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Partnership Act:
The Indian Partnership Act was passed in
1932 to define and amend the law relating to partnership. Indian
Partnership Act is one of very old mercantile law. Partnership is
one of the special types of Contract. Initially, this was part of
Indian Contract Act itself (Chapter IX - sections 239 to 266), but
later converted into separate Act in 1932.
The Indian Partnership Act is complimentary to Contract Act. Basic
provisions of Contract Act apply to contract of partnership also.
Basic requirements of contract i.e. legally enforceable agreement,
mutual consent, parties competent to contract, free consent,
lawful object, consideration etc. apply to partnership contract
also.
Partnership Contract is a ‘concurrent subject’ - ‘Contract,
including partnership contract’ is a ‘concurrent subject, covered
in Entry 7 of List III (Seventh Schedule to Constitution). Indian
Partnership Act is a Central Act, but State Government can also
pass legislation on this issue. Though Partnership Act is a
Central Act, it is administered by State Governments, i.e. work of
registration of firms and related matters is looked after by each
State Government. The Act is not applicable to Jammu and Kashmir.
UNLIMITED LIABILITY IS MAJOR DISADVANTAGE - The major disadvantage
of partnership is the unlimited liability of partners for the
debts and liabilities of the firm. Any partner can bind the firm
and the firm is liable for all liabilities incurred by any firm on
behalf of the firm. If property of partnership firm is
insufficient to meet liabilities, personal property of any partner
can be attached to pay the debts of the firm.
Partnership Firm is not a legal entity - It may be surprising but
true that a Partnership Firm is not a legal entity. It has limited
identity for purpose of tax law. As per section 4 of Indian
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 one of them acting for all. - - Under partnership
law, a partnership firm is not a legal entity, but only consists
of individual partners for the time being. It is not a distinct
legal entity apart from the partners constituting it - Malabar
Fisheries Co. v. CIT (1979) 120 ITR 49 = 2 Taxman 409 (SC).
FIRM LEGAL ENTITY FOR PURPOSE OF TAXATION - For tax law,
income-tax as well as sales tax, partnership firm is a legal
entity - State of Punjab v. Jullender Vegetables Syndicate - 1966
(17) STC 326 (SC) * CIT v. A W Figgies - AIR 1953 SC 455 * CIT v.
G Parthasarthy Naidu (1999) 236 ITR 350 = 104 Taxman 197 (SC).
Though a partnership firm is not a juristic person, Civil
Procedure Code enables the partners of a partnership firm to sue
or to be sued in the name of the firm. - Ashok Transport Agency v.
Awadhesh Kumar 1998(5) SCALE 730 (SC). [A partnership firm can sue
only if it is registered].
Partnership, partner, firm and firm name -
“Partnership” is the relation between persons who have agreed to
share the profits of business carried on by all or any to them
acting for all. - - 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”. [section 4].
“Business” includes every trade, occupation and profession.
[section 2(b)]. Thus, a ‘partnership’ can be formed only with
intention to share profits of business. People coming together for
some social or philanthropic or religious purposes do not
constitute ‘partnership’.
PARTNERS ARE MUTUAL AGENTS - The business of firm can be carried
on by all or any of them for all. Any partner has authority to
bind the firm. Act of any one partner is binding on all the
partners. Thus, each partner is ‘agent’ of all the remaining
partners. Hence, partners are ‘mutual agents’.
ORAL OR WRITTEN AGREEMENT - As per normal provision of contract, a
‘partnership’ agreement can be either oral or written. - -
Agreement in writing is necessary to get the firm registered.
Similarly, written agreement is required, if the firm wants to be
assessed as ‘partnership firm’ under Income Tax Act. A written
agreement is advisable to establish existence of partnership and
to prove rights and liabilities of each partner, as it is
difficult to prove an oral agreement. - - However, written
agreement is not essential under Indian Partnership Act.
SHARING OF PROFIT NECESSARY - The partners
must come together to share profits. Thus, if one member gets only
fixed remuneration (irrespective of profits) or one who gets only
interest and no profit share at all, is not a ‘partner’. - -
Similarly, sharing of receipts or collections (without any
relation to profits earned) is not ‘sharing of profit’ and the
association is not ‘partnership’. For example, agreement to share
rents collected or percentage of tickets sold is not
‘partnership’, as sharing of profits is not involved. - - The
share need not be in proportion to funds contributed by each
partner. - - Interestingly, though sharing of profit is essential,
sharing of losses is not an essential condition for partnership .
- - Similarly, contribution of capital is not essential to become
partner of a firm.
NUMBER OF PARTNERS - Since partnership is ‘agreement’ there must
be minimum two partners. The Partnership Act does not put any
restrictions on maximum number of partners. However, section 11 of
Companies Act prohibits partnership consisting of more than 20
members, unless it is registered as a company or formed in
pursuance of some other law.
