Partnership

Introduction: 1. Voluntary Agreement A partnership can only arise as a result of an agreement, express or implied, between two or more persons. Where there is no agreement there is no partnership. But a partnership cannot be formed with more than ten persons in banking and twenty persons in other types of business. 2. Sharing of Profits of a Business: The second element states the motive underlying the formation of a partnership. It also lays down that the existence of a business is essential to a partnership. Business includes any trade, occupation or profession. If two or more persons join together to form a music club it is not a partnership because there is no business in this case. 3. Mutual Agency: The third elements is the most important feature or partnership. It states that persons carrying on business in partnership are agents as well as principals. The business of a firm is carried on by all or by any one or more of them on behalf of all. Every partner has the authority to act on behalf of all and can, by his actions, bind all the partners of the firm. Each partner is the agents of the others in all matters connected with the business of the partnership. Who can be a Partner: 2 A person: Under the Indian partnership Act, a person may be partner if he has the capacity to enter into a contract (“Capacity of parties”) 2 Minor: A minor cannot be a partner. But in an existing partnership, a minor can be admitted into a firm if all the partners of the firm agree. 2 Persons of unsound mind: A person who is of unsound mind cannot become a partner.

2 Woman: A woman can be a partner, married or unmarried. Of course a woman cannot be a partner if she is a minor or she is of unsound mind. 2 Company: In a company the capacity to enter into contract is determined by the Memorandum and Articles of the Association of the company. The liability of the members of a firm under the Partnership. Act, for the debts of the firm, is unlimited. But a company cannot incur unlimited liability. Therefore a company cannot become a partner of a firm. 2 An alien enemy: An alien enemy cannot enter into a contract of partnership with a citizen of any Country. Classes of Partners: Partners can be classified as below: Active partner: An active partner is one who actually participates in the business of the firm. A person becomes a partner only by agreement. Dormant, Sleeping or Nominal Partner: These partners join the firm by agreement but do not take any active part in the business. Their liabilities are same as of Active Partners. Sub-Partner: The transferee of a share of a partner’s interest in a firm is called a Sub-partner. Suppose P, the owner of ½ of firm, transfers 1/2 of his share to Q. Q will be called a sub-partner. His rights and liabilities are limited. Classes of Partnerships: Partnerships can be classified as below:

(a) Every partner has a right to take part in the conduct and management of business. (b) Every partner has a right to be consulted and heard in all matters affecting the business of the partnership. (c) Every partner has a right of free access to all records, books and accounts of the business, and also to examine and copy them. (d) Every partner is entitled to share the profits equally. (e) A partner who has contributed more than the agreed share of capital is entitled to interest at the rate of 6 per cent per annum. But no interest can be claimed on capital. (f) A partner is entitled to be indemnified by the firm for all acts done by him in the course of the partnership business, for all payments made by him in respect of partnership debts or liabilities and for expenses and disbursements made in an emergency for protecting the firm from loss provided he acted as a person of ordinary prudence would have acted in similar circumstances for his own personal business. ADVERTISEMENTS:

(g) Every partner is, as a rule, joint owner of the partnership property. He is entitled to have the partnership property used exclusively for the purposes of the partnership.

(h) A partner has power to act in an emergency for protecting the firm from loss, but he must act reasonably. (i) Every partner is entitled to prevent the introduction of a new partner into the firm without his consent. (J) Every partner has a right to retire according to the Deed or with the consent of the other partners. If the partnership is at will, he can retire by giving notice to other partners. ADVERTISEMENTS:

(k) Every partner has a right to continue in the partnership. (l) A retiring partner or the heirs of a deceased partner are entitled to have a share in the profits earned with the aid of the proportion of assets belonging to such outgoing partner or interest at six per cent per annum at the option of the outgoing partner (or his representative) until the accounts are finally settled. Relations of Partners to one another: The Partnership Act lays down two general rules regarding the conduct of the partners to one another. Rules regarding the conduct of the business: Subject to any agreement to the contrary, the following rules apply as regards the management of a firm: Every partner has a right to take part in the conduct of the business. Every partner is bound to attend diligently to his duties in the conduct of the business.

and difference arising as to ordinary matters connected with the business may be decided by a majority of the partners, and every partner shall have the rights to express his opinion before the matter is decided but no change may be made in the nature of the business without the consent of all the partners; and Every partner has a right to have access to and to inspect and copy any of the books of the firm.

