Contract law Final Draft

CHANAKYA NATIONAL LAW UNIVERSITY, PATNA

A Project

On

NATURE OF PARTNERSHIP

Submitted To: Mr. Ravi Ranjan Teacher Te acher A!cia"e

Submitted By: Parijat IIIrd Semester 769

Nature of Partnership

Parijat Singh, CHANAKYA NATIONAL LAW UNIV!SITY

Page "


A#$no%&e'g(ent I am feeling feeling highly highly elated to or! on the to"ic #$ature of Partnershi"% Partnershi"% under the guidance of my &a of 'ontract teacher (r )a*i )anjan sir+ I am *ery grateful to him for the e,em"lary guidance+ guidance+ I ould li!e to enlighten my readers regarding this to"ic to"ic and I ho"e ho"e I ha*e tried my best to "a*e the ay for bringing more luminosity to this to"ic+ I ould li!e to than! my "arents for their incessant hel" and su""ort hich made me hat I am today+ today+ I also ish to e,tend my gratitude my friends- ithout hose coo"eration this "roject as not "ossible+ A"art from all these- I ant to gi*e s"ecial than!s to the librarian librarian of my uni*ersity uni*ersity ho made e*ery rele*ant rele*ant materials materials regarding regarding to my to"ic a*ailable to me at the time of my busy research or! and ga*e me assistance+


Page )


INT!O*UCTION The Indian Partnershi" Act as enacted in .9/0 and it came into force on . st day of October.9/0+ The "resent act su"erseded the earlier la relating to Partnershi"- hich as contained in 'ha"ter 1I of the Indian 'ontract Act- .270+ The Act is not e,hausti*e+ It "ur"orts to define and amend the la relating to Partnershi"+ Indian Partnershi" Act as se"arated because at that time- there as a change in business at the global le*el and the "ro*isions contained contained in Indian Indian 'ontract 'ontract Act ere not sufficient sufficient in the eyes of the legislature+ legislature+ Also Also they anted to ma!e the "rocedure sim"le for carrying out the business+ A "artnershi" is formed hen to or more "ersons agree to carry ca rry on a business together+ This This agreement can be ritten or oral+ A "artnershi" is formed hen to or more "eo"le intend to or! together to carry on a business acti*ity+ $o local or state filings are re3uired to create this ty"e of "artnershi"+ This is different than a cor"oration- hich does not come into e,istence until Articles of Incor"oration ha*e been filed ith the Secretary of State+ The research methodology used in the "roject is basically the doctrinal method as no field or! is done on this to"ic+ The hole "roject is made ith the use of secondary source+ The aim of the "roject is to "resent a detailed study of 4'once"t of Partnershi"5 through decisions and suggestions+ This to"ic consists of si, cha"ters+ This to"ic deals ith the meaning- definition and nature of Partnershi"+ urther ith the creation and determination of Partnershi"- then rights and duties of "artners hich is further sub  di*ided into relations of "artner5s interest and relation of "artner ith third "arties+ Then- dissolution of a firm fir m and lastly conclusion of the conce"t of "artnershi"+


Page +


!esear#h etho'o&ogor the "ur"ose of research the researcher has relied on secondary sources to loo! for information relating to #'O$'8PT O PA)T$8)SIP%+ The researcher has done this !ee"ing in mind the fre3uently as!ed 3uestions arising out of this to"ic+ The researcher has aimed at doctrinal method of research and ill try to critically analyse and "ro*ide an un biased account on this to"ic+

Ai(s an' O.je#ti/es The researcher5s "rime objecti*e is to "resent a detailed study of 4'once"t of Partnershi"5 through decisions and suggestions+ It aims to descri"ti*ely "ro*ide an o*er*ie of conce"t of "artnershi"+ The researcher is going to limit its sco"e to the legislations concerning this to"ic and also to the case las hich concern this to"ic+

Sour#es of *ata0 The folloing secondary sources of data ha*e been used in the "roject • • • •

BOO;S (A8BSIT8S A)TI'&8S


Page 1


Ta#$e !% C!n"en" In"r!&'c"i!n..............................................................................................................................( ).Meanin*, +e%ini"i!n an& Na"'re !% Par"nerhi..................................................................Crea"i!n an& +e"er/ina"i!n !% Par"nerhi.....................................................................)0 1.Ri*h" an& +'"ie !% Par"ner............................................................................................ 2 3.+i!$'"i!n !% a Fir/...........................................................................................................14 0.C!nc$'i!n............................................................................................................................34 5i#$i!*rah6.......................................................................................49


Page 2


ANIN3, *4INITON AN* NATU! O4 PA!TN!SHIP Section ? of the Indian Partnershi" Act- .9/0- defines "artnershi" in the folloing ords: #Partnershi" is the relation beteen "ersons ho ha*e agreed to share "rofits of a business carried on by all or any one of them acting for all+% Persons ho ha*e entered into "artnershi" ith one another are called indi*idually 4"artners5 and collecti*ely 4 a firm5 and the name under hich their business is carried on is called the 4firm name5+ Section ? of the "resent act corres"onds to Section 0/9 @e of the Indian 'ontract Act the "ro*ision of the re"ealed Section 0/9 @e has been ado"ted in "resent Section ? ith some changes+ In Section ?- the element of agency has been gi*en due em"hasis and the "ro*ision relating to the 4firm name5 has been added+ The re"ealed Section 0/9 @e contained illustrations hich are still rele*ant and useful+ The re"ealed Section 0/9 @e contained folloing illustrations: @a A and B buy . bales of cotton- hich they agree to sell for their joint account A and B are "artners in res"ect of such cotton+ @b A and B buy . bales of cotton- agreeing to share in beteen them+ A and B are not "artners+ @c A agrees ith- a goldsmith- to buy and furnish gold to B- to be or!ed u" by him and sold- and that they shall share in the resulting "rofit or loss+ A and B are "artners+ @d A and B agree to or! together as car"enters- but A shall recei*e all "rofits and shall "ay ages to B+ A and B are not "artners+ @e A and B are joint oners of a shi"+ This circumstance does not ma!e them "artners+ Essentials Elements

In Raghunath Sahu *. Trinath Das 1- a Ci*ision Bench of the Orissa igh 'ourt "ointed out the three essential elements of Partnershi" @. an agreement beteen the "ersons concernedD @0 this agreement should be for sharing "rofits of a business- and @/ the business should either be carried on by all or anyone of them on behalf of all+ The first element is regarding 5

AI! 5671 Ori 7, 58


Page 9

Nature of Partnership the contractual nature of "artnershi"+ The second element indicates moti*e or sharing of "rofits for hich the "artnershi" is established+ The third element ma!es it clear that the "erson or "ersons ho carry on business act as agents of all the "artners0+ In Helper Girdharbhai *. Saiyed Mohmad Mirasaheb Kadri and others 3 , Sabyasachi- E+ @as he as then of the Su"reme 'ourt obser*ed: >hether there as a "artnershi" or not in certain cases be a mi,ed 3uestion of la and fact- in the sense that hether the ingredients of Partnershi" as embodied in the la of "artnershi" ere there or not in a "articular case must be judged in the light of the "rinci"les a""licable to "artnershi"+ The first 3uestion- thereforeis hat a "artnershi" is+ That has to be found in Section ? of the Partnershi" Act- .9/0 hich says #Partnershi" is the relation beteen "ersons ho ha*e agreed to share "rofits of a business carried on by all or any one of them acting for all%+ Section 6 of the said Act reiterates that in determining hether a grou" of "ersons is or is not a firm- or hether a "erson is or is not a "artner in a firm- regard shall be had to the real relation beteen the "arties- as shon by all rele*ant facts ta!en together+% The folloing im"ortant elements must be there in order to establish "artnershi": @. there must be an agreement entered into by all "arties concernedD @0 the agreement must be to share "rofits of business- and @/ the business must be carried on by all or any of the "ersons concerned acting for all+ 8*en hen a deed is named as "artnershi" deed- courts ha*e held that the nature of relationshi" is not determined by the mere use of the ord #"artnershi"% either in the arguments or in the "leadings+ There must be three elements before any relationshi" hich can be called a "artnershi" comes into e,istence: @. there must be an agreement entered into by all the "arties concernedD @0 the agreement must be to share "rofits of the businessD and @/ the business must be carried on by all or any of the "ersons concerned @in action for all+ All these elements must e,ist in a "artnershi"?+ The abo*e three elements can be discussed under the folloing four heads: @. Agreement @0 Business @/ Sharing of Profits "

