Company Law


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Q. Define Partnership. Is sharing of profit conclusive proof of partnership? Explain - "partners are agents of each other". What are the mutual rights and liabilities of the partners? What is implied authority of a partner? Can it be restricted? Can a partner retire? What are its consequences? Can a partner be expelled? If so, when? Can minor be admitted to the benefits of partnership? If yes, what are the rights and liabilities of such a minor after attaining majority?

Is the registration of a partnership firm compulsory? What are the consequences of non-registration? Can a partner of an unregistered firm bring a suit against a third party to release the property of the dissolved firm?
What is the procedure for registration? Explain various modes of dissolution of the Firm. What are the liabilities of the partners after dissolution? 

In common parlance, partnership is a business owned and managed by two or more people. To form a partnership, each partner normally contributes money, valuable property or labor in exchange for a partnership share, which reflects the amount contributed. Section 4 of Indian Partnership Act 1932 defines Partnership as follows -

Section 4 - Partnership is the relationship between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Persons who have entered into partnership with one another are individually called partners and collectively called a firm and the name under which their business is carried on is called firm name.

Examples -
  1. A and B buy 100 bales of cotton to sell later on profit which they agree to share equally. A and B are partners in respect of such cotton.
  2. A and B buy 100 bales of cotton together for personal use. There is no partnership between A and B.
  3. A, a goldsmith, agrees with B to buy and provide gold to B to work on an ornament and to sell and that they shall share the profit. A and B are partners.
  4. A and B are carpenters working together. They agree that A will keep all the profits and will pay B a wage. They are not partners.
  5. A and B jointly own a ship. This circumstance does not make them partners.

Section 5 of IPA 1932 says that the relation of partnership arises from contract and not from status. Thus, if there is no specific contract, there can be no partnership. As per Section 6, to determine whether a partnership exists between a group of persons, we have to look at the real relation between them as shown by all relevant facts taken together. It further says that sharing of profits or of gross returns arising from a property owned jointly by them does not by itself makes them partners.

Based on these definitions, in Helper Girdharbhai vs Saiyed M Kadri and others AIR 1987, J Sabyasachi of SC identified that the following elements must be there in order to establish a partnership - there must be an agreement entered into by all the parties concerned, the agreement must be to share profits of the business, and the business must be carried on by all or any of the person concerned for all. These three aspects can be discussed under four heads -

  1. Agreement -  There has to be an agreement between two or more people to enter into partnership. The agreement is the source of the partnership. It is not necessary that the agreement be formal or written. An agreement can be express or implied. Further, such agreement must follow all the requirements of a valid contract given by Indian Contract Act 1872. This includes the parties must be competent to contract and the object  of the agreement should be legal.
  2. Business - They must intend to start or do a business. A business is a very wide term and includes any trade, occupation, or profession. Business may not be of long duration or permanent and even a single activity may be considered a business. Thus, if two persons are not partners, they can engage is a transaction with an intention to share profits and can become partners in respect of that transaction. For example, if two advocates are appointed to jointly plead a case and if they  agree to divide the profits, they are partners in respect to that case. Section 8 also mentions that a person may become partner with another in particular adventures of undertaking.
    It is however necessary that a business exists.  If a business is simply contemplated and has not been started, the partnership is not considered to be in existence. In Ram Priya Saran vs Ghanshyam Das AIR 1981 All, two persons agreed that after their tender is passed they will construct the dam in partnership. In order to deposit earnest money, the plaintiff gave 2000 Rs. The tender was not accepted. It was held that since a business was only contemplated and not started, there was no partnership and so the plaintiff was entitled to get 2000 Rs from the defendant.
    However, in Khan vs Miah 2000 WLR, two persons obtained loan from the bank to start a restaurant. They also entered into a contract to purchase equipement and laundary for the restaurant. But their relationship terminated before the opening of the restaurant. It was held that there is no rule of law that parties to a joint venture do not become partners untill they actually embark on the activity in question. It is necessary to identify the venture in order to decide whether the parties have actually embarked upon it but it is not necessary to attach any name to it. Many business require a lot of investment and activities before the actual trading begins. This does not mean that the business has not started until the trading begins. It was held that in this case the activity of the business had begun and so the partnership was in existence.
  3. Sharing of profits - Normally, an activity is done in partnership with a goal to make profits. Thus, for a valid partnership to exist, the partners must agree to share the profits according to their investment. Here, profits include losses as well. 
  4. Mutual Agency - The firm must be managed by the partners and thus when any partner acts, he acts on behalf of the firm and thus on behalf of other partners. Therefore, a partner is considered an agent of others. In absence of such mutual right of agency, a partnership cannot exist.  This was held in Cox vs Hickman 1860. In this case, two person carried on business in partnership. Due to financial crisis they obtained loans. Having unable to repay the loans they executed a trust deed of properties in favor of the creditors. Some of the creditors were made trustees of the business. This included Cox and Wheatcroft. They were empowered to enter into contracts and execute instruments to carry on business and to divide the profits among the creditors. After the recovery of debts, the property was to be restored to the two original partners. Cox never acted as trustee and retired, while Wheatcroft acted as a trustee for some time and retired. Other trustee then became indebted to Hickman and executed a bill of exchange, which was not accepted and paid. Hickman sued the trustees for recovery of the money for materials supplied. The trustees could be held liable if they were partners. However, it was held that they were not partners. They observed that in partnership every partner is an agent of another and in this case this element was absent.

