Contract- Ii.docx

DR. RAM MANOHAR LOHIA NATIONAL LAW UNVERSITY LUCKNOW

Contract- II Final Draft Profit Sharing as Test of Partnership Submitted to:

Submitted by:

Dr. V. Visalakshi

Margaret Rose

Assistant Professor

Roll no. 79

RMLNLU

Semester- 3rd

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Acknowledgement It feels great pleasure in submitting this research project to Dr. V. Visalakshi Assistant Professor(LAW) ,without whose guidance this project would not have been completed successfully. Secondly, I would like to express my gratitude towards Prof. Gurdip Singh Vice Chancellor and Prof. (Dr.) C. M. Jariwala Professor, Dean Academics for their support and encouragement. Next, I would like to sincerely thank my seniors, whose suggestions and guidance assisted me throughout the entire tenure of making the project. Last but not the least, I would like to express my heartfelt gratitude towards my parents and friends who guided me and helped me at every possible step.

Margaret Rose B. A. LLB.(Hons.) 3rd semester Roll No. 79

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Table Of Content  Intoduction…………………………………………………………………(4)  Nature Of Partnership……………………………………………………..(5)  Right to profit………………………………………………………………(7)  Contribution to losses………………………………………………………(12)  Conclusion………………………………………………………………….(14)  Bibliography………………………………………………………………..(15)

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Introduction The Indian Partnership Act was enacted in 1932 and it came into force on 1st day of October, 1932.1 The present Act superseded the earlier law relating to Partnership, which was contained in Chapter XI of the Indian Contract Act, 1872. The Act is not exhaustive. It purports to define and amend the law relating to Partnership. A Partnership arises from a contract, and therefore, such a contract is governed only by the provisions of the Partnership Act in that regard, but also by the general law of contact in such matters, where the Partnership Act does not specifically make any provision. It has been expressly provided in the Partnership Act that the unrepealed provisions of the Indian Contract Act, 1872, save in so far as they are inconsistent with the express provisions of this Act, shall continue to apply.2 Thus, the rules relating to offer and acceptance, consideration, free consent, legality of object, etc. as contained in the contained in the Indian Contract Act are applicable to a contract of partnership also. On the other hand, regarding the position of a minor, since there is a specific provision contained in Section 30 of the Indian Partnership Act, the minor’s position is governed by the provisions of the Partnership Act.

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Sec. 1. The Act came into force on the 1st day of October, 1932, except Section 69, which came into force on the 1 day of October, 1933. st

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Sec. 3.

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Nature of Partnership Partnership is a form of business organization, where two or more persons join together for jointly carrying on some business. It is an improvement over the ‘Sole- trade business’, where one single individual with his own resources, skill and effort carries on his own business. Due to the limitation of the resources of only a single person being involved in the sole- trade business, a larger business requiring more investment and resources than available to a sole-trader, cannot be thought of in such a form of business organization. In a Partnership, on the other hand, a number of persons could pool their resources and efforts and could start a much larger business, than could be afforded by any of these partners individually. In case of loss also the burden gets divided amongst various partners in a partnership. Any two or more persons can join together for creating Partnership. Section 11 of the Companies Act, 1956 imposes a limit as to the maximum number of persons in a partnership. In a partnership for the purpose of carrying on banking business, there can be a maximum of 10 partners, whereas if the partnership is for carrying on any other business, there can be a maximum of 20. If the number of members in any association exceeds the above stated limits, considered to be an illegal association. As against partnership, where the maximum number of partners can be 10 or 20, depending on the nature of the partnership business, there could be possibly much larger number of members in a Company. In a private Company there can be a maximum of 50 members, whereas in case of a public Company there is no such limit to the maximum number. Therefore, if a much larger business than could be afforded by only 10 or 20 persons, is sought to be carried on, a Company works out to be a better form of business organization than partnership. For instance, there could be a public Company having 1,00,000 members, each one of them having contributed just Rs. 10, and thus having a capital of Rs. 5|Page

10,00,000 for its business. A Company, as a form of business organisation may be better than a partnership in another way also. It is an artificial person, district from its members, and has much longer life than that of a partnership, whereas the partnership being nothing but an aggregate of all the partners, partnership has a much smaller span of life than a Company. In the case of a Company, the liability of a member (shareholder) is limited to the extent of the amount of shares purchased by him, whereas in case of partnership, the liability of every partner is unlimited, and this factor is of great advantage in the case of a Company, from the point of view of risk of investors in the business.

