Relations of Partners to one another in a Partnership: An Analysis

Submitted by
Mranal Sharma
SM0117030

Faculty in Charge
Ms. Daisy Changmai

NATIONAL LAW UNIVERSITY AND JUDICIAL ACADEMY, ASSAM

 TABLE OF CONTENTS

CONTENTS

1. Introduction...........................................................................................................
1.1 Research Question
1.2 Literature Review
1.3 Scope and Objectives
1.4 Research Methodology

2. Meaning of Partnership and its elements……………………………………….

2.1 Meaning
2.2 Elements

3. Duties and Rights of a partner……………………………………………………

4. Liability of a partner to the third party………………………………………….

5. Conclusion…………………………………………………………………………

6. Bibliography……………………………………………………………………….
 CHAPTER-1
INTRODUCTION

“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. 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”. 1 Partnership is
the agreement between two or more person to carry out any legal business. They are
collectively known as partnership firm. Originally, in partnership firm there is maximum
limit of 10 partners for banking and 20 for other business. But according to amendments in
companies act, 2013, there can be maximum 100 partners.

An association of two or more persons engaged in a business enterprise in which the profits
and losses are shared proportionally. According to section 4 of the Partnership Act of 1932,
"Partnership is defined as the relation between two or more persons who have agreed to share
the profits according to their ratio of business run by all or any one of them acting for all".
The Common law definition of a partnership is generally stated as "an association of two or
more persons to carry on as co-owners a business for profit" A partnership firm is not a legal
entity apart from the partners constituting it. It has limited identity for the purpose of tax law
as per section 4 of the Partnership Act of 1932. The formation of a partnership requires a
voluntary "association" of persons who "co-own" the business and intend to conduct the
business for profit. Persons can form a partnership by written or oral agreement, and a
partnership agreement often governs the partners' relations to each other and to the
partnership. The term person generally includes individuals, corporations, and other
partnerships and business associations. Accordingly, some partner-ships may contain
individuals as well as large corporations. Family members may also form and operate a
partnership, but courts generally look closely at the structure of a family business before
recognizing it as a partnership for the benefit of the firm's creditors. Certain conduct may lead
to the creation of an implied partnership. Generally, if a person receives a portion of the
profits from a business enterprise, the receipt of the profits is evidence of a partnership. If,
however, a person receives a share of profits as repayment of a debt, wages, rent, or an

1
Indian Partnership Act, 1932, Section 4.
annuity, such transactions are considered "protected relationships" and do not lead to a legal
inference that a partnership exists

1.1 Research Question

 What is the meaning of partnership?
 What is the relationship among the partners?
 What are the liability of the partner towards the third party?

1.2 Literature Review

 The Indian Partnership Act by Pollock and Mullah

The principles of partnership law are of expanding significance in these days of

globalization. This revised edition is a concerted effort to put forward the various
concepts in Partnership Law. Many English decisions have been included to aid in
explaining the finer points of this law. This edition includes updated judicial
pronouncements and cases. The editor has made every effort to analyse the judgments and
legal provisions in depth.

 Law of Partnership by Avatar Singh

In the book the author has explicitly covered all the provisions regarding the rights and
duties of the partnership and firm. In the book the author has not only focused on the
rights of a partner of the partner but also his duties.

1.3 Scope and Objectives

The scope of this project is limited to the study of the duties of partner to one another and to
the third party.

The objectives of this projects are as follows:

 To know the meaning of partnership firm.

 To know the change in relationship among partners of a firm.
 To know how relationship among partner of a firm and third party.
1.4 Research Methodology
Approach to research
In this project, the researcher has adopted Doctrinal type of research. Doctrinal research is
a research in which secondary sources are used and it is essentially a library-based study,
which means that the materials collected by the researcher may be available in libraries,
archives and other data-bases. The researcher has used computer laboratory to get
important data related to this topic. Books, journals, articles were used while making this
project. Help from various websites were also taken.
Sources of data collection
Data has been collected from secondary sources like web sources. No primary sources
like survey data or field data were collected by the researcher.
 CHAPTER-2
MEANING OF PARTNERSHIP AND ITS ELEMENTS

2.1 Meaning

A partnership is the agreement between two or more people for carrying out any business. A
partnership may be made for a specified time or specific task also. Persons who have entered
into partnership with one another to carry on a business are individually called “Partners”;
collectively called as a “Partnership Firm” 2; and the name under which their business is
carried on is called the “Firm Name” A partnership firm is not a separate legal entity distinct
from its members. It is merely a collective name given to the individuals composing it.
Hence, unlike a company which has a separate legal entity distinct from its members, a firm
cannot possess property of employ servants, neither can it be a debtor or a creditor. It cannot
sue or be sued by others. It is only for the sake of convenience that in commercial usage
terms like “firm’s property”, “employee of the firm”, “suit against the firm” and so on are
used, but in the eyes of the law that simply means “property of the partners”, “employees of
the partners” and “a suit against the partners of that firm”. It is relevant to state that for the
purposes of levy of taxes, a partnership firm is an entity quite distinct from the partners
composing it and is assessable separately. But for all other laws, they are treated as the same
because a partnership firm does not have a separate legal entity of its own.

