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Low Cost Hotels

  1. 1. CHAPTER 3 INDIAN PARTNERSHIP ACT 1932 3.1 THE NATURE OF PARTNERSHIP [Sections 1-8] • Originally, the law relating to Partnership was contained in and formed part of the Indian Contract Act, 1872 as Chapter XI thereof. But, in 1932 Chapter XI of the Contract Act was repealed and in place was passed a comprehensive legislation, the Indian Partnership Act. Definition of partnership (Section 3.) • A Partnership is defined as "the relationship between persons who have agreed to share profits of a business carried on by all, or by any of them acting for all." ESSENTIALS OF PARTNERSHIP • Thus, the following elements must be present before partnership can be said to come into existence (i) Partnership is an association of two or more persons. (ii) Partnership must be the result of mutual agency between two or more persons. (iii) The agreement must be to carry on some business. (iv) The agreement must be to share profits of the business. (v) Business must be carried on by all or any of them acting for all. • It must be noted that the Partnership Act does not specify the minimum or the maximum number of partners in a partnership firm. Since an association cannot be formed with persons less than two, hence it is obvious that the minimum numbers of persons to constitute a valid partnership should be atleast two. • Further, the maximum number of partners in a partnership firm, the Act is silent. It is only Section 11 of the Companies, 1956 that imposes a limit at 10 in case of banking business and 20 in case of any other business. NOTES – A firm is not a person in legal terms. As such, two partnership firms cannot enter into partnership. The partners are personally liable for all the business obligations of the firm. [Malabar Fishries v. Kerala AIR 1980 SC 176] NOTE – The Hon`ble Supreme Court in Devji v. Magan Lal, AIR 1965 SC 139, observed that the true test of partnership is the `Agency relationship` and not the sharing of profits. 'PARTNERS', 'FIRM' AND 'FIRM NAME' (SECTION 4) • 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." • Firm Name - Partners may choose any name as their firm's name provided it does not go against the rules relating to trade name or goodwill. 3.2 PARTNERSHIP DISTINGUISHED FROM CERTAIN SIMILAR ORGANISATIONS • The following points of distinction between the two may he noted: Partnership Co-ownership 1. It arises from contract. 2. It always implies a business. 3. It involves sharing of profits and losses. 4. Each partner is the agent of other partners. 5. A partner cannot transfer his interest without the consent of all other partners. 6. A partner can claim a share in the surplus assets of the firm, but not a share in the proper ties of the firm in specie. 1. It may, besides contract, arise by status, e.g. A and B inherit a house from their father. 2. It may exist without any business. 3. It does not always involve the sharing of profits or losses because. it may exist without any business. 4. A co-owner is not the agent of the other co- owners. 5. A Co-owner may transfer his interest to a third party without the consent of other co-owners. 6. A co-owner can claim division of the joint prop erty In specie. PARTNERSHIP AND COMPANY • Distinction between a partnership and a company incorporated under the Companies Act 1956, is as follows: Partnership Company 1) Legal status. A partnership firm has no existence 1) A company is a separate legal entity distinct from its
  2. 2. IIPM CH. – 3. PARTNERSHIP ACT apart from its members. [Indian Cotton Co. v. Raghunath.]. 2) Mutual Agency. Partnership is founded on the idea of mutual agency: every partner is an agent of the rest of the partners. 3) Liability of Members. Liability of a partner is unlimited, i.e., even his own personal assets are liable for the debts of the firm. 4) Transfer of Interest. A partner cannot transfer his interest without the consent of all other partners. 5) 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. 6) Minimum Membership. The minimum number of persons required to form a partnership is 2. 7) Maximum membership. A partnership cannot be formed with persons exceeding 20. The number is limited to 10 in case of banking business. 8) Audit. The audit of the accounts of a firm is not compulsory. members. [Salomon v. Salomon & Co. Ltd.]. 2) A member of a company is not an agent of other members. 3) Liability of member or shareholder of limited company is limited to' the extent of the amount remaining unpaid on shares held by him or the amount of guarantee as mentioned in the Memorandum of Association of the company. 