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Partnership Act,1932 & NIA,1881
Partnership Act,1932 & NIA,1881
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Partnership act

  1. 1. Partnership Act,1932 By Dr. Sridevi Krishna Asst. Professor VVLC
  2. 2. Indian Partnership • The law relating to partnership was contained in section 239 and 266 of Chapter xi of the Indian Contract Act, 1872. but with a view to develop modern law of partnership separately these sections were repealed and a separate act namely, the Indian Partnership Act, 1932 was enacted.
  3. 3. Definition • Section 4: Partnership is the relation between persons who have agreed to share profits of a business carried on by all or any of 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.’
  4. 4. Essential elements • An agreement between the persons concerned • This agreement should be for sharing of a business profits. • The business should be carried on by all or any of them acting for all. • Thus based on above three elements following elements can be established
  5. 5. Elements • Agreement • Business • Sharing of profits • Mutual agency
  6. 6. Agreement • Section 5: relation of partnership arises from contract and not from status. • Agreement must be in writing. • It is the basis of partnership
  7. 7. Business • Section 2(b): business includes every trade, occupation and profession. • It is not necessary that the business should be for long standing and permanent. • A single commercial transaction may constitute a business. • If two persons join together, share profits and losses of a particular transaction, they may be partners for the said transaction. • It is necessary that the business must be in existence. If a business has simply been contemplated and has not been started, the partnership shall not be deemed to be in existence.
  8. 8. Ram Proya Saran V Ghanshyam Das • The plaintiff and the defendant agreed that after the acceptance of their tender, they shall construct the dam in partnership. In order to deposit earnest money the plaintiff gave Rs 2000 to the defendant. The tender was not accepted. The question for consideration before the court was whether the partnership has come into existence? • All HC: the partnership was to start after the acceptance of the tender and work would start in its pursuance. Since the tender was not accepted, work did not commence and the partnership did not come into existence between the parties. hence the Plaintiff is entitled to receive the earnest money from the defendant.
  9. 9. Sharing of Profits • Sharing of profits is one of the essential element. Before 1860 this essential element was considered so much that if two or more persons agreed to carry out a business with the objective of sharing profits, it was considered to be decisive of constituting a partnership between them. • In 1860 the decision of Cox V Hickman brought a revolutionary change. • Where Lord Cranworth : sharing of profits is prima facie evidence of partnership. But decisive test is mutual agency. The real basis of liability is that the business is being carried on behalf of the persons sharing profits.
  10. 10. Mutual Agency • Cox V Hickman • Two persons (Benjamin Smith & Josiah Smith) carried on business in partnership under the name Smith & Co. Due to financial crises they obtained loan. Having not been able to repay the debts, they executed a trust deed in favour of creditors. Some of the creditors were made trustees of the business. These included Cox and Wheatcroft. Under the deed the property was assigned to the trustees and they were empowered to enter into contract and executed instruments to carry on business and to divide the profits among creditors. This deed was executed for the realization of the debts given by the creditors. After recovery of debts, the property was to be resorted to the above- mentioned two partners.
  11. 11. Continued.. • Cox never acted as trustee and retired. Wheatcroft acted as trustee for some time and then retired. Other trustees who were carrying on business became indebted to Hickman and executed a bill of exchange. The bill was not paid and Hickman sued the trustees for recovery of money on account of goods delivered. • House of lords: they were not partners and hence not liable. For the purpose of business all partners are agent for others. Here the trustees are not partners. • The deed is merely an arrangement between creditors and Smith to repay the debt.
  12. 12. Mode of determining existence of partnership • Section 6: in determining whether a group of persons is or 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. • Khan V Miah • certain persons obtained loan from Bank in joint names to purchase premises for restaurant. They also entered into contract for purchase of equipment and laundry for the restaurant but their relationship terminated before the opening of the restaurant. • The trial judge held that business existed between them and they was partnership. • The court of appeal reversed this decision by a majority holding that they had not become partners in a restaurant business by the date when relationship was terminated.
  13. 13. House of lords • The main question before house of lords was whether there existed a partnership before the relationship broke down. • Persons who agree to carry on a business activity as a joint venture do not become partners until they actually embark on the activity in question. • It is necessary to identify the venture in order to decide whether the parties have actually embarked upon it.