2.2 Elements

There are 5 elements which constitute of a partnership namely:

(1) There must be a contract: Partnership is the result of a contract. It does not arise from
status, operation of law or inheritance. Thus, at the time of death of the father, who was a
partner in the partnership firm, the son can claim share in the partnership property but cannot
become a partner unless he enters into a contract for the same with other Similarly, the
members of a Hindu undivided family carrying on a family business cannot be called partners
for their relation arises not from any contract but from status. Thus, a “contract” is the very
foundation of partnership.

(2) Between two or more persons: Since partnership is the result of a contract, at least two
people are necessary to constitute a partnership. The Indian Partnership Act, 1932 does not

2
AVATAR SINGH, LAW OF PARTNERSHIP 9 (2nd ed. 2012).
mention anything about the maximum no. of partners in a partnership firm but as per the
Companies Act, a partnership consisting of more than 10 persons for a banking business and
more than 20 persons for any other business would be considered as illegal. Hence, these
should be regarded as the maximum limits to the number of partners in a partnership firm.
Only, the persons competent to contract can enter into a contract of partnership. Persons may
be natural or artificial. A Company may, being an artificial legal person, enter into a contract
of partnership, if authorized by its Memorandum of Association to do so. There could even
be a partnership between 2 companies (Steel bros & Co. Ltd. v. Commissioner of Income
Tax)3 A partnership firm, since it is not recognized as a legal person having a separate legal
entity from that of its partners cannot enter into contract of partnership with another
partnership firm or individuals (Duli Chand v. Commissioner of Income Tax)4. When a
partnership firm (under a firm name) enters into a contract of partnership with another
partnership firm or individual, in that case, in the eyes of the law the members of the firms or
firm.

(3) Who agree to carry on a business: The third essential element of a partnership is that the
parties must have agreed to carry on a business. The term “business” is used in its widest
sense and includes every trade, occupation or profession. Therefore, if the purpose is to carry
on some charitable work, it will not be a partnership. Similarly, if a number of persons agree
to share the income of a certain property or to divide the goods purchased in bulk amongst
them, there is no partnership and such persons cannot be called partners because in neither
case they are carrying on a business. Thus, where A and B jointly purchased a tea shop and
incurred additional expenses for purchasing pottery and utensils for the job, contributing the
money in equal proportions and then leased out the shop on rent which was shared equally by
them , it was held that they are only co-owners and not partners as they never carried on any
business.

(4) With the object of sharing profits: This essential element provides that the agreement to
carry on business must be with the object of sharing profits amongst all the partners. Thus,
there would be no partnership where the business is carried on with a philanthropic motive
and not for making a profit or where only one of the persons is entitled to the whole of the
profits of the business. The partners may however, agree to share the profits in any ratio they
like. Sharing of losses not necessary to constitute a partnership, it is not essential that the

3
AIR 1958 SC 315
4
AIR 354, 1956 SCR 154
partners should agree to share the losses 5 (Raghunandan v. Hormasji)6. It is open to one or
more partners to agree to bear all the losses of the business. Moreover, the manner in which
the profits/losses are to be shared should be expressly stated in the partnership deed. In the
absence of this being mentioned in the partnership deed, the provisions of the Partnership
Act, 1932 would apply which state that the profits/losses should be distributed equally among
all partners. However, it must be noted that although a partner may not share in the losses of a
business, yet his liability towards the outsiders shall be unlimited. In case the partners’ intent
to limit their liability towards the outsiders, a new concept of partnership i.e. Limited
Liability Partnerships have been introduced in India. In a Limited Liability Partnership, the
liability of the partners towards the outsiders is limited.

(5) The business must be carried on by all or any of them acting for all: The fifth element
in the definition of partnership provides that the business must be carried on by all the
partners or any (one or more) of them acting for them all, i.e. there must be a mutual agency 7.
Thus, every partner, is both an agent and principal for himself and other partners, i.e. he can
bind by his acts the other persons and can be bound by the acts of other partners. The
importance of the element of mutual agency lies in the fact that it enables every partner to
carry on the business on behalf of others.

5
AVATAR SINGH, LAW OF PARTNERSHIP 9 (2nd ed. 2012).
6
(1927) 29 BOMLR 207
7
GEOFFREY MORSE, PARTNERSHIP LAW 63 (7th Ed. 2010).
 Chapter 3

