LAW RELATING TO PARTNERSHIP

MEANING OF PARTNERSHIP

 ‘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.’

CHARACTERISTICS

It is the result of an agreement.

It is organised to carry on business*.

That the persons concerned agree to share the profits of the business.

That the business will be carried on by all or any one of them acting for all*.

Business

 Ordinary Meaning

A person's regular occupation, profession, or trade.

An activity that someone is engaged in.

Partnership Act defines ‘business’ in all inclusive manner, as ‘every trade, occupation and

profession’

Partnership…..

At will: ‘no provision in contract for the duration of the partnership’

Particular partnership : ‘particular adventure or undertakings’

REAL TEST OF PARTNERSHIP

The real test of partnership is not merely sharing of profits or carrying on of business but of Mutual Agency.

Cox V Hickman (1860) – case of trustee appointed by creditors to run a business.

Law of partnership is an extension of the law of agency.

Act of a partner to bind the firm

• Partnership agreement, whereby one partner is given the power to manage the affairs of the firm, and it is stated that whatever he does shall be binding on the partners – does not give the said partner the power to transfer immovable property.
• In order to bind the firm an act or instrument done or executed by a partner or other person on behalf of the firm shall be done or executed in the firm name or in any other manner expressing or implying an intention to bind the firm.

 Partners who have entered into partnership with one another are called individually

partners & collectively a firm.

A firm as such, is not entitled to enter into a partnership with another firm or individuals.

 The name under which their business is carried out is called the firm name.

In the case of a partnership, no separate legal entity is created. A partnership is only a putting together of the partners.

The Income Tax Act had provided to treat a firm as separate assessable units. 

(A firm is a separate entity for the purpose of Income Tax)

KINDS OF PARTNERS

 The various kinds of Partners are :

Actual,

Sleeping,

Nominal,

Partners for profits only &

Partner by holding out i.e. partner by Estoppel*

MINOR AS A PARTNER

Partnership is a contract. As such all the essential elements of a valid contract must be present. But a minor may be admitted to the benefits of a partnership without any consideration but with the approval of all partners.

DURATION OF A FIRM

A partnership may be for a fixed period of time. But where no provision is made by the partners for the duration of the partnership, it is a partnership at will.

REGISTRATION OF PARTNERSHIP

Partnership Act does not provide for compulsory registration; but:

• A partner of an unregistered partnership firm cannot file a suit against the firm or any partner thereof for the purpose of enforcing a right arising from a contract conferred by the Act.
• No suit can be filed on behalf of an unregistered firm against any third party for the purpose of enforcing a contract.

LIABILITY OF A PARTNER
The liability of partners is unlimited.

RIGHTS OF A PARTNER

Right to take part in the conduct of the business

Majority rights

Ordinary Matter

Right to be consulted & express opinion (can have a contract to the contrary for petty & routine matters)

Fundamental Matter

No change can be made in the nature of the business without the consent of all the partners

CRAG vs. FORD [1842]

FACTS: Crag and Ford were partners in a firm dealing with cotton. They purchased a certain quantity of cotton. After a month’s time, Crag told Ford to sell the same. But Ford did not do so as the prevailing market rates were low and he hoped that they would rise in the coming months. After three months, the rates were still low and Ford finally sold the cotton. Crag sued Ford alleging the delay of two three months caused much greater losses to the firm than those the firm would have suffered if Ford had followed Crag’s directions. Crag claimed damages from Ford for these extra losses suffered by the firm.

HELD: The plaintiff’s case failed as the judges held that both partners had equal rights and duties in the partnership firm. Crag could have sold the cotton himself; after all, he was also responsible for running the business of the firm. He did not perform his duties diligently or in time to be able to succeed in the action for damages.

BLISSET vs. DANIEL [1853]

FACTS: Blisset was a partner in a firm where a proposal was mooted to appoint one of the partner’s son as a co-manager of the firm. Blisset objected to such an appointment. The partner whose son was nominated complained to the other partners behind Blisset’s back and persuaded them to sign and serve a notice of expulsion to him. This was in keeping with a partnership clause that empowered a majority of the partners to expel any partner without citing any reason. Blissett contested the validity of the expulsion.

HELD: The plaintiff’s expulsion was set aside. The court held that it was up to the partners and the majority to decide what was good for the firm but the partners are required to act in good faith when making use of such powers.

Right of access to books; and to inspect & copy any of the books of the firm

Right to indemnity in respect of payments made and liabilities:

• Incurred by a partner in the ordinary and proper conduct of the business.

Thomas V Atherton (1877)

Trespass by a colliery

In doing such an act, in an emergency, for the purpose of protecting the firm from loss, as would have been done by a person of ordinary prudence, in his own case, under similar circumstances.

Right to profits

Unless otherwise agreed, partners are entitled to share equally in the profits earned by the firm.

Right to interest

Interest on advance at the rate of 6% p.a.