Mode of determining existence of partnership - In determining
whether a group of persons is or is not a firm, or whether a
person is or is not a partner in a firm, regard shall be had to
the real relation between the parties, as shown by all relevant
facts taken together. [section 6].
MUTUAL AGENCY IS THE REAL TEST - The real test of ‘partnership
firm’ is ‘mutual agency’, i.e. whether a partner can bind the firm
by his act, i.e. whether he can act as agent of all other
partners.
Partnership at will - Where no provision is made by contract
between the partners for the duration of their partnership, or for
the determination of their partnership, the partnership is
“partnership at will”. [section 7]. - - Partnership ‘at will’
means any partner can dissolve a firm by giving notice to other
partners (or he may express his intention to retire from
partnership) - - Partnership deed may provide about duration of
partnership (say 10 years) or how partnership will be brought to
end. In absence of any such term, the partnership is ‘at will’. -
- In case of ‘particular partnership’, the partnership comes to
end when the venture for which it was formed comes to end.
Determination of rights and duties of
partners by contract between the partners - Subject to the
provisions of this Act, the mutual rights and duties of the
partners of a firm may be determined by contract between the
partners, and such contract may be express or may be implied by a
course of dealing. - - Such contract may be varied by consent of
all the partners, and such consent may be express or may be
implied by a course of dealing. [section 11(1)]. - - Thus,
partners are free to determine the mutual rights and duties by
contract. Such contract may be in writing or it may be implied by
their actions.
Dutiesand mutual rights of partners - Subject to contract to
contrary, partners have duties and mutual rights as specified in
Partnership Act-
EVERY PARTNER HAS RIGHT TO TAKE PART IN BUSINESS - Subject to
contract between partners (to the contrary), every partner has
right to take part in the conduct of the business. [section
12(a)]. - - Thus, every partner has equal right to take active
part in business, unless there is specific contract to the
contrary. Even if authority of a partner is restricted by
contract, outside party is not likely to be aware of such
restriction. In such case, if such partner acts within the
apparent authority, the firm will be liable for his acts.
The property of the firm - Subject to contract between the
partners, the property of the firm includes all property and
rights and interests in property originally brought into the stock
of the firm, or acquired, by purchase or otherwise, by or for the
firm, or for the purposes and in the course of the business of the
firm, and includes also the goodwill of the business. - - Unless
the contrary intention appears, property and rights and interests
in property acquired with money belonging to the firm are deemed
to have been acquired for the firm [section 14].
Partner to be agent of the firm - Subject to the provisions of
this Act, a partner is the agent of the firm for the purposes of
the business of the firm. [section 18].
Implied authority of partner as agent of the firm - Subject to the
provisions of section 22, the act of a partner which is done to
carry on, in the usual way, business of the kind carried on by the
firm, binds the firm. The authority of a partner to bind the firm
conferred by this section is called his “implied authority”.
[section 19(1)]. -
PARTNERS JOINTLY AND SEVERALLY LIABLE ACTS OF THE FIRM - Every
partner is liable, jointly with all the other partners and also
severally, for all acts of the firm done while he is a partner.
[section 25]. ‘An act of a firm’ means any act or omission by all
the partners, or by any partner or agent of the firm which gives
rise to a right enforceable by or against the firm [section 2(a)].
‘Joint and several’ means each partner is liable for all acts.
Thus, if amount due cannot be recovered from other partners, any
one partner will be liable for payment of entire dues of the firm.
Partner by Holding out - ‘Holding out’ means giving impression
that a person is partner though he is not. This is principle of ‘estoppel’.
If a person gives an impression to outsiders that he is partner of
firm though he is not partner, he will he held liable as partner,
if third party deals with the firm on the impression that he is a
partner. Similarly, if a person retires from the firm but does not
give notice of retirement, he will be liable as a partner, if some
third party deals with the firm on the assumption that he is still
partner.
Minors admitted to the benefits of partnership - A person who is a
minor according to the law to which he is subject may not be a
partner in a firm, but, with the consent of all the partners for
the time being, he may be admitted to the benefits of partnership.
[section 30(1)].
RIGHTS OF MINOR - Minor (who is admitted to benefit of
partnership) has a right to such share of the property and of the
profits of the firm as may be agreed upon and he may have access
to and inspect and copy any of the accounts of the firm. [section
30(2)]. [Since the word used is ‘may’, it seems that right of
minor to inspect accounts can be restricted by agreement among
partners].
MINOR’S SHARE LIABLE BUT NOT MINOR HIMSELF - Such minor’s share is
liable for the acts of the firm, but the minor is not personally
liable for any such act. [section 30(3)].
Reconstitution of a Partnership Firm - A partnership firm is not a
legal entity. It has no perpetual existence as in case of a
company incorporated under Companies Act. However, the Act gives
the partnership limited rights of continuity of business despite
change of partners. In absence of specific provision in
partnership deed, death or insolvency of a partner means
dissolution of the firm. However, partnership can provide that the
firm will not dissolve in such case.