*r: S:K: Kapoor, Contracts-II, 58th e'ition, A&&aha.a', Centra& La% Agen#-, "881,p;"1" ) AI! 5679 SC 597" + S.K. Parthasarthy Naindu /. K. Rama Naidu, AI! "885 a': )66,+89


Page 7

Nature of Partnership @? (utual Agency 7)8

A*ree/en" According to Section ?- the first essential element of Partnershi" is

agreement+ Section ? ma!es it clear that "artnershi" is a relation beteen "ersons ho ha*e 4agreed5 to share "rofits+ There can be no "artnershi" ithout an agreement+ Section F further clarifies this by "ro*iding that # the relationshi" of "artnershi" arises from contract and not from status+% In Deputy Commissioner o Sales Ta! "#a$%, &oard o Re'enue"Ta!es% *. M(s K. Kelu)uttyF- the Su"reme 'ourt has held that relation beteen "artners is founded on agreement beteen them+ ence the basis of "artnershi" and firm is "artnershi" agreement+ The source of "artnershi" is "artnershi" agreement+ In the ords of Patha!- E+ #The foundation of a "artnershi" and- therefore- of a firm- is a "artnershi" agreement+ A "artnershi" agreement is the source of "artnershi"D it also gi*es e,"ression to other ingredients defining the "artnershi"- s"ecifying the business agreed to be carried on- the "ersons ho ill actually carry on the business- the shares in hich the "rofits ill be di*ided and se*eral other considerations hich constitute such an organic relationshi"+ It is "ermissible to say that a "artnershi" agreement creates and defines the relation of "artnershi" and therefore identifies the firm+% It is- hoe*er- not necessary that the agreement must be formal or in riting+ It is also not necessary that it must alays be e,"ress+ It may be im"lied or may be inferred from the conduct of the "arties+ 78

5'ine 9 The second essential element of "artnershi" is 4business5 because ithout

business there can be no "artnershi"+ A *ery ide definition of the ord 4 business5 has been gi*en in Section 0@b of the Indian Partnershi" Act+ According to Section 0@b- #business% includes e*ery trade- occu"ation and "rofession+ The ord #business% should be inter"reted in its "ractical sense rather than in its literal meaning+ It is not necessary that the business should be of long standing and "ermanent+ A single commercial transaction may constitute a business+ According to &indley- if the "ersons are not already "artners- share "rofits and losses of a "articular transaction- they may be "artners for the said "articular transaction+ or e,am"le- if to ad*ocates or solicitors ho are not "artners- are a""ointed jointly to "lead a case and they agree to di*ide the "rofits- they become "artners in res"ect of this "articular case+ Similarly- a "artnershi" can be limited to sale and "urchase of a "articular jeellery- in the or! of the "atent- its or! or o"eration in any "articular "lace- e,"loitation of the 1

AI! 5671 SC 55+)


Page 6

Nature of Partnership contract of ser*ice- soing- har*esting cro"s or sale of any "articular cro"+ In all such cases the rights and duties of "artners are go*erned by cro"- the same "rinci"les hich a""ly to ordinary "artnershi"+ But such rights or obligations are essentially less ide or *ast+ The 3uestion as to hat e,tent "ersons can be considered "artners de"ends com"letely on their agreement and conduct+ The abo*e  mentioned *ies of &indley ha*e been a""ro*ed by the igh 'ourt of Andhra Pradesh in ;ota"ally *. Ko)umanu *en)atasatyanarayana 6+ A""ro*ing the said *ies the igh 'ourt obser*ed that- thus the test is if there is any acti*ity hich can be called a business for that transaction+ It is not necessary that there must be more than one transaction+ It is sufficient that a transaction is ca"able of being carried on by to or more "ersons+ ence a single contract ith the go*ernment can be a subjectmatter of "artnershi"+ Section 2 of the Indian Partnershi" Act also "ro*ides: #A "erson may become a "artner ith another "erson in "articular ad*entures of underta!ing+% It is- hoe*er- necessary that the business must be in e,istence+ If a business has sim"ly been contem"lated and has not been started- the "artnershi" shall not be deemed to be in e,istence+ or e,am"le- in Ram +riya Saran *. Ghanshyam Das 7- the "laintiff and the defendant agreed that after the acce"tance of their tender- they shall construct the dam in "artnershi"+ In order to de"osit earnest money the "laintiff ga*e )s+ 0 to the defendant+ The tender as not acce"ted+ The 3uestion for consideration before the court as hether the "artnershi" had come into e,istence+ The Allahabad igh 'ourt held that this as a "artnershi" agreement but its terms indicated that the "artnershi" as to start after the acce"tance of the tender and or! ould start in its "ursuance+ Since tender as not acce"ted- or! did not commence and the "artnershi" did not come into e,istence beteen the "arties+ ence the "laintiff is entitled to recei*e the earnest money from the defendant+ 718

Sharin* !% Pr!%i"  Another essential element of "artnershi" is sharing of "rofits of

moti*e is not to share "rofitsD it shall not constitute a "artnershi"+ Thus sharing of "rofits or "artici"ation in "rofits of a business is one of the im"ortant essential elements of "artnershi"+ Thus sharing of "rofits or "artici"ation in "rofits of a business is one of the im"ortant essential elements of "artnershi"+ Before .26 this essential element as considered so much im"ortant that if to or more "ersons agreed to carry out a business ith the objecti*e of 2

AI! 567+ AP 5+6;518 AI! 5675 A&&: 57+

9


Page 58

Nature of Partnership sharing "rofits- it as considered to be decisi*e of constituting a "artnershi" beteen them+ In .26 the decision in Co! *. Hi)man2- brought about a re*olutionary change in this res"ect+ Celi*ering the judgement &ord 'ranorth of the ouse of &ords said that sharing of "rofits is good e*idence that the business in hich "rofits ha*e been incurred is being carried on behalf of the "ersons ho are sharing "rofits+ In other ords- sharing of "rofits is "rima facie e*idence of "artnershi"+ But the decisi*e test is mutual agency+ The real basis of liability is that the business is being carried on behalf of the "ersons sharing "rofits+ 738

M'"'a$ A*enc6  If to or more "ersons agree to carry on a business to share "rofits-

it is still "ossible that the "artnershi" may not come into e,istence+ In order to constitute a "artnershi"- mutual agency is most essential+ The facts of this case are that to "ersons @iron merchants carried on business in "artnershi"+ Cue to financial crisis they obtained loans+ a*ing not been able to re"ay the debts- they e,ecuted a trust deed in fa*our of creditors+ Some of the creditors ere made trustees of the business+ These included 'o, and >heatcroft+ Gnder the deed the "ro"erty as assigned to the trustees and they ere em"oered to enter into contracts and e,ecute instruments to carry on business and to di*ide the "rofits among the creditors+ This deed as e,ecuted for the realiHation of the debts gi*en by the creditors+ After the reco*er y of the debts- the "ro"erty as to be restored to the abo*e mentioned to "artners+ 'o, ne*er acted as trustee and retired+ >heatcroft acted as trustee for some time and then retired+ Other trustees ho ere carrying on carrying on business became indebted to ic!man and e,ecuted a bill of e,change+ The Bill of 8,change ha*ing not been acce"ted and "aid- ic!man sued the trustees for reco*ery of money on account of the goods deli*ered+ The trustees could be held liable if they ere "artners+ The court held that they ere not "artners and hence they ere not liable+ In his judgement &ord 'ranorth said that here to or more "ersons are "artners in an ordinary business- is entitled to bind other "artners by contracts+ or ordinary "ur"oses of the business- each "artner is the agent of other "artners+ Therefore all "artners are bound by ordinary business contracts of other "artners+ It as argued that creditors ere sharing the "rofits of the business+ But &ord 'ranorth held: #+a right to "artici"ate in the "rofits affords good e*idence that the trade in hich "rofits ha*e been made as carried on behalf of the "ersons sharing "rofits+ But the real ground of liability is that the trade has been carried on by "ersons acting on his behalf that he stood in relation of the "rinci"al+ 8*ery "artner is an agent of the "artnershi"- and his "osition is go*erned by the same rules as that of an agent+ A "artner 7