4) A shareholder, subject to restrictions contained in the Articles, can freely transfer his share. 5) A company enjoys a perpetual succession. Death or retirement or insolvency of a member does not affect the existence of the company. 6) The minimum number required to form a company is 2 in the case of private companies and 7 in case of public companies. 7) There is no limit to the maximum number of members in case of a public company. However, a private company cannot have more than 50 members. 8) The audit of the accounts of a company is obligatory, i.e., a legal necessity. PARTNERSHIP AND JOINT HINDU FAMILY BUSINESS. • The principal differences between a Partnership and a Joint Hindu Family business are as following:- Partnership Joint Hindu Family Business 1) Creation. Partnership is essentially the result of an agreement between the parties. 2) Admission. In a partnership, new partner can be admitted only with the consent of all the existing partners. 3) Female Members. A female can join partnership business as a full-fledged partner. 4) Minor Members. A minor cannot be member of a firm except that he may be admitted to the benefits of an already existing partnership firm. 5) Death of a Member. Death of a partner generally dissolves the firm. 6) Mutual Agency. Every partner is an agent of the rest of the partners and, therefore, his acts bind the firm. 7) Liability. Every partner is liable to an unlimited extent. 1) A Hindu Family is the result of status. 2) In Joint Hindu Family business a person becomes a member merely by his birth. 3) A female member cannot become a member of a Joint Hindu Family business. 4) Minors, in case of Joint Hindu Family, are members of the family from the date of their birth. 5) The death of a member of a Joint Hindu Family leaves the firm unaffected. . 6) It is the Karta who has the authority to contract and bind the family other coparceners cannot do so. 7) Only Karta is liable unlimitedly, the liability of other co-parceners is limited to the extent of their share in the profits of the family business. ILLEGAL PARTNERSHIP • A partnership may be illegal in either of two ways; (1) By being formed to carry on an illegal business. (2) Where the number of partners exceeds the maximum limit. PARTNERSHIP-AT-WILL (Section 7) • A partnership is called a partnership-at-will (1) When the partnership is not for a fixed period of lime and (2) It can be dissolved at any time by any of the partners notifying his willingness to do so. PARTICULAR PARTNERSHIP (Section 8) • A particular partnership is one, which is formed for a particular adventure or a particular undertaking. LECTURES BY PROF. S N GHOSH 19
  3. 3. IIPM CH. – 3. PARTNERSHIP ACT • Such a partnership is usually dissolved on the completion of the adventure or undertaking. • Ex- two auditors engaged in a particular audit may be regarded as partners in that audit. [Robinson v. Ander- son.] 3. 3 REGISTRATION OF FIRMS [Sections 58-59] Procedure • A partnership firm may be registered at any time by sending by post, or delivering to the Registrar of Firms of the area in which any place of business of the firm is situated or proposed to be situated, a statement in the prescribed form and accompanied by the prescribed fee stating: (1) the firm name, (2) the place or principal place of business of the firm, (3) the names of any other places where the firm carries on business, (4) the date when each partner joined the firm, (5) the names in full and addresses of the partners and (6) the duration of the firm. • The statement must be signed by all the partners, or by their agents specially authorised in that behalf, and duly verified. When the Registrar is satisfied that the relevant provisions of the Partnership Act have been duly complied with, he registers the firm by recording an entry of the statement in a register called the Register of Firms, and shall file the statement. • It should be noted that registration of a firm is not compulsory. Effect of non-registration • The consequences of non-registration of a firm as follows: 1. A partner of an unregistered firm cannot file a suit against the firm or any partner, so as to enforce a right (a) arising from contract, or (b) conferred by the Partnership Act. 2. No suit can be filed on behalf of an unregistered firm against any third party for the purpose of enforcing a right arising from a contract. (Note that suit for recovery of money can be filed against the unregistered firm in the name of individual partners). 