Question 13:

(A) Define Partnership and the nature of Partnership.

(B) Discuss about the relation of partners to one another and to third parties.

A) I. Define Partnership

 Section 4 of the Indian Partnership Act defines “partnership” as 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.

 Partnership is a form of business organization, where two or more persons join together for
jointly carrying on some business.

 In partnership, the partners pool their resources and efforts to start a much larger business,
than couldn’t be afforded by any of these partners individually. In case of loss the burden gets
divided amongst the partners in a Partnership.

A) II. Nature of Partnership

 Association of at least Two Persons: In order to constitute a partnership legally there must be
an association of at least two persons. Under the new Companies Act 2013 the maximum
number of members prescribed in case of a partnership firm should not be more than 100.
In case of private companies, the maximum limit has been increased by the Act of 2013 from 50
to 200. There is however still no maximum limit in case of public companies. The minimum
number of members in case of a public company is 7 and private company is 2, in case of
partnership the minimum number should be 2.

 2. Agreement: A partnership is created by contract and not by status. It is however, not

necessary that there should be a very formal or written agreement. The agreement to create a
partnership may as well arise from the conduct of the parties concerned. Where, the parties
agree to enter into partnership at some future date, the relation of partnership does not arise
until that date.

 3. Business: A partnership can be formed only for the purpose of carrying on business. Business
includes every trade, occupation and profession. The word business generally conveys the idea
of running business involving numerous transactions. The business to be carried on by the firm
must be legal.
  4. Sharing of Profits: The word Partnership is derived from the word “to part” which means “to
divide”. Thus, division of profits is an essential condition of the existence of a partnership. The
object of partnership should be to make profits and distribute among the partners.

 5. Mutual Agency: The business of partnership may be carried on by all or anyone of them
acting for all. Thus, if a person carrying on the business acts not only for himself but for others
also, so that they stand in the position of principles and agents, they are partners. It is not
necessary that all of them should actively participate in the affairs of business. The necessary
element is that the business must be carried on, on behalf of all the partners.

B) I. Relation of Partners to one another

The relation of partnership is determined in 2 ways:

1. Written Partnership agreement between the partners (Partnership deed)- contains the
clauses with regard to the conduct and management of the business, the contribution of capital
by each partner, the proportion in which profits are to be shared, and the rights and duties of
the partners in the business.

2. If there is no written partnership agreement, their relations, will be governed by the course
of dealing among themselves. Where partners fail to provide for their relations the rules laid
down in the Partnership Act will apply.

However, such relation can be changed by the consent of all the partners.

Rights of Partners

 Right to take part in the management: Every partner has a right to take part in the conduct and
management of the business. It is not necessary that each partner should participate in the
conduct of business, but the right to participation is available to each partner.

 Right to be consulted: Every partner has got the right to be consulted and heard in all matters
affecting the business of the firm.

 Right to retire: Every partner has the right to retire with the consent all the partners and in
accordance with the express agreement by the partners or where the partnership is at will by
giving notice in writing to all the partners.

 Right to share profits: Every partner is entitled to equal share in the profits, unless different
proportions are stipulated.
 Interest on capital: A partner who has contributed more than his share of the capital for the
purposes of the business is entitled to interest at a rate agreed upon and where no rate is
agreed upon, at 6% p.a.

 Interest on advance: For the purpose of payment of interest, law has made distinction between
a loan by the partner to the firm and his contribution towards the capital of the firm. Advance of
money by a partner to the firm is not treated as an increase in the capital. A partner who makes
an advance of money to the firm beyond the amount of capital for the purpose of the business
to get thereon an interest at the rate of 6% p.a.

 Right to be indemnified: A partner is entitled to be indemnified by the firm for all acts done by
him in the course of the partnership business, for all the payments made by him to discharge
the debts and liabilities of the firm and for expenses made by him in an emergency.

 Right to use of partnership property: In the absence of any contract, each partner is presumed
to have an equal share in the partnership property and is entitled to have the partnership
property held ad us exclusively for the purpose of the business.

 Powers in an emergency: A partner has power to act in emergency for protecting the firm form
loss.

 No new partner to be introduced: Every partner is entitled to prevent the introduction of a new
partner into the firm without his consent.

 No liability before joining: An incoming partner is not liable for any debts and obligations of the
firm incurred before he joined it, excepting by his own consent.

 Right not to be expelled: Every partner has a right to continue in the partnership and not to be
expelled from it unless power of expulsion is provided in the partnership agreement.

 Right to carry on competing business: A partner cannot be expelled from the firm by any
majority of the partners unless power of expulsion is provided in the partnership agreement.