<5728= 7 HLC "27


Page 55

Nature of Partnership *irtually embraces the character of both a "rinci"al and agent+% The abo*e discussion also establishes that "artnershi" is the branch of the la of agency+ Section .2 of the Partnershi" Act further clarifies and confirms this+ Section .2 "ro*ides: #Subject to the "ro*isions of this Act- a "artner is the agent of the firm- for the "ur"oses of the business of the firm+% Thus the firm as ell as other "artners ill be bound by the act of the firm+ In -arin'a *. Kamat *. lredo ntonio Doe Martins 9- the a""ellant- a "artner of the firm dro*e the car of the firm negligently and as a result of it one "erson died+ The car as insured in the name of the firm+ The Su"reme 'ourt held that e*ery "artner of the firm ill be deemed to be insured+ 8*ery "artner- if he "ossesses a dri*ing license- ill be entitled to dri*e it+ 8*ery "artner of the firm is an agent of the firm+ NATURE OF PARTNERSHIP

Partnershi" is a form of business organisation- here to or more "ersons join together for jointly carrying on some business+ It is an im"ro*ement o*er the sole trade business- here one single ith his on resources- s!ill and effort carries on his on business+ Cue to the limitation of the resources of only a single "erson being in*ol*ed in the soletrade business- a larger business re3uiring more in*estment and resources than a*ailable to a soletrader cannot be thought of in such a form of business organisation+ In a Partnershi"- on the other hand- a number of "ersons could "ool their resources and efforts and could start a much larger business- than could be afforded by any of these "artners indi*idually+ In case of loss also the burden gets di*ided amongst *arious "artners in a Partnershi".+ As "ointed out by the Su"reme 'ourt of India in Mrs. &aha /. Gu0dar *. Commissioner o nome Ta! ..- "artnershi" is only a grou" of "ersons and the name of the firm is the brief method of describing the "artners+ On the other hand com"any is a se"arate juristic entity and is distinct from its shareholders+ In another case- Maharani Mandalsa De'i *. Ramnarain +ri'ate #td ..0- the Su"reme 'ourt has held that only for certain "ur"oses "artnershi" has been conferred u"on a limited "ersonality and that this legal fiction cannot be further e,tended+ Partnershi" is not a legal entity+ The "ersons indi*idually called "artners are called a firm collecti*ely and the name and the name ith hich they carry on business are called the firm name+ 6

<5671=" SCC 19+ *r: !:K: >angia, Contracts-II, 4ari'a.a', A&&aha.a' La% Agen#-,"858,pp; 52+,521 55 AI! 5611 SC 9+ 5" AI! 5621 SC 5957 58


Page 5"

Nature of Partnership Any to or more "ersons can join together for creating "artnershi"+ Section .. of the 'om"anies Act- .9F6 im"oses a limit as to the ma,imum number of "ersons in a "artnershi"+ In a "artnershi" for the "ur"ose of carrying on ban!ing business- there can be a ma,imum of . "artners- hereas if the "artnershi" is for carrying on any other business- there can be a ma,imum of 0 "artners+ If the number of members in any association e,ceeds the abo*e stated limits- that must be registered as a 'om"any under the 'om"anies Act- otherise that ill be considered to be an illegal association+ As against "artnershi"- here the ma,imum number of "artners can be . or 0- de"ending on the nature of the "artnershi" business- there could be "ossibly much larger number of members in a com"any+ In a "ri*ate 'om"any there can be a ma,imum of F members- hereas in case of a "ublic 'om"any there is no such limit to the ma,imum number+ Therefore- if a much larger business than could be afforded by only . or 0 "ersons is sought to be carried on- a com"any or!s out to be a better form of business organisation than "artnershi"+ or instance- there could be a "ublic 'om"any ha*ing .-- members each one of them ha*ing contributed just )s+ .- and thus ha*ing a ca"ital of )s+ .-- for its business+ A 'om"any- as a form of business organisation may be better than a "artnershi" in another ay also+ It is an artificial "erson- distinct from its members- and has much longer life than that of a "artnershi"- hereas the "artnershi" being nothing but an aggregate of all the "artners- "artnershi" has a much smaller s"an of life than a 'om"any+ In the case of a com"any- the liability of a member @shareholder is limited to the e,tent of the amount of shares "urchased by him- hereas in case of "artnershi"- the liability of e*ery "artner is unlimited- and this is factor is of great ad*antage in the case of a 'om"any- from the "oint of *ie of ris! of in*estors in the business+ In certain res"ects- a "artnershi" is a more suitable form of business organisation than a 'om"any+ or the creation of "artnershi" just an agreement beteen *arious "ersons is all hat is re3uired- hereas in the case of a 'om"any- there are a lot of "rocedural formalities hich ha*e to be gone through before a 'om"any are created+ or the day to day running of the business- maintenance of the accounts- holding of meetings- distribution of "rofits and numerous other things a 'om"any is subject to a lot of statutory control- hereas the "artners are their on masters for regulating their affairs+ 8*en for the dissolution of "artnershi"- a mere agreement beteen the "artners is enough- but that is not so in case of 'om"any- hich can be ound u" only after a certain set "rocedure is folloed+ Since all the "rofits are to be "oc!eted by "artners in a "artnershi" firm- there is a great incenti*e to ma!e the business successful- but that is not so in case of a 'om"any+


Page 5)


C!ATION AN* *T!INATION O4 PA!TN!SHIP Section F declares that the relation of "artnershi" arises from contract- not from status+ It may be too elementary to say that a "artnershi" can arise only by an agreement beteen the "arties concerned and in no other ay- yet the "oint is im"ortant+ It is one of those elements hich clearly dis"lay the distinction beteen a "artnershi" and the other business relations- li!e joint family carrying on business- hich do not arise by agreement- but are the result of status- o"eration of la- succession or inheritance./+ Section F hich lays em"hasis u"on this "oint is as follos: “Partnership not created by status - The relation of partnership arises from contract and not from status; and, in particular, the members of a Hindu undivided family carrying on such are not partners in such business.” Hin&' Un&ivi&e& Fa/i$6: A joint indu family is the creation of indu la+ A joint indu

family running a indu undi*ided family @G business differs from a "artnershi" in to res"ects- namely- @. it is not dissol*ed by death of any member and @0 a member of the family becomes a member by o"eration of la .?+ It necessarily follos that the members of the joint indu family cannot be said to be "artners of the "artnershi" firm only because Karta or any other co"arcener has joined the "artnershi" firm as a "artner .F+ On the contrary- it has long been recognised that the "artnershi" is not a s"ecies of joint tenancy and that in the absence of any contrary agreement- there is no sur*i*orshi" as beteen "artners- at least in so far as it concerns the beneficial interest in the "artnershi" assets.6+ But in G the rule of sur*i*orshi" is attracted .7+

5)