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Right to profit [ clause (b), S. 13] In the Absence of Agreement, Principle of Equality Clause (b) of Section 13 says that partners are entitled to share equally in the profits earned, and shall contribute equally to the losses sustained by the firm. The effect of the statement is that in the absence of an agreement to the contrary all partners are entitled to an equal share in the profits and are also bound to share the losses equally. The presumption is in favour of equal interest in profits and equal burden of losses. This will be so even where the capital contribution is not equal. Burden lies on those of the partners who allege that equality of profit sharing was not intended to prove that fact. In the absence of any agreement the presumption of equality stands.3 It is not at all necessary to prove that the partners agreed to share profits and losses equally. An equality in this respect between the partners is taken for granted.4 In a case before the Lahore High Court,5 either partner offered evidence of the fact that profit sharing was not intended to be equal but also claimed a different allotment of shares, and the trial Court, finding it impossible to accept the evidence of either party, decreed equal division. The High Court directed that it was incumbent upon the Court in a suit of this nature to weigh the evidence led by both sides and to give a decision as far as possible according to the weight of that evidence. In the absence of any evidence of an agreement to the contrary, the principle of equality prevails. Where a firm composed of two members entered into an agreement of partnership with an individual without any distinct agreement respecting the division of profits, it was held that the proper inference from the form and mode of execution of the contracts was that the adventure was undertaken by B & C as a firm, i.e., as one person conjointly with A as another person, and

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Jagmohan Dey v Balloram, ILR (1899) 26 Cal 281: 13 Indian Decisions (Cal) 784. Robison v Anderson, (1855) 109 RR 362. 5 Harchand Singh v Gurdip Singh, (1926) ILR 8 Lah 241. 4

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consequently the profits, ought to be divided in moieties one to A and the other to B and C. A similar view has been expressed by AMEER ALI J of the Calcutta High Court.6 “ The position is as follows, and this appears from the cases under the English Law which are cited in Lindley: Assuming that a partnership between a firm and an individual is in law a partnership between the individuals who compose the firm and the individual, the only question that arises is of this nature. Y and Z enter into partnership with A and B. Apart from special contract each takes 1/4. If Y and Z are partners and they combine with A and B, and there are no terms of partnership, the question arises as to whether Y and Z are to take a third or to take a quarter each. This depends upon whether Y and Z have entered into the partnership contract as a unit, although not a legal unit, or as separate individuals. Equality even when Disproportionate Capital Contribution In a Punjab case,7 it was argued that because the contribution of one partner in the capital of the firm was little over three times than that of the other partner and that this ratio had been maintained from the very inception of the partnership to its end and that, therefore, an agreement should be deduced that profits would be distributed in the proportion of their capital contributions. The court rejected this contention and stated: “ Whether, partners have contributed money equally or unequally, whether they are or are not on a parity as regards skill, etc., whether they have or have not laboured equally for the benefit of the firm, their shares will be considered as equal, unless some agreement to the contrary can be shown to have been entered into.” In Robinson v Anderson8 two solicitors were jointly retained to defend certain actions and there was no satisfactory evidence to show in what proportion they were to divide their remuneration.