  14. 14. continued • Explanation 1 : sharing of profits or returns arising from property by persons holding a joint or common interest in that property does not itself make such persons as partners. • Ex: where joint owners collect rent out of properties. • Explanation 2 : the receipt by a person of a share of the profits of a business or of a payment contingent upon the earnings of profits or varying with the profits earned in business, does not itself make him a partner with the person carrying on the business. • Explanation 2(a) : if lender of money is paid through the profits he does not become a partner.
  15. 15. Continued.. • Explanation2 (b): the receipt of share or payment by a servant or agent as remuneration does not itself make the receiver a partner with the persons carrying on the business. • A carried in his own name the business of loading and unloading goods in railway wagons. He appointed B to manage the business. A and B entered into an agreement providing that B shall get 75% of net profits and A shall get 25% of the net profits. The agreement further provided that A shall not be liable for any loss. Here the relation between A and B was not that of partnership but it was that of Principal and Agent.
  16. 16. Continued…. • Explanation 2(c): The receipt of share or payment by a widow or child of deceased partner as annuity does not of itself make the receiver a partner, with the persons carrying on the business. • Explanation2(d): the receipt of share or payment by sale of good will: the receipt of share or payment by sale of goodwill, does not itself make him a partner with the persons carrying on the business or does not itself make the receiver a partner, with the persons carrying on the business.
  17. 17. Distinction between partnership & co-ownership Partnership Co-ownership Created by agreement Not essentially by agreement Partners cannot transfer whole of his their interest to third person without the consent of other partners Co owners can transfer their interest Partners are agent for each other They may not be agent for each other Proper remedy is the suit for dissolution and accounts Proper remedy is suit for partition.
  18. 18. Distinction between partnership and Joint family Partnership Joint family 1.Created by contract Created by status 2.New partner can be admitted when all the partners consents It is through birth 3.Death of partner dissolves the form It does not dissolve 4.All partners are entitled to participate in the business of the firm Management of business is usually in the hands of the Kartha 5.Every partner is agent of other partner Kartha represents the whole family 6.Partners are jointly and severally liable for the debts of the firm 7.Partners bind other partners 8.After dissolution partners can see and demand accounts 9.Partners can sue for dissolution A member of joint family is liable only to the extent of his share Members of family does not Members of family after partition has no right Members can sue for partition
  19. 19. Partnership & company Partnership Company It is only group of persons and identified through partners A separate juristic entity and distinct from its share holders Each partner is agent of the other Liability of shareholders is limited to the extent of their shares Partners cannot transfer whole of his interest to the other partner without the consent of other partners The shares of the company can be sold freely
  20. 20. Kinds of Partnership • Partnership may be of two types:- • Partnership for fixed period • Partnership at will • Section 7: 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 43: Dissolution by notice of partnership at will.— 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 is dissolved as from the date mentioned in the notice as the date of dissolution or, if no date is so mentioned, as from the date of the communication of the notice.
  21. 21. Continued.. • Thus a partnership can be partnership at will under section7 if two conditions are fulfilled:- • There must not be express or implied provision as to the duration in the partnership agreement. • The agreement must not contain any provision regarding the termination of the partnership. • But if there is a provision as to retirement of partner and remaining partner continuing the business it is not inconsistent with section 7.
  22. 22. Continued. • Moss v Elphick • The Plaintiff & defendant established a partnership, by a written agreement on 14th August 1907 to carry on the business of tobacco. The agreement provided that the partnership could be terminated only by mutual agreement. On 2nd March 1909, the Plaintiff gave two weeks notice to the defendant expressing his intention to terminate the partnership agreement. The defendant contended that the notice was ineffective bcoz under clause 4 the agreement could be terminated only by mutual agreement or compromise. • Court of Appeal: Defendant was correct. The agreement contained a provision regarding the duration of the partnership.
  23. 23. Abott V Abott • The partnership agreement between father and his 5 sons inter alia provided that the death or retirement of any partner shall not terminate the partnership and if any partner shall do or suffer any act which would be ground for the dissolution of the partnership by the court then he shall be considered as having retired. One of them contended that since no duration had been mentioned, it was a partnership at will and sought the dissolution of the same through a notice. He filed a suit. • Held: a single partner could not terminate the partnership by a notice, although he could retire or cease to be a partner allowing the partnership firm to continue thereafter and hence it was not partnership at will and could not be dissolved by a notice by any one partner.