 Right to share subsequent profits after retirement: Where any member of a firm has died or
otherwise ceases to the partner, and the continuing partners carry on the business of the firm
with the property of the firm without any final settlement of the accounts between them and
the outgoing partner or his estate, then , in the absence of a contract, the outgoing partner or
his estate is entitled at the option of himself or his representatives to such share of the profits, ,
or interest at 6% p.a., if so desired by the legal representatives of the deceased partner, or by
the partner himself.

 Right of free access to all records, books and accounts: Every partner, active or dormant, has a
right of free access to all records, books and accounts of the business and also to examine and
copy them.
Duties of Partners

 To carry out business of the firm with greatest common advantage: Every partner must carry on
the business of the firm to the greatest common advantage.

 To be just and faithful to each other and to render full information to partners: Every partner
must be just and faithful to the other partners. A partner is bound to keep and render true,
proper and correct account of the partnership. He must permit the other partners to inspect
such accounts and take copies of them.

 To attend his duties diligently: Every partner is bound to attend diligently to his duties in
conducting the business of the firm. He has no right to receive any remuneration for taking part
in the conduct of the business.

 To indemnify for fraud: Every partner is bound to indemnify the firm for any loss caused by his
fraud in conduct of business. Also, if a partner commits a fraud on his co-partner, he must
indemnify him for any loss caused to him.

 To indemnify for willful neglect: Every partner who is guilty of willful neglect in the conduct of
the business and the firm suffers loss in consequence, is bound to make compensation to the
firm and other partners.

 To share losses: Each partner is liable to contribute for the firm’s losses equally, in the absence
of any contract.

 To hold and use property of the firm: The property of the firm is the property of all the partners,
and therefore, each partner should hold and use property of the firm exclusively for the
purposes of the firm.

 To account for private profits: A partner shall be liable to account for and pay to the firm any
private profits derived from the transactions of the firm or from the use of the property or
goodwill of the firm.

 To account for profits of the competing business: No partner can carry on any business which is
likely to compete with the business of the partnership except with the consent of the other
partners. If he does so, he shall have to account for the profits of such business to the firm, and
also to compensate the firm for any loss sustained by his carrying on such competing business.

 To act within authority: A partner is bound to act within the scope of this actual or apparent
authority. In case he exceeds his authority and the other partners do not ratify his unauthorized
acts, he will be liable to the other partners for the loss that they may suffer o account of his such
acts.
  Not to assign his rights: A partner cannot assign his rights or interests in a partnership firm to an
outsider, so as to make the outsider a partner in the firm’s business without the consent of the
partners. In the case such an assignment has been made, the assigns cannot, during the
continuance of the firm, interfere in the conduct of the business, or require accounts or inspect
the books of the firm. The transferee will be only entitled to receive the share of the transferring
partner, and the transferee shall accept the accounts of profits agreed to by the partners.

B) II. Relation of partners to third party

The relation of partnership is determined in 2 ways:

 Written Partnership agreement between the partners (Partnership deed)

Power of partner to bind the firm: Every partner is the agent of the firm and his co-partners for
the purposes of the business of the firm. When two or more persons agree to carry on a
partnership business and share its profits, each is a principal and each is an agent for the others.
Each is bound by the other’s contract in carrying on the business, just as a single principal would
be bound by the acts of an agent. The principal of agency governs the relationship between the
partners. It is because of this that the law of partnership is said to be a branch of the law of
agency. The authority of a partner to act on behalf of the firm may either be express or implied.
Any authority which is expressly given to a partner by agreement of partnership is called Express
Authority. The firm is bound by all acts done by a partner by virtue of any express authority
given to him. Implied Authority means the authority to bind the firm which arises by implication
of law-from the fact of partnership.

 IMPLIED AUTHORITY OF A PARTNER The act of a partner which is done to carry on, in the usual
way, business of the kind carried on by the firm, binds the firm, provided that the act is done in
the firm name or in any manner expressing or implying an intention to bind the firm. Such an
authority of a partner to bind the firm is called the implied Authority of a partner. Therefore, the
test, to judge whether a transaction entered into by a partner comes within his implied
authority is quite simple. For successful application of this test the following three conditions
must be fulfilled. Absence of even one condition will vitiate the transaction and will not come
under the ambit of implied authority of a partner. These conditions are:
1.The nature of the transaction—Is to carry on business of the kind carried on by the firm.
2.The manner in which the transaction has been transacted—Is it done in the usual way?
3.In whose name the transaction has been done-ls it done in the name of the firm?
Or is the intention to bind the firm clear?