3.3 TYPES OF PARTNERS 1. Partner by Holding Out or by Estoppel - Anyone who by words spoken or written or by conduct represents himself, to be a partner in a firm. 2. Dormant or Sleeping Partner - A "dormant" or "sleeping" partner is one who does not take an active part in the business of the firm. Such a partner is liable like any other partner of the firm. 3. Nominal Partner - A nominal partner, as the title suggests, is partner only in name. Thus, where a person's name is used, as if he were a partner of the firm, though actually he is not, he will be called as a "Nominal partner." Such a partner is not entitled to share the profits of the firm but is liable for all acts of the firm as if he were a real partner. 3.. Sub-Partner - A sub-partnership comes into existence when one of the partners agrees to share the profits derived by him from the firm with a stranger. That stranger is called a 'sub-partner'. A sub-partner is not a partner in the eyes of law and, therefore, has no rights against the firm. He is also not liable for the debts of the firm. 5. Working Partner - A partner, because of his special qualifications, may be assigned the management and control of the business. Such a partner is commonly known as a "working partner." A working partner normally receives a fixed amount of salary, besides his share in the profits of the firm. Other partners, however, remain liable to the third parties for all his acts. 6. Incoming Partner -No person can be introduced as a partner into a firm without the consent of all the existing partners. Thus, a person who is admitted as a partner into an already existing firm with the consent of all the existing partners is called as "incoming partner." An incoming partner does not become liable for any act of the firm done before his admission as a partner. However, where he specifically agrees to bear the past liabilities, he will be liable to the other partners for the same. Third parties, however, cannot hold him liable since there is no privity of contract between the new partner and the creditors. 7. Outgoing Partners - A partner who leaves a firm in which the rest of the partners continue to carry on business is called a retired or outgoing partner. MINOR AS A PARTNER [SECTION 30] • Partnership, being a contract, a minor cannot enter into partnership, he being incapable of contracting. An agreement with or by a minor is void-ab-initio. However, if all the partners agree, a minor may be admitted to the benefits of an already existing firm. LECTURES BY PROF. S N GHOSH 20
  4. 4. IIPM CH. – 3. PARTNERSHIP ACT 3.4 RIGHTS, DUTIES AND LIABILITIES OF PARTNERS RIGHTS OF A PARTNER It must be understood that the following rights conferred upon a partner are subject to contract amongst the partners: 1. Right to take part in the conduct of business; 2. Right to express his opinion on any matter. [but in case of difference of opinion regarding ordinary matters of the business, he is bound by the majority decision. However, no change can be made in the nature of the business without the consent of all the partners]; 3. Right to have access to and inspect and copy any of the books, of the firm; 3.. Entitled to share equally in the profits; 5. A joint owner of the property of the firm including also the goodwill of the business; 6. Right to do, in an emergency, all such acts as are reasonably necessary to protect the firm from loss; 7. Entitled to claim interest @ 6 per cent per annum on any amount advanced by him beyond the amount of capital that he agreed to subscribe; 8. Entitled to be indemnified by the firm in respect of liabilities incurred by him in the ordinary course of business; 9. Right not to be expelled; 10. Right to resist the introduction of a new partner. No new partner can be introduced into the firm unless all the partners consent thereto; 11. Right to retire; 12. Right to carry on a competing business; and 13. Right as an outgoing partner, in certain cases to share subsequent profit. Implied authority of a partner • A partner's authority may be express or implied. It is "express", when it is fixed between the partners by mutual agreement. The agreement may, however, be verbal or written. It is implied when the law impliedly gives certain powers to a partner, i.e., the law presumes that every partner has power to do certain acts. The partners may however by a contract amongst them, restrict the implied authority of any partner. • Implied authority of a partner may be: - 1. Such acts which are common in the type of the business carried on by the firm; and 2. Such acts which are done by the partner in the usual course of business of the firm. • Following are not the implied powers: - 1. submitting of a dispute relating to the business of the firm. 2. withdrawal of a suit or proceeding filed on behalf of the firm. 3. admission of any liability in a suit. 4. transfer of any immovable property belonging to the firm. DUTIES OF A PARTNER 1. General Duties of Partners  Partners are bound (a) to carry on the business of the firm to the greatest common advantage, (b) to be just and faithful to each other, and (c) to render true accounts and full information of all things affecting the firm to any partner or his legal representative. 