Meaning and Essentials of Partnership | Law of Contracts - CLAT PG PDF Download

Introduction 

• Partnerships in India were initially governed by the Indian Contract Act, 1872. However, in 1930, the specific provisions regarding partnership were removed from this Act. Subsequently, the Indian Partnership Act, 1932 was enacted to regulate partnerships in India. This Act is still in effect today, with its provisions applicable across most of India, except for the State of Jammu and Kashmir.
• The Indian Partnership Act, 1932 came into force on October 1, 1932, with the exception of Section 69, which was implemented a year later, on October 1, 1933.

 Key Features of the Indian Partnership Act, 1932 

• The Act governs partnerships formed through an agreement between two or more individuals who intend to share the profits of a business operated by all or any of them on behalf of all.
• While the Act provides specific regulations for partnerships, the general principles of contract and agency law from the Indian Contract Act, 1872 still apply unless the Partnership Act states otherwise.
• The Act outlines essential aspects such as the formation of partnerships, the rights, duties, and liabilities of partners, the types of partners (including minor partners), and the procedures for dissolution of partnerships.

Meaning and Definition 

• A partnership is formed when individuals agree to share the profits of a business that is conducted by all or any one of them on behalf of everyone involved.

 Essential Elements of a Partnership 

•  Agreement:  There must be a mutual agreement between two or more persons.
•  Profit Sharing:  The agreement should specify that profits will be shared among the partners.
•  Business Conduct:  The business must be carried on by all partners or any one of them acting for all.

 Example:  A manager may receive a share of the business profits as part of their compensation.

Meaning of 'Partner,' 'Firm,' and 'Firm Name' (Section 4) 

• Individuals who enter into a partnership are referred to as  'partners'  individually and collectively as a  'firm.'  The name under which their business operates is known as the  'firm name.' 

 Maximum Limit on Number of Partners 

•  For a partnership firm engaged in banking business:  Maximum of 10 members.
•  For a partnership firm engaged in any other business:  Maximum of 20 members.

If the number of partners exceeds these limits, the partnership firm becomes an illegal association.

Essential Elements of Partnership 

Partnership is a vital component of business law in India, governed by the Indian Partnership Act of 1932. Understanding its essential elements is crucial for anyone looking to engage in a partnership arrangement. Below, we break down these elements into key points for clarity.

 1) Two or More Persons 

• A partnership requires at least  two persons  who are competent to contract. According to Section 11 of the Indian Contract Act, 1872, a person is considered competent unless they are a minor, of unsound mind, or disqualified by law.
• For instance, minors cannot be partners, but they can be admitted to the benefits of a partnership after its formation with the consent of all partners.
• Partnerships can be formed between companies, but firms cannot form partnerships as they are not legal persons. Companies, being artificial persons, can be parties to a partnership deed.
• The case of  Dulichand v. Commissioner of Income Tax, Nagpur  illustrates this point.

 2) Agreement 

• A partnership must arise from an  agreement  between two or more persons. This agreement can be express or implied from the conduct of the partners.
• Partnerships are voluntary and contractual in nature, as clarified in Section 5 of the Indian Partnership Act. For example, a Hindu undivided family running a family business is not considered a partnership because the coparceners have an interest by status, not by agreement.
• The relationship of partnership is based on mutual understanding and consent among the partners.

 3) Business 

• There must be a  business  involved, which includes any trade, occupation, or profession. For example, sharing income from joint property does not constitute a partnership as there is no business involved.
• Partnerships cannot be formed for charitable, religious, or social purposes as these do not involve a business. An agreement to start a business in the future does not create a partnership until the business actually begins.
• It is important that the business is lawful as per Section 23 of the Indian Contract Act, 1872.

 4) Sharing of Profits 

• There must be a  sharing of profits  , which typically implies sharing of losses as well. However, sharing profits is only  prima facie evidence  of partnership and not conclusive.
• For instance, a manager who receives a share of profits as part of their remuneration is an employee, not a partner.

 5) Mutual Agency 

•  Mutual agency  is a key element where each partner acts as both an agent and a principal. Each partner can bind the others by their actions and is also bound by the actions of the other partners.
• This concept is outlined in Section 18 of the Indian Partnership Act, which states that a partner is an agent of the firm for its business.
• The distinction of mutual agency sets partnerships apart from co-ownership and simple agreements for sharing profits. For example, in the case of  Cox v. Hickman  , trustees managing a business did not become partners because they were acting as agents, not principals.