Brief
description about Partnership
Drafting of Partnership Deed
Registration of Partnership
Deed
Brief description about Partnership
The Indian Partnership Act was passed in 1932 to define and amend the
law relating to partnership. Indian Partnership Act is one of very old
mercantile law. Partnership is one of the special types of Contract.
Initially, this was part of Indian Contract Act itself (Chapter IX -
sections 239 to 266), but later converted into separate Act in 1932.
The Indian Partnership Act is complimentary to Contract Act. Basic
provisions of Contract Act apply to contract of partnership also. Basic
requirements of contract i.e. legally enforceable agreement, mutual
consent, parties competent to contract, free consent, lawful object,
consideration etc. apply to partnership contract also.
Partnership Contract is a 'concurrent subject' - 'Contract, including
partnership contract' is a 'concurrent subject, covered in Entry 7 of
List III (Seventh Schedule to Constitution). Indian Partnership Act is a
Central Act, but State Government can also pass legislation on this
issue. Though Partnership Act is a Central Act, it is administered by
State Governments, i.e. work of registration of firms and related
matters is looked after by each State Government. The Act is not
applicable to Jammu and Kashmir.
Unlimited liability is major disadvantage - The major disadvantage of
partnership is the unlimited liability of partners for the debts and
liabilities of the firm. Any partner can bind the firm and the firm is
liable for all liabilities incurred by any firm on behalf of the firm.
If property of partnership firm is insufficient to meet liabilities,
personal property of any partner can be attached to pay the debts of the
firm.
Partnership Firm is not a legal entity - It may be surprising but true
that a Partnership Firm is not a legal entity. It has limited identity
for purpose of tax law. As per section 4 of Indian Partnership Act,
1932, 'partnership' is the relation between persons who have agreed to
share the profits of a business carried on by all or any one of them
acting for all. Under partnership law, a partnership firm is not a
legal entity, but only consists of individual partners for the time
being. It is not a distinct legal entity apart from the partners
constituting it - Malabar Fisheries Co. v. CIT (1979) 120 ITR 49 - 2
Taxman 409 (SC).
Firm legal entity for purpose of taxation - For tax law, income-tax as
well as sales tax, partnership firm is a legal entity - State of Punjab
v. Jullender Vegetables Syndicate - 1966 (17) STC 326 (SC) * CIT v. A W
Figgies - AIR 1953 SC 455 * CIT v. G Parthasarthy Naidu (1999) 236 ITR
350 = 104 Taxman 197 (SC). Though a partnership firm is not a juristic
person, Civil Procedure Code enables the partners of a partnership firm
to sue or to be sued in the name of the firm. - Ashok Transport Agency
v. Awadhesh Kumar 1998(5) SCALE 730 (SC). [A partnership firm can sue
only if it is registered].
Partnership, partner, firm and firm name - "Partnership" is the relation
between persons who have agreed to share the profits of business carried
on by all or any to 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". [section 4].
"Business" includes every trade, occupation and profession. [section
2(b)]. Thus, a 'partnership' can be formed only with intention to share
profits of business. People coming together for some social or
philanthropic or religious purposes do not constitute 'partnership'.
Partners are Mutual agents - The business of firm can be carried on by
all or any of them for all. Any partner has authority to bind the firm.
Act of any one partner is binding on all the partners. Thus, each
partner is 'agent' of all the remaining partners. Hence, partners are
'mutual agents'.
Oral or written agreement - As per normal provision of contract, a
'partnership' agreement can be either oral or written. Agreement in
writing is necessary to get the firm registered. Similarly, written
agreement is required, if the firm wants to be assessed as 'partnership
firm' under Income Tax Act. A written agreement is advisable to
establish existence of partnership and to prove rights and liabilities
of each partner, as it is difficult to prove an oral agreement.
However, written agreement is not essential under Indian Partnership
Act.
Sharing of profit necessary - The partners must come together to share
profits. Thus, if one member gets only fixed remuneration (irrespective
of profits) or one who gets only interest and no profit share at all, is
not a 'partner'. Similarly, sharing of receipts or collections
(without any relation to profits earned) is not 'sharing of profit' and
the association is not 'partnership'. For example, agreement to share
rents collected or percentage of tickets sold is not 'partnership', as
sharing of profits is not involved. The share need not be in
proportion to funds contributed by each partner. Interestingly,
though sharing of profit is essential, sharing of losses is not an
essential condition for partnership . Similarly, contribution of
capital is not essential to become partner of a firm.
Number of partners - Since partnership is 'agreement' there must be
minimum two partners. The Partnership Act does not put any restrictions
on maximum number of partners. However, section 11 of Companies Act
prohibits partnership consisting of more than 20 members, unless it is
registered as a company or formed in pursuance of some other law.