2. Duty to Indemnify for loss caused by fraud. 3. To attend diligently to his duties in the conduct of the firm's business without any remuneration 3.. If restrained by an agreement with other partners, a partner has a duty not to carryon any business other than that of the firm while he is a partner. 5. If a partner carries on any business competing with that of the firm, he shall account for and pay to the firm all profits made by him in that business. 6. To account for any profit, including secret profit, derived by a partner from any transaction of the firm, or from the use of the property, or business connection of the firm or the firm name. 7. Not to assign his share. 8. To contribute equally to the losses of the firm. (The partners may however contract otherwise). 9. To indemnify the firm for any loss caused to it by his willful neglect in the conduct of the business of the firm Ex- A was the owner of a cotton mill. He entered into partnership with B and C. The business of the firm was carried on at A`s mill. However, the value of assets of the mill was credited to A`s capital account and he was also allowed interest on it. Subsequently, the mill was enlarged and improved by the firm and also a new building was constructed on the land acquired by the firm. It was held that the mill had become the property of the firm. LECTURES BY PROF. S N GHOSH 21
  5. 5. IIPM CH. – 3. PARTNERSHIP ACT [Robinson v. Ashtan 1875) 20 Eq. 25; 3.3. LIC Ch. LIABILITIES OF A PARTNER • Liabilities of a partner stem from not complying with his duties under the Partnership Act. • Thus, a partner shall be liable (i) for not carrying on the business of the firm to the greatest common advantage; (ii) for not being just and faithful to other partners and (iii) for failure to render true accounts and full information of all things affecting the firm to any partner or his legal representative. • Liable to indemnify the firm for any loss caused by his fraud or willful neglect in the conduct of the business of the firm. • Liable to account for any profit, including secret profit, derived by a partner from any transaction of the firm, or from the use of the property or business connection of the firm or the firm name. • Liable to contribute equally towards the losses of the firm. (This is subject to contract). . Ex – 1) A and B were partners in a firm. They wee carrying on the business of buying and selling the wine. C, a wine merchant, employed the firm of A and B for buying and selling the wine for him on the commission basis. C gave a sum of money to the firm, for the purpose. A, the active partner of the firm, gave to C the false accounts of purchase and sale of wine and misappropriated the money. It was held that the firm was liable to pay the money to C. [Rapp v. Lathm 2 B & A 795; (11919) 21 RR 3.95] 3.5 DISSOLUTION OF PARTNERSHIP [Sections 39-3.3.] What is dissolution • The dissolution of firm means the discontinuance of the jural relation between all the partners of the firm. Thus dissolution of firm amounts to the break up of the relation of partnership between al the partners. • A firm may be dissolved: 1. By Mutual Agreement - A firm may at any time be dissolved with the consent of all the partners, or in accordance with a contract between the partners. 2. By Notice - Where the partnership is at will, it may be dissolved by giving notice in writing to the other partners of his intention to dissolve the firm. The notice must (1) state the intention to dissolve the firm and (2) be in writing. 3. Dissolution By Operation of Law 3.. By the Happening of Certain Contingencies (also called Optional Dissolution)  Partnership will stand dissolved on the happening f any of the following events: (a) if the firm is constituted for a fixed term; on the expiry of that term; (b) if constituted to carry out one or more adventures or undertakings; on the completion thereof; (c) on the death of a partner; (d) on the adjudication of a partner as an insolvent. 5. Dissolution by Court Grounds for dissolution by court  If a partner has become of unsound mind.  Permanent incapacity of a partner.  Misconduct of a partner affecting the business.  Willful and persistent disregard of partnership agreement by a partner.  Transfer of interest or share by a partner.  Where the business cannot be carried on except at loss.  