Partnership act 1932

Partnership Act.1932

Mr. Raju Rosha

Partnership

Section 4 of the Partnership Act, 1932 defines the term ‘Partnership’ as under:

A partnership is the relationship between persons who have agreed to share the profits of a business carried on by all or any of them acting or all.

Thus, Partnership is the name of legal relationship between/among persons who have entered in to the contract

Features of Partnership Act, 1932

Indian Partnership Act, 1932 is a Central Act. (made by Parliament

This Act deals with special type of contract.(contract of partnership)

Provisions regarding contract of partnership were earlier contained in the Indian Contract Act, 1872.

This Act extends to the whole of India except the state of Jammu and Kashmir.

This Act came in to force on 1.10.1932, except section 69 which came into force on the 1st Day of October, 1933.

Eligibility For Partnership A partnership agreement can be entered into between

persons who are competent to contract. Every person who is of the age of majority according to the

law to which he is subject who is of sound mind Who is not disqualified from contracting by any law to

which he is subject can enter into a partnership.

Nature of Partnership

1. A partnership firm is not a person in the eyes of Law (except for the purpose of taxation [sec.2 (31)] ).

2. It has no separate legal entity (like company) apart from the partners constituting it. [Malabar Fisheries Co. v CIT]

3. Further Section 5 of the Act provides that partnership arises from contract and not from status (like HUF).

The following can enter into a partnership Individual: An individual, who is competent to contract, can become

a partner in the partnership firm. If there are more than two partners in a firm, an individual can be a partner in his individual capacity as well as in a representative capacity as Karta of the Hindu undivided family.

Firm: A partnership firm is not a person and therefore a firm can not enter into partnership with any firm or individual. But a partner of the partnership firm can enter into partnership with other persons.

Hindu Undivided Family: A Karta of the Hindu undivided family can become a partner in a partnership in his individual capacity.

Company: A company is a juristic person and therefore can become a partner in a partnership firm, if it is authorised to do so by its objects.

Trustees:Trustees of private religious trust, family trust and trustees of Hindu mutts or other religious endowments are juristic persons and can therefore enter into partnership, unless their constitution or objects forbid.

Number Of Partners The number of partners in a firm shall not exceed 20. A partnership having more than 20 persons is illegal. When there is partnership between two firms, all the

partners of each firm will be taken into account. If the partnership is between the karta or member of Hindu

undivided family the members of the joint Hindu family will not be taken into account.

Characteristics of Partnership

A partnership firm has the following characteristics:1. Two or more members2. Unlimited liability3. Voluntary registration 4. No separate legal existence 5. Restriction on transfer of interest: 6. Based on agreement7. Partners are competent to contract8. Partnership may be only for lawful business.

Maximum Limit on Number of Partners

Section 11 Companies Act provides that the maximum no. of persons, a firm can have:

In case of partnership firm carrying on a banking business 10

In case of partnership firm carrying on any other business 20

If the number of partners exceeds the aforesaid limit, the partnership firm becomes an illegal association.If an association of persons or firm having members or partners exceeding the Above limit will not be an illegal association if that firm’s objective is not to earn profit.

Two or more persons

An agreement

Sharing of profit

Business

Mutual agency

Essential elements of Partnership

Essentials Of A Partnership

1. Agreement -The relationship between partners arises from contract and not status.

2. Sharing Of Profits -The partners may agree to share profits out of partnership business, but not share the losses. Sharing of losses is not necessary to constitute the partnership.

3. Business -Business includes every trade, occupation, or profession. There must be course of dealings either actually continued or contemplated to be continued with a profit motive.

4. Relation Between Partners -The partner while carrying on the business of the partnership acts a principle and an agent. He is a principal because he acts for himself, and he is an agent as he simultaneously acts for the rest of the partners.

General Duties Of A Partner

1. To carry on the business of the firm to the greatest common advantage.

2. Good faith requires that a partner shall not obtain a private advantage at the expense of the firm.

3. To be just and faithful. 4. To render true accounts and full information of all things

done by them to their co-partners. 5. To indemnify for loss caused by fraud. Every partner shall

indemnify the firm for loss caused to it by his fraud in the conduct of the business of the firm.

General Duties Of A Partner6. Not to carry on business competing with 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.

7. To indemnify the firm for willful neglect of a partner. 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.

8. To carry out the duties created by the contract. The partners are bound to perform all the duties created by the agreement between the partners.

Rights Of The Partners

1. To take part in the conduct and management of the business. 2. To express opinion in matters connected with the business. He has

a right to be consulted and heard in all matters affecting the business of the firm

3. To have free access to all the records, books of account of the firm and take copy from them.

4. To share in the profits of the business. Every partner is entitled to share in the profits in proportion agreed to between the parties.

5. To get interest on the payment of advance. Where a partner makes for he purpose of the business.

6. To be indemnified by the firm against losses or expenses incurred by him for the benefit of the firm.

Restrictions On Authority Of A Partner

Under the Partnership Act in the absence of any usage of trade to the contrary, the implied authority of a partner does not empower him to do the following acts:

Submit a dispute relating to the business of a firm to arbitration. Open a bank account in his own name. Compromise or relinquish any claim of the firm. Withdraw a suit or proceeding on behalf of the firm. Admit any liability in a suit or proceeding against the firm. Acquire immovable property on behalf of the firm. Transfer immovable property belonging to the firm. Enter into partnership on behalf of the firm.

Rights Of A Minor

1. 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.

