Business Laws: The Partnership Act, 1932

The Partnership Act, 1932

This law came into force on October 1st, 1932.
Definition of Partnership (Section 4, para 1): 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.
Partners and Firm (Section 4, para 2):
- Individuals are called partners.
- Collectively, they are known as a firm.

Formation of Partnership

The partnership agreement can be:
- Oral,
- Written, or
- Implied from the course of dealing between partners.
Essential Elements: All essential elements of a valid contract must be fulfilled.
- Minor Partner: A minor may be admitted to the benefits of the partnership with the consent of all other partners.
- Consideration: No consideration is required to create a partnership (Section 185).

Partnership Deed

The partnership agreement can be express or implied.
Implied agreements may be inferred from conduct, course of dealing, or the circumstances of the case.
Definition: A written document containing the agreement is called a deed.
Contents of the Deed:
- Nature and principal place of business
- Name of the firm
- Names and addresses of the partners
- Duration of the firm
- Profit-sharing ratio, interest on capital, and drawings
- Valuation of goodwill on death or retirement of a partner
- Details about management, accounts, arbitration, etc.
Stamping: The partnership deed must be duly stamped as per the provisions of the Indian Stamp Act, 1889.

Who May Be Partners?

General Rule: A contract of partnership may be entered into by every person who is competent to enter into a contract.
Restrictions:
- Alien Enemy: Cannot enter into a contract of partnership with an Indian subject; an alien friend can.
- Minor: Cannot become a partner but, with the consent of all partners, may be admitted to the benefits of partnership.
- Person of Unsound Mind: Not competent to enter into a contract of partnership.
- Corporation: A registered company can enter into a contract of partnership as a single individual, not as a group of individuals comprising it.

Duration of Partnership

Partnership for a Fixed Term: The partners may fix the duration of the partnership at the time of entering into it.
Partnership-at-Will: The partners say nothing about the duration of the partnership.
Particular Partnership: A partnership formed for carrying on a particular adventure or undertaking.

Maximum Number of Partners

A partnership firm can have up to 50 partners.

Registration of Firms

The Act does not provide for compulsory registration of firms, but there are disabilities for unregistered firms (Section 69).
Procedure (Sections 58 and 59):
- Registration can be effected at any time.
- File an application in the form of a statement with the Registrar of Firms.
Application Requirements:
- Prescribed fee.
- Statement includes:
  - Firm name
  - Place or principal place of business
  - Names of other places where the firm carries on business
  - Date when each partner joined the firm
  - Names in full and permanent addresses of the partners
  - Duration of the firm
The statement shall be signed by all partners or their authorized agents.
Registration takes effect from the date of entry in the Register of Firms (Section 59).

Time of Registration

No definite provision in the Act.
Section 69(2) states that no suit by an unregistered firm is competent, and the court must dismiss it.

Effects of Non-Registration (Section 69)

No Suit by Partner Against Firm or Co-Partners: In case of disputes related to contract or Partnership Act, a partner of the unregistered firm cannot institute a suit.
- Exception: Criminal proceedings can be brought (e.g., theft by a partner).
No Suit by Firm Against Third Parties: An unregistered firm cannot file a suit against a third party to enforce any rights arising from a contract.
- Exception: Criminal proceedings can be initiated.
- A third party can sue the firm.
Cannot claim a set-off if a third party sues the firm.

Effects of Non-Registration (Exceptions)

The right of third persons to sue the firm or its partners.
Right of partners to sue for the dissolution of the firm or for the realization of the property of the dissolved firm.
Power of Official Assignee/Receiver or Court to realize the property of the insolvent partner and to bring action on behalf of the insolvent.
Rights of the firm or partner of firm having no place of business in India.
The right to sue or claim a set-off if the value of the suit does not exceed INR 100.

Alterations

If any alteration relating to the following matters takes place in the case of a registered firm, a statement or intimation is to be sent to the Registrar of Firms:
- Change in the name of the firm or location of the principal place of business (Section 60)
- Closing and opening of branches (Section 61)
- Changes in names and addresses of partners (Section 62)
- Change in the constitution of the firm and its dissolution or election of a minor partner on attaining majority to continue as a partner or to sever his connection

Characteristics of Partnership

At least two people who have the competence to contract.
An agreement (express or implied).
Lawful business.
Sharing of Profits.
Mutual Agency (carrying on of business by all or any of them acting for all).

Test for Determining Partnership

Definition in Section 4 is used as the test, but the key principle is in Section 6.
Section 6: Determine if a group of persons is a firm or whether a person is a partner, regard shall be had to the real relation between the parties, as shown by all the relevant facts taken together.