Just and Equitable, e.g., deadlock in management. CONSEQUENCES OF DISSOLUTION 1. Right to enforce Winding-up 2. After dissolution, a partner cannot bind the firm in any case, except: (a) insofar as it may be necessary to wind up affairs of the firm, and (b) to complete transaction begun but unfinished at the time of dissolution. 3. If any partner earns any profit from any transaction connected with the firm after its dissolution, he must share it with the other partners and the legal representatives of the deceased partners. Further, where a partner has paid a premium on entering into partnership for a fixed term, and the firm is dissolved before the expiration of that term, he shall be entitled to repayment of the premium or of such part thereof as may be reasonable (regard being had to the terms and to the length of time during which he was a LECTURES BY PROF. S N GHOSH 22
  6. 6. IIPM CH. – 3. PARTNERSHIP ACT partner). Exception (I) the dissolution is due to the death of a partner; or (2) to his own misconduct; or (3) the dissolution is in pursuance of an agreement containing no provision for the return of the premium or any part of it. Restraint of trade by Buyer of Goodwill Partners may, upon or in anticipation of dissolution of the firm, make an agreement that some or all of them will not carry on a business similar to that of the firm within a specified period or within specified local limits. Such an agreement shall be valid if the restrictions imposed are reasonable. SETTLEMENT OF ACCOUNTS • Usually the "Deed of partnership" contains an accounting clause according to which the final accounts between the partners are settled. • Where there is no such agreement or no such provision is provided, the Partnership Act states: - 1. Losses, including losses on capital must be paid, first from profits, next out of capital and lastly, if necessary, by contribution of each partner in proportion to his share in profits; 2. The assets of the firm, including sums contributed by partners to make up deficiency of capital shall be applied: (a) in paying debts of the firm to outsiders; (b) in paying each partner rateably, for advances made by him to the firm as distinct from capital; (c) in paying each partner, ratebly, amount due for capital contribution; and (d) the residue in paying each partner in accordance with his share in the profits of the firm. 3. If a partner becomes insolvent or otherwise cannot pay his share of the contribution, the solvent partners must share rateably the available assets (including their own contribution to the capital deficiency) i.e., the available assets will be distributed in proportion to their original capital. This is called the Rule in Garner v. Murray Gift. 3.3.2. 12. (1903.) 1 Chapter 57. Limitation - The period for suit for accounts on dissolution is 3 years. If a partner fails to bring such a suit against one partner within the period, the whole claim is barred against the remaining partners also. Payment of Partnership Debts • Where there are joint debts from the firm, and also separate debts due from any partner – the property of the firm shall be applied as follows: - (i) payment of the debts of the firm, and if there is any surplus, then (ii) the share of each partner shall be applied in payment of his separate debts or paid to him. • The separate property of any partner shall be applied first in the payment of his separate debts and the surplus (if any) in the payment of the debts of the firm. Sale of Goodwill after Dissolution • The goodwill shall be included in the assets and it may be sold either separately or along with other property of the firm. The partnership agreement may contain different provision. • A partner may carry on a business competing with that of the buyer and he may advertise such business. Ex- A, B and C were partners in a firm. They contributed the capital Rs. 3.0,000, Rs. 20,000 and Rs. 5,000 respectively making a total capital of Rs. 65,000. They agreed to share equally the profits and losses of the firm. On dissolution of the firm, it was found that after satisfying the outside debts and liabilities of thee firm, the assets were only Rs. 20,000. In this case, the deficiency of capital is Rs. 3.5,000 (Rs. 65,000-Rs.20, 000). This being the losses, each partner has to contribute Rs. 15,000 to make up the deficiency. After this is done, the assets then available are Rs. 65,000 arrived at as Rs. 20,000 (assets after paying the outside liabilities)+ Rs. 3.5,000 (the contribution made by the partners). This will be distributed among the partners according to the contribution towards the capital. So that each will suffer a total loss of Rs. 15,000. However, in actual practice it will not be necessary for A and B to pay Rs. 15,000 each in cash. But the matter will be worked out on the basis of notional adjustment. In this adjustment, C whose capital was only Rs. 5,000. Now out of Rs. 30,000 (Rs. 20,000 of assets and Rs. 10,000 paid by C), A and B will get Rs. 25,000 and Rs. 5,000 respectively. In the way the total loss suffered by A B and C will be Rs. 15,000 each. LECTURES BY PROF. S N GHOSH 23
