General Nature of Partnership – CA Foundation Law Study Material

This General Nature of Partnership – CA Foundation Law Study Material is designed strictly as per the latest syllabus and exam pattern.

General Nature of Partnership – CA Foundation Business Law Study Material

Question 1.
Define Partnership. Discuss the essential elements of Partnership.
Answer:
Section 4 of the Indian Partnership Act, 1932, lays down that “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 ”All the following elements must be present if an association of persons is to be called a partnership:

1. Association of two or more persons
There must be at least two persons to form a partnership. As far as the maximum number of partners, in a firm is concerned, the Partnership Act is silent. However, Section 464 of the Indian Companies Act, 2013 lays down that where the firm is carrying any business, the number of partners should not exceed 50 (It can be increased up to 100). If the num¬ber of maximum partners exceeds this limit, the partnership becomes an illegal association of persons.

2. Agreement between persons
According to Section 5 of the Indian Partnership Act, the relation of partnership arises from contract and not from status. Thus, the members of a Hindu Joint Family carrying on a business, or the co-owners of a business are not ‘partners’ because HUF and co-ownership are created by operation of law and not by contract. The agreement of partnership may be expressed or implied.

3. Business
A partnership can be formed only for the purpose of carrying on some business. Section 2(b) of the Partnership Act says that the term ‘business’ includes every trade, occupation or profession. Thus, an association created primarily for charitable, religious and social purposes are not regarded as a partnership.

4. Sharing of Profits
The division of profits is an essential condition of the existence of a partnership. The sharing of profits is only prima facie evidence of the existence of a partnership, and this is not the conclusive test of it.

5. Business carried on by all or any of them acting for all. (Mutual Agency)
The underlying or cardinal principle which governs partnership is the mutual agency relationship amongst the partners. It means each partner is the agent of the firm as well as of the other partners. The business of the firm may be carried on by all the partners or by any of them acting for all. Thus, a partner is both an agent and a principal. He can bind the other partners by his acts and is also bound by the acts of the other partners. The law of partnership is regarded as an extension of the general law of agency.

General Nature of Partnership – CA Foundation Law Study Material

Question 2.
“The true test of partnership is the mutual agency”. Comment. What are the instances of non-partnership interests?
OR
‘Whether a group of persons is or is not a firm, or whether a person is or is not a partner in a firm’. Explain the made of determining the existence of partnership as per the Indian Partnership Act, 1932.
OR
What is the conclusive evidence of Partnership? State the circumstances when the partnership is not considered between two or more parties.
Answer:
According to Sec. 4, there are 4 essential elements of partnership:

  1. That it is the result of an agreement, between two or more persons.
  2. That it is formed to carry on a business.
  3. That the persons concerned agree to share the profits of the business.
  4. That the business is to be carried on by all or any of them acting for all.

Further According to Sec. 6 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. If all the relevant facts taken together show that all the four essential elements are present, the group of persons doing business together will be called a partnership.

The relevant factors to be considered for determining whether there is partnership are the conduct of parties, the mode of doing business, who controls the property, the mode of keeping accounts, correspondence, the manner of distribution of profits, etc. of the four elements, the third element, viz., sharing of profits is important but not conclusive. In the following cases there is no partnership even though there is sharing profits:

  • A creditor taking a share of profits in lieu of interest and part-payment of principal.
  • An employee getting a share of profits as remuneration.
  • Share of profits given to workers as a bonus.
  • Share of profits given to the widow or children of deceased partners as an annuity.
  • Share of profits given to a previous owner of the business as the con¬sideration for the sale of the goodwill.

In all the above cases the fourth essential element of partnership viz., mutual agency, is absent. A creditor or any employee, or the widow and children of deceased partners cannot bind the firm by any act done on behalf of the firm. Only those who have the authority to bind the firm by their actions can be called partners. Thus, the most important test of partnership is agency and authority. This is the cardinal principle of partnership law. If this element of mutual agency is absent, then there will be no partnership.

General Nature of Partnership – CA Foundation Law Study Material

Question 3.
“Partnership arises from contract and not from status.” Comment.
Answer:
“Partnership arises from contract and not from status”.
That partnership is the result of a contract and cannot arise by status is sufficiently emphasised by section 4 itself by use of the words “partnership is the relation between the persons who have agreed to share the profits of a business”. It is clear from the definition that the partnership is of contractual nature. It springs from an agreement. The same point is further stressed by the opening words of Section 5 that the relation of partnership arises from contract and not from status.

