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PARTNERSHIP AND ITS ESSENTIAL

INTRODUCTION:
One of the forms in which business can be carried on is partnership, where two or more persons join together to form the partnership and run the business. In order to govern and guide partnership, the Indian Partnership Act, 1932 was enacted. Since public at large would be dealing with the partnership as customers, suppliers, creditors, lendors, employees or any other capacity, it is also very important for them to know the legal consequences of their transactions and other actions in relation with the partnership. A partnership is mean of bringing together the person who can contribute capital skill for expansion of business. This type of business is very popular in our country.

INDIAN PARTNERSHIP ACT, 1932


The preamble is an admissible aid to construction. It throws light on the intent and design of the legislature and indicates the scope and purpose of the legislation itself. But it cannot be used to control or qualify precise and unambiguous language of the enactment . It is only when there is a doubt as to the meaning of a provision, that recourse may be had to the preamble to ascertain the reasons for the enactment and hence, the intention of Parliament. Features of Partnership Act, 19321 Indian Partnership Act, 1932 is a Central Act. (made by Parliament). This Act deals with special type of contract.( contract of partnership) Provisions regarding contract of partnership were earlier contained in the Indian Contract Act, 1872. This Act extends to the whole of India except the state of Jammu and Kashmir. This Act came in to force on 1.10.1932, except section 69 which came into force on the 1st Day of October, 1933. Scope: The scope of a partnership is primarily a question of the intention of the partners. There is no restriction on the exercise of such powers as it chooses at any time to exercise, except such prohibitions on illegal, immoral or fraudulent conduct as apply equally to individuals. A partnership may itself be a member of another firm if the partners of the constituent firm consent thereto.

____________________________ 1. S.D. Singh & J.P.Gupta, Law of Partnerships in India, Orient Law House, Third Revised Edition,(1988), at p.8.
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If it appears that all the partners have either authorized or ratified the contract, no further question as to its validity ordinarily remains. The case where the question of the validity of partnership contract arises is where one partner has made the contract without specific authority from his co-partners. As to their implied scope partnerships may he divided into the classes of the non-trading and the trading. Some powers can be exercised by partners in partnership of either type. Thus a partner may retain an attorney protect the interests of the firm.

In common parlance, partnership is a business owned and managed by two or more people. To form a partnership, each partner normally contributes money, valuable property or labor in exchange for a partnership share, which reflects the amount contributed. Section 4 of Indian Partnership Act 1932 defines Partnership as follows -

Section 42 - Partnership is the relationship between persons who have agreed to share the
profits of a business carried on by all or any of them acting for all. Thus, Partnership is the name of legal relationship between/among persons who have entered in to the contract. Meaning of Partner Firm and Firm Name Section 4 of Indian Partnership Act, 1932 provides that: Persons who have entered into partnership with one another are individually called partners and collectively called a firm and the name under which their business is carried on is called firm name. Partnership is thus Invisibility which binds the partners together and firm is the visible form of those partners who are thus bound together.

Examples:
1. A and B buy 100 bales of cotton to sell later on profit which they agree to share equally. A and B are partners in respect of such cotton. 2. A and B buy 100 bales of cotton together for personal use. There is no partnership between A and B. 3. A, a goldsmith, agrees with B to buy and provide gold to B to work on an ornament and to sell and that they shall share the profit. A and B are partners. _____________________________ 2. G.C.V. Subba Raos , Special Contracts, s.gogia & company, 12th edition 2012

4. A and B are carpenters working together. They agree that A will keep all the profits and will pay B a wage. They are not partners. 5. A and B jointly own a ship. This circumstance does not make them partners. Section 5 of IPA 1932 says that the relation of partnership arises from contract and not from status. Thus, if there is no specific contract, there can be no partnership. As per Section 6, to determine whether a partnership exists between a group of persons, we have to look at the real relation between them as shown by all relevant facts taken together. It further says that sharing of profits or of gross returns arising from a property owned jointly by them does not by itself makes them partners. Based on these definitions, in Helper Girdharbhai vs Saiyed M Kadri and others, J Sabyasachi of SC3 identified that the following elements must be there in order to establish a partnership There must be an agreement entered into by all the parties concerned, the agreement must be to share profits of the business, and the business must be carried on by all or any of the person concerned for all. Sir Frederick Pollock defines Partnership as: The relation which subsists between persons who have agreed to share the profits of a bus iness carried on by all or any of them on behalf of all of them.