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Kader Bux Omar Hyat v Bikt Behari, AIR 1932 Cal 768, 769: 36 Cal Wal 489. Mansha Ram v Tej Bhan, AIR 1958 Punj 5. 8 (1855) 20 Beav 98. 7

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It was held that they were entitled to share it equally although they had been paid separately and done unequal amount of work. The Master of the Rolls, enunciating the above principle observed: Assuming nothing to have been said as to the manner in which the profits were to be divided, it appears to me, as a necessary consequence of law, that they are to be divided equally between them. And, although one may do more business and have exerted himself more than the other, yet, if nothing is said upon the subject upon the subject of profits, the presumption is that they are to be equally divided between them. Implied Agreement to the Contrary An agreement to the contrary can be inferred from the circumstances of the case. In another Punjab case a partnership was constituted with a view to disposing of the plots of land mentioned in the document creating the firm. The duration of the partnership was fixed as “until this plot of land and any other plots of land purchased are not disposed of after development”. There was mention of the way in which profits were to be shared, but the interest of each partner in the partnership property was fixed. This was held to be an evidence of an agreement that the interest of the partners in profits and losses would be the same as their interest in the property. Effect of Change in the Constitution of Firm Where a change occurs in the constitution of a firm and no new agreement is made, the provision of Section 17 will apply and, therefore, the ratio of profit sharing will remain the same to the extent to which it is consistent with the altered composition of the firm. In a Madras case,9 the two partners of a firm were sharing profits in a certain proposition. One of them died. His son joined the firm and the business was continued on the same lines as before. No new agreement 9

Dawood Sahib v Sk. Mohindeen Sahib, AIR 1938 Mad 5: (1937) 2 Mad LJ 760.

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was made as to anything whatever. The court held that the profit sharing proportion between them must remain the same. The parties had merely agreed to carry on the partnership business, the plaintiff taking the place of his deceased father and nothing was said about the shares. On this finding the trial court held that the plaintiff was entitled to the share of his deceased father and the High Court declared this decision to be correct. Effect of Retirement on Equality of Profit Sharing The same principle is applicable on the retirement of a partner. If there is no agreement to the contrary between the remaining partners, their profits sharing ratio will remain the same, though to share here has to be some numerical adjustment. In a case before the Madhya Bharat High Court,10 of the three partners in a firm two were receiving profits to the extent 5 annas each and the remaining 6 annas belonged to the third. Thus the ratio roughly was 30: 30: 40. The partner who was receiving six annas retired. It was held that the reallocated share of the remaining would be ½ each. Both of them were now to share the profits equally, their shares being before the retirement. Another case of retirement was before the House of Lords in Robley v Brooke. There were two partners, R and A. The share of R was ¾ nad A ¼. R had a sub-partner B, who was to have a fourth share in the partnership, which was to come out to the three- fourths belonging to R. In other words, as between Rand B, their shares were to the ratio 2:1. It was a term of the partnership that in case of the death of Anderson his share would be divided so as to give R twothirds and B one-third of the whole business. Anderson retired from the partnership and there was in consequence dissolution of the firm. Anderson was paid out of the moneys in the business, and it was agreed that all the property of the partnership should belong absolutely to R

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Hiralal v Changanmal, AIR 1950 MB 56.

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and B. There was no specification then made as to the proportion in which they were to hold their shares or interest in the partnership assests. On R’s death subsequently, disputes arose between his representatives on the one hand and B on the other, as to their shares in the partnership. It was held by the House of Lords, reversing the Court of Appeal, that the shares of the partners Robley and Brooke were 2:1 in the business carried on after the retirement of Anderson as before. The decision on this particular point is to be found in the following observations of the Lord Chancellor: “ First, the whole profit and loss account is to be divided among the three partners, two shares to Mr Robley, and one share to Mr. Brooke. That was prior to Mr. Anderson’s leaving the firm. Now looking at the transactions as they pass, who pays for Mr. Anderson’s share. [ Both payments] come out of the whole concern, and, therefore, Mr Anderson’s share was purchased in the proportion of two-thirds and one- third. The event contemplated (the death of Mr. Anderson), being provided for this way, raised a very strong probability that in the same way an event not provided for, a causes omissus, that of Mr. Anderson’s retiring and not dying should be provided for in like manner, unless proof to the contrary could be shown. This consideration would be enough to throw the onus of proof on the other side, which onus had not been discharged.

