After studying this unit, you would be able to:
• Understand the concept of partnerships and be clear about its essentials.
• Try to understand the ‘principal - agent relationship’ among the partners.
• Note the points of difference between partnership and other various forms of organization.
DEFINITION OF ‘PARTNERSHIP’, ‘PARTNER’, ‘FIRM’ AND ‘FIRM NAME’ (SECTION 4):
‘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 definition of the partnership contains the following five elements which must coexist before a partnership can come into existence:
We shall now discuss the aforestated elements one by one:
1. ASSOCIATION OF TWO OR MORE PERSONS: Partnership is an association of 2 or more persons. Again, only persons recognized by law can enter into an agreement of partnership. Therefore, a firm, since it is not a person recognized in the eyes of law cannot be a partner. Again, a minor cannot be a partner in a firm, but with the consent of all the partners, may be admitted to the benefits of partnership.
The partnership Act is silent about the maximum number of partners but section 464 of the Companies Act, 2013 has now put a limit of 50 partners in any association/partnership firm.
2. AGREEMENT: It may be observed that partnership must be the result of an agreement between two or more persons. There must be an agreement entered into by all the persons concerned. This element relates to voluntary contractual nature of partnership. Thus, the nature of the partnership is voluntary and contractual.
An agreement from which relationship of Partnership arises may be express. It may also be implied from the act done by partners and from a consistent course of conduct being followed, showing mutual understanding between them. It may be oral or in writing.
3. BUSINESS: In this context, we will consider two propositions. First, there must exist a business. For the purpose, the term ‘business’ includes every trade, occupation and profession. The existence of business is essential. Secondly, the motive of the business is the “acquisition of gains” which leads to the formation of partnership. Therefore, there can be no partnership where there is no intention to carry on the business and to share the profit thereof.
4. AGREEMENT TO SHARE PROFITS: The sharing of profits is an essential feature of partnership. There can be no partnership where only one of the partners is entitled to the whole of the profits of the business. Partners must agree to share the profits in any manner they choose. But an agreement to share losses is not an essential element. It is open to one or more partners to agree to share all the losses.
However, in the event of losses, unless agreed otherwise, these must be borne in the profit-sharing ratio.
Example 1: Co-owners who share amongst themselves the rent derived from a piece of land are not partners, because there does not exist any business.
Example 2: No charitable institution or club may be floated in partnership [A joint stock company may, however, be floated for non-economic purposes].
Example 3: X and Y buy certain bales of cotton which they agree to sell on their joint account and to share the profits equally. In these circumstances, X and Y are partners in respect of such cotton business.
5. BUSINESS CARRIED ON BY ALL OR ANY OF THEM ACTING FOR ALL: The business must be carried on by all the partners or by anyone or more of the partners acting for all. This is the cardinal principle of the partnership Law. In other words, there should be a binding contract of mutual agency between the partners.
An act of one partner in the course of the business of the firm is in fact an act of all partners. Each partner carrying on the business is the principal as well as the agent for all the other partners. He is an agent in so far as he can bind the other partners by his acts and he is a principal to the extent that he is bound by the act of other partners.
It may be noted that the true test of partnership is mutual agency rather than sharing of profits. If the element of mutual agency is absent, then there will be no partnership.
KD Kamath & Co.
The Supreme Court has held that the two essential conditions to be satisfied are that:
(1) there should be an agreement to share the profits as well as the losses of business; and
(2) the business must be carried on by all or any of them acting for all, within the meaning of the definition of ‘partnership’ under section 4.
The fact that the exclusive power and control, by agreement of the parties, is vested in one partner or the further circumstance that only one partner can operate the bank accounts or borrow on behalf of the firm are not destructive of the theory of partnership provided the two essential conditions, mentioned earlier, are satisfied.
Note: The ‘Partnership Agreement’ is also known as ‘Partnership Deed’.
TRUE TEST OF PARTNERSHIP
Mode of determining existence of partnership (Section 6): In determining whether a group of persons is or is not a firm, or whether a person is or 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.
For determining the existence of partnership, it must be proved-
1. There was an agreement between all the persons concerned
2. The agreement was to share the profits of a business and
3. the business was carried on by all or any of them acting for all.
1. Agreement: Partnership is created by agreement and not by status (Section 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 on business as such are not partners in such business.
2. Sharing of Profit: 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. 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-
(a) by a lender of money to persons engaged or about to engage in any business,
(b) by a servant or agent as remuneration,
(c) by a widow or child of a deceased partner, as annuity, or
(d) by a previous owner or part owner of the business, as consideration for the sale of the goodwill or share thereof, does not of itself make the receiver a partner with the persons carrying on the business.
As discussed earlier, sharing of profit is an essential element to constitute a partnership. But, it is only a prima facie evidence and not conclusive evidence, in that regard. The sharing of profits or of gross returns accruing from property by persons holding joint or common interest in the property would not by itself make such persons partners. Although the right to participate in profits is a strong test of partnership, and there may be cases where, upon a simple participation in profits, there is a partnership, yet whether the relation does or does not exist must depend upon the whole contract between the parties. Where there is an express agreement between partners to share the profit of a business and the business is being carried on by all or any of them acting for all, there will be no difficulty in the light of provisions of Section 4, in determining the existence or otherwise of partnership.