  7. 7. IIPM CH. – 3. PARTNERSHIP ACT partner). Exception (I) the dissolution is due to the death of a partner; or (2) to his own misconduct; or (3) the dissolution is in pursuance of an agreement containing no provision for the return of the premium or any part of it. Restraint of trade by Buyer of Goodwill Partners may, upon or in anticipation of dissolution of the firm, make an agreement that some or all of them will not carry on a business similar to that of the firm within a specified period or within specified local limits. Such an agreement shall be valid if the restrictions imposed are reasonable. SETTLEMENT OF ACCOUNTS • Usually the "Deed of partnership" contains an accounting clause according to which the final accounts between the partners are settled. • Where there is no such agreement or no such provision is provided, the Partnership Act states: - 1. Losses, including losses on capital must be paid, first from profits, next out of capital and lastly, if necessary, by contribution of each partner in proportion to his share in profits; 2. The assets of the firm, including sums contributed by partners to make up deficiency of capital shall be applied: (a) in paying debts of the firm to outsiders; (b) in paying each partner rateably, for advances made by him to the firm as distinct from capital; (c) in paying each partner, ratebly, amount due for capital contribution; and (d) the residue in paying each partner in accordance with his share in the profits of the firm. 3. If a partner becomes insolvent or otherwise cannot pay his share of the contribution, the solvent partners must share rateably the available assets (including their own contribution to the capital deficiency) i.e., the available assets will be distributed in proportion to their original capital. This is called the Rule in Garner v. Murray Gift. 3.3.2. 12. (1903.) 1 Chapter 57. Limitation - The period for suit for accounts on dissolution is 3 years. If a partner fails to bring such a suit against one partner within the period, the whole claim is barred against the remaining partners also. Payment of Partnership Debts • Where there are joint debts from the firm, and also separate debts due from any partner – the property of the firm shall be applied as follows: - (i) payment of the debts of the firm, and if there is any surplus, then (ii) the share of each partner shall be applied in payment of his separate debts or paid to him. • The separate property of any partner shall be applied first in the payment of his separate debts and the surplus (if any) in the payment of the debts of the firm. Sale of Goodwill after Dissolution • The goodwill shall be included in the assets and it may be sold either separately or along with other property of the firm. The partnership agreement may contain different provision. • A partner may carry on a business competing with that of the buyer and he may advertise such business. Ex- A, B and C were partners in a firm. They contributed the capital Rs. 3.0,000, Rs. 20,000 and Rs. 5,000 respectively making a total capital of Rs. 65,000. They agreed to share equally the profits and losses of the firm. On dissolution of the firm, it was found that after satisfying the outside debts and liabilities of thee firm, the assets were only Rs. 20,000. In this case, the deficiency of capital is Rs. 3.5,000 (Rs. 65,000-Rs.20, 000). This being the losses, each partner has to contribute Rs. 15,000 to make up the deficiency. After this is done, the assets then available are Rs. 65,000 arrived at as Rs. 20,000 (assets after paying the outside liabilities)+ Rs. 3.5,000 (the contribution made by the partners). This will be distributed among the partners according to the contribution towards the capital. So that each will suffer a total loss of Rs. 15,000. However, in actual practice it will not be necessary for A and B to pay Rs. 15,000 each in cash. But the matter will be worked out on the basis of notional adjustment. In this adjustment, C whose capital was only Rs. 5,000. Now out of Rs. 30,000 (Rs. 20,000 of assets and Rs. 10,000 paid by C), A and B will get Rs. 25,000 and Rs. 5,000 respectively. In the way the total loss suffered by A B and C will be Rs. 15,000 each. LECTURES BY PROF. S N GHOSH 23

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