Introduction to The Indian Partnership Act, 1932 – Law Tribune

Partnership : Dictionary meaning : The members of a business venture created by contract, or, A contract between two or more persons who agree to pool talent and money and share profits or losses.

Concise law dictionary : A partnership is a contract of two or more competent persons to place their money, labour, skill or some or all of them, in lawful commerce or business and to divide the profit and bear the loss in certain proportions.

Law of Partnership : Before the Indian Partnership Act, 1932 the law of partnership was dealt with in chapter XI of The Indian Contract Act, 1872. The present Act makes considerable changes in definition and arrangement. Adds provisions for voluntary registration of firms.

The law relating to the insolvency of partners and its effect upon partnership has been altered, in spite of that, it does not affect any rule of insolvency relating to partnership.

The Act is not retrospective and applies only to anything done or suffered after the commencement of the Act.

The Indian Partnership Act, 1932

(Act IX of 1932)

(Received the assent of the Governor-General on the 8^th April, 1932).

An Act to define and amend the law relating to partnership.

WHEREAS it is expedient to define and ament the law relating to partnership; it is hereby enacted.

Commencement : It shall come into force on the lst day of October, 1932, except section 69, which shall come into force on the lst day of October, 1933.

Sec 2. Definitions :- In this Act, unless there is anything repugnant in the subject or context,-

a— 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;

b— “business” includes every trade, occupation and profession;

c—“prescribed” means prescribed by rules made under this Act;

d—“third party” used in relation to a firm or to a partner therein means any person who is not a partner in the firm; and

e— expressions used but not defined in this Act and defined in the Indian Contract Act, 1872 (9 of1872), shall have the meanings assigned to them in that Act.

4. Definition of partnership, partner, firm and firm name

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.

Elements of partnership : The following important elements must be there in order to establish partnership.

1. An agreement entered into by all the parties concerned.
2. The agreement must be to share profits of business
3. The business must be carried on by all or any of the persons concerned acting for all.

(Helper Girdharbhai v. Saiyed Mohmad Mirasaheb Kadri)

1. There must be an agreement :- This element relates to the voluntary contractual nature of partnership as distinguished from non-contractual partnership relations, such as a joint Hindu family.

A joint Hindu Family carrying on a family business is not governed by the provisions of this Act.

The rights of member of joint Hindu family arises from status

(i.e. by birth in the family) and not by agreement. In the case however, of a partnership composed of certain individual members of a joint Hindu family and others who are strangers to the family, the relations of the parties are governed by the provisions of this Act, and not by any rules of a joint Hindu family. (Pichappa Chettiar v. Chockalingam Chettiar)

A proprietary concern would not answer the description of a firm within the meaning of the provisions of S.4 of Indian Partnership Act

(Raghu Lakshminarayanan v. Fine Tubes)      

2. Sharing of profits of business :- ‘Profit’ is not defined in the Act, but it means the excess of returns over outlay (expenses) that is net profit.

Co-ownership of land does not constitute a partnership between the co-owners, but the co-owners may work the land in partnership. (Chettyar Firm v. Chettiyar Firm)

The agreement to share profits is essential, but it should be noted that an agreement to share the losses is not essential. There is nothing to prevent one or more partners from agreeing to indemnify the others against loss. (Reference : Abdul Latiff v. Gopeswar).

Where nothing is said as to the sharing of losses, by virtue of section 13(b) of the Partnership Act the partners shall contribute equally to the loss sustained by the firm.

“The essential motive in making a partnership agreement is the making of profit and this has been clearly brought out in definition”. So, where persons agree to share profits of a money-lending business, they become partners (Gokuldas v. Kesherao).

3. Carried on by all or any of the persons concerned, acting for all :

The fundamental principal of a partnership is that partners when carrying on the business of the firm are agents as well as principals.

Acting for all : The other partners are bound by the act of one, only when the act is in the course of business, which will depend upon the nature of the business and practice of persons engaged in it. (Mara v. Browne)

Partners : Persons who have entered into partnership with one another are calledindividually “partners”.

Firm : Persons who have entered into partnership with one another are called collectively “a firm”. A firm is merely a collective name for the individuals.

Distinguished from other associations :- A partnership is to be distinguished from other kind of associations e.g. a club, a society, or a company.

  In the case of a club or a society, the two essential ingredients viz intention to share profits and an intention to constitute one member as agent for another member are lacking.

In case of a company, it is a juristic entity.

Firm Name : The name under which the business of the partners is carried on is called the “firm name”. The firm name shall not contain the words like, “Crown”, “Emperor”, “King”, “Queen” etc (reference sec 58)

Maugham v. Sharpe : Individuals may carry on business under any name and style they may choose to adopt, provided they do not adopt a name tending to mislead the public into confusing them with others already trading under the same or like names.