Thus if on the death of the sole proprietor of a business the legal heirs decide to continue to carry on the business, they cannot be called partners because there is no agreement between them. Similarly, members of a Joint Hindu Family business carrying on a family business cannot be treated as partners because a person becomes a member of the business by birth and not by agreement. Sec. 5

On the death of a partner, his legal heirs do not automatically become the partners of the firm. If the surviving partners agree to admit the legal heirs into partnership, then a fresh agreement to that effect will have to be made. Thus from the above, it is clear that partnership always arises out of a contract and not from status.

Question 4.
What are the types of partnerships, under the Indian Partnership Act, 1932?
Answer:
A partnership can be classified as below:
1. Partnership at will (sec. 7)
A partnership is called a partnership at will

  • When the partnership is not for a fixed period of time and
  • When no provision is made as to when and how the partnership will come to an end.

If either of these provisions exists, it is not a partnership at will. The essence of partnership at will is that it is open to either partner to dissolve the partnership by giving notice in writing to all other partners. The firm is then dissolved from the date mentioned in the notice as the date of dissolution, and if no such date is mentioned, then from the date of the communication of the notice (sec. 43) If a partnership is to be dissolved by mutual agreement only, then it will not be a partnership at will.

2. Particular partnership (sec. 8)
A particular partnership is one that is formed for a particular adventure or a particular undertaking. Such a partnership is usually dissolved on the completion of the adventure or undertaking. For example, forming a partnership for the construction of a bridge.

3. Partnership for a Fixed period
Where a provision is made by a contract for the duration of the partnership, the partnership is called a partnership for a fixed period. Such partnership comes to an end after the expiry of the fixed period.

4. General Partnership
Where a partnership is constituted with respect to the business in general, it is called a general partnership. A general partnership is different from a particular partnership. In a particular partnership, the liability of the partners extends only to that particular adventure or an undertaking but it is not so in the case of a general partnership.

Question 5.
What constitutes Partnership Property under the provisions of the Indian Partnership Act, 1932?
Answer:
What constitutes a partnership property, depends upon the agreement between the partners. It is open to the partners to agree among themselves as to what is to be treated as the property of the firm and what is to be the separate property of one or more partners. They can convert by mutual agreement, partnership property into the separate property of an individual partner and vice versa. In the absence of any such agreement, the property of the firm according to section 14, means

  • the property originally brought into the common stock of the firm by the partners;
  • property acquired in the course of the business with money belonging to the firm;
  • the goodwill of the firm.

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. Subject to contract between partners, the property of the firm shall be held and used by the partners exclusively for the purposes of the business.

General Nature of Partnership – CA Foundation Law Study Material

Question 6.
Who can become a partner in a firm?
Answer:
According to the definition of partnership in section 4, a partnership is an agreement. All those persons who are competent to contract can become partners. As per section 11 of the Contract Act, a person is competent to contract if he is a major, of sound mind and is not disqualified from contracting by any law. Thus a partner must fulfil the conditions of section 11. However, a minor u/s 30 of the Partnership Act, can be admitted to the benefits of the partnership firm with the consent of all the partners.

Question 7.
What is a Partnership deed? State the contents, contained therein.
Answer:
The partnership is created out of an agreement which may be oral or written. However, it is advisable to have the partnership agreement in writing to avoid future disputes. The document containing the terms and conditions as to the relationship of partners to each other is called a partnership deed. It should be drafted with care and be stamped according to the provisions of the Stamp Act, 1899.
The partnership deed usually contains provisions relating to the following :

  • Name of the firm,
  • Duration of partnership,
  • Nature of business,
  • Place where business is to be carried on,
  • Capital brought in by each individual partner,
  • Property of the firm,
  • Proportions of profits and losses of each partner,
  • Rights and duties of partners,
  • Provisions for accounts, audit, keeping of account books,
  • Drawings by partners and especially by a working partner,
  • Dissolution of the firm,
  • Retirement of a partner,
  • Settlement of accounts, division of assets, profits etc., upon dissolution,
  • The arbitration clause in case of a dispute.

General Nature of Partnership – CA Foundation Law Study Material

Question 8.
Differentiate between the following :

  1. Partnership & Company
  2. Partnership & HUF
  3. Partnership & Co-ownership

Answer:
(1) Distinction between Company & Partnership Firm

Basis Company Partnership Firm
Formation A company that comes into existence only to alter registration under the Companies Act. A partnership is formed by the mutual agreement of all the partners. Registration is not compulsory.
Legal Status A company has a separate legal entity distinct from its members. A partnership is a collection of individuals. It does not have a separate legal entity.
Number of Members (i) The minimum number of persons required to form a company is 2 for a private company (other than One Person Company) and 7 for a public co.