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. [section 6].
Mutual agency is the real test - The real test of 'partnership firm' is
'mutual agency', i.e. whether a partner can bind the firm by his act,
i.e. whether he can act as agent of all other partners.
Partnership at will - Where no provision is made by contract between the
partners for the duration of their partnership, or for the determination
of their partnership, the partnership is "partnership at will". [section
7]. Partnership 'at will' means any partner can dissolve a firm by
giving notice to other partners (or he may express his intention to
retire from partnership) Partnership deed may provide about duration
of partnership (say 10 years) or how partnership will be brought to end.
In absence of any such term, the partnership is 'at will'. In case
of 'particular partnership', the partnership comes to end when the
venture for which it was formed comes to end.
Determination of rights and duties of partners by contract between the
partners - Subject to the provisions of this Act, the mutual rights and
duties of the partners of a firm may be determined by contract between
the partners, and such contract may be express or may be implied by a
course of dealing. Such contract may be varied by consent of all the
partners, and such consent may be express or may be implied by a course
of dealing. [section 11(1)]. Thus, partners are free to determine
the mutual rights and duties by contract. Such contract may be in
writing or it may be implied by their actions.
Duties and mutual rights of partners - Subject to contract to contrary,
partners have duties and mutual rights as specified in Partnership Act-
Every partner has right to take part in business - Subject to contract
between partners (to the contrary), every partner has right to take part
in the conduct of the business. [section 12(a)]. Thus, every partner
has equal right to take active part in business, unless there is
specific contract to the contrary. Even if authority of a partner is
restricted by contract, outside party is not likely to be aware of such
restriction. In such case, if such partner acts within the apparent
authority, the firm will be liable for his acts.
The property of the firm - Subject to contract between the partners, the
property of the firm includes all property and rights and interests in
property originally brought into the stock of the firm, or acquired, by
purchase or otherwise, by or for the firm, or for the purposes and in
the course of the business of the firm, and includes also the goodwill
of the business. Unless the contrary intention appears, property and
rights and interests in property acquired with money belonging to the
firm are deemed to have been acquired for the firm [section 14].
Partner to be agent of the firm - Subject to the provisions of this Act,
a partner is the agent of the firm for the purposes of the business of
the firm. [section 18].
Implied authority of partner as agent of the firm - Subject to the
provisions of section 22, 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. The authority of a partner to bind the firm conferred by this
section is called his "implied authority". [section 19(1)]. -
Partners jointly and severally liable acts of the firm - Every partner
is liable, jointly with all the other partners and also severally, for
all acts of the firm done while he is a partner. [section 25]. '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 [section 2(a)]. 'Joint and several' means each
partner is liable for all acts. Thus, if amount due cannot be recovered
from other partners, any one partner will be liable for payment of
entire dues of the firm.
Partner by Holding out - 'Holding out' means giving impression that a
person is partner though he is not. This is principle of 'estoppel'. If
a person gives an impression to outsiders that he is partner of firm
though he is not partner, he will he held liable as partner, if third
party deals with the firm on the impression that he is a partner.
Similarly, if a person retires from the firm but does not give notice of
retirement, he will be liable as a partner, if some third party deals
with the firm on the assumption that he is still partner.
Minors admitted to the benefits of partnership - A person who is a minor
according to the law to which he is subject may not be a partner in a
firm, but, with the consent of all the partners for the time being, he
may be admitted to the benefits of partnership. [section 30(1)].
Rights of minor - Minor (who is admitted to benefit of partnership) has
a right to such share of the property and of the profits of the firm as
may be agreed upon and he may have access to and inspect and copy any of
the accounts of the firm. [section 30(2)]. [Since the word used is
'may', it seems that right of minor to inspect accounts can be
restricted by agreement among partners].
Minor's share liable but not minor himself - Such minor's share is
liable for the acts of the firm, but the minor is not personally liable
for any such act. [section 30(3)].
Reconstitution of a Partnership Firm - A partnership firm is not a legal
entity. It has no perpetual existence as in case of a company
incorporated under Companies Act. However, the Act gives the partnership
limited rights of continuity of business despite change of partners. In
absence of specific provision in partnership deed, death or insolvency
of a partner means dissolution of the firm. However, partnership can
provide that the firm will not dissolve in such case.
Change in partners may occur due to various reasons like death,
retirement, admission of new member, expulsion, insolvency, transfer of
interest by partner etc. After such change, the rights and liabilities
of each partner are determined afresh. This is termed as reconstitution
of a firm.
Dissolution of a Firm - A partnership firm is an 'organisation' and like
every 'organ' it has to either grow or perish. Thus, dissolution of a
firm is inevitable part in the life of partnership firm some time or the
other.