*r: A/atar Singh, Introduction to Law of Partnership, 7th e'ition, Lu#$no%, astern >oo$ Co(pan-, "881,p;9 5+ Baijnath Prasad /. Ram opa! AI! 56)6 Ca& 6" 51 CI" /. #$arwa! Brothers % Co. <5698= 91 IT! +15 52 Syndicate Ban& /. R.S.R. 'n$$. Wor$s <"88)= 2 SCC "21 59 :!: a&&i#$, oy!e(s "he Law of Partnership, "n' e'ition, Ko&$ata, astern La% House, "882, p;16


Page 5+

Nature of Partnership S"ar"in* a ne: #'ine, i% j!in" %a/i$6 #'ine; The )arta of a indu joint family may

start a ne business and all the co"arceners including minors may be admitted to the benefits of such a business+ But unless such a business is started or carried on ith their e,"ress or im"lied consent the adult co"arceners are not liable for the loss incurred in such a business+ As a minor is inca"able of gi*ing consent a minor co"arcener is not liable for loss of such business- unless he has "artici"ated in the carrying on of the business after attainment of majority+ But if the co"arcenary consists of the father and his sons the sons hether major or minor are liable to the e,tent of their shares in the joint family "ro"erty for the debts of a ne business started by the father as being ancestral debts or on account of "ious obligation of the sons to "ay their father5s debt not incurred for immoral "ur"oses .2 oe*er- hether the alleged ne business is really a ne business or an e,tension of the e,isting business de"ends u"on the nature of the business concerned+ If the family is a trading family and the e,tended business is no more haHardous or s"eculati*e than the one hich is e,isting it may not be regarded as a ne business .9+ >hen a joint family business is a business of a contractor the business becomes no ne business- if after e,ecution of one contract a ne job is underta!en for e,ecution+ Similarly- if the business as a contractor came to a standstill after the death of the father and the ido and one of the sons on attaining majority re*i*es it- it does not become a ne business 0+ oe*er- the Pri*y 'ouncil has obser*ed that the )arta of a joint indu family is not "rohibited by any la from starting a ne business ith the aid of the joint family funds although alienation of joint family "ro"erty for the "ur"ose of such a business is not justifiable0.+ Such a business ould- at the outset- be se"arate business of the )arta+ But if in course of time the "rofits of the business are blended ith the family funds- it loses the character of a se"arate business and becomes joint family business liable for "artition amongst the co"arceners+ If the )arta borros money or alienates joint family "ro"erty for such ne business the transaction cannot be binding on the 4other co"arceners5 unless it can be shon

57 56 "8 "5

)en&atasami /. Pa!aniappa, AI! 56"6 a' 51) Prasenjit *ehta /. +nited Commercia! Ban& AI! 5696 Pat 515 Nasiraad +ran Co-operatie Ban& /. yan Chand AI! 5678 !aj: 9) Benaras Ban& /. ari Narayan AI! 56)" PC 57"


Page 51

Nature of Partnership that it as beneficial for the family or and the family estate or at least it as necessary for starting of a ne business 00+ The managing member of )arta hile managing joint family business may e,"and the family business- but he cannot claim that the said e,"ansion or e,tension of the business is his se"arate ac3uisition on the "lea that the said se"arate ac3uisition or e,"ansion is on the basis of his on s"ecial s!ill and labour 0/+ The "osition may be otherise- if the managing member had his on se"arate assets from hich the said e,"ansion as made and the joint family income as not utilised to e,"and such business 0?+ Section 6 of the Indian Partnershi" Act "ro*ides: “ode of determining e!istence of partnership -

"n determining #hether a group of

persons is or is not a firm, or #hether a person is or is not a partner in a firm, regard shall be had to the real relation bet#een the parties, as sho#n by all relevant facts ta$en together. E!planation " % The sharing of profits or of gross returns arising from property by persons holding a &oint or common interest in that property does not of itself ma$e such persons partners. E!planation "" % The receipt by a person of a share of the profits of a business, or of a payment contingent upon the earning of profits or varying #ith the profits earned by a business, does not itself ma$e him a partner #ith the persons carrying on the business; and, in particular, the receipt of such share or payment ' (a) by a lender of money to persons engaged or about to engage in any business (b) by a servant or agent as remuneration, (c) by the #ido# or child of a deceased partner, as annuity, or (d) by a previous o#ner or part-o#ner of the business, as consideration for the sale of the good#ill or share thereof; does not of itself ma$e the receiver a partner #ith the persons carrying on the business.” ""

Chaitanatha /. Ram Chandra AI! 5611 SC 966 Supra 57, p;2+ "+ Kumaraswami /: Suha ownder AI! 5699 a' )1) ")


Page 52

Nature of Partnership Gndoubtedly- it is not an easy tas! to determine hether a grou" of "ersons constitute a "artnershi" or not+ Often s"ecific instruments mention the ord 4"artner5 *aguely ithout carrying about its legal connotation+ Sim"ly- by the use of the ord 4"artner5 in an instrument or by any descri"tion- "ersons concerned do not become "artners+ On the other hand- if legal re3uirements or essential elements as mentioned abo*e are fulfilled- no descri"tion ill "re*ent them from becoming the "artners+ Similarly- a statement that a "erson is a "artner ill not essentially ma!e him a "artner in la+ Therefore- in order to determine hether a grou" of "ersons is or is not a firm or hether a "erson is or is not a "artner in a firm regard shall be had to the real relation beteen the "arties as shon by all rele*ant facts ta!en together+0F In *han v. iah06- certain "ersons obtained loan from Ban! in joint names to "urchase "remises for restaurant+ They also entered into contract for "urchase of e3ui"ment and laundry for the restaurant+ But their relationshi" terminated before the o"ening of the restaurant+ The trail Eudge held that a business e,isted beteen and that there as a "artnershi"+ The 'ourt of A""eal re*ersed this decision by a majority holding that they had not become "artners in a restaurant business by the date hen the relationshi" as terminated+ Thus the main 3uestion- inter alia- before the ouse of &ords as hether there e,isted a "artnershi" before the relationshi" bro!e don+ The ouse of &ords alloed the a""eal reser*ing the decision of the 'ourt of A""eal07+ A "ertinent 3uestion arises- after ha*ing defined 4"artnershi"5 in Section ? and ha*ing made clear in Section F that "artnershi" is created by contract and not by status- hat as the need of adding Section 6+ Probably the main reason for this as that the framers of the Act ere aare that the definition contained in Section ? did not clarify the "osition+ Although Section ? outlines clearly three essential elements- namely: @a agreementD @b businessD and @c sharing of "rofits- it sim"ly indicate the fourth element- i+e+- mutual agency+ The ord #carried on by all or any one of them acting for all% indicates the element of mutual agency+ But these ords do not clarify the "osition beyond all doubts+ The reason for this inference is also based on the fact that the si, illustrations gi*en in to e,"lanations of section 6- though there is sharing of "rofits there is no "artnershi" because of the absence of the element of "1

Ra$hunath Sahu /. "rinath, AI! 5671 Ori: 7, at p;58 <"888= 5 WL! "5") "9 Supra ", p;"16 "2


Page 59

Nature of Partnership mutual agency+ Thus it ould not be rong to conclude that ith a *ie to em"hasiHe the element of mutual agency these illustrations ha*e been gi*en+ The illustrations gi*en in Section 6 are folloing: @. Sharing of "rofits or of gross returns arising from "ro"erty by "ersons holding a joint or common interest  According to 8,"lanation. of Section 6- the sharing of "rofits or of gross returns arising from "ro"erty by "ersons holding a joint or common interest in that "ro"erty does not of itself ma!e such "ersons "artners+ or e,am"le- here joint oners collect rent out of "ro"erties recei*ed in gift and no business is carried on by all or anyone of them on behalf of all- there is no "artnershi"+ therefore- in such a case- suit for dissolution of "artnershi" cannot be filed+ In such a case- the "ro"er suit ill be the suit for "artnershi" and account 02+ @0 Persons recei*ing share of "rofits out of business  As "ro*ided under 8,"lanation 0 of Section6 of the Partnershi" Act- the reeipt by a person o a share o the proits o a business or o a payment ontingent upon the earnings o proits or 'arying $ith the proits earned in business, does not itsel ma)e him a partner $ith the pro'isions arrying on the business. In this illustration also no "artnershi" constituted because the element of mutual agency as not "resent 09+

