Partnership and the Nature of Partnership under the Indian Partnership Act | Law Optional Notes for UPSC PDF Download

Introduction

• Partnership arises from a formal agreement and is regulated by the Partnership Act of 1932.
• Additionally, the final provisions of the Indian Contract Act apply to areas not covered by the Partnership Act.
• The Indian Contract Act's provisions will apply to partnerships unless they conflict with the Partnership Act of 1932.
• Contract principles such as capacity, offer, and acceptance are relevant to partnerships.
• However, rules concerning the legal status of minors are governed by the Partnership Act of 1932, particularly outlined in Section 30.
• Section 30 of the Partnership Act focuses on the status of minors within partnerships.
• Partnership agreements involving minors must adhere to the regulations set forth in Section 30.
• Minors are individuals under the age of 18 and have limited legal capacity.
• While minors can be admitted to the benefits of partnership, they cannot be made personally liable for partnership obligations.

Section 3: Application of Provisions Of the Indian Partnership Act

• The provisions of the Indian Contract Act, 1872 that have not been repealed will continue to apply to firms, except where they conflict with the explicit provisions of this Act.

Section 4: Definition Of “Partnership”, “Partner”, “Firm” And “Firm-Name”

• “Partnership” refers to the relationship between individuals who have agreed to share the profits of a business conducted by all or some of them on behalf of all.
• Individuals who have formed a partnership are called “partners” individually and “a firm” collectively. The name under which their business operates is known as the “firm-name”.
• The Indian Partnership Act, 1932 defines a partnership as a connection between two or more persons who agree to share business profits. Partners are collectively referred to as a “firm”, and the business name is known as the “firm name”.

Illustrations

• Illustration 1: Partners A and B agree to jointly operate a bakery. They share the profits and losses equally. Here, A and B are partners, the bakery is the firm, and its name is “A&B Bakery”.
• Illustration 2: Partners X, Y, and Z come together to start a tech startup. They agree to distribute profits based on their investment percentages. X, Y, and Z collectively form the firm, and their business operates under the name “XYZ Tech Solutions”.
• X and Y buy 100 bales of cotton together to sell jointly. This action makes them partners in the sale of the cotton. However, if they purchase the cotton and simply agree to share it, they are not considered partners.
• X enters into an agreement with Y, a goldsmith, to buy and supply gold to Y for processing and selling. In this case, they become partners and share the resulting profits or losses.

Section 5: Partnership under the Indian Partnership Act  Not Created By Status

• The concept of partnership is established through a legal contract rather than through one's social or family status. For instance, members of a Hindu undivided family conducting a family business or a Burmese Buddhist husband and wife engaged in business together are not automatically regarded as partners in the business. 
• It's important to note that partnership is a relationship formed by agreement and not by inherent status. For example, a Hindu undivided family running a business or a Burmese Buddhist couple engaged in a business venture are not automatically considered partners in the legal sense.
• In a specific scenario in Goa, Daman, and Diu, there is a state amendment where the term "Burmese Buddhist husband and wife carrying on business as such" is replaced with "a husband and wife under the regime of the communion of property-carrying on business as such."

Section 6: Mode of Determining Existence of Partnership under the Indian Partnership Act

When establishing whether a group of individuals constitutes a partnership or if an individual is a partner in a firm, the Indian Partnership Act considers the actual relationship between the parties based on all relevant facts collectively.

Explanation I

• The act of sharing profits or gross returns from property among individuals with a joint interest does not automatically classify them as partners.

Explanation II

• Merely receiving a portion of business profits, or a payment dependent on profit earnings, does not by itself confer partnership status. This is applicable in scenarios such as:
• Receiving profits as a lender to individuals involved in a business.
• Receiving profits as remuneration by a servant or agent.
• Receiving profits as an annuity by the widow or child of a deceased partner.
• Receiving profits as consideration for the sale of goodwill by a previous owner of the business.

Section-7: Partnership-At-Will

Partnership-At-Will is a type of partnership where the partners haven't specified the duration of their partnership or how it will end in their agreement. Essentially, if there is no clear provision for the partnership's duration or termination, it is considered a partnership-at-will.
According to Section 7 of The Indian Partnership Act, 1932, for a partnership to be classified as a partnership at will, two conditions must be met:

• There is no agreement on a fixed period for the existence of the partnership.
• No provision is made for establishing the partnership.

If a partnership continues to operate beyond any fixed term that was initially agreed upon, it automatically transitions into a partnership at will after the expiration of that term.

Section-8: Particular Partnership under the Indian Partnership Act

• Definition of Particular Partnership: A particular partnership under the Indian Partnership Act refers to a scenario where individuals come together as partners for specific ventures or undertakings.
• Nature of a Specific Partnership: In essence, a specific partnership can be established for either a continuous business operation or a defined purpose. If the partnership's sole aim is to carry out a single project or task, it falls under the category of a specific partnership.
• Duration of a Specific Partnership: The partnership exists until the designated venture or activity is completed. Following the conclusion of the specific project, the partnership is typically dissolved. However, the partners can collectively decide to extend the partnership beyond that specific task.
• Termination of a Specific Partnership: If there is no mutual agreement to continue the partnership after the completion of the task, the partnership ceases to exist. The completion of the specific project marks the natural end of the partnership unless the partners decide otherwise.