After analyzing section 4 of Indian partnership act, the essentials in order people may become the

partners
1. There must be at least 2 person
2. Relationship must be arising out of an agreement between the 2 or more persons to do
business.
3. Agreement must be to share profits out of business
4. The business must be carried out by all or anyone of them acting for all.
All the 4 elements must coexist before a partnership comes into existence. The first element is
voluntary contractual nature of partnership.
The facts of the case:
Messrs. Smith were partners, engaged in the business of iron masters & corn merchant. Benjamin
Smith and Josiah Timmis Smith under the name of ‘B.Smith & Son’, were unable to pay the dues to
their creditors. Hence they executed a deed of arrangement in favour of the creditors. There were 5
creditors (Cox, Wheatcroft & 3 other creditors) stating that creditors would be the trustees of the
company & after recovering the debt amount from the income of the business, the business will again
owned by Smith & Smith. The creditors would carry the business of Smith & Smith under the name
of “The Stanton Iron Co.” The deed also contained a clause which prevented them from suing the
Smiths for existing debts. After signing of the deed, Cox has never acted as trustee & Wheatcroft
resigned after 6 weeks. After the resignation of Wheatcroft, the other trustees, who continued to act in the
conduct of the business, incurred certain indebtedness to Hickman wherein he drew three “Bills of
Exchange” for the goods supplied by him and bills were accepted by one of the three creditors but
didn’t honoured. Hence, Hickmen sued Cox & Wheatcroft assuming them as partners. Court of
Common Pleas held the creditors trustees liable.
Issue:
Whether there is a partnership between the traders who were in essence the creditors of the firm.
Whether the defendants including Cox & Wheatcroft are liable to the Hickman.
Argument/ contentions of the parties:
1. The counsel for Cox contended that-
The defendant can be made liable only if:
a) He put his name on the bill
b) Authorized someone else to put their name on the bill.
c) Held himself to have given the authority.
As to the first & third point are concerned, he is not liable as he had not acted as trustee. As far as the
second point is concerned, the defendant cannot be held liable unless an agency is proved.
2. The counsel for Wheatcroft contended that:
a.) There was no action against the appellant, as if Hickman had heard that Cox and
Wheatcroft were the trustees, he would have realized that Cox had never been a trustee &
Wheatcroft had resigned.
b.) Moreover, the ownership of the partnership never changed & was still owned by the Smiths.
c.) A qualified benefit derived from a trade does not make a person a partner in it. Here, unless
the profits are taken, there exists no partnership.
The counsel for Hickman contended that:
1. There was the contract of partnership under which business was to be carried out for the
benefits of creditors.
2. The defendants were allowed to participate in the profits of the firm thereby making them
partners.
3. Anyone of the partners may bind all the others by the acceptance of the bills in the regular
course of business.

Judgment:

The decision of the Court of Common Pleas was reversed and the defendants were not held liable .

Reason for Judgment.

The deed in this case is merely an arrangement between the creditors and the Smiths, to repay the
creditors out of existing and future profits. This relationship between the creditors and debtors is not
enough to constitute a relationship between a principal and agent. Trustees are liable as they are the
agent by the contract but the creditors are not the principals of the trustees.
After analyzing section 4 of Indian partnership act, the essentials in order people may become the
partners
1. There must be at least 2 person
2. Relationship must be arising out of an agreement between the 2 or more persons to do
business.
3. Agreement must be to share profits out of business
4. The business must be carried out by all or anyone of them acting for all.
All the 4 elements must coexist before a partnership comes into existence. The first element is
voluntary contractual nature of partnership.
Explanation 1 of the section 6 of the Partnership Act, 1932 describes that the sharing of the profits
or of the gross returns arising from property or business or person holding joint or common
interest in that property doesn’t of itself make such person partners.
The mutual agency & the liability of the debtor has been dealt in the respective case. Mutual Agency
is the foundation of the partner’s liability. Each partner is both an agent & principal for himself &
others; that is significance of the phrase “carried on by all or any of them acting for all”. Each partner
is an agent binding the other partners who are his principal & each partner is again a principal who in
turn is bound by the acts of the other partners. In other words, there must be facts or circumstances
from which it can be inferred that each of the persons alleged to be partners was the agent, real or
Implied of another. What is essential is that the partner who conducts the business of the firm not only
acts for himself but for the other partners also.
The true test, therefore, in determining whether a partnership exists, is to see whether the relation of
principal & agent exists between the parties & not merely whether the parties share the profits of the
business is carried out on for the benefit of all. It is this relation of agency among partners which
distinguishes a partnership from a single co-ownership on one hand & the agreement to share profits
on the other. The existence of this reason of agency can be gathered from the real intention of the
parties & the circumstances of the case. The question of intention must be decided on the basis of the
conduct of the parties & of all the surrounding circumstances.
The parties finding themselves in financial difficulties assigned their properties to the creditors
trustees for carrying on the business & paying off their debts out of the income of the business. The
trustee incurred certain liabilities & creditors brought the action against trustees seeking to make them
liable on these contracts. The House of Lords held that they were not liable. Mere sharing of the
profits is not conclusive test of partnership. ‘The real test is whether the trade was carried on
his behalf, i.e he stood in the relation of the principal towards the persons acting ostensibly as
the traders, by whom the liability has been incurred & under whose management the profits
have been made.’
It may be observed that the question whether a person is or is not a partner depends almost in
all cases upon whether other partners have the authority to act for him. It follows that the
agency relationship is the most important test of partnership.