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Corporate Law Partnership Act (The Nature and Essentials of Partnership)

Prepared by Assist. Professor Rekha Khandelwal

Plz. click the link to read Legal Study Material For all Purpose

Partnership Act, 1932 An Introduction with flow Chart

Corporate Law Partnership Act, 1932 (The Nature and Essentials of Partnership)

Chapter II – The Nature and Essentials of Partnership

Section 4. Definition of partnership, partner, firm and firm name. –

According to Section

A partnership is the relation between persons who have agreed to share all the profits of the business carried on by all or any of them acting for all.
A person who enters into partnership with other person, is called individually a partner. Collectively all the partners are known as a firm.
The name under which their business is carried on is called the firm name.

According to Story –

“Partnership” is a voluntary contract between two or more competent persons to place their money, effects, labour and skill or some or all of them, in lawful commerce or business, with the understanding that there shall be a trasaction of profitsthreof between them.

According to Frederick Pollock-

“Partnership”is the relation which subsists between persons who have agreed to share the profits of a business carried on by all or any of them on behalf of all.

Thus, it can be said that “ Partnership” is a voluntary agreement between the partners to carry on a business to share the profits as well as loss.

Deoha F. Guzdar v. C.I.T., AIR 1955 SC 74.

Hon’ble Supreme Court has laid down that the firm name is just a compendious method of describing the partners only.

Chimanram Motilal v. Jayantilal Chhaganlal, AIR 1939 Bom 410 (DB).

The important test of partnership is the existence of mutual agency between the partners.

Essential Elements of Partnership

There are three important elements:-

Agreement between the persons.
Agreement to share the profits of a business
Business carried on by all or any of them acting for all.

1.Agreement between the persons. –

This is the first necessary element of the partnership that there must be an agreement between the individuals to continue the business with further agreement to share its profits. In general, these individuals are called “partners”

However, the word “agreement” is defined under Section 2(e)of the Indian Contract Act, 1872 which reads as under :-

“Every promise and every set of promises forming the consideration for each other is an agreement.”

Therefore, in view of the above provisions an agreement is a promise or set of promises made for consideration, is called “agreement”.

According to Section 2(b) of the Indian Contract Act, 1872 “When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal when accepted becomes a promise.”

Thus, a proposal when accepted becomes agreement and further an agreement enforceable by law becomes a contract. In other words all agreements are contracts provided they are made by the free consent of parties competent to contract for a lawful consideration with lawful object.

2. Agreement to share the profits of a business.-

Under the terms of Section 4 of the Partnership Act, 1932, the agreement between the individuals should be for profit sharing. In other words there is a relationship between individuals to share profits. However, these individuals can be natural or artificial. Natural persons include men and artificial persons include registered companies / institutions / corporations / committees etc.

Profit sharing agreement.- Section 4 of the Partnership Act, 1932 does not provide that profits must be shared by the partners. The provision for profit sharing in the partnership agreement is sufficient. The fact that the partners actually share or not the profits does not affect the existence of the partnership deed.

3. Business carried on by all or any of them acting for all.-

An important component in the definition of partnership is that the business of partnership must be carried on by all or any one of the partners. The most crucial element of the partnership is the mutual agency of the contracting parties and as soon as there is a mutual agency among the capital contributors, the partnership takes place..

Illustrations :

a) P and Q buy 100 bags of Rice , which they agree to sell for their joint account. P and Q are partners in respect of such bag of Rice.

b) P and Q buy 100 bags of Rice, agreeing to share it between them. P and Q are not partners.

c) P agrees with Q a goldsmith , to buy and furnish gold to Q , to be worked on by him and sold , and that they shall share in the resulting profit or loss. P and Q are partners.

Section 5. Partnership not created by status. –

The relation of partnership arises from contract and not from status,
Particulary the members of a Hindu undivided family carrying on a family business as such are not partners in such business.
Burmese, Buddhist husband and wife carrying on business as such are not partners in such business.

Section 6. Mode of determining existence of partnership. –

In determining whether a group of persons is or is not a firm, regard shall be had to the real relation between the parties,as shown by all relevant facts taken together.
In determining 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.

Explanation. – 1. The sharing of profits or of gross returns arising from property by persons holding a joint or common interest in that property does not of itself make such persons partners.

Explanation.– 2. The receipt of a share of the profits of a business, or of a contingent amount of payment by a person who has a share in the profits of a business, oes not make itself a partner with the persons doing that business.

And, in particular, receipts of such shares or payments

(A) by a lender to persons engaged or about to engage in any business,

(B) as remuneration by the servant or agent,

(d) by a previous owner or part owner of the business, as consideration for the sale of the goodwill or share thereof,

does not make itself the receiver a partner with the persons carrying on the business.

Section 7. Partnership at will. –

If partners do not make provision by contract for the duration of their partnership,
If partners do not make provision by contract for the determination of their partnership then the partnership is at will.