THE ESSENTIALS OF PARTNERSHIP4:


Agreement. Agreement between two or more persons: According to Section 5 of Partnership Act, the relation of partnership arises from contract and not from status. Business. Sharing of Profits. Business carried on by all or any of them acting for all. (Mutual Agency) _____________________________ 3. AIR 1987 4. Justice K. Sukumaran, Mulla The Indian Partnership Act, Pollock & Mulla, Lexis Nexis Butterworths, Sixth Edition.

1. Agreement:
There has to be an agreement between two or more people to enter into partnership. The agreement is the source of the partnership. It is not necessary that the agreement be formal or written. An agreement can be express or implied. Further, such agreement must follow all the requirements of a valid contract given by Indian Contract Act 1872. This includes the parties must be competent to contract and the object of the agreement should be legal. The Supreme Court, in Tarsem Singh v Sukhminder Singh5, has held that it is not necessary under the law that every contract must be in writing. There can be an equally binding contract between the parties on the basis of oral agreement, unless there is a law which requires the agreement to be in writing.

2. Agreement between two or more persons:


The term person as used in Sec.4 does not include a firm. This is because a firm is not a separate legal entity. As such two partnership firms cannot enter into partnership, though all the partners of the two firms may form a partnership out of their separate firms provided their number does not exceed the statutory limit6. A company is a person and being an entity distinct from its members; enter into a contract of partnership if it is authorized by its Memorandum of Association. The following can enter into a partnership Individual firm Hindu undivided family Company Trustees

Individual: An individual, who is competent to contract, can become a partner in the partnership firm. If there are more than two partners in a firm, an individual can be a partner in his individual capacity as well as in a representative capacity as Karta of the Hindu undivided family. ______________________________ 5. AIR 1998 SC 1400 6. G.C.V. Subba Raos , Special Contracts, s.gogia & company, 12th edition 2012