"7

I.i', pp;"16,"28 I.i', p;"28

"6


Page 57


!I3HTS AN* *UTIS O4 PA!TN!S RELATIONS OF PARTNERS INTER SE 'ha"ter III @Section 9 to .7 of the Indian Partnershi" Act contains "ro*isions concerning 4)elations of Partners to one another5- i+e+- the rights and duties of the "artners as beteen themsel*es+ Section .. of the Act contains the general rule that the mutual rights and duties of the "artners are to be determined by their mutual agreement+ The "ro*isions are as under: Setion 112 Determination o Rights and Duties o +artners by ontrat bet$een the partners "1% Sub4et to the pro'isions o this t, the mutual rights and duties o the partners o a irm may be determined by ontrat bet$een the partners, and suh ontrat may be e!press or may be implied by a ourse o dealing. Suh ontrat may be 'aried by onsent o all the partners, and suh onsent may be e!pressed or may be implied by a ourse o dealing. "5% greements in restraint o trade 6 -ot$ithstanding anything ontained in Setion 57 o the ndian Contrat t, 1875, suh ontrats may pro'ide that a partner shall not arry on any business other than that o the irm $hile he is a partner. As it has been noted abo*e- this section incor"orates the general "rinci"le that the mutual rights and duties of the "artners may be determined by a contract beteen themsel*es+ They may themsel*es decide that ho much in*estment or labour is to be "ut by hom- or hether a "artner ill be entitled to any remuneration- a"art from sharing the "rofits- or hat ill be the "rofit sharing ratio- etc+ Such contract may be e,"ressed or im"lied by a course of dealing+ The mutual rights and duties hich may ha*e been agreed u"on beteen the "artners may be subse3uently *aried by the consent of all the "artners+ Such *ariance or change in the mutual rights and duties may also be made either e,"ressly or by an im"lied consent through a course of dealing beteen the "artners+ In Pabitra +onstruction +o. v. + an$ /- three "artners o"ened a joint account ith the res"ondent ban! ith s"ecial instruction that any one of the to "artners ould be entitled to )8

AI! "887 Ca&: 58)


Page 56

Nature of Partnership o"erate the ban! account+ In the course of business transaction- dis"utes arose beteen them and one of them ga*e ritten instructions to the res"ondent ban!- not to clear any che3ue unless all the three "artners jointly o"erate the account in de*iation from the earlier instruction+ The Ban!- in *ie of such instructions- refused to clear to che3ues issued by to of the "artners+ The action ta!en by the Ban! as held as 3uite justified by the 'alcutta igh 'ourt+ The court e,"lained that in a "artner  business- all the "artners ere e3ually interested in case of "rofit and loss arising out of business and if all the three "artners jointly o"ened an account- one of them could subse3uently decide not to continue ith the said account or e*en gi*e instruction to sto" further transaction unless the dis"ute among them as resol*ed+ The 'ourt held that if one of the joint account  holders decided to change the mode of o"erating the account- hich as initially agreed to by the "arties- the Ban! should not continue ith the account based on the instruction initially gi*en to it so long the dis"ute as not settled by the "arties+ /greement in restraint of trade Section ..@0 gi*es the liberty to the "artners to ma!e a

contract that a "artner shall not carry on any business other than that of the firm hile he is a "artner+ Although according to Section 07 of the Indian 'ontract Act- agreement in restraint of trade is *oid- but such an agreement entered into beteen the "artners as stated abo*e ill be *alid/.+ The right of the "artners to ma!e any contract to regulate their mutual rights and duties is subject to the "ro*isions of the Partnershi" Act+ or instance- certain duties of the "artners5 are incor"orated in Section 9 and .- hich ha*e to be adhered to by all the "artners and they are not subject to contract beteen the "artners+ Thus- the disabilities suffered by the "artners of an unregistered firm- as en*isaged by Section 69- are binding on e*ery "artnershi" and the "artners cannot agree contrary to those "ro*isions+ Similarly- the "ro*isions contained in Section ?. regarding com"ulsory dissolution of a firm on the ha""ening of certain e*ents are binding on e*ery firm+ In the same ay- the right of the "artners to file a suit for dissolution of a firm under section ??- is not subject to contract beteen the "artners+ Section ..- hich "ermits "artners to ma!e any )5

?#eptions to se#tion "9, In'ian Contra#t A#t are a&so #ontaine' in Se#tions )2<"=, 1+ @ 11<)= of the In'ian Partnership A#t:


Page "8

Nature of Partnership contract for regulating their mutual relations- is subject to the "ro*isions of the Act- and Section ?? is one such "ro*isions+ Therefore- a "artner can alays in*o!e the jurisdiction of the court under section ?? for the dissolution of the firm /0+ As has been noted abo*e- Section 9 and . contain ce rtain duties by hich all the "artners are bound and the duties cannot be negati*e by a contract beteen the "artners+ Section .0 to .7 contains *arious other mutual rights and duties of the "artners+ 8ach one of those sections has been made 4subject to contract beteen the "artners5+ It means that the rights and duties incor"orated in Sections .0 to .7 are to be a""lied to the "artners- if they ha*e not made any contract to the contrary+ or instance- if the "artners ha*e agreed to the "ro"ortion in hich they ill be sharing "rofits and losses then their agreement ill "re*ail- but if the "artners ha*e not agreed to anything on the "rofits- then according to Section ./ @b the "artners are entitled to share e3ually in the "rofits earned- and shall contribute e3ually to the losses sustained by the firm+

RI
As "er the "ro*isions laid don in Section .0@a- e*ery "artner has a right to ta!e "art in the conduct of the business+ Since the business of the "artnershi" belongs to all the "artnerse*ery "artner is entitled to ta!e "art in the conduct of the business /?+ Gnless there is a contract to the contrary beteen the "artners the court cannot- through an injunction- "re*ent or restrain a "artner from ta!ing "art in the conduct of the business+ So ill be the case here there is contro*ersy or difference of o"inion among the "artners /F+ A "artner can be de"ri*ed of his right to ta!e "art in the conduct of business only through a contract beteen "artners /6+ )"

N. Satyanarayana / *. )en&ata Ba!a, AI! 5676 A:P: 529: Se#tion 5"

Page "5

Nature of Partnership 0+ Ri*h" "! e>re !ini!n JSection .0@cK: “any difference arising as to ordinary matters connected #ith the business may be decided by a ma&ority of the partners, and every partner shall have the right to e!press his opinion before the matter is decided, but no change may be made in the nature of the business #ithout the consent of all the partners.” 37