As we can see, a partnership requires all the above ingredients to have legal validity, and so a mere sharing of profits is not a conclusive proof of a partnership. It must have the other three elements also. As mentioned in Section 6, merely sharing of profits arising out of a jointly owned property does not necessarily create a partnership. For example, if two persons own a house and give it on rent, the sharing of the rent does not create a partnership. Similarly, a payment to a person contingent upon profits also does not necessarily create a partnership until the element of mutual agency is not present. This is the case when profits is shared with the lender of money for business. In case of Mollow March Co vs The Court of Wards 1872, a Hindu Raja loaned some money to Watson & Co. In return, he was to get a % of profit and was to exercise control on some aspects of the business. He was not empowered to direct the transactions of the company. It was held that although sharing of profits is a very strong test, yet whether a relation of partnership exists depends on the real intention and conduct of the parties.

Duty/Liabilities of the partners
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  1. General Duties - According to section 9, every partner is liable to carry on the business in the best interest of the firm, to be just and faithful to each other, and to render true accounts and full information affecting the firm to any partner or his legal representative. During the course of business no partner can do any act which may be against his duty to work to greatest common advantage.
    In Bentlay vs Craven 1853, it was held that if a partner was authorized to purchase goods for the firm and if he supplies the goods from his own stock and makes a profit, he is liable to give the profit to the firm. This matter is further clarified in section 16 which says that subject to contract between the partners, if a partner derives any profit for himself from any transaction of the firm or from the use of the property or business connection of the firm, he shall pay that profit to the firm. Further, if a partner carries on any business of the same nature as and competing with that of the firm, he shall pay all such profit to the firm. Subject to contract means, partners can choose to modify this rule while entering into partnership. For example, the partnership contract may specify that a partner may be allowed to use firm's property for personal use.
  2. Duty to indemnify for loss caused by fraud - According to section 10, every partner shall indemnify the firm for any loss caused to it by his fraud in the conduct of the business of the firm. For example, a firm of A and B enter into a contract with the government. Later on, due to B's conduct, the govt. cancels the contract and gives it to B. Here, the contract obtained by B in his own name will be for the benefit of the partnership. Further, if the second contract is of the lesser value, B is personally liable to the firm for the difference.
  3. Duties imposed by contract - As per Section11 any special rights and duties may be given or imposed by the contract between the partners.
  4. Duty relating to the conduct of business - According to section 12, every partner is bound to attend to his duties diligently. Thus, if a partner is assigned some task, he must do it to the best of his abilities. Further, if any difference arises in respect of ordinary business matter, it may be decided by majority. However, no change in the nature of business can be made without the consent of all the partners.
    In Suresh Kumar vs Amrit Kumar AIR 1982, Delhi HC held that majority cannot trample on the opinion of minority in the key matters of  the partnership. Thus, majority cannot replace the managing director of the firm because it is a key business decision. It can be done only with the consent of all the partners.
  5. Duty to contribute equally to the losses - According to section 13(b), partners shall contribute equally to the losses sustained by the firm.