Firm: A partnership firm is not a person and therefore a firm cannot enter into partnership with any firm or individual. But a partner of the partnership firm can enter into partnership with other persons and he can share the profits of the said firm with his other co-partners of the parent firm. Hindu undivided family: A Karta of the Hindu undivided family can become a partner in a partnership in his individual capacity, provided the member has contributed his self-acquired or personal skill and labour. Company: A company is a juristic person and therefore can become a partner in a partnership firm, if it is authorized to do so by its objects. Trustees: Trustees of private religious trust, family trust and trustees of Hindu mutts or other religious endowments are juristic persons and can therefore enter into partnership, unless their constitution or objects forbid. In agreement associated between two or more persons, the number of partners in a firm shall not exceed 20 and a partnership having more than 20 persons is illegal. If the partnership is between the karta and member of Hindu undivided family the members of the joint Hindu family will not be taken into account. 2. Business : They must intend to start or do a business. A business is a very wide term and includes any trade, occupation, or profession. Business may not be of long duration or permanent and even a single activity may be considered a business. Thus, if two persons are not partners, they can engage is a transaction with an intention to share profits and can become partners in respect of that transaction. For example, if two advocates are appointed to jointly plead a case and if they agree to divide the profits, they are partners in respect to that case. Section 8 also mentions that a person may become partner with another in particular adventures of undertaking. It is however necessary that a business exists. If a business is simply contemplated and has not been started, the partnership is not considered to be in existence. _____________________________ 7. H.R. Gokhale & Y.S. Chithale, The Sale of Goods & Partnership Act, Pollock & Mulla, Tripathi, Fourth Edition.
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Lang v James Morrison & Co Ltd8 Fact: An action was bought by an English company, James Morrison & Co Ltd, against 3 defendants, J McFarland, T Lang and W Keates. The plaintiffs carried on the business of receiving and disposing of frozen meat from abroad. They alleged that the 3 defendants carried on business in melb as partners under the names T McFarland & Co and on occasions McFarland, Lang and Keates. Before the action commenced, J McFarland and W Keates became insolvent and the action proceeded against their assignees and Lang. Held: There was no partnership as there was no real evidence that the plaintiffs and Thomas McFarland intended on entering into a joint venture. They were not partners against third parties, but each party had certain rights against each other. Evidence for this finding was found in the fact that separate bank accounts were kept as it was apparent that neither Lang nor Keates operated on the account of T McFarland & Co. Further Lang and Keates took no part in the business of the new firm other than to sign two letters. It was stated: Now in order to establish that there was a partnership, it is necessary to prove that JW McFarland carried on the business of Thomas McFarland & Co. on behalf of himself, Lang and Keates, in this sense, that he was their agent in what he did under the contract with the plaintiffs. In the circumstances, there was no such agency. Ram Priya Saran vs Ghanshyam Das9 Fact: Two persons agreed that after their tender is passed they will construct the dam in partnership. In order to deposit earnest money, the plaintiff gave 2000 Rs. The tender was not accepted. Held: It was held that since a business was only contemplated and not started, there was no partnership and so the plaintiff was entitled to get 2000 Rs from the defendant. _____________________________ 8. (1912) 13 CLR 1. 9. AIR 1981 All

Khan Vs Miah10 : Fact: Two persons obtained loan from the bank to start a restaurant. They also entered into a contract to purchase equipment and laundry for the restaurant. But their relationship terminated before the opening of the restaurant. It was held that there is no rule of law that parties to a joint venture do not become partners until they actually embark on the activity in question. It is necessary to identify the venture in order to decide whether the parties have actually embarked upon it but it is not necessary to attach any name to it. Many businesses require a lot of investment and activities before the actual trading begins. This does not mean that the business has not started until the trading begins. Held: It was held that in this case the activity of the business had begun and so the partnership was in existence. 3. Sharing of profits : Normally, an activity is done in partnership with a goal to make profits. Thus, for a valid partnership to exist, the partners must agree to share the profits according to their investment. Here, profits include losses as well. The partners may agree to share profits out of partnership business, but not share the losses. Sharing of losses is not necessary to constitute the partnership. The partners may agree to share the profits of the business in any way they like. The honourable apex Court of the nation has reiterated the provision in Section 6 of the Act in Girdharbhai v. Saiyed Mohmad Mirasaheb Kadri12 That in determining whether a group of persons is a firm or not, the real intention of the parties has to be taken into consideration. The Supreme Court had laid down the elements to determine a partnership as (a) there must be an agreement entered into by all parties concerned; (b) the agreement so entered into must be to share profits of a business;(3) the business must be carried on by all or any one for all. _____________________________ 10. [2001] All ER 20 11. sydney.edu.au lec subject pages law of associations 12. AIR 1987 SC 1782
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4. Mutual Agency: The present definition replaces Section 239, Indian Contract Act which defined Partnership as under: Partnership is the relation which subsists between persons who have agreed to combine their property, labour or skill in some business, and to share the profits thereof between them. The present definition is wider than the one contained in the Indian Contract Act in so far as it includes the important element of mutual agency , which was absent in the old definition. According to Pollock, Partnership is the relation which subsists between persons who have agreed to share the profits of a business carried on by all or any way of them on behalf of all of them. The firm must be managed by the partners and thus when any partner acts; he acts on behalf of the firm and thus on behalf of other partners. Therefore, a partner is considered an agent of others. In absence of such mutual right of agency, a partnership cannot exist. This was held in Cox Vs Hickman 186013 In this case, two people carried on business in partnership. Due to financial crisis they obtained loans. Having unable to repay the loans they executed a trust deed of properties in favor of the creditors. Some of the creditors were made trustees of the business. This included Cox and Wheat croft. They were empowered to enter into contracts and execute instruments to carry on business and to divide the profits among the creditors. After the recovery of debts, the property was to be restored to the two original partners. Cox never acted as trustee and retired, while Wheat croft acted as a trustee for some time and retired. Other trustee then became indebted to Hickman and executed a bill of exchange, which was not accepted and paid. Hickman sued the trustees for recovery of the money for materials supplied. The trustees could be held liable if they were partners. However, it was held that they were not partners. They observed that in partnership every partner is an agent of another and in this case this element was absent. As we can see, a partnership requires all the above ingredients to have legal validity, and so a mere sharing of profits is not a conclusive proof of a partnership. It must have the other three elements also. As mentioned in Section 6, merely sharing of profits arising out of a jointly owned property does not necessarily create a partnership. For example, if two persons own a house and give it on rent, the sharing of the rent does not create a partnership. Similarly, a payment to a person contingent upon profits also does not necessarily create a partnership until the element of mutual agency is not present. This is the case when a profit is shared with the lender of money for business. _____________________________ 13. (1860) 8 H.L. 268