Key Differences Between Partnership Firm and Company

1. A partnership is an agreement between two or more persons who come together to carry out a business and share profit & losses mutually. A company is an incorporated association, also called an artificial person having a separate identity, common seal and perpetual succession.
2. The registration of the partnership firm is not compulsory whereas to form a company; it needs to be registered.
3. In the event of dissolution of the partnership firm, there are no legal formalities. In opposition to this, a company has many legal formalities for winding up.
4. A partnership firm can be dissolved by any one of the partners. In contrast to this, the company cannot be wound up, by any one of the members.
5. For the creation of a partnership, there must be at least two partners. For the formation of a company, there must be at least two members in case of private companies and 7 in regard to public companies.
6. The limit for the maximum number of partners in a partnership firm is 100. On the other hand, the maximum number of partners in case of a public company is unlimited and in the case of a private company that limit is 200.
7. A partnership firm is not bound to use the word limited or private limited at the end of its name while a company has to add the word ‘limited’ if it is a public company and ‘private limited’ if it is a private company.
8. The liability of the partners is unlimited whereas the liability of the company is limited to the extent of shares held by every member or guarantee given by them.
9. As a company is an artificial person so that it can enter into contracts in its own name, the members are not held liable for the acts of the company. But in the case of a partnership firm, a partner can enter into a contract in their own name with the mutual consent of the other partners, and they can also be sued for the acts done by the firm.
10. A partner has an interest in the assets of the partnership. A member of a company has no interest in the assets of the company.
11. Every partner has an implied authority to act as an agent of the firm and other partners. No member of a company has any implied authority.
12. Partnership deed can be altered at any time by agreement. In case of company, its Articles of Association and Memorandum can be altered according to the statutory provisions of the Indian Companies Act.
13. Partnership deed is not open to public inspection. Memorandum and Articles Association are open to public inspection.
14. A company is a mere abstraction of law. So its existence is not affected by the change of membership or death or insolvency of its members. But a partnership is a mere aggregation of individuals. So the life of a partnership ends on the death or insolvency or insanity of any one partner.
15. Shares of a company are freely transferable unless restricted by the Articles. But a partner cannot transfer his share without the consent of all other partners.

Partnership not created by status. (Sec 5) :-

The relation of partnership arises from contract and not from status; and, in particular, the members of a Hindu undivided family carrying on a family business as such, or a Burmese Buddhist husband and wife carrying business as such, are not partners in such business.

In Hindu joint family, a person becomes entitled to a share in the family business by the mere fact that, he is either born or adopted in the family. He is not a partner within the meaning of the Partnership Act, but a joint owner of the business.

Difference between partnership and joint Hindu family. :- In case of a joint Hindu family business :

1. One co-parcener is not the agent of the others.
2. All powers are with the Karta
3. A co-parcener is liable to the extent of his share in the family estate but in case of partnership debt, a partner’s debt, a partner’s own separate estate is also liable.
4. Death of a partner dissolves partnership but in case of the death of a co-parcener the family business is not dissolved.
5. A partnership is governed by the provisions of the Indian Partnership Act, 1932. A joint Hindu family business is governed by the principles of Hindu law.
6. In a partnership no new partner is admitted without the consent of all the partners, while in the case of a joint Hindu family firm a new member is admitted just by birth.

Sec 6. 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.

Explanation 1 : The sharing of profits or of gross returns arising from property by persons holding a joint or common interest in that property does not of itself make such persons partners.

Explanation 2 : The receipt by a person of a share of the profits of a business, or of a payment contingent upon the earning of profits or varying with the profits earned by a business, does not of itself make him a partner with the persons carrying on the business;

and in particular, the receipt of such share or payment-

1. by a lender of money to persons engaged or about to engage in any business,
2. by a servant or agent as remuneration,
3. by the widow or child of a deceased partner, as annuity, or
4. by a previous owner or part owner of the business, as consideration for the sale of the good will or share thereof,

does not of itself make the receiver a partner with the persons carrying on the business.

Determining existence of partnership :

In Ross v. Parkyns, it is stated as, “It is said that the mere participation in profits affords cogent evidence of partnership. But it is now settled by the cases, (like Cox v. Hickman) that although a right to participate in profits is a strong test of partnership, whether the relation of partnership does or does not exist depend upon the whole contract between the parties.

The law as stated above has been restated in section 6.

The question whether the relation of partnership does or does not exist,  “must depend on the real intention and contract of the parties”.

Cox v. Hickman : in this case the creditors of a trader entered into an arrangement with him by which the trade was to be conducted under their superintendence, and they were gradually to be paid off out of the profits. These creditors may have agreed to take a share of profits, and may have supervised the business but they did not become partners because the business was not carried on their behalf.

Chimanram v. Jayantilal : The test is not whether there is a partnership or sharing of profits, but whether there is such sharing of profits as to constitue the relation of principal and agent between the persons taking the profits and those actually carrying on the business.

Explanations  : The mere fact that a person is entitled to a share in the profits does not make him a partner, because the real relationship may be one of debtor and a creditor

Illustration : (Reference : Holme v. Hammond)

— A & B entered into a partnership for a fixed term.

–It is agreed that, if either of them dies before the end of the term his representatives shall during the term receive the share of the profits which he would have been entitled to if living.

–A dies, and as per the agreement his share of profit is paid to his legal representatives.

–The representatives are not partners.

In Girdharbhai v. Saiyed Mohd. Kadri the SC observed that section 6 reiterates that in determining partnership, regard shall be had to real relations between parties as shown by all the relevant facts taken together.