Test for Determining Partnership: Determination of Real Relation

The following facts are taken collectively to establish real relation:

Written or Verbal Agreement
Surrounding Circumstances at the time of Account
Conduct of the Parties
Other Relevant Facts – Books of Account, Evidence of Employees etc.

Test for Determining Partnership: Mixed Question of Law and Fact

It is a mixed question of law and fact as to whether a genuine partnership exists or not.
Case Example: Helper Girdharbhai v Saiyed M M Kadri (1987) – Court was unable to establish a genuine partnership even with evidence of a partner receiving a fixed percentage of profits, not sharing losses, and could not operate bank accounts.

Test for Determining Partnership: Cases where no Partnership Relation (Section 6)

(a) Joint Owners Sharing Gross Returns: Joint owners of property sharing gross returns do not become partners.
- Example: Govind Nair v Maga (1933) – X and Y jointly purchased a tea shop, contributing equally and leasing it out, sharing the rent. The court held them to be co-owners, not partners.
- Exception: If co-owners start a business to share profits, they become partners.
(b) Sharing of Profits: Sharing of profit is a very strong indicator of partnership but just the fact that profits are shared does not make the sharing persons as partners.
- (i) Lending money with interest varying with profit.
- (ii) Servant or agent receiving remuneration as a share of profit.
  - Example: Munshi Abdul Latif v. Gopeshwar (1933) – A contractor appointed a servant to manage loading/unloading, the servant receiving 75% of profits. The court held the servant was an agent, not a partner.

Test for Determining Partnership - Continued

(iii) Widow or child of a deceased partner receiving a portion of the profits.
(iv) A person has sold his business and receives a portion of the profits in consideration of the sale.
Conclusion: Mutual agency is the real test of partnership.

Test for Determining Partnership: Who Are Not Partners?

Members of a HUF carrying on family business.
A Burmese Buddhist husband and wife carrying on business.

Types of Partners

Actual Partner
Sleeping Partner
Nominal Partner
Partner in Profit only
Partner by Estoppel or Holding Out
Minor Partner
Sub-partner

Types of Partners: Detailed Explanation

Actual (or Ostensible) Partner: Actively engaged in the business and is an agent of other partners.
Sleeping (or Dormant) Partner: Does not take an active part but invests capital and shares in profits. Liable for debts even if their existence is kept secret.
- Need not give public notice of retirement.
Nominal Partner: Lends name without real interest. Does not invest or share profits but is liable for debts to outsiders.
- | Feature | Nominal Partner | Sleeping Partner |
- | ------------------- | ----------------------------------------- | ----------------------------------------- |
- | Known to the world | Is known as a partner | Not known as a partner |
- | Shares profits | Does not share in profits | Shares in profits |
- | Liability | Liable for all acts of the firm | Liable for all acts of the firm |
Partner in Profits Only: Shares profits only and is not liable for losses, but liable to third parties for firm debts.
Sub-Partner: Shares profits from a partner, not connected with the firm, and has no rights or liabilities against the firm.
Partner by Estoppel or Holding Out: Not a partner but liable for debts if they give the impression of being a partner.
- Example: Lake Vs. Duke of Argyll (1844) - A retired businessman assumed the honorary presidentship of a business and was held liable for debts due to the belief he was a partner.
Minor Partner: May be admitted to the benefits of partnership with the consent of all partners (Section 30(1)). Cannot be a promisor but can be a promisee or beneficiary.
- Cannot form a new partnership with a minor partner or partnership of minors among themselves.

Types of Partners: Minor Partner - Position

Position before attaining majority
- Rights:
  - (a) Right to share of property and profits as agreed upon.
  - (b) Right to access, inspect, and copy accounts of the firm.
  - (c) Right to file a suit for share of property if not given due share of profit, but only if severing connection with the firm [Section 30(4)].
- Liabilities:
  - (a) Liability is confined only to the extent of his share in the profits and the property of the firm. over and above this, neither is he personally liable nor is his estate liable [Section 30(3)].
  - (b) Cannot be declared insolvent, but if the firm is declared insolvent his share in the firm vests in the Official Receiver or the Official Assignee.
Position after attaining majority
- On attaining majority, the minor has to decide within six months whether he shall continue in the firm or leave it.
- Within this period he should give a public notice of his choice –
  - (a) to become, or
  - (b) not to become, a partner in the firm
  - If he fails to give a public notice, he is deemed to have become a partner in the firm on the expiry of the said six months [Section 30(5)].