Change in partners may occur due to various reasons like death,
retirement, admission of new member, expulsion, insolvency,
transfer of interest by partner etc. After such change, the rights
and liabilities of each partner are determined afresh. This is
termed as reconstitution of a firm.
Dissolution of a Firm - A partnership firm is an ‘organisation’
and like every ‘organ’ it has to either grow or perish. Thus,
dissolution of a firm is inevitable part in the life of
partnership firm some time or the other.
Dissolution of a firm without intervention of Court can be (a) By
agreement (section 40) (b) Compulsory dissolution in case of
insolvency (section 41) (c) Dissolution on happening of certain
contingency (section 42) (d) By notice if partnership is at will
(section 43).
A firm can also be dissolved by Court u/s 44.
DISSOLUTION OF PARTNERSHIP AND DISSOLUTION OF FIRM - The
dissolution of partnership between all the partners of a firm is
called the dissolution of the firm. [section 39]. - - . As per
section 4, Partnership is the relation between persons who have
agreed to share profits of business carried on by all or any of
them acting for all. - - Thus, if some partner is changed/added/
goes out, the ‘relation’ between them changes and hence
‘partnership’ is dissolved, but the ‘firm’ continues. Hence, the
change is termed as ‘reconstitution of firm’. However, complete
breakage between relations of all partners is termed as
‘dissolution of firm’. After such dissolution, the firm no more
exists. Thus, ‘Dissolution of partnership’ is different from
‘dissolution of firm’. ‘Dissolution of partnership’ is only
reconstruction of firm, while ‘dissolution of firm’ means the firm
no more exists after dissolution.
Mode of dissolution of firm - Following are various modes of
dissolution of firm. * Dissolution by agreement - [section 40]. *
Compulsory dissolution in case of insolvency - [section 41] *
Dissolution on the happening on certain contingencies [section 42]
* Dissolution by notice of partnership at will [section 43(2)] *
Dissolution by the court
Consequences of dissolution of firm - After firm is dissolved,
business is wound up and proceeds are distributed among partners.
The Act specifies what are the consequences of dissolution of a
firm.
Sale of goodwill of firm after dissolution - Business is attracted
due to reputation of a firm. It creates a ‘brand image’ which is
valuable though not tangible. ‘Goodwill’ is the value of
reputation of the business of the firm. Goodwill of a firm is sold
after dissolution either separately or along with property of
firm. - - As per section 14, property of partnership firm includes
goodwill of the firm. - - Goodwill is the reputation and
connections which the firm establishes over time, together with
circumstances which make the connections durable. This reputation
enable to earn profits more than normal profits which a similar
business would have earned. Goodwill is an intangible asset of the
firm. - -
In settling the accounts of a firm after dissolution, the goodwill
shall, subject to contract between the partners, be included in
the assets, and it may be sold either separately or along with
other property of the firm. [section 55(1)].
Settlement of accounts after dissolution - Accounts are settled
after a firm is dissolved as provided in the Act. A firm is said
to be ‘wound up’ only after accounts are fully settled.
Registration of Firms - Registration of firm is not compulsory,
though usually done as registration brings many advantages to the
firm. Since ‘partnership contract’ is a ‘Concurrent Subject’ as
per Constitution of India, registration of firms and related work
is handled by State Government in each State. Section 71
authorises State Government to make rules for * prescribing fees
for filing documents with registrar * prescribing forms of various
statements and intimations are to be made to registrar and *
regulating procedures in the office of Registrar.
PARTNER CANNOT SUE IF FIRM IS UNREGISTERED - No suit to enforce a
right arising from a contract or conferred by this Act shall be
instituted in any court by or on behalf of any person suing as a
partner in a firm against the firm or any person alleged to be or
to have been a partner in the firm unless the firm is registered
and the person suing is or has been shown in the Register of Firms
as a partner in the firm. [section 69(1)]. - - Thus, a partner
cannot sue the firm or any other partner if firm is unregistered.
- - If third party files suit against a partner, he cannot claim
of set off or institute other proceeding to enforce a right
arising from a contract. - - Suit or claim or set off upto Rs 100
can be made as per section 69(4)(b), but it is negligible in
today’s standards. - - Criminal proceedings can be filed, but
civil suit is not permissible.
UNREGISTERED FIRM CANNOT SUE THIRD PARTY - No suit to enforce a
right arising from a contract shall be instituted in any Court by
or on behalf of a firm against any third party unless the firm is
registered and the persons suing are or have been shown in the
Register of Firms as partners in the firm. [section 69(2)]. - - If
third party files suit against the unregistered firm, the firm
cannot claim set off or institute other proceeding to enforce a
right arising from a contract. - - Suit or claim or set off upto
Rs 100 can be made as per section 69(4)(b), but it is negligible
in today’s standards. - - Criminal proceedings can be filed, but
civil suit is not permissible.
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