According to the abo*e stated "ro*ision- hen there is difference of o"inion beteen the "artners- majority of the "artners cannot be ignore the minority and ta!e decisions ithout consulting them+ The difference of o"inion may be either @i as to ordinary matters connected ith the business- or @ii matters of fundamental im"ortance+ >hen the difference of o"inion "ertains to an ordinary or routine matter connected ith the business- the same may be resol*ed by a decision of the majority of the "artners+ But before the matter is decided e*ery "artner must be "ro*ided ith an o""ortunity to e,"ress his o"inion+ In this connection &ord 8ldon obser*ed- # I call that the act of all- hich is the act of majority- "ro*ided all are consulted- and the majority are acting bonfide- meeting not for the "ur"ose of negati*ing- hat anyone ha*e to offer- but for the "ur"ose of negati*ing- hathen they met together- they may- after due consideration- thin! "ro"er to negati*e: or a majority of "artners to say 4 >e do not care hat one "artner may say- e- being the majorityill do hat e "lease- is- I a""rehend- hat this court ill not allo+5 The "oer of the majority has to be e,ercised in good faith+ If- for instance- the majority of "artners decide to e,"el a "artner ithout sufficient cause- the e,"ulsion ould be set aside+% >hen the matter is not an ordinary or a routine matter but is of fundamental im"ortanceconsent of all the "artners is needed+ Admission of a ne "artner to the firm or a change in the nature of the business is the matters of this nature+ This "ro*ision being subject to contract beteen the "artners- they may decide that in all matters it is the decision of majority hich ill "re*ail/2+ /+ Ri*h" "! have acce "! #!!= !% "he %ir/ JSection .0@dK: ? 0ub&ect to contract bet#een the partners, every partner has a right to have access to and to inspect and copy, any of the boo$s of the firm.” /9 )9

Se#tion 5" <#= Supra 58, p;565 )6 Se#tion 5"<'= )7


Page ""

Nature of Partnership According to Section .0 @d- e*ery "artner has a right to ha*e access to and to ins"ect and co"y any boo!s of the firm+ This right is a*ailable to both acti*e and dormant "artners+ This right is not only in res"ect of boo!s of accounts but in res"ect of any boo!s of the firm+ A "artner could e,ercise this right either "ersonally or by engaging an agent for the "ur"ose+? ?+ Ri*h" "! hare r!%i" JSection ./@bK: ?The partners are entitled to share e1ually in the profits earned. This is sub&ect to contract bet#een the partners.” ?.

8*ery "artner has the right to share the "rofits+
As "er Section ./ @c- generally- no interest on ca"ital subscribed by the "artners is to be gi*en because the "artners share the "rofits of the business of the firm+ In case the "artners agree that interest on ca"ital is to be gi*en- such interest shall be "ayable only out of "rofits+ “/ partner ma$ing for the purpose of the business, any payment or advance beyond the amount of capital he has agreed to subscribe, is entitled to interest thereon at the rate of si! percent per annum. This again is sub&ect to contract bet#een the partners.” 99

As "er Section ./ @d- sometimes o*er and abo*e the ca"ital subscribed by the "artners- the firm may need e,tra money+ In case a "artner ma!es any "ayment or ad*ance beyond he

+8

Supra 58, p;565 Se#tion 5) <.= +" Supra 58: P;56" +) Se#tion 5) <#= ++ Se#tion 5) <'= +5


Page ")

Nature of Partnership amount of ca"ital he has agreed to subscribe- he is entitled to interest thereon at the rate of si, "er cent "er annum+ 6+ Ri*h" "! In&e/ni"6 JSection ./ @eK: ? 0ub&ect to contract bet#een the partners, the firm shall indemnify a partner in respect of payments made and liabilities incurred by him% (i)

"n the ordinary and proper conduct of the business, and

"ii%

"n doing such act, in an emergency, for the purposes of protecting the firm from loss as #ould be done by a person of ordinary prudence, in his o#n case under similar circumstances.” 9:

A "artner hile acting on behalf of the firm may ma!e certain "ayments and also incur some liabilities+ According to Section ./@e- he is entitled to claim indemnity for the same+ The indemnity can be claimed for the acts done by a "artner in the ordinary "ro"er conduct of the business and also for doing some act in an emergency for the "ur"ose of "rotecting the firm from the loss?6+

+UTIES OF THE PARTNERS Section 9 and . incor"orate certain duties of the "artners hich are not subject to contract beteen the "artners- hereas certain duties ha*e been "ro*ided from Section .0 to .7- each one of those "ro*isions has been made 4subject to contract beteen the "artners5+ The duties of the "artners as incor"orated in these sections are being e,"lained belo+ Section 9 mentions a number of duties by hich all the "artners are bound+ It "ro*ides ?2eneral duties of the partners- partners are bound to carry on the business of the firm to the greatest common advantage, to be &ust and faithful to each other, and to render true accounts and full information of all things affecting the firm to any partner or his legal representative.”

The duties as contained in this "ro*ision are:

+1

Se#tion 5)
+2


Page "+

Nature of Partnership .+

+'"6 "! carr6 !n "he #'ine "! "he *rea"e" c!//!n a&van"a*e : 

Partnershi" is based u"on mutual confidence and trust+ It is- therefore- necessary that no "artner should gain any "ersonal ad*antage at the cost of others+ One of the duties mentioned in Section 9 is that "artners must carry on the business to the greatest common ad*antage+ This "ro*ision is to be read ith Section .6@a of the Act according to hich if a "artner deri*es any "rofit for himself from any transaction of the firm- or from the use of the "ro"erty or business connection of the firm or the firm name- he shall account for that "rofit and "ay it to the firm+ e is bound to account for that "rofit to the firm+ In entley v. +raven?7- a firm hich had been established for refining sugar consisted of four "artners+ One of the "artners- ho ere considered to be e,"ert in the job- as authorised to "urchase sugar for the firm for refining+ Instead of "urchasing sugar from the mar!et he su""lied his on sugar- hich he had "urchased earlier at much loer "rice and thus made considerable "rofit+ e did not disclose this fact to other "artners that he as ma!ing "rofit in this "articular transaction+ It as held that the firm as entitled reco*er the "rofit thus made by this "artner+ 0+

+'"6 "! #e j'" an& %ai"h%'$ "! each !"her :

Another duty mentioned in Section 9 is that the "artners must be just and faithful to each other+ Persons enter into "artnershi" ith others on the basis of their mutual confidence and trust+ There is mutual agency beteen the "artners and e*ery "artner is the agent of all others and he can bind them to unlimited e,tent+ 8*ery "artner is- therefore- e,"ected to be just and faithful to his co"artners+ The "artners must "erform their functions ith utmost fairness+ Thus- Section // "ro*ides that e*en if the contract beteen the "artners authorised the e,"ulsion of a "artner- the fello "artner must e,ercise this "oer in good faith+ In case a "artner is guilty of a conduct hich destroys mutual confidence- e+g+- one "artner commits adultery ith another "artner5s ife that could be a ground on hich the court may order dissolution of the firm+ ?2 /+

+'"6 "! ren&er "r'e acc!'n" :

)endering true accounts is another duty hich is im"osed by Section 9+ 8*ery "artner is therefore- bound to !ee" and render true and com"lete accounts of all the "artnershi" moneys +9

<571)= 57 >ea/: 91 0 58+ !:!: )9) #ott /: Crump <5798= 1 >eng: L:!: 586

+7


Page "1

Nature of Partnership ith him+ e also must ma!e these accounts a*ailable to the other "artners because e*ery "artner has a right to ha*e access to and to ins"ect and co"y any of the boo!s- including the account boo!s of the firm ?9+ The "artnershi" funds in the hands of a "artner must be s"ent by him "ro"erly for the "ur"ose of the firm5s business and the "artner concerned should !ee" "ro"er *ouchers in res"ect of the e,"enses+ e should not mi, u" his money ith that of the firm nor should he rongly s"end or misa""ro"riate the firm5s money- otherise he ill be accountable for the same toards the firm+ ?+ +'"6 "! ren&er %'$$ in%!r/a"i!n !% a$$ "hin* a%%ec"in* "he %ir/ : 8*ery "artner is an agent of the firm+ According to the la of agency- information to the agent is deemed to be information to the "rinci"al+ Section 9- therefore- ma!es it incumbent on e*ery "artner to "ass on full information of all things affecting the firm to his other fello "artners+ 'oncealment of the facts by a "artner renders him liable to others+ In 3a# v. 3a#Fit has been held that if a "artner- ho is entitled to re"udiate the contract on the ground of concealment of facts by the other co"artner- does not insist on full disclosure- but rather agrees to the modification of the original bargain- such a "artner cannot subse3uently re"udiate the contract+ F+ +'"6 "! in&e/ni%6 %!r %ra'& JSection .K : “4uty to indemnify for loss caused by fraud ' every partner shall indemnify the firm for any loss caused to it by his fraud in the conduct of the business of the firm.” :1