Rights of Partners

Right to take part in the conduct of business
Right to be consulted
Right of access to books
Right to share the profits
Right to interest on capital (if entitled, can be given from profit only)
Right to interest on advance (if any advance is made beyond the amount of capital)
Right to indemnity

Duties of Partners

| Absolute Duties (Imposed by law and are mandatory) | Qualified Duties (Depend on the contract between the parties) |
| --------------------------------------------------- | -------------------------------------------------------------- |
| Duty to carry on the business to the greatest common advantage | Duty to attend diligently to his duties |
| Duty to be just and faithful inter-se | Duty to work without remuneration |
| Duty to render true accounts | Duty to contribute to the losses |
| Duty to provide full information | Duty to indemnify for wilful neglect |
| Duty to indemnify for loss caused by fraud | Duty to use firm’s property exclusively for the firm |
| Duty to be liable jointly and severally | Duty to account for personal profits derived |
| Duty to not assign his interest | Duty to not compete with the business of the firm |

Incoming Partner (Section 31)

Requires consent of all other partners.
Liability: Liable for debts only after admission, but may agree to assume old debts.

Retirement of a Partner (Section 32)

Occurs when surviving partners continue the business, and the retiring member ceases to be a partner.
In a particular partnership, retirement requires the consent of all partners unless otherwise agreed.
In a partnership at will, the retiring partner must serve a written notice to other partners.
Liability: remains for acts done before retirement and agreement with creditors and remaining partners may free him from liability.
Continues to be liable until public notice is given of retirement.
Restrictions on Retiring Partner
- Must not use the name of the firm
- Must not represent as carrying on the business of the firm
- To canvass the old customers of the firm
Rights of a Retiring Partner if He Shares Subsequent Profits
- To claim such share of the profits made since he ceased to be a partner as may be attributable to him
- To claim interest at the rate of six percent per annum on the amount of his share in the property of the firm.

Death of a Partner (Section 35)

If the firm is not dissolved after the death of a partner, the estate of the deceased partner is not liable for the acts of the firm.
No public notice is required of the death to relieve the estate of the deceased partner.
Provisions regarding restrictions and rights to share subsequent profits are applicable even in the case of insolvency, death, or expulsion.

Dissolution of Partnership

The dissolution of the partnership between all the partners of a firm is called ‘dissolution of the firm’. [Section 39]
Dissolution of Firm: Complete breakdown of partnership between all partners.
Dissolution of the Partnership: Change in the relationship of the partners.
- Example: Bonesh, Manpreet, and Shashank are partners. If Manpreet retires, the partnership between Bonesh, Manpreet, and Shashank ends, and a new partnership between Bonesh and Shashank begins. The new firm is called a reconstituted firm.

Dissolution without the Order of Court

Dissolution by agreement (Section 40). A firm may be dissolved –
- (a) With the consent of all the partners, or
- (b) In accordance with a contract between them. The contract of dissolution may be express or implied.
Compulsory dissolution (Section 41). A firm is compulsorily dissolved –
- (a) By the adjudication of all the partners or all the partners but one as insolvent.
- (b) By the happening of any event which makes it unlawful for the business of the firm to be carried on, or for the partners to carry it on in partnership.
Dissolution on the happening of certain contingencies (Section 42)
- (a) The expiry of the term for which it was constituted.
- (b) The completion of the particular adventure or adventures, if the firm is constituted for the execution thereof.
- (c) The death of a partner
- (d) The adjudication of a partner as insolvent.
Dissolution by notice of partnership-at-will (Section 43)
- Where the partnership is at will, the firm may be dissolved by any partner giving notice in writing to all the other partners of his intention to dissolve the firm. The firm, in such a case, is dissolved 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.

Dissolution by Court

Under Section 44, the Court may, at the suit of a partner, dissolve a firm on the following grounds:

Insanity: Where a partner has become of unsound mind.
Permanent Incapacity: Where a partner is permanently incapable of performing their duties.
Misconduct [Section 44(c)]: Affects the carrying on of the business prejudicially.
- Example: Abbott Vs Crump(1870) - P and F are partners. P has adulterous relations with F’s wife. This was held to be a sufficient ground for dissolution, as it destroyed mutual confidence.
Persistent breach of agreement
Transfer of Interest: A partner transfers their interest to a third party, or their share is attached under a decree.
Business working at loss: The business cannot be carried on except at a loss [Section 44(e)].
Any other ground: Which renders it just and equitable that the firm should be dissolved [Section 44(f)].