(ii) There is no maximum limit to the number of members in the case of a public company. A private company cannot have more than 200 members.

(i) The minimum number of persons required to form a partnership is 2.

 

(ii) As per CumpaniesAct.2013 the number of partners in a partnership firm carrying on any business should not exceed 50 persons. (limit as currently prescribed)

Liability of Members The liability of the members is limited. The liability of partners is unlimited.
Agency of Members A shareholder is not an agent of the company nor he is an agent of other shareholders. Every partner is the agent of the firm and his partners for the purposes of the business of the firm.
Transfer of shares Shares can be transferred without the consent of other members. In a private company, there are restrictions on the transfer of shares. No partner can transfer his share or interest in the firm without the consent of his co-partners.
Stability A company has perpetual succession. The death or insolvency of a member does not affect its existence. A partnership comes to an end on the death and insolvency of its partners.
Management There is the separation of ownership from management. The shareholders do not actually take part in the management of the company. The Board of Directors manages the company. A partnership firm is managed by partners themselves.
Powers The general powers of the company are regulated by the Memorandum of Association. It is difficult to change the objects The partnership agreement (deed) regulates the mutual rights and duties of partners only.
Statutory Obligations A company is required to comply with various statutory obligations. Such as compulsory audit, the holding of the meetings, the keeping of proper account books and registers, filing of annual returns etc. A Partnership Firm is not required to comply with any such statutory obligation.
Interest A member has no interest in the A partner has an interest in assets of the company. A partner has an interest in the assets of the partnership.

(2) Distinction between Partnership and Joint Hindu Family.
There are some common features in partnership and Joint Hindu families. Both are forms of business organization and there is sharing of profits. The important points of distinction are :

Mode of creation The partnership is created by agreement, whereas the joint family is established by law. A person becomes a member of a joint family by birth.
Death The death of a partner brings about the dissolution of the partnership. But the death of a member of a Joint Hindu Family does not give rise to the dissolution of the family’ business. HUF has continuity till its partition.
Mutual Agency In a partnership, every partner can bind the firm by his acts. however, in HUF, univ the Karta has the authority to contract on behalf of HUF.
Management In a joint family, only Karta has the right to manage the business. In partnership, all the partners have the right to take part in the management of the firm.

Note: The amendment in the Hindu Succession Act, 2005, entitled all adult members, whether male or female, to become coparceners in a HUF. They enjoy equal rights of inheritance due to this amendment. On 1st February 2016, Justice Najmi Waziri, in a judge allowed the eldest female coparcener of a HUF to become the Karta.

Liability The liability of partners in a partnership concern is unlimited, joint, and several. The liability of members of a joint Hindu family except the Karta is limited on1 to the extent of their share in the business of the family.
Calling for accounts On the partition of a joint family, a member is not entitled to ask for the accounts of the family business. But a partner can bring a suit against the firm for an account on the dissolution of the firm.
Registration Registration of partnership is essential for the maintenance of Suits both against the partners as well as an outsider but a joint family business need not be registered at all.
Number of members In a partnership, the number of partners is limited to 50, but in the case of a joint family business, there is flO such restriction.
Minor position A minor can be a member of a Hindu joint family, but a minor cannot be a partner in a firm. However, he can be admitted to the benefits of partnership with the consent of all the partners.
Governing Law A partnership is governed by the Indian Partnership Act, 1932, while a joint Hindu family is governed by Hindu Law.
Share in Business Share in a partnership is defined by an agreement between partners. However, in HUF, the share of coparceners is not ethnic. His interest is fluctuation which is capable of being enlarged by deaths in the family and diminished by births.

(3) Distinction between Partnership and Co-Ownership.
Co-ownership’s like joint purchasers, co-tenants, co-heirs are different from partnerships. Co-owners may share profits, by virtue of their status and not by virtue of a contract; One co-owner is not the agent of another co-owner; the co-owner may transfer his shares to a stranger but a partner cannot do so. The following are the points of distinction:

1. Formation
Partnership always arises out of contract. Co-ownership may arise either from the agreement or by the operation of law, such as by inheritance.

2. Sharing of profits
In a partnership, profit must have to be shared, but in the case of a co-ownership, it does not necessarily involve sharing of profits.

3. Agency
In a partnership, a partner is the agent of the other partners, but in the case of co-ownership, a co-owner is not the agent of other co-owners.