  6. Duty to indemnify for loss caused by his willful neglect - According to section 13 (f), if a partner neglects the business activity willfully, he must compensate the firm for the loss caused. It has been long held that if a partner during the course of business commits breach of duty, or fraud, or culpable negligence and causes harm to the firm, even if he is not liable in law, he must be held liable to indemnify the firm in equity. This does not mean that a partner, when acting in good faith, makes an error in judgment and causes loss to the firm, is liable. However, this is subject to the contract among the partners. This means that the contract may specify that a partner is a sleeping partner and may excuse him from doing any work.
  7. Duty in respect of application of property of the firm - According to section  15, the property of the firm shall be held and used exclusively for the purposes of the business. If a partner uses it for personal benefits, he shall account for and pay such profits to the firm.
  8. Duty in respect of personal profits - According to section 16(a), if a partner derives any profit for himself from any transaction of the firm or from any property or business connection of the firm, he shall account for that profit and pay it to the firm, subject to the contract.
  9. Duty not to compete with the firm - According to section 16(b), if a partner engages in a business in competition of the firm, he should pay the profits to the firm. But if a partner does a private act, which is not in the scope of the business of the firm, he is not liable to the firm for the profits.

Rights of the partners
The partners of the firm have following rights -
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  1. Rights given by contract - As per Section11 any special rights, such as right to remunerationmay be given by the contract between the partners.
  2. Right to take part in the conduct of business - As per section 12(a), subject to the contract between them, a partner has a right to take part in the conduct of business. Only way to restrain a partner from getting involved in the business is to specify it in the contract of partnership. Even courts cannot, through an injunction, restrain a partner.
  3. Right to have access to and inspect and copy books of the firm - As per section 12, every partner has a right to inspect the books and make a copy if he wants.
  4. Right to share in profit - As per section 13, subject to contract, a partner is entitled to an equal share of the profit.
  5. Right to receive interest on the capital subscribed - As per section 13, subject to contract, where a partner is entitled to interest on the capital subscribed by him, such interest shall be payable only out of profits. Further, if a partner pays any money to the firm, beyond the amount of capital, he is entitled to 6% interest.
  6. Right to indemnity in respect of payments made and liabilities incurred - According to section 13, the firm shall indemnify a partner in respect of payments made and liabilities incurred by him in the ordinary and proper conduct of business or in doing such act, in an emergency, for the purposes of protecting firm from loss as would be done by a person of ordinary prudence in his own case under similar circumstance.
Implied authority of a partner
As held in Cox vs Hickman 1860, if two or more agree to carry on a business, each of them is a principal and each is an agent for the other. Further, each is bound by the other's contract in carrying on the trade as much as a single principal would be bound by the act of an agent. This principle has been incorporated in section 18 of IPA 1932. It says that a partner is the agent of the firm for the purposes of the firm. Its complimentary principle is incorporated in section 25 which says that every partner is liable jointly with all other partners and also severally for all acts of the firm done while he is a partner. 

This brings us to the implied authority of the partners. Since, a partner is an agent of the firm, his act binds every other partner and the firm. For example, if a partner A gives a check in the firm's name to a creditor and if the check is unpaid, partner B is equally liable even though B's signature does not appear on the check. This authority to bind the firm is called "implied authority". It has been incorporated in section 19 of IPA 1932, which says that the act of the partner which is done to carry on, in the usual way, business of the kind carried on by the firm, binds the firm.