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Contribution to Losses Section 13(b) also provides that subject to contract between partners, they shall contribute equally to the losses sustained by the firm. The provision lays down two presumptions with which the court should start. The two presumptions are clubbed in one sub-section. They are; first, if no specific contract is proved, the shares of the partners must be presumed to be equal. This statement occurs in the Madras High Court, where the plaintiff alleged unequal shares which were not denied by the defendant. The parties being agreed as to the shares possessed by them in the profits, there was no scope for the application of the first presumption. The second presumption is that where the partners are to participate in the profits in certain shares they should also participate in the losses in similar shares. “Now the section says that both should be in equal shares and implies that if unequal shares are admitted by the partners as to profit that applies equally to losses. In the absence of a special agreement, that this should be the presumption with which one should start is merely a matter of common sense, and in India, one has only to rely on Section 114, Evidence Act, for such a principle. This principle is in consonance with the decision in Nowell v Nowell where there was an agreement to share profits and losses in certain shares, but the question arose whether that agreement as to losses covered the case of a partner advancing a larger capital and the capital being lost. Sir W.M. JAMES VC observed: “Whether moneys are brought in originally as capital, or advanced subsequently, or paid by one partner at the winding up, is, in my judgement, wholly immaterial. In the absence of stipulations to the contrary, the community of profits involves like community of loss.” The learned Judge then gave an arithmetical example where one partner advances $ 1000 for speculation in cotton, and winds up like this: 12 | P a g e

“If it only produces $300 could it be contended that the capitalist partner is to put up with the entire loss and that the game of partnership between the man without money and the man with, was to be on the principle of heads, I win; tails, you lose.” Accrual of Right to Profits In the case of a partnership, where there is a covenant binding between the partners under which the accounts are to be made at stated intervals, the right of a partner to demand his share of the profits does not arise until the contingency which by operation of law or under a covenant of the partnership deed gives rise to that right has arisen.11 Recovery of Share of Profits One partner lent money to the other in his personal capacity for completing cinema hall and for fully equipping it for shows. A clause in the partnership agreement indicated the mode of recovering or adjusting the loaned amount, i.e. by crediting the rent of the theatre together with the share of borrowing partner’s profits in the partnership. Partnership earned no profits and no evidence was produced showing that the rent was credited as per terms of the agreement. It was held that the said clause of the agreement would not bar the creditor to file a suit for recovery of the amount due to him.12

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CIT v Ashokbhan Chimanbhai, AIR 1965 SC 1343: (1965) 1SCR 758: (1965) 1 SCJ 653:(1965) 56 ITR 42. Hari Singh Darbar v Mahant Vaishnavadas Guru M ahant Rajarangadas, (1972) 4 SCC 722: AIR 1971 SC1971.

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Conclusion Clause (b) of Section 13 says that partners are entitled to share equally in the profits earned, and shall contribute equally to the losses sustained by the firm. The effect of the statement is that in the absence of an agreement to the contrary all partners are entitled to an equal share in the profits and are also bound to share the losses equally. The presumption is in favour of equal interest in profits and equal burden of losses. Assuming nothing to have been said as to the manner in which the profits were to be divided, it appears to me, as a necessary consequence of law, that they are to be divided equally between them. And, although one may do more business and have exerted himself more than the other, yet, if nothing is said upon the subject upon the subject of profits, the presumption is that they are to be equally divided between them. The same principle is applicable on the retirement of a partner. If there is no agreement to the contrary between the remaining partners, their profits sharing ratio will remain the same, though to share here has to be some numerical adjustment. Where a change occurs in the constitution of a firm and no new agreement is made, the provision of Section 17 will apply and, therefore, the ratio of profit sharing will remain the same to the extent to which it is consistent with the altered composition of the firm. Section 13(b) also provides that subject to contract between partners, they shall contribute equally to the losses sustained by the firm. The provision lays down two presumptions with which the court should start. The two presumptions are clubbed in one sub-section. They are; first, if no specific contract is proved, the shares of the partners must be presumed to be equal. The second presumption is that where the partners are to participate in the profits in certain shares they should also participate in the losses in similar shares.

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Bibliography  Law of Partnership- Avtar Singh  Contract-II – Dr. R.K. Bangia  Contract and Specific Relief- Avtar Singh

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