Dissolution of a firm without intervention of Court can be (a) By
agreement (section 40) (b) Compulsory dissolution in case of insolvency
(section 41) (c) Dissolution on happening of certain contingency
(section 42) (d) By notice if partnership is at will (section 43).
A firm can also be dissolved by Court u/s 44.
Dissolution of partnership and dissolution of firm - The dissolution of
partnership between all the partners of a firm is called the dissolution
of the firm. [section 39]. . As per section 4, Partnership is the
relation between persons who have agreed to share profits of business
carried on by all or any of them acting for all. Thus, if some
partner is changed/added/ goes out, the 'relation' between them changes
and hence 'partnership' is dissolved, but the 'firm' continues. Hence,
the change is termed as 'reconstitution of firm'. However, complete
breakage between relations of all partners is termed as 'dissolution of
firm'. After such dissolution, the firm no more exists. Thus,
'Dissolution of partnership' is different from 'dissolution of firm'.
'Dissolution of partnership' is only reconstruction of firm, while
'dissolution of firm' means the firm no more exists after dissolution.
Mode of dissolution of firm - Following are various modes of dissolution
of firm. * Dissolution by agreement - [section 40]. * Compulsory
dissolution in case of insolvency - [section 41] * Dissolution on the
happening on certain contingencies [section 42] * Dissolution by notice
of partnership at will [section 43(2)] * Dissolution by the court
Consequences of dissolution of firm - After firm is dissolved, business
is wound up and proceeds are distributed among partners. The Act
specifies what are the consequences of dissolution of a firm.
Sale of goodwill of firm after dissolution - Business is attracted due
to reputation of a firm. It creates a 'brand image' which is valuable
though not tangible. 'Goodwill' is the value of reputation of the
business of the firm. Goodwill of a firm is sold after dissolution
either separately or along with property of firm. As per section 14,
property of partnership firm includes goodwill of the firm.
Goodwill is the reputation and connections which the firm establishes
over time, together with circumstances which make the connections
durable. This reputation enable to earn profits more than normal profits
which a similar business would have earned. Goodwill is an intangible
asset of the firm.
In settling the accounts of a firm after dissolution, the goodwill
shall, subject to contract between the partners, be included in the
assets, and it may be sold either separately or along with other
property of the firm. [section 55(1)].
Settlement of accounts after dissolution - Accounts are settled after a
firm is dissolved as provided in the Act. A firm is said to be 'wound
up' only after accounts are fully settled.
Registration of Firms - Registration of firm is not compulsory, though
usually done as registration brings many advantages to the firm. Since
'partnership contract' is a 'Concurrent Subject' as per Constitution of
India, registration of firms and related work is handled by State
Government in each State. Section 71 authorises State Government to make
rules for * prescribing fees for filing documents with registrar *
prescribing forms of various statements and intimations are to be made
to registrar and * regulating procedures in the office of Registrar.
Partner cannot sue if firm is unregistered - No suit to enforce a right
arising from a contract or conferred by this Act shall be instituted in
any court by or on behalf of any person suing as a partner in a firm
against the firm or an{ person alleged to be or to have been a partner
in the firm unless the firm is registered and the person sueing or has
been shown in the Register of Firms as a partner in the firm. [section
69(1)]. Thus, a partner cannot sue the firm or any other "partner
if firm is unregistered. If third party files suit against a
partner, he cannot claim of set off or institute other proceeding to
enforce a right arising from a contract. Suit or claim or set off upto Rs 100 can be made as per section 69(4)(b), but it is negligible in
today's standards. Criminal proceedings can be filed, but civil suit
is not permissible.
Unregistered Firm cannot sue third party - No suit to enforce a right
arising from a contract shall be instituted in any Court by or on behalf
of a firm against any third party unless the firm is registered and the
persons suing are or have been shown in the Register of Firms as
partners in the firm. [section 69(2)]. If third party files suit
against the unregistered firm, the firm cannot claim set off or
institute other proceeding to enforce a right arising from a contract. Suit or claim or set off upto Rs 100 can be made as per section
69(4)(b), but it is negligible in today's standards. Criminal
proceedings can be filed, but civil suit is not permissible.
Drafting of Partnership Deed
Our Expert Professionals do the work of drafting different partnership
deeds according to your requirements.
Registration of Partnership
Deed
We are providing services for Registration of Partnership Deed after
approval from the client. For this service we are charging a nominal
fee. The time lag for registration of partnership deed will depend on
the particular office from place to place. After registration of the
deed, Original Registration certificate and the necessary documents will
be handed over to the client.
To know more details about registration of partnership deed please e-mail to contact@businesswonder.com.