The following essential conditions are required for the exercise of Implied Authority to bind the firm -
  1. Usual way - The act must be done to carry on the business in the usual way. Any drastic action, which is out of ordinary, requires the consent of all the partners. For example, if a firm deals in coal, a partner has the implied authority to enter into a contract to buy and sell coal, but not gold. The implied authority of partners is limited to only those acts which are done in usual way and related to the business of the kind carried on by the firm.
  2. Mode of doing act to bind firm - Section 22 specifies that in order to bind the firm, the act must be done in firm's name or in any manner expressing or implying the intention to bind the firm. For example, if a partner A obtains a loan in his name without mentioning anything about the firm, it will not bind the firm. It must be clear from the action that it is intended as being done by the firm.
    In Devji vs Magan Lal AIR 1965, a partner had taken a sublease in his own name instead of the firm's name. Further, there did not seem to be any intention to bind the firm. SC held that the firm was not bound by the lease as the parties did not intend to bind the firm by this transaction.

Power of implied authority also has the following restrictions - 
There are two kinds of restrictions - Statutory restrictions, as imposed by section 19 (2)  and Restrictions imposed by partnership deed and those imposed by the agreement between the partners. Statutory restrictions are binding upon all the partners whether they know them or not, while the second type of restrictions are applicable only when the partners have knowledge about them.

Statutory restrictions - In the absence of any usage or custom of trade to the contrary, a partner is not allowed to -
  1. Refer a dispute to arbitration.
  2. open a banking account on behalf of the firm in his own name.
  3. compromise or relinquish any claim or portion of the claim by the firm.
  4. withdraw a suit or proceeding filed on behalf of the firm.
  5. admit any liability in a suit or proceeding against the firm.
  6. acquire immovable  property on behalf of the firm.
  7. transfer immovable property belonging to the firm.
  8. enter into partnership on behalf of the firm.
Contractual Restrictions - As per section 20, Partners may, by contract, put additional restrictions or give additional powers to the partners.  However, any act which falls under the implied authority but is restricted by the contract, will bind the firm unless certain conditions are satisfied. A firm can avoid its liability in such case, if the person dealing with the partner knows the restriction or the person dealing with the partner does not know or does not believe that the partner is a partner in the firm.

In Sanganer Dal & Flour Mill vs F C I AIR 1982, a partner of the firm, who had the implied authority to enter the contract with FCI to purchase goods, entered in to a contract with FCI to purchase Dal. The contract had an arbitration clause. In this case, the question was whether the partner had the power to enter into such a contract?  It was held by SC that the partner was within his implied authority to enter into a contract to purchase goods from the corporation because it was normal for their business and the contract was done in the usual way.  Thus, the contract was valid even if it contained an arbitration clause.

Admission of Partners (Section 23)
Since a partner is an agent of the firm and can bind the firm by his acts, an admission or representation by him concerning the affairs of the firm, is evidence against the firm. This is incorporated in section 23, which says that an admission or representation made by a partner concerning the affairs of the firm is evidence against the firm if it is made in ordinary course of business.
The key factor in this is that the admission or representation must be made in ordinary course of business. This will also not include the representation by which a partner increases his scope of authority. For example, if a partner executes a bill of exchange for payment of his personal debts and on inquiry he makes a false statement that the other partners have authorized him, the said bill of exchange will not bind the firm.

Incoming partners
The mutual relations of the partners is based on the principle that they have to be just and fair to each other and are bound to carry on the business of the firm to the greatest common advantage. Thus, it is important for each partner to have trust in each other.  Therefore, section 31 lays down a general principle that a partner cannot be introduced into a firm without the consent of all the existing partners. However, the existing partners may, by contract, authorize a partner to introduce a new partner. A contract may also be made that upon death of a partner, a new partner may be nominated in his place. If there are only two partners and one of them dies, there is no question of nominating a new partner because the partnership ends as soon as the partner dies.
Also, a new partner is not liable for any act of the firm done before he became a partner.