Liability of a Partner: The partner’s liabilities can be discussed in three categories. Liability of the firm

for

wrongful acts of a partner:

Where, by the wrongful act or omission of a partner acting in the ordinary course of the business of a firm, or with the authority of his partners, loss or injury is caused to any third party, or any penalty is incurred, the firm is liable therefore to the same extent as the partner. Liability of firm for misapplication by partners: Where a partner acting within his apparent authority receives money or property from a third party and misapplies it, or a firm in the course of its business receives money or property from a third party, and the money or property is misapplied by any of the partners while it is in the custody of the firm, the firm is liable to make good the loss. Dissolution of Firms: A firm may be dissolved on any of the following grounds: By agreement. A firm gray be dissolved any of with the consent of all the partners of the firm Partnership is created by contract, it can also be terminated by contract. Compulsory Dissolution. A firm is dissolved 1. by the adjudication of all the partners or of all the partners but one as insolvent, or 2. by the happening of any event which makes the business of the firm unlawful.

But if a firm has more than one undertaking, some of which become unlawful and some remain lawful, the firm may continue to carry on the lawful undertakings. On the happening of Certain Contingencies Subject to contract between the partners firm is dissolved 1. if constituted for a fixed^ term, by the expiry of that term 2. if constituted to carry out one or more adventures or undertakings, by the completion thereof: 3. by the death of a partner 4. by the adjudication of a partner as an insolvent.

The partnership agreement may provide that the firm will not be dissolved in any of the aforementioned cases. Such a provision is valid a By notice: Where the 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. The firm is dissolved as from the date mentioned in the notice as the date of dissolution, or, if no date is mentioned, as from the date of communication, of the notice. a Dissolution by the Court: At the suit of a partner, the court may dissolve a firm on any one of the following grounds: a. Insanity: If a partner has become of unsound mind. The suit for dissolution in this case can be field by the next friend of the insane partner or by any other partner. b. Permanent incapacity: If a partner becomes permanently incapable of performing his duties as a partner. Permanent incapacity may arise from an incurable illness like paralysis. In Whitwell v. Arthur a partner was attacked with paralysis which on medical evidence was found to be curable. Dissolution was not granted. The suit for dissolution in this case must be brought by a partner other than the person who has become incapable. c. Guilty Conduct:

If a partner is guilty of conduct-which is likely to affect prejudicially the carrying on of the business, regard being had to the nature of the business. To justify dissolution under this clause the misconduct must be of such a nature as to affect adversely the particular business concerned. Misconduct which affects one business may not affect another business. Therefore the court must take into account the nature of business that1 the partnership carries on. The test generally applied is whether the act complained of is likely to affect the credit and custom of the particular business. The suit for dissolution on the ground mentioned in this clause must be brought by a partner other than the partner who is guilty of misconduct. Examples: The partner of a firm of solicitors was convicted of traveling on the railway without a ticket and with intent to defraud. It was held that since the conviction was for dishonesty, it was likely to be detrimental to the partnership business and dissolution was granted. Carmichael v. Evans. In English cases dissolution has been granted for the following acts conviction for an offence involving moral turpitude ; misapplication of the monies of a client by a solicitor ; adultery by a doctor ; speculation in shares by the partner of a regular mercantile business. Persistent Breach of Agreement. If a partner willfully and persistently commits breach of the partnership agreement regarding management, or otherwise conducts himself in such a way that it is not reasonably practicable for the other partners to carry on business in partnership with him. The suit for dissolution in cases coming under this clause is to be brought by a partner other than the partner guilty of the acts complained of. Example: In English cases the following acts have been held to be suffices ground for directing dissolution: refusing to account for monies received taking away the books of account; the application of monies belonging to the firm in payment of his private debts; continued quarrelling, and such a state of animosity as precludes reasonable hopes of reconciliation and friendly co-operation Transfer of whole interest. It a partner has transferred the whole of his interest in the firm to an outsider or has allowed his interest to be sold in execution of a decree.