Interest on capital shall be payable only out of profits

Right to remuneration

Unless otherwise agreed, partners are not entitled to receive any salary or remuneration for taking part in the conduct of the business

Right to use of partnership property

Property originally brought in

B N Murthy & Sons V V V Sugana (1978) 

– Land- theatre - firm to exhibit films

Property subsequently acquired

Partner’s property in firm’s use

Robinson V Ashton (1875) 

- Cotton mill case

Right to be consulted for admission of new partner

No liability before joining (there may be a contract to the contrary)

Right to retire*

Right not to be expelled*

Right of outgoing partner to share in the subsequent profits if his final settlement is not carried out by the other partners

Right of outgoing partner to carry on competing business (there may be a contract to the contrary)

  

DUTIES OF A PARTNER

Duty of Good Faith (fiduciary relation - every partner should be just, faithful and observe utmost good faith towards every other partner of the firm)

To carry on the business to the greatest common advantage (He must use his knowledge & skill for the common benefit of the firm)

Bentley V Craven (1853)

– Sugar refiners case

Due diligence: to attend diligently to the business and use his knowledge & skill to the common advantage of all the partners.

A partner shall indemnify the firm for any loss caused to it by his wilful neglect in the conduct of the business of the firm

Sasthi Kenkar V Man Gobinda (1919)

 – dissolution of firm - managing partners failed to sue firms for amounts due – one claim became time barred & other lost due to insolvency of debtor

Duty to indemnify for fraud in the conduct of the business of the firm.

The liability for fraud cannot be excluded by any contract to the contrary.

Duty to render true accounts

Duty to use the property for the firms purposes

Duty to share in the losses

Duty to account for personal profits from partnership transactions

Any transaction of the firm

Use of the property of the firm

Use of the business connection of the firm

Use of the firm name

Duty to account for profits in competing business (opportunity to make it comes his way while he was partner of the firm)

INTRODUCTION OF A PARTNER

A person may be admitted as a partner with the consent of all the existing partners. An incoming partner does not become liable for any act done prior to his admission as a partner. A minor can be admitted only to share the profits of the firm.

RETIREMENT OF A PARTNER

 A partner can retire from a firm:

   

with the consent of all the partners,

 in accordance with an express agreement by the partners, or

where the partnership is at will, by giving notice in writing to all the other partners of his

intention to retire.

LIABILITY OF A RETIRED PARTNER

A retired partner continues to be liable for all acts of the firm done before his retirement. He  continues to be liable as a partner to third parties for any act done by the firm after his retirement until a public notice* is given of the retirement.

*except in the case of a sleeping partner

  

PUBLIC NOTICE

  A public notice has to be given:

On the retirement or expulsion of a partner

On the dissolution of a registered firm

On the election to become or not to become a partner in a registered firm by a minor on attaining majority

NOTICE TO BE GIVEN TO:

The registrar of firms

The official gazette

Publication in at least one vernacular newspaper circulating in the district where the firm has its place or principal place of business.

EXPULSION OF A PARTNER

A partner may be expelled from the partnership provided the power of expulsion is conferred by the contract between the partners and the power is exercised by a majority of the partners.

The power should be exercised in good faith.

The test of good faith is that the expulsion must be in the interest of the partnership, the expelled partner is served with a notice and that he is given an opportunity of being heard.

INSOLVENCY OF A PARTNER

 Where a partner is adjudicated insolvent, he ceases to be partner on the date on which the order of adjudication is made, whether or not the firm is thereby dissolved.

The firm is not liable for any act of the insolvent partner after the date of the order of adjudication.

  

DEATH OF A PARTNER

Subject to contract between the partners, a firm is dissolved by the death of a partner.

No public notice is required of the death of the partner.

Whether or not the firm is dissolved, the estate of the deceased partner is not liable for the acts of the firm done after his death.

TRANSFER OF PARTNER’S INTEREST

A partner may transfer his interest in the firm by sale, mortgage or charge. The transfer may be absolute or partial. It does not entitle the transferee, during the continuance of the firm:

• to interfere in the conduct of business of the firm,
• to require accounts of the firm or
• to inspect the books of the firm.

On transfer of interest by a partner, the transferee only becomes entitled to receive the share of profit of the transferring partner.

 DISSOLUTION OF A FIRM

A firm can be dissolved without the order of court.

A firm can be dissolved by the court at the suit of a partner.

DISSOLUTION WITHOUT COURT ORDER

By agreement by the partners
By compulsory dissolution –

When all the partners or all but one partners is insolvent  or
By the happening of any event which makes it unlawful for the business of the firm to be
carried on by the partners
When the term of the partnership expires
When the particular adventure for which the firm was constituted is accomplished

On the death of the partner or when a partner becomes insolvent*
 Dissolution by notice of partnership at will

DISSOLUTION BY COURT ORDER
(On a Suit by a Partner)

Insanity of partner
When a partner is permanently incapable of performing duties of a partner
Misconduct of a partner*

Snow V Milfred (1868)
– Case of the adulterous banker
Persistent breach of agreement & destruction of mutual confidence
Transfer of interest in the firm
Business cannot be carried on except at a loss
Any other ground which the court finds as just & equitable