Outgoing partners
In many situations, a partner may have to leave the partnership. A partner may leave in the following ways -
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  1. With the consent of all other partners - According to section 32(1) (a), a partner may retire with he consent of all the other partners.
  2. With an express agreement by partners -  Section 32 (1)(b) provides that a partner may retire with an express agreement by partners. This means that if there is a provision in the contract deed of partnership that allows a partner to retire, a partner can retire using that agreement.
    In Vishnu Chandra vs Chandrika Prasad Agarwal AIR 1983, the question before SC was whether a partner was entitled to retire on the basis of partnership deed. The deed provided that a partner may retire by giving one month notice and that a partner cannot retire within one year of commencement of business and if he does so, his capital will not be returned. SC held that it is consistent with the provisions of section 31(1)(b) and the partner can retire according to the deed.
  3. By giving notice to all other partners in case of partnership at will -  According to section 32(1)(c), a partner may retire where the partnership is at will, by giving notice in writing to all the other partners of his intention to retire.
  4. By Expulsion (Can a partner be removed? How?) - According to section 33 (1) a partner may not be expelled by any majority of the partners, save in exercise of good faith of powers conferred by contract between the partners. Thus, to expel a partner by majority of the partners, the following two conditions must be satisfied -
    1. Such a power must be conferred by contract between the partners. This means, the contract of partnership must clearly give this power to the partners otherwise, a partner cannot be expelled.
    2. The power to expel a partner conferred under the contract must be exercised in good faith. Thus, if majority of the partners try to expel a partner with evil intention and without any reasonable cause, it is not possible.

    In Carmichael vs Evans 1904, a partner was caught traveling without ticket and was convicted on this charge. He was expelled by the majority of the partners. It was held that the expulsion was justified.
    In Blisset vs Daniel 1953, a partner was expelled by the majority of the partners because he opposed the appointment of the son of a partner on the post of manager. It was held that the expulsion was invalid.
  5. On insolvency of a partner - According to section 34(1), where a partner in a firm is adjudicated an insolvent he ceases to be a partner on the date on which the order of adjudication is made, whether or not firm is thereby dissolved.
  6. By Death - Upon death of a partner, his association with the firm ends and he ceases to be a partner. His estate will not be liable for the acts of the firm after his death. According to section 42(c), subject to the contract between the partners, a firm is dissolved by the death of a partner. This means that partners may by contract that by death of a partner the firm will not be dissolved but if there is no such contract, the firm will be dissolved.

Liability of a retired partner
The liability of a retired partner may be of two types - For acts done before retirement and for acts done after retirement.
  1. Acts before retirement -  The general rule is that a partner is liable for all acts done before retirement even after he is retired. However, a retiring partner may be discharged of his liabilities for act before retirement by an agreement between the retiring partner and the remaining partners. The agreement should specify that all such liabilities will be borne by the remaining partners. A notice to this effect must also be given to the creditors.
  2. Acts after retirement -  The general principle is that a retired partner is not liable for the acts of the firm done after his retirement. However, he must give a public notice of his retirement to escape liabilities.

Partnership with a minor
By virtue of section 10 and 11 of Indian Contract Act 1872, a minor is not considered capable of giving consent and thus any contract with a minor is void ab initio. Therefore, a contract of partnership with a minor is also void. In other words, a partnership cannot be done with a minor and a minor cannot become a partner of a firm. However, a minor can be admitted to the benefits of the partnership as per section 30 (1), by the consent of all the partners.  In Venkatarama Iyer vs Balayya AIR 1936, it was held that there must be some positive act of the partners so that the court may infer that the minors have been admitted to the benefits of the partnership. Merely assuming that the minors were admitted would be an error in law and is not sufficient.
Further, in Addl Commr. of Income Tax vs Uttam Kumar Pramod Kumar 1975, a partnership deed was not signed by minor or anybody on his behalf. It was held that to admit the minor to the benefits of partnership it is necessary to have an agreement between the partners and the minor. Since the property and money of the minor can be used for the firm, an agreement is necessary between the partners and someone on behalf of the minor.

Rights and Liabilities of a minor