The firm is liable not only for the contract made by one of them on behalf of other but also for rongful act or omission of a "artner acting in the ordinary course of business of the firm+ If a "artner commits fraud against a third "arty hile acting in the ordinary course of business of the firm- the third "arty can ma!e the firm liable for the same+ Section . entitles the firm to reco*er indemnity from the "artner guilty of fraud because of hich the firm had to suffer the loss+ Gnli!e the "ro*isions of Section .0 to .7- the duty mentioned in this section is not subject to the contract beteen the "artners+ It is therefore- not "ossible for a "artner to negati*e his liability toards the firm for loss caused to the firm due to his fraud+ This section in absolute terms "ro*ides that e*ery "artner shall indemnify the firm for any loss caused to

+6

Se#tion 5"<'= <5681= 5 Ch: 5+8 15 Se#tion 58 18


Page "2

Nature of Partnership the firm by his fraud in the conduct of the business of the firm and lea*es no sco"e for the guilty "artner to contract himself out of such liability+ 6+ +'"6 "! #e &i$i*en" JSection .0@b and ./@fK According to Section .0 @b- e*ery "artner is bound to attend diligently to his duties in the conduct of the business of the firm+ If a "artner is negligent in the "erformance of his dutiesthis may cause loss not to that "artner alone but to the hole firm+ It has- therefore- been "ro*ided in Section ./@f that if the firm suffers any loss by the ilful neglect of a "artner- he shall indemnify the firm for the same+ The e,"ression 4ilful neglect5 means an act done intentionally or deliberately rather than by inad*ertence or an accident+ F0 An act done in good faith and bonafide cannot be termed as ilful neglect+ In +ragg v . 5ord F/- a "artner ho as made in charge for inding u" the business of the firm made some delay in dis"osing of some bales of cotton- ignoring the suggestion of a fello "artner+ The "rices of cotton fell considerably and loss as caused due to the delayed sale+ It as held that the defendant as not liable for the loss as there as no ilful neglect on the "art of the "artner concerned because he as acting bonafide and did not antici"ate the sudden fall in the "rices+ 7+ +'"6 "! r!er$6 'e "he %ir/@ r!er"6 JSection .? and .FK: According to Section.F- the "ro"erty of the firm is to be used by the "artners e,clusi*ely for the "ur"oses of the firm5s business rather than the "ri*ate and "ersonal use of a "artner+ 0Although e*ery "artner has an interest in the "ro"erty but no one can deal ith any s"ecific item of "ro"erty as his on+ In /ddan$i 6arayanappa v . has$ara *rishnappaF?- the Su"reme 'ourt e,"lained the nature of the rights of the "artners in the folloing ords: 4++hate*er may be the character of a "ro"erty hich is brought in by the "artners hen the "artnershi" is formed or hich may be ac3uired in the course of the business of the "artnershi"- it becomes the "ro"erty of the firm and hat a "artner is entitled to is his share of "rofits- if any - accruing to the "artnershi" from the realiHation of this "ro"erty- and u"on dissolution of the "artnershi" to a share in the money re"resenting the *alue of the "ro"erty+ $o doubt- since a firm has no legal e,istence- the "artnershi" "ro"erty ill *est in all the "artners and in that sense e*ery "artner has an interest in the "ro"erty of the "artnershi"+5

1"

"amo!i /. .I.P. R!y., AI! 56"7 P:C: "+ <57+"= 5 Y @ C: Ch: Cas: "78 1+ AI! 5622 SC 5)88, at p;5)8) 1)


Page "9

Nature of Partnership The "ro"erty of the firm has got to be used e,clusi*ely for the "ur"ose of the business of the firm+ If any "artner deri*es any "rofit or "ersonal ad*antage by the use of the "artner of the firm- he has to account for that "rofit and "ay the same to the firm FF+ This rule is subject to contract beteen the "artners+ Section .? defines the "ro"erty of the firm as “the property of the firm ' 0ub&ect to contract bet#een the partners, the property of the firm includes all property and rights and interest in property originally brought into the stoc$ of the firm, or ac1uired by purchase or other#ise, by or for the firm, or for the purpose and in the course of the business of the firm, and includes also the good#ill of the business. nless the contrary intention appears, property and rights and interest in property ac1uired #ith money belonging to the firm are deemed to have been ac1uired for the firm.”

According to the abo*e mentioned "ro*ision- the "ro"erty of the firm not only includes hat is originally brought into the stoc! of the firm but also hate*er is subse3uently ac3uired- by "urchase or otherise+ Partners may bring an immo*able "ro"erty also into the common stoc! and that becomes the "ro"erty of the firm+ 8*en if the "ro"erty contributed by one "artner be an immo*able "ro"erty- no document- registered or otherise- is re3uired for transferring the "ro"erty to "artnershi" F6+ Section .? of the Partnershi" Act- .9/0 e,"ressly declares that "ro"erty e,clusi*ely belonging to a "erson- on his entering into "artnershi" ith others- does not become a "ro"erty of the "artnershi" merely because it is used for the business of the "artnershi"- in the absence of an agreement to the contrary+ Thus- such "ro"erty ill become "ro"erty of the "artnershi" only if there is an agreemente,"ress or im"lied that the "ro"erty as under the "artnershi" agreement- to be treated as the "ro"erty of the "artnershi"+F7 2+ +'"6 n!" "! earn er!na$ r!%i" !r "! c!/e"e JSection .6K: The "artnershi" business belongs to all the "artners jointly+ It is therefore- e,"ected of e*ery "artner that he ill act to the greatest common ad*antage rather than acting for "ersonal 11

Se#tion 52

Page "7

Nature of Partnership "rofit at the cost of other "artners+ e should also not engage in a com"eting business+ Section .6 contains the folloing "ro*ision as regards such duty+ ? Personal profits earned by partners - 0ub&ect to the contract bet#een the partners, (a) if a partner derives any profits for himself from any transaction of the firm, or from the use of the property or business connection of the firm or the firm-name, he shall account for that profit and pay it to the firm; (b) if a partner carries on any business of the same nature as and competing #ith that of the firm, he shall account for and pay to the firm all profits made by him in that business.”

A "artner is the agent of the firm for the "ur"ose of the business of the firm+ According to the rules of the la of agency- no agent can deal on his on account in the business of agency ithout the consent of the "rinci"al+ F2 If an agent- ithout the consent of his "rinci"al- deals in the "rinci"al of agency on his on account instead of on account of his "rinci"al- the "rinci"al is entitled to claim from the agent any benefit hich may ha*e resulted to him from the transactionF9+ Section .6@a ma!es e*ery "artner accountable to the firm for any "ersonal "rofit made by him: @i

rom any transaction of the firm-

@ii

rom the use of the "ro"erty or business connection of the firm- or

@iii

rom the use of the firm name+

In entley v +raven6- one of the "artners in a firm of sugar refiners- ho as considered e,"ert in the job- as entrusted ith the duty of "urchasing sugar fro the firm for being refined+ e himself as a hole  sale dealer in sugar+ e su""lied his on sugar hich he had "urchased at a loer "rice- to the firm at eh "re*ailing mar!et rates and thereby made considerable "rofit+ e did not let his co"artners !no that he as selling his on sugar to the firm and thereby ma!ing "rofit out of this transaction of the firm+ It as held that he as bound to account to the firm for the "rofit thus made by him+

17

Se#tion "51, In'ian Contra#t A#t: Se#tion "52, In'ian Contra#t A#t: 28 <571)= 57 >ea/: 91 16