2. Such minor 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 of the accounts of the firm.

3. Such minor's share is liable for the acts of the firm, but the minor is not personally liable for any such act.

4. Such minor may not sue the partners for an account or payment of his share of the property or profits of the firm

Rights Of A Minor Where such person becomes a partner- 1. His rights and liabilities as a minor continue upto the date on which he

becomes a partner, but he also becomes personally liable to third parties for all acts of the firm done since he was admitted to the benefits of the partnership, and

2. His share in the property and profits of the firm shall be the share to which he was entitled as a minor.

Where such person elects not to become a partner- 1. His rights and liabilities shall continue to be those of a minor upto the

date on which he gives public notice. 2. His share shall not be liable for any acts of the firm done after the date

of the notice, and 3. He shall be entitled to sue the partners for his share of the property

and profits.

Dissolution Of A Firm (imp.10 marks)

A firm may be dissolved in the following manner

Dissolution by Court Dissolution by agreement Dissolution by operation of law Dissolution on the happening of certain contingencies Dissolution by notice

1. Dissolution By Court The court may dissolve a firm at the suit of any partners on

any of the following grounds namely : Insanity Of A Partner: That a partner has become of

unsound mind. The insanity of a partner does not ipso facto dissolve the firm and the next friend or continuing partners has to file suit foe dissolution.

Permanent Incapacity Of A Partner: That a partner has become permanently incapable of performing his duties as partner.

Conduct Affecting Prejudicially The Business: that a partner is guilty of conduct, which is likely to affect prejudicially the carrying on the business of the firm.

Dissolution By Court4. Breach Of Partnership agreement: That a partner wilfully or

persistently commits breach of agreements relating to the management of the affairs of the firm or the conduct of it’s business or otherwise conducts himself in matters relating to the business, that it is not reasonably practical for the other partners to carry on the business with him.

5. Transfer Of Interesy of A Partner: That a partner has in any way transferred the whole of his interest in the firm to a third party.

6. Loss: That the business of the firm cannot be carried on save at a loss 7. Just And Equitable: On any other ground that renders it just an

equitable that the firm should be dissolved.

2. Dissolution By Agreement

A firm may be dissolved with the consent of all the partners.

Or in accordance with the contract between the partners. The partnership agreement may contain a proviso that the

firm will be dissolved on the happening of certain contingency.

3. Dissolution By Operation Of Law

A firm is compulsorily dissolved on the following grounds Insolvency of partners By the happening of any event which makes it unlawful

for the business of the firm to e carried on.

4. Dissolution On The Happening Of Certain Contingencies

Subject to contract between the partners a firm is dissolved on the happening of the following contingencies.

If constituted for a fixed term, by the expiry of that term If constituted to carry out one or more adventures or

undertakings, by its completion. By the death of a partner On insolvency of a partner

5. Dissolution By Notice

1. The partnership is at will, the same may be dissolved by service of a notice by one partner to dissolve the firm.

Registration Of A Partnership Firm

Procedure For Registration

The registration of a firm may be effected at any time by sending by post or delivering to the Registrar of Firms of the area in which any place of business of the firm is situated or proposed to be situated, a statement in the prescribed form and accompanied by the prescribed fee, stating :

1. the firm name. 2. the place or principal place of business of the firm. 3. the names of any other places where the firm carries on

business. 4. the date when each partner joined the firm. 5. the names in full and permanent addresses of the partners. 6. the duration of the firm.

Partnership deed1. A partnership is formed by an agreement.

2. This agreement may be in writing or oral.though the law does not expressly require that the partnership agreement should be in writing, it is desirable to have it in writing in order to avoid any dispute with regard to the terms of the partnership.

3. The document which contains the term of a partnership as agreed among the partners is called “partnership deed”.

4. The partnership Deed is to be duly stamped as per the Indian Stamp Act, and duly signed by all the partners.

Checklist For Drafting a Partnership Deed

Partnership deed should contain the following clauses Name of the parties Nature of business Duration of partnership Name of the firm Capital Share of partners in profits and losses Banking, Account firm Books of account Powers of partners Retirement and expulsion of partners Death of partner Dissolution of firm Settlement of disputes

Types of Partnership

Partnership at Will(Sec.7)

Particular Partnership(Sec.8)

On the Basis of Duration

Partnership at Will [Sec.7 read with Sec.43)]

1. When there is no provision in partnership agreement (known as partnership Deed, if in writing) for:

1. The duration of their partnership, or2. The determination of their partnership,

2. then the partnership is called ‘Partnership at Will’.3. Special feature of ‘Partnership at will’ is that such firm may be dissolved

by any partner by giving a notice in writing to all other partners of his intention to dissolve the firm

4. The firm will be dissolved from that date which is mentioned in the notice as the date of dissolution and if no date is mentioned then from the date of communication of notice.

Particular Partnership [sec. 8]

1. When a partnership is formed for a 1. Specific venture or undertaking, or2. Particular period (fixed term)

2. then such partnership is called a ‘particular partnership’.3. Such partnership comes to an end on the completion of the

venture or the expiry of time period.4. If such partnership is continued after the expiry of term or

completion of venture, it is deemed to be a partnership at will.5. A particular partnership may be dissolved before the expiry of

the term or completion of the venture only by the mutual consent of all the partners.

Contd…..

6. Sec. 17 (b) of the Act provides that if a firm ,constituted for a fixed term, continues to carry on business after the expiry of that term, then the partnership will become partnership at will AND mutual rights and duties of partners will remain same as they were before the expiry.

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