In case of Mollow March Co Vs the Court of Wards 187214 Fact: A Hindu Raja loaned some money to Watson & Co. In return, he was to get a % of profit and was to exercise control on some aspects of the business. He was not empowered to direct the transactions of the company. Held: It was held that although sharing of profits is a very strong test, yet whether a relation of partnership exists depends on the real intention and conduct of the parties.

CONCLUSION:
To conclusion it can be said that, a partnership is a form of business. It has at least two members. Who joined capital or services for prosecuting of some business. Partnership is very important because in day to day activities we enter into partnership agreements and by making partners big goals are achieved with the help of joint and more number of people. The joint efforts of all the member results in successful accomplishment of tasks and that task or job can be easily afforded. Division of work leads to increase in efficiency at work among different partners. When some job is done by consent of all the members and if some profit is earned then it is shared among the different partners. And similar is the case when some loss occurs then that is also beard among all the members and its not that only one has to take responsibility or give compensation. So in my view Partnership is a good form of doing business than a company which is owned by a single person. Partnership is one of the oldest forms of business relationships. Though limited liability companies have replaced partnership firms in complex businesses, partnerships are still preferred by professionals and small trading and business enterprises in India and abroad. The Indian partnership act of 1932 provides for a general form of partnership which is the most prevalent form in India, but, over time the general form of partnership has lost its charm because of the inherent disadvantages in it, the most important is the unlimited liability of all partners for business debts and legal consequences, regardless of their holding, as the firm is not a legal entity. ____________________________ 14. L.R. 4 P.C. 419

General partners are also jointly and severally liable for tortuous acts of co-partners. Each partner has the exposure of their personal assets being appropriated and liquidated to meet partnership dues. These are statutory position, which cannot be altered by contract inter-se, though at times subterfuges are resorted to by unscrupulous partners to avoid personal liability. General partnership holdings are not easy to transfer; typically all other partners have to agree. Yet partnership is preferred in India, because of the ease of formation and lack of compliances involved.

BIBLIOGRAPHY
S.D. Singh & J.P.Gupta, Law of Partnerships in India, Orient Law House, Third Revised Edition,(1988), at p.8. Justice K. Sukumaran, Mulla The Indian Partnership Act, Pollock & Mulla, Lexis Nexis Butterworths, Sixth Edition. H.R. Gokhale & Y.S. Chithale, The Sale of Goods & Partnership Act, Pollock & Mulla, Tripathi, Fourth Edition. G.C.V. Subba Raos , Special Contracts, s.gogia & company, 12th edition 2012

REFERENCE
www.studymode.com/ www.hanumant.com/ www.freellbnotes.blogspot.in www.indiankanoon.org

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