not the losses. He is liable
to third parties for all acts of the firm, along with the other partners. Insanity or personal
incapacity of such a partner may be a ground for the dissolution of the firm.
Sub-Partner: a third person with whom a partner agrees to share his profits. Such a partner has
no rights or liabilities with regard to the actions taken by the firm. Insanity or personal
incapacity of such a partner will not be a ground for the dissolution of the firm.

*It is important to know the type of a partner in question in order to determine the liability of
such a partner.

Partner by Estoppel or Holding Out [Section 28(1)]

A person is held liable as a partner by estoppel or holding out if and where the following two
conditions are fulfilled:

(a) Where he has represented himself to be a partner by word spoken or written or by his conduct
or, where he has knowingly permitted himself to be represented as a partner; and,

(b) The other person acting on the faith of such representation has given credit to the firm.

Example 1: Fazaldin, sole proprietor of Fazaldin & Co. employs Ahsan as a manager. Fazaldin
then introduces Ahsan as his partner to X, a supplier of goods. Ahsan remains silent. On account
of the fact that Ahsan is a partner of Fazaldin & Co. X supplies a certain amount of goods on
credit to the firm. Fazaldin fails to pay the price of the goods. X files a suit against both Fazaldin
and Ahsan for the recovery of money due. Ahsan will be liable as a partner by holding out
because he knowingly permitted himself to be represented as a partner and X supplied the goods
on the faith of such representation.

Example 2: After the retirement of a partner, the firm continues to use the retired partners name
as a partner. The partner has no given public notice of his retirement. X supplies goods to the
firm on credit on the faith that the retired partner is still partner. Such a partner will be held liable
as a partner by holding out [Section 28(2)].

Exceptions to the Principle of Holding Out

There are two exceptions to the principle that a partner will be held liable by holding out:

(a) If the firm uses the name of a deceased partner after his death, the estate of the deceased
partner or his legal representatives will not be held liable for acts of the firm done after the death
of the partner; or,

(b) The estate of an insolvent partner will not be held liable for the acts of the firm done after the
date of order of adjudication.

9. POSITION OF A MINOR AS PARTNER

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A minor is not capable of entering into a contract. On account of this an agreement by or with a
minor is void-ab-intio. Therefore, a minor cannot enter into a partnership agreement. However,
Section 30 of the Act provides that a minor can be admitted to the benefits of a partnership, with
the consent of all partners.

Section 30 of the Act contains the entire law on the position of minors as a partner. The
provisions of Section 30 are self-explanatory (*adding to these from the class discussion shall be
sufficient for your understanding). Section 30 provides as under:

30. Minors admitted to the benefits of a partnership.

(1) A person who is a minor according to the law to which he is subject may not be a partner
in a firm, but, with the consent of all the partners for the time being, he may be admitted
to the benefits of partnership.

(2) Such minor has a right to such share of the property and of the profits of the firm as may
be agreed upon, and he may have access to and inspect and copy any of the accounts of
the firm.

(3) Such minors share is liable for the acts of the firm, but the minor is not personally liable
for any such act.

(4) Such minor may not sue the partners for payment of his share of the property or profits
of the firm, save when severing his connection with the firm…

(5) At any time within six months of his attaining majority, or his obtaining knowledge that
he had been admitted to the benefits of the partnership, whichever date is later, such
person may give public notice that he has elected to become or that he has elected not to
become a partner in the firm, and such notice shall determine his position…

(6) …

(7) Where such person becomes partner:

(a) His rights and liabilities as a minor continue up to the date on which he becomes
partner, but he also becomes personally liable to third parties for all acts of the
firm done since he was admitted to the benefits of the partnership, and
(b) His share in the property and profits of the firm shall be the share to which he
was entitles as a minor

(8) Where such person elects not to become a partner:

(a) His rights and liabilities shall continue to be those of a minor under this section
up to the date on which he gives public notice,
(b) His share shall not be liable for any acts of the firm done after the date of such
notice, and

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(c) He shall be entitled to sue the partners for his share of the property and profits in
accordance with sub-section (4).