  24. 24. K T Chettiar V Muthappa • The agreement between two partners concerning the business of managing agencies of mills inter alia provided for carrying on the management in rotation once in four years by the two partners. It further provided that the partners and their heirs and those getting their heirs should carry on the management in rotation. • Held: SC: the intention of the partners could not be to create a partnership at will, but to have partnership of some duration though the duration was not expressly fixed in the agreement.
  25. 25. Particular partnership • Section 8 : a person may become a partner with another person in particular adventures or undertaking.
  26. 26. Relations of partners to one another • The relation between partners is governed by mutual agreement between them. • Section 11(1): the mutual rights and duties of the partners of a firm may be determined by contract between the partners, and such contract may be expressed or may be implied by a course of dealing. • Section 11(2) agreement in restraint of trade: a contract may provide that a partner shall not carry on any business other than that of the firm while he is a partner. • Section 27 of Indian Contract Act: every agreement by which anyone is restrained from exercising a lawful profession trade or business of any kind is to that extent void.
  27. 27. Duties of partners • 1. Section 9: partners are bound to carry on the business of the firm to the greatest common advantage to be just and faithful to each other, and to render true accounts and full information of all things affecting the firm to any partner or his legal representatives. • Section 16: subject to the contracts between the partners • If a partner derives any profit for himself from any transaction of the firm or from the use of the property or business connection of the firm name, he shall account for that profit and pay it to the firm; • If a partner carries on any business of the same nature as and competing with that of the firm he shall account for and pay to the firm all profits made by him in that business.
  28. 28. Duty to indemnify for loss caused by fraud • Section 10: every partner shall indemnify the firm for any loss caused to it by his fraud in the conduct of the business of the firm. • 3.Duty relating to the conduct of business • Section 12(b) subject to the contract between the partners, every partner is bound to attend diligently to his duties in the conduct of the business. • Section 12(c ): any difference arising as to ordinary business may be decided by a majority of the partners and every partner shall have the right 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 partners.
  29. 29. Suresh Kumar V Amrit Kumar • The plaintiff and the defendants (1to 6) were carrying on the business of motor cars, jeeps and spare parts under the name of Sanghi Motors. The plaintiff was a managing partner and his appointment was made with the consent of all the partners. Majority of the partners removed him and appointed Ashok Kumar Sanghi as the managing partner. It was questioned. • Held: the Delhi HC: majority decision cannot be enforced. Section 12© applies in respect of ordinary matters. They are not applicable to important matters and that partners cannot make them binding on other partners.it can be taken with the consent of all partners and it should be obtained in good faith. Here before passing resolution, the Plaintiff & defendants 5 and 6 had not been given opportunity to express their views nor it was recorded in the book of the firm. The plaintiff had been acting as managing partner with the consent of all since its inception. This consent cannot be withdrawn by the majority in the context of controversy or dispute. The resolution of majority is passed not with the desire to share more responsibilities or to increase interest but with ill will and malce.
  30. 30. 4. Duty to indemnify the firm for loss caused to it by his willful neglect • Section 13(f): a partner shall indemnify the firm for any loss caused to it by his willful neglect in the conduct of the business of the firm. • Willful negligence: knowing that it will cause damage. • 5. Duty in respect of personal profits earned by partners: • Section 16(a): if a partner derives any profits for himself from any transaction of the firm, or from the use of the property or business of the firm or the firm name, he shall account for that profit and pay it to the firm. • 6. Duty not to compete with the business of the firm: section 16(b) if a partner carries on any business of the same nature as and competing with that of the firm he shall account for and pay to the firm all profits made by him in that business.
  31. 31. Continued • 7. Duty in respect of application of the property of the firm: section 15: the property of the firm shall be held and used by the partners exclusively for the purpose of the business. • Section 16(a) if a partner derives any profit for himself from any transaction of the firm, or from the use of the property or business or business connection of the firm or the firm name, he shall account for that profit and pay it to the firm.
  32. 32. Property of firm/partnership property • Section 14 • 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 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.
