Law of Partnership

Meaning of partnership:

According to Section 4 of the Partnership Act, 1932, 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.

Essential Elements of Partnership:

The aforesaid definition clearly indicates the essential elements of partnership as given below:

I) It is the result of an agreement between two or more parsons;

II) It is organized to carry on a business;
III) The persons concerned agree to share the profits of the business;
IV) The business is to be carried on by all or any of them acting for all i.e. there must be
mutual agency.

I) Agreement between two or more parsons

There must be an agreement to form a partnership. This agreement may be express or implied. It
may also be written or oral. This essential element is further clarified in Sec. 5 which provides
that the relation of a partnership arises from contract and not from status. Thus, a Hindu
undivided family carrying on a family business is not considered as partnership. The reason is
that the members of that family acquire their interest in the business because of their status (i.e.
birth) in the family and not because of any agreement. Thus, partnership is voluntary and
contractual in nature.

There must be at least two persons to form a partnership and all such persons must be competent
to contract.

III) Business:

There must exist a business. According to Section 2(b), the term ‘business’ includes every trade,
occupation and profession. Thus the term has been used in a very wide sense. But this definition
can’t be taken literally, because, while every trade may be a business, every occupation or
profession may not be. When two or more persons agrees to share the income of a joint property
(e.g. rent from a building), it doesn’t amount to a partnership because there doesn’t exist any
business. Similarly, any association created for charitable, religious or social purpose can’t be
regarded as partnership because there doesn’t exist any business. It may also be noted that an
agreement to carry on a business at future time doesn’t result in partnership unless the time
arrives and the business is started. So the term business must be taken in a practical sense.

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IV) Sharing of Profits:

There must be sharing of profits. Well, to constitute a partnership, it is not necessary that all the
partners should agree to share the losses. Sec. 13 (b), however, provides that the partners shall
contribute equally to the losses sustained by the firm unless otherwise agreed. So, it can be said
that, if nothing is said in the contract, an agreement to share the profit implies an agreement to
share the losses as well.

It may also be noted that sharing of profits is a prima facie evidence and not a conclusive
evidence of partnership. Therefore, everyone who shares the profits of a business need not
necessarily be a partner. For example, a manager who receives a particular share in the profits of
a business as part of his remuneration is simply an employee and not a partner.

V) Mutual Agency:

There must exist a mutual agency relationship among the partners. ‘Mutual Agency’ relationship
means that each partner is both an agent and principal. Each partner is an agent in the sense that
he has the capacity to bind other partners by his acts done. Each partner is a principal in the sense
that he is bound by the acts of other partners. The importance of the element of mutual agency
lies in the fact that it enables every partner to carry on the business on behalf of others.

Partner, Firm and Firm Name:

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’.

Maximum Limit on Number of Partners:

According to section 4 of the Companies Act 1994, the maximum limit is as under:

(a) In case of a partnership firm carrying on a banking business – 10

(b) In case of a partnership firm, carrying on any other business – 20

If the number of partners exceeds the aforesaid limit, the partnership firm becomes illegal
association.

Nature of a Partnership Firm:

A partnership firm is not a person in the eye of Law (except under the Income Tax Ordinance,
1984 for the purpose of taxation). It has not separate legal entity apart from the partners
constituting it. Thus, firms themselves can’t enter into a contract for partnership though their
partners can.

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Registration of the Partnership Firm:

Registration of a Partnership Firm is not compulsory. But in practice, firms are registered.
Because, by creating certain liabilities from which an unregistered firm suffers, the law has made
the registration of firms desirable. For example, sec. 69(2) provides that no suit can be filed by or
on behalf of an unregistered firm in a court. This means the firm must have certificate of
registration before any suit is filed in a court.

Since registration is not compulsory, a firm may be registered at any stage i.e. at the time of its
formation or at anytime thereafter.

Procedure for registration: [Ss. 58 and 59]

Application for registration has to be filed in prescribed form with requisite fee to the Registrar.
The application must be signed by all the partners or by their agent duly authorized in this
regard, and must contain the following particulars:

i) Name of the firm;

ii) Place or principal place of business of the firm;
iii) The name of any other places where the firm carries on business;
iv) The date when each partner joined the firm;
v) The names in full and permanent address of the partners;
vi) The duration of the firm.

When the Registrar is satisfied that the above provisions have been duly complied with, he shall
record an entry of the statement in a register called the “Register of Firms’ and shall file the
statement. He shall then issue a certificate of registration.

Types of Partners:

Active Partner:

Partner, who takes an active part in the conduct of the partnership business, is called ‘active’ or
‘actual’ partner. He along with other partners is liable to third parties for all the acts of the firm.
He must give public notice of his retirement. His insanity or permanent incapacity to perform his
duties may be a ground for the dissolution of the firm.

Sleeping Partner:

He doesn’t take an active part in the conduct of the business. He along with other partners is
liable to third parties for the acts of the firm. But he need not give public notice of his retirement.
His insanity or permanent incapacity is not a ground for the dissolution of the firm.