Transfer of a partner’s interest does not by itself dissolve the firm. But the other partners may ask the court to dissolve the firm if such a transfer occurs. Only the transfer of the entire interest of the partner gives ground for action. The transfer of a part of the partner’s interest does not provide any ground for dissolution. The formation of a sub-partnership is, therefore, not a ground for dissolution. The suit for dissolution on the ground mentioned in this clause must be brought by a partner other than the partner whose interest has been transferred or sold. Loss: If thy business of the firm cannot be carried on except at a loss. Since the motive, with which partnerships are formed, is acquisition of gain, the courts have been given discretion to dissolve a firm in cases where it is impossible to make profits. Just and Equitable clause: If the court considers it just and equitable to dissolve the firm. This clause gives a discretionary power to the court to dissolve a firm in cases which do not come within any of the foregoing clauses but which are considered to be fit and proper cases for dissolution. Dissolution has been granted under the clause in the following cases deadlock in the management; partners not on speaking terms; disappearance of the substratum of the business. Conclusion: Under the above discussion, we can say that partnership business is a legal business and its partners are also legal. Because they have to perform some formalities. But except these the most important thing of this business is belief. Without belief everything is baseless. As the partnership business is consist of some partners. So, the partners must be honest and faithful to each other. If there is lack of perfect relationship among the partners the business must be dissolve. So, we can say that “Partnership Business is a Business Based on Fiduciary Relationship.”

Relation of Partners with One Another

All partners are free to form their own terms and conditions with respect to functioning in their partnership deed. The Indian Partnership Act, 1932 has also prescribed provisions to govern their relationship inter

se (amongst them), and these provisions are applicable if no such deed exists. Let us take a look at the duties and the rights of partners.

Right to Determine Relationship Partners can determine their mutual rights and duties by a contract called partnership deed, which determines aspects of general administration, such as which partner will do what work, what will be their share in profits, etc. It may be varied by express or implied consent of all the partners. Such deed can be expressly made or implied by a course of dealing. For example, if one partner checks accounts of the firm daily and others do not object, his conduct will be presumed to be a right of all partners in the absence of a written partnership deed between them. So they can themselves determine the rights of partners.

Agreement in Restraint of Trade is Valid

Section 27 of the Indian Contracts Act, 1872 declares contracts in restraint of trade as void. All agreements restraining exercise of a lawful profession, trade or business are invalid. Section 11 of Partnership Act, however, states that partners can validly levy such a restraint on each other, but such restraint must be provided for under the partnership deed. Partners can use this agreement to

prohibit each other from carrying on any business other than that of the firm.

Effect on Rights and Duties after a change in Firm The nature of the existing relationship between partners will be affected whenever there is a change in the firm’s constitution. Such changes occur in the following situations: 1. Change in constitution of the firm due to incoming or outgoing or partner(s); 2. Expiry of the pre-determined term of the firm; and 3. Carrying out of additional business undertakings than originally agreed upon.

Mutual rights and duties of the partners will continue to be the same as they existed prior to such changes, but partners can change this by making a fresh partnership deed.

Solved Examples for You Question: Aman and Priya started a partnership firm for which they contributed capital of Rs. 1 lakh and Rs. 50,000 each. Aman wants interest on his capital as he has contributed more. Can he ask for such interest? Answer: Interest is payable on capital only if the deed states so. Aman cannot claim an interest in the absence of a deed.

Question: A dispute arose between Aman and Priya with respect to sharing of profits. Aman demands equal profits, but Priya wants more as she works longer hours than him. Who is correct? Answer: Profits must be shared in accordance with the ratio agreed upon by them in their deed. They can change this ratio with mutual acceptance. However, they are both entitled to equal share if no such deed exists. RELATION OF PARTNER S Relation of Partners to OneAnother The relation of partnership comes into existence by an agreement betwe en the partners and such an agreement usuallyprovides for the mutual rights and duties of partners. The Deed of Partnership usually contains the clauses with regard tothe conduct and management of the business, the contribution of capital by each partner, the proportion in w hichprofits are to be shared, and the rights and duties of the partners in the business. If there is no writtenpartnership agreement, their relations, will be governed by the course of dealing among themselves. Wherepartners fail to provide for their relations the rules laid down in th e Partnership Act will apply. It should beremembered that the partners, relations whether governed by written articles of partnership or defined by thePartnership Act can be changed by the consent of all the partners. The Partnership Act lays down the rights and duties of partners as fo llows :