But the task becomes difficult when either there is no specific agreement or the agreement is such as does not specifically speak of partnership. In such a case for testing the existence or otherwise of partnership relation, Section 6 has to be referred.
According to Section 6, regard must be had to the real relation between the parties as shown by all relevant facts taken together. The rule is easily stated and is clear but its application is difficult. Cumulative effect of all relevant facts such as written or verbal agreement, real intention and conduct of the parties, other surrounding circumstances etc., are to be considered while deciding the relationship between the parties and ascertaining the existence of partnership.
3. Agency: Existence of Mutual Agency which is the cardinal principle of partnership law, is very much helpful in reaching a conclusion in this regard. Each partner carrying on the business is the principal as well as an agent of other partners. So, the act of one partner done on behalf of firm, binds all the partners. If the elements of mutual agency relationship exist between the parties constituting a group formed with a view to earn profits by running a business, a partnership may be deemed to exist.
Existence of Mutual Agency which is the cardinal principle of partnership law, is very much helpful in reaching a conclusion in this regard. Each partner carrying on the business is the principal as well as an agent of other partners. So, the act of one partner done on behalf of firm, binds all the partners. If the elements of mutual agency relationship exist between the parties constituting a group formed with a view to earn profits by running a business, a partnership may be deemed to exist.
Santiranjan Das Gupta Vs. Dasyran Murzamull (Supreme Court)
In Santiranjan Das Gupta Vs. DasyranMurzamull, following factors weighed upon the Supreme Court to reach the conclusion that there is no partnership between the parties:
(a) Parties have not retained any record of terms and conditions of partnership.
(b) Partnership business has maintained no accounts of its own, which would be open to inspection by both parties.
(c) No account of the partnership was opened with any bank.
(d) No written intimation was conveyed to the Deputy Director of Procurement with respect to the newly created partnership.
PARTNERSHIP DISTINGUISHED FROM OTHER FORMS OF ORGANISATION
Partnership Vs. Joint Stock Company
|Basis||Partnership||Joint Stock Company|
|Legal status||A firm is not legal entity i.e., it has no legal personality distinct from the personalities of its constituent members.||A company is a separate legal entity distinct from its members (Salomon v. Salomon).|
|Agency||In a firm, every partner is an agent of the other partners, as well as of the firm.||In a company, a member is not an agent of the other members or of the company, his actions do not bind either.|
|Distribution of profits||The profits of the firm must be distributed among the partners according to the terms of the partnership deed.||There is no such compulsion to distribute its profits among its members. Some portion of the profits, but generally not the entire profit, become distributable among the shareholders only when dividends are declared.|
|Extent of liability||In a partnership, the liability of the partners is unlimited. This means that each partner is liable for debts of a firm incurred in the course of the business of the firm and these debts can be recovered from his private property, if the joint estate is insucient to meet them wholly||In a company limited by shares, the liability of a shareholder is limited to the amount, if any, unpaid on his shares, but in the case of a guarantee company, the liability is limited to the amount for which he has agreed to be liable. However, there may be companies where the liability of members is unlimited.|
|Property||The firm’s property is that which is the “joint estate” of all the partners as distinguished from the ‘separate’ estate of any of them and it does not belong to a body distinct in law from its members.||In a company, its property is separate from that of its members who can receive it back only in the form of dividends or refund of capital.|
|Transfer of shares||A share in a partnership cannot be transferred without the consent of all the partners.||In a company a shareholder may transfer his shares, subject to the provisions contained in its Articles. In the case of public limited companies whose shares are quoted on the stock exchange, the transfer is usually unrestricted.|
|Management||In the absence of an express agreement to the contrary, all the partners are entitled to participate in the management||Members of a company are not entitled to take part in the management unless they are appointed as directors, in which case they may participate. Members, however, enjoy the right of attending general meeting and voting where they can decide certain questions such as election of directors, appointment of auditors, etc.|
|Registration||Registration is not compulsory in the case of partnership.||A company cannot come into existence unless it is registered under the Companies Act, 2013.|
|Winding up||A partnership firm can be dissolved at any time if all the partners agree.||A company, being a legal person is either wind up by the National Company Law Tribunal or its name is struck of by the Registrar of Companies.|
|Number of membership||According to section 464 of the Companies Act, 2013, the number of partners in any association shall not exceed 100.|
However, the Rule given under the Companies (Miscellaneous) Rules, 2014 restrict the present limit to 50.
|A private company may have as many as 200 members but not less than two and a public company may have any number of members but not less than seven. A private Company can also be formed by one person known as one person Company.|
|Duration of existence||Unless there is a contract to the contrary, death, retirement or insolvency of a partner results in the dissolution of the firm.||A company enjoys a perpetual succession.|
Partnership Vs. Club
|Defnition||It is an association of persons formed for earning profits from a business carried on by all or any one of them acting for all.||A club is an association of persons formed with the object not of earning profit, but of promoting some beneficial purposes such as improvement of health or providing recreation for the members, etc.|
|Relationship||Persons forming a partnership are called partners and a partner is an agent for other partners.||Persons forming a club are called members. A member of a club is not the agent of other members.|
|Interest in the property||Partner has interest in the property of the firm.||A member of a club has no interest in the property of the club.|
|Dissolution||A change in the partners of the firm affect its existence.||A change in the membership of a club does not affect its existence.|