4. Lien
A partner has a lien on the partnership property for outlay or expenses or a loan advanced to the firm, whereas a co-owner has no such lien.

5. Transfer of interest
A share in the partnership may be transferred only with the consent of all other partners. The co-owner may transfer his interest in the property without the consent of other co-owners.

General Nature of Partnership – CA Foundation Law Study Material

Question 9.
R is not a partner in a particular firm. But, lie represents himself or knowingly permits himself to be represented as a partner of that particular firm to Sanjay, who on the faith of such representation gives credit to the firm. Is R liable as a partner in the firm?
Answer:
Partner by estoppel/holding out is one represents himself or knowingly permits himself to be represented as a partner in a firm, where in fact he is not as such a partner. When a third party on the faith of such a representation contracts with the alleged firm, then such a person shall be held liable as a partner by estoppels/holding out, to such a third party. In the given case R, not being a partner, represents himself/knowingly represents himself to be a partner in the firm and Sanj ay on the faith of such representation gives credit to the firm.

Thus applying the above-stated provisions R shall be regarded as a Partner by estoppels/holding out and he shall be liable in respect of this contract.

Question 10.
A B and C are partners in a firm carrying on money leading business. D, a customer, deposits his jewellery with the firm for safe custody. A and B sell this jewellery and misappropriate the money C, being a sleeping partner, have no knowledge about this sale. Now, D files a suit against all three partners. Can C be held liable? Give reasons.
Answer:
According to the provisions of the Indian Partnership Act, 1932, a sleeping or a dormant partner shall have the same liabilities as of the active partners, even though he does not take part in the conduct of the business of the partnership firm. Thus a dormant partner shall be liable for the acts of the firm to the third parties. In the given case, A, B, the other partners of the firm have misappropriated the jewellery received by them from their customer D, in the ordinary course of conduct of the business of the firm.

Thus applying the above-stated provisions, D is rightfully entitled to sue all the three partners, including Mr. C, the dormant partners, irrespective of the fact that he had no knowledge of such misappropriation.

Question 11.
Ratan Tata, a retired businessman of repute, assumed the honorary presidentship of the business of XYZ & Associates, a partnership firm, carrying on the business of trading in steel pipes, at the request of the partners. Mr. Warren Buffet lent a sum of ₹ 50,00,000 to the firm, relying on Ratan Tata’s association with the firm. Later the firm defaulted in repayment of the loan. Warren Buffet decides to sue Ratan Tata & the other partners. Comment on the validity of his decision in the context of the provisions of the Indian Partnership Act, 1932.
Answer:
Hint: Partner by Holding out; When a person by his express words or conduct represents himself to be a partner in the firm, where in fact he is not as such a partner then if a third party on the faith of such representation contracts with the alleged firm, then such a person shall be held liable as a partner by holding out to such a third party.

In the given case Ratan Tata assumes the honorary presidentship of XYZ & Associates and thereby, his conduct represents him as a partner in the said firm. Warren Buffet lends a sum of ₹ 50,00,000 relying on this representation. Therefore applying the above-stated provisions it can be concluded that Ratan Tata will be regarded as a Partner by Holding out despite holding honorary presidentship and shall be held liable along with the other partners by Warren Buffet. Thus the action actions of Warren Buffet are legal & valid under the provision of the Indian Partnership Act, 1932.

General Nature of Partnership – CA Foundation Law Study Material

Question 12.
Asian and Ravi are carrying on business in partnership. In the partnership deed, it is provided that neither of the partners should borrow money except with the consent of both. Anand borrowed a sum of Rs. 10,000 from Suresh for the business of the firm without the consent of Ravi. Is the firm liable? Give reasons for your answer.
Answer:
According to the provisions of the Indian Partnership Act, 1932, a firm shall be bound by the acts of a partner done within the scope of his implied authority provided the following conditions are satisfied:

  • The act must be done in the name of the firm
  • The act must be performed by a partner of the firm in the capacity of a partner acting within the scope of his apparent authority
  • The act must relate to the ordinary course of business of the firm
  • The act must be done in the usual way.

If an act is so performed then it shall be binding on the firm. Further, if the act falls beyond the scope of the partner’s real authority, on account of restrictions imposed on his authority by virtue of the partnership deed, the act shall be binding on the firm, provided the third party had no knowledge of the restrictions & had acted in a bonafide manner. Thus in the give case firm shall be liable for the amount borrowed by Anand from Suresh for the business of the firm even though the deed expressly provides for the exercise of borrowing power only with the consent of both the partners, provided Suresh had no knowledge of the terms of the deed in this respect.

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