  33. 33. Partnership property • Three types:- • Property originally brought into the stock of the firm: • Property acquired by purchase or otherwise by or for the firm • Partner’s property in use of firm by or for the firm
  34. 34. Property brought into stock of the firm • Property brought at the commencement of business of firm is partnership property. • Their contribution to capital is not regarded as sale. • When partner brings his assets to the firm as capital it is subject to the rights of other partners in it.
  35. 35. Property acquired by purchase or for the firm • All property and its rights earned by the use of firm money are deemed to be earned for the benefits of the firm • Ex: buying sharers of company, insurance, lease of property etc. • Any thing purchased by using firm money will become property of the firm. • It also includes good will of the business.
  36. 36. Partners' property in use of firm by or for the firm • Partner’s property which is being used by the firm or for the firm, becomes the property of the firm. • It depends on the intention of the parties. • Boda Narayana Murthy & sons V Valluri Venkat Suguna & others • Five persons purchased a building. Later on constructed a Cinema Hall namely Minerva Talkies in the said building. The partnership firm exhibited films in this cinema hall. There was no evidence of firm money being used in the construction of cinema hall. Question was whether hall was partnership property. • AP HC: held: Minerva Talkies was not partnership property. It is not essential that every partnership business must have its own property for carrying on its business. It can use property of others for the purpose of its business. The fact that firm exhibited film in talkies does not make minerva talkies the property of the firm. The property was never regarded as partnership property and was held as co-owners.
  37. 37. Continued.. • 8. Duty to contribute equally to the losses: section 13(b): partners shall contribute equally to the losses sustained by the firm.
  38. 38. Rights of partners • Right to take part in the conduct of the business- section 12(a) every partner has a right to take part in the conduct of the business. It is subject to contract between partners. • Right to have access to and to inspect and copy books of the firm: section 12(d): inspect and copy, any of the books of the firm • Right to share equally in the profits earned: section 13(b): they are entitled to share equally in the profits earned. • Actus curiae neminem gravabit : • the act of the court shall prejudice no one.
  39. 39. Continued.. • T.O Alias and others V T.O Abraham & Co • The partners were litigating different matters before court, in one of the suit the civil court ordered that funds of firm could be utilized only after getting majority decisions of partners. But without making other partners as partners, two partners filed for releasing amount from bank. Thus the government amount was got released and utilized the same without obtaining the approval of majority of partners. • Kerala HC: the conduct of two partners was an abuse of process. They were directed to redeposit the amount .
  40. 40. Continued.. • Right to receive interest in respect of payments made and liabilities incurred. • Section 13(c) where a partner is entitled to interest on the capital subscribed by him such interest shall be payable only out of profits; • a partner making, for the purposes of the business, any payment or advance beyond the amount of capital he has agreed to subscribe, is entitled to interest thereon at the rate of six per cent. per annum; this is subject to contract between partners
  41. 41. Continued.. • Right to indemnity in respect of payments made and liabilities incurred section 13(e) • the firm shall indemnify a partner in respect of payments made and liabilities incurred by him— (i) in the ordinary and proper conduct of the business, and • (ii) in doing such act, in an emergency, for the purpose of protecting the firm from loss, as would be done by a person of ordinary prudence, in his own case, under similar circumstances.
  42. 42. Right to receive remuneration • Section 12(a): Subject to contract between the partners, : a partner is not entitled to receive remuneration for taking part in the conduct of the business; • Majority Rights: section 12 (c ):any 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 right 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
  43. 43. Rights & duties-After change in the firm • Rights and duties of partners.—Subject to contract between the partners— Section 17 • (a) after a change in the firm.—where a change occurs in the constitution of a firm, the mutual rights and duties of the partners in the reconstituted firm remain the same as they were immediately before the change, as far as may be; • (b) after the expiry of the term of the firm, and.—where a firm constituted for a fixed term continues to carry on business after the expiry of that term, the mutual rights and duties of the partners remain the same as they were before the expiry, so far as they may be consistent with the incidents of partnership at will; and • (c) where additional undertakings are carried out.—where a firm constituted to carry out one or more adventures or undertakings carries out other adventures or undertakings, the mutual rights and duties of the partners in respect of the other adventures or undertakings are the same as those in respect of the original adventures or undertakings.

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