Duties and rights of partners

Two fundamental principles govern relations of partners to one another. The first principle
gives the partners the freedom to settle their mutual rights and duties by their own voluntary
agreement. The statement of duties and rights should be prefaced with the contents of Section
11 which gives freedom to partners, subject, of course, to the provisions of the Act, to
determine their mutual rights and duties by their own agreement. Certain duties, as stated in
the chapter, are of compulsory nature and, therefore, cannot be altered by an agreement to the
contrary. But, subject to that, the partners can settle their rights and obligations inter se by
their own contract.
The second principle of high importance is that relations of partners to one another are based
upon the fundamental principle of absolute good faith. Every partner is an unlimited agent of
his co-partners for all matters connected with the business and, therefore, has the power to
bind them into any amount of liability. Mutual trust and confidence among the partners,
therefore, becomes a necessary condition of their relations. Section 9 gives statutory
recognition to this principle by providing that "partners are bound to be just and faithful to
each other" .This duty cannot be excluded by any agreement to the contrary. Commenting
upon his fiduciary obligation Bacon VC observed in Helmore v Smith: If fiduciary
relationship means anything I cannot conceive a stronger case of fiduciary relations than that
which exists between partners. Their mutual confidence is the life blood of the concern. It is
because they trust one another that they are partners in the first place; it is because they
continue to trust one another that the business goes on.

The statutory rights of partners can be enumerated as under:8

1. Right to take part in business [S. 12(a)]
2. Majority rights [S. 13(c)]
3. Access to books [S. 12(d)]
4. Right to indemnity [S. 13(e)]
5. Right to profits [S. 13(b)]
6. Right to interest on capital [S. 13(c) and (d)]

8
Indian Partnership Act 1932
7. Right to remuneration [S. 13(a)].
In Short, the Partnership Deed contains the mutual rights, duties and obligations of the
partners, in certain cases, the Partnership
Act also makes a mandatory provision as regards to the rights and obligations of partners.
When there is no Deed or the Deed is silent on any point, rights and obligations as provided
in the
Partnership Act shall apply.

Duties of a Partner:
The duties of partners which emerge from the provisions of the chapter can be briefly
enumerated thus:9
1. Duty of absolute good faith [S. 9]
2. Duty not to compete [S. 16(b)]
3. Duty of due diligence [Ss. 12(b) and 13(/)]
4. Duty to indemnify for fraud [S. 10]
5. Duty to render true accounts [S. 9]
6. Proper use of property [S. 15 and S. 16(a)]
7. Duty to account for personal profits [S. 16]

9
Ibid
 Chapter 4
Liabilities of a Partner to Third Parties

The following are the liabilities of a partner to third parties:10

i. Liability of a partner for acts of the firm: Every partner is jointly and severally
liable for all acts of the firm done while he is a partner. Because of this liability,
the creditor of the firm can sue all the partners jointly or individually.

ii. Liability of the firm for wrongful act of a partner: If any loss or injury is
caused to any third party or any penalty is imposed because of wrongful act or
omission of a partner, the firm is liable to the same extent as the partner. However,
the partner must act in the ordinary course of business of the firm or with
authority of his partners.

iii. Liability of the firm for miss utilisation by partners: Where a partner acting
within his apparent authority receives money or property from a third party and
miss utilises it or a firm receives money or property from a third party in the
course of its business and any of the partners miss utilises such money or
property, then the firm is liable to make good the loss.

iv. Liability of an incoming partner: An incoming partner is liable for the debts and
acts of the firm from the date of his admission into the firm. However, the
incoming partner may agree to be liable for debts prior to his admission. Such
agreeing will not empower the prior creditor to sue the incoming partner. He will
be liable only to the other co-partners.11

v. Liability of a retiring partner: A retiring partner is liable for the acts of the firm
done before his retirement. But a retiring partner may not be liable for the debts
incurred before his retirement if an agreement is reached between the third parties
and the remaining partners of the firm discharging the retiring partner from all
liabilities. After retirement the retiring partner shall be liable unless a public
10
Pratik purswani, Relation of Partners to one another under Indian Partnership Act, 1932.pdf,
https://www.academia.edu/35100326/Relation_of_Partners_to_one_another_under_Indian_Partnership_Act_19
32.pdf , accessed on 29 May 2019
11
Ibid
notice of his retirement is given. No such notice is required in case of retirement
of a sleeping or dormant partner.
 CONCLUSION

According to the researcher, partnership is a very viable and realistic mode of doing business.
It is not only fusion of coherent and methodical work structure balanced on good faith and
utmost honesty, but also reduces liability. It is easy to form and with the combined talent,
skill and judgment it diffuses the risk and makes it more flexible. There may be certain issues
like division of authority against will, uncertainty and even risk of implied authority;
however, the various benefits overpower it and make it a very feasible and achievable mode
of doing business. All this is possible with smooth and healthy relationship between partners
with no animosity and rancour and to ensure that, various provisions of the Act provide a safe
haven and necessary remedies to problems between partners.
 Bibliography

Books and Articles

1. Pratik purswani, Relation of Partners to one another under Indian Partnership Act,
1932.pdf,
https://www.academia.edu/35100326/Relation_of_Partners_to_one_another_under_In
dian_Partnership_Act_1932.pdf

2. AVATAR SINGH, LAW OF PARTNERSHIP 9 (2nd ed. 2012).

3. GEOFFREY MORSE, PARTNERSHIP LAW 63 (7th ed. 2010).

Statutes

1. Indian Partnership Act 1932