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Nominal Partner:

He lends his name to the firm without having any real interest in the firm. He neither contributes
to the capital nor takes part in the conduct of the business of the firm. But he is an actual partner,
he is liable to third parties for the acts of the firm. And he must give public notice of his
retirement. His insanity or permanent incapacity is no ground for the dissolution of the firm.

Partner in Profits only:

He shares the profits only and not losses. He along with other partners is liable to third parties for
the acts of the firm. He must give public notice of his retirement. His insanity or permanent
incapacity to perform his duties may be a ground for the dissolution of the firm.

Sub-Partner:

He is a third person with whom a partner agrees to share his profits. He has no rights against the
firm and he is not liable for the acts of the firm. He is a third person and not a partner, so the
question of notice for retirement doesn’t arise and his incapacity can not be a ground for the
dissolution of the firm.

Partner by Estoppel or Holding Out:

If a person represents to the outside world by words written or spoken or by his conduct or by
lending his name, that he is a partner in a certain partnership firm, he is then estopped from
denying his being a partner and is liable as a partner in that firm to anyone who has on the faith
of such representation granted credit to the firm.

Mutual Rights and Duties of Partners in a Firm:

The mutual rights and duties of partners are governed by (a) the Partnership Agreement and (b)
the Partnership Act. The various provisions of the Partnership Act governing the mutual rights
and duties of partners are summarized below:

Provisions of Sections 9 and 10:

These provisions lay down the mandatory duties of partners. These provisions can’t be changed
by an agreement amongst the partners.

Mandatory duties are –

(a) to carry on the business of the firm to the greatest common advantage;
(b) to be just and faithful to each other i.e. every partner should act in good faith. Good faith
requires that a partner shouldn’t deceive the other partner by concealment of material facts.

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(c) To render true accounts and full information of all things affecting the firm to any partner or
his legal representative.
(d) To indemnify the firm for loss caused to it by his fraud in the conduct of the business of the
firm.

Provisions of Sections 11,12,16, to 25:

These provisions lay down the general rights and duties. These provisions can be changed by an
agreement amongst the partners.

General Duties of Partners:

(a) To attend to his duties diligently;

(b) Not to claim remuneration for taking part;
(c) To contribute equally to the losses;
(d) To indemnify the firm for any loss suffered by it due to his willful neglect;
(e) To hold and use firm’s property for business purpose;
(f) To account for and pay the personal profits from transactions of firm;
(g) Not to compete with the business of the firm.

Rights of Partners:

(a) Right to take part in the conduct of the business of the firm;
(b) Right to be consulted;
(c) Right of access to books;
(d) Right to share profits;
(e) Right to receive interest on capital out of profits (only if the partnership agreement provides);
(f) Right to claim interest on advances;
(g) Right to be indemnified.

Dissolution of Partnership or Firm:

The term dissolution stands for discontinuation. Under the Partnership Act, the dissolution may
either be of partnership or of a firm.

Dissolution of partnership:

Dissolution of partnership refers to the change in the existing relations of the partners. The firm
continues its business after being reconstituted. This may happen on admission, retirement or
death of a partner or change in profit sharing ratio in the firm.

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Dissolution of firm:

Dissolution of firm means the dissolution of partnership between all the partners of a firm. In
such a situation, the business of the firm is discontinued, its assets are realized, the liabilities are
paid off and the surplus (if any) is distributed among the partners according to their rights.

Thus dissolution of firm involves dissolution of partnership but dissolution of partnership may
not lead to dissolution of firm.

Modes of Dissolution of Firm [Sections 40 to 44]:

The dissolution of a firm may take place without the order of the court or by an order of the
court.

Dissolution without the order of the Court [Sections 40-43]:

(a) Dissolution by mutual agreement: A firm may be dissolved by mutual agreement among all
the parties.

(b) Compulsory dissolution: A firm is compulsorily dissolved in the following two

circumstances:
i) If all the partners, or all but one partner of the firm are declared insolvent;
ii) If some event takes place which makes it unlawful for the firm’s business to be
carried on.

(c) Dissolution on the happening of certain contingencies: Unless otherwise agreed by partners,
a firm is dissolved on the happening of any of the following four contingencies:
i) On the expiry of the fixed term for which the firm was continued;
ii) On the completion of the venture(s) or undertaking(s) for which the firm was
constituted;
iii) On the death of a partner; and
iv) On the insolvency of a partner.

(d) Dissolution by notice: Where partnership is at will, the firm may be dissolved by any partner
giving notice in writing to all other partners of his intention to dissolve the firm.

Dissolution by an order of the Court [Section 44]:

This section deals with those grounds on which the court may, on the receipt of petition from a
partner, order for the dissolution of a firm. These grounds are:

(a) Insanity; (b) Permanent incapacity; (c) Misconduct; (d) Persistent breach of agreement; (e)
transfer of interest; (f) Perpetual losses; (g) Any other just and equitable ground.