Page "6

Nature of Partnership Similarly- if a "artner- ithout the !noledge of the other co  "artners- directly or indirectlyhe "urchases the "ro"erty of the firm and thereby gains some benefit- he has to account for that benefit to the firm+ In 2ordon v . Holland 6.- a "artner sold the land belonging to the firm to a bonafide "urchaser and then re"urchased that land himself- it as held that all the benefits made by this "artner on re"urchase of the land had to be gi*en to the firm+ A "artner is su""osed to de*ote himself solely to the business of the firm+ e should not carry on a com"eting business+ If a "artner carries on any business of the same nature as and com"eting ith that of the firm- he shall account for and "ay to the firm all "rofits made in the com"eting business+

7)8 RELATIONS OF PARTNERS TO THIR+ PARTIES

The relation beteen "artners on the one hand and the third "arties on the other is founded on the "rinci"al contained in Section .2- hich reads as under: ;+artner to be agent o the irm  Sub4et to the pro'isions o this t, a partner is the agent o the irm or the purposes o the business o the irm.< or the "ur"oses of the business of the firm- a "artner is an agent of the firm+ It means that a firm -that is- all the "artners of the firm are bound by the act of a "artner as any "rinci"al ould be bound by the act of his agent+ (utual Agency beteen the "artners is one of the essentials to create "artnershi"+ 8*ery "artner ha*ing the ca"acity to act as firm5s agent- the act done by any "artner renders the hole firm liable toards a third "arty+ &a of "artnershi" is generally stated as a branch of the la of "rinci"al and agent+ )elations of "artners to third "arties are thus founded on the "rinci"le of mutual agency beteen the "artners+

25

<565)= 587 L:T: !ep: )71


Page )8


Nature an' ?tent of Lia.i&it- of the 4ir( for the A#ts of a Partner Se#tion 57;"9B The 3uestion of liability of the firm for the acts of a "artner is being discussed under the folloing sub  heads: @A$ature of liability of the "artners toards third "arties- and @B The !inds of acts for hich the "artners are liable hich are as follos: @. &iability for the acts done ithin the authority of a "artner @Section .2-.9-0 and 00+ Such authority may be either e,"ress or im"lied authority+ @0 &iability hen a "artner acts in emergency @Section 0.D @/ &iability on ratification of a "artner5s actD @? &iability for admission made by a "artner @Section 0/D @F &iability on notice to an acting "artner @Section 0?D @6 &iability for torts and rongful acts @Section 06D and @7 &iability for misa""lication of money or "ro"erty @Section 07 @A The na"'re !% $ia#i$i"6 !% "he ar"ner "!:ar& "hir& ar"ie JSection 0FK Section 0F contains the folloing "ro*ision to e,"lain the nature of liability of the "artners of a firm: ;#iability o the partner or ats o the irm  ='ery partner is liable 4ointly $ith all the other partners and also se'erally, or all ats o the irm done $hile he is a partner.< A "rinci"al is liable for the act of his agent done by him on his behalf+ According to Section .2- it has been noted abo*e- a "artner is an agent of the firm for the "ur"ose of the business of the firm+ Ob*iously- therefore- the hole of the firm- hich means all the "artners of the firm become liable for an act of the firm done by any "artner+ As regards the nature of liability of


Page )5

Nature of Partnership the "artners- Section 0F states that e*ery "artner is jointly and se*erally liable for all acts of the firm done hile he is a "artner+ 758 The =in& !% ac" %!r :hich "he ar"ner are $ia#$e 7)8 Ac" &!ne :i"hin "he a'"h!ri"6 !% a ar"ner 7Sec"i!n )4,), 2 an& 8

A "artner being an agent of the firm- his acts bind the firm "ro*ided that the "artner is acting ithin the authority *ested in him+ As in a contract of agency- the authority of the "artner may also be either e,"ress or im"lied+ =!press uthority An authority is said to be e,"ress hen it is gi*en by ords s"o!en or ritten 60+ mplied uthority An authority is said to be im"lied hen it is to be interfered from the circumstances of the caseD and things s"o!en or ritten- or the ordinary course of dealing- may be accounted circumstances of the case+ or instance-  is authorised to reco*er )s+ F- from &+ In this case  has the im"lied authority to file a suit for the reco*ery of the amount+ In the conte,t of "artnershi" the sco"e of im"lied authority has been e,"lained by Section .9@. as under: ;Sub4et to the pro'isions o setion 55, the at o a partner $hih is done to arry on, in the usual $ay, business o the )ind arried on by the irm, binds the irm. The authority o a partner to bind the irm onerred by this setion is alled his >implied authority>.< In any business it may not be "ossible to e,"ressly mention each and e*ery thing hich can be done by an agent or a "artner+ Ce"ending on the nature of the business some of the authority may be deemed to be *ested in a "artner so that the business can be "ro"erly and efficiently run+ Such an authority is !non as 4im"lied5- 4a""arent5- 4ordinary5 or 4ostensible5 authority+ In such a case the firm ill be bound to the third "arties e*en though for such an act no s"ecific e,"ress authority has been conferred on the "artner+ or an act to be co*ered ithin the im"lied authority- it is necessary that 

2"

Se#tion 579, In'ian Contra#t A#t


Page )"

Nature of Partnership @i

The act should be done in relation to the "artnershi" business- and

@ii

The act should be done in usual ay- in relation to a business of the !ind carried on by the firm+

78 Par"ner@ a'"h!ri"6 in an e/er*enc6 BSec"i!n )

Sometimes e*en if a "artner does not ha*e either e,"ress or im"lied authority to act on behalf of the firm- his act can bind the firm if the same has been done in a situation of emergency as described in Section 0.+ The section reads as under: ;+artner?s authority in an emergeny   partner has authority, in an emergeny@ to do all suh ats or the purpose o proteting the irm rom loss as $ould be done by a person o ordinary prudene, in his o$n ase, ating under similar irumstanes, and suh ats bind the irm.< Section 0. confers an authority on a "artner in emergency for doing all such acts for the "ur"ose of "rotecting the firm from loss as ould be done by a "erson of ordinary "rudence in his on case+ or such an act the firm ould be bound toards the third "arty+ The authority conferred by this section is similar to the authority conferred u"on an agent under Section .29 of the Indian 'ontract Act+ 718 Ra"i%ica"i!n !% a ar"ner@ ac"

>hen an agent does an act on behalf of a "rinci"al but ithout the "rinci"al5s "rior authoritythe "rinci"al may grant subse3uent a""ro*al to such an act- i+e+- ratify the same+ If the "rinci"al ratifies the act- the same effect follos as if the act had been "erformed ith his "rior authority+ The relation beteen *arious "artners being that of "rinci"al and agent- the rules of the la of agency are a""licable in such a case also+ 8*en if a "artner has acted ithout any authority- if the act is subse3uently ratified by the other "artners- the act ill become binding on them+ or instance- a "artner - ithout any authority- borros )s+ .- from &. ?s act is ratified by the other "artners+ Thereafter- they become bound to "ay that sum to &+ 738 A&/ii!n /a&e #6 a ar"ner B Sec"i!n 1


Page ))

Nature of Partnership ;dmission made by a partner  n admission or representation made by a partner onerning the aairs o the irm is e'idene against the irm@ it is made in the ordinary ourse o business.
;=et o notie to an ating partner  -otie to a partner $ho habitually ats in the business o the irm o any matter relating to the aairs o the irm operates as notie to the irm, e!ept in the ase o a raud on the irm ommitted by or $ith the onsent o that partner.< Section 0? embodies another general "rinci"le of the la of agency+ $otice to an agent concerning the matters of agency is deemed to be a notice to the "rinci"al+ Section 0? "ro*ides that notice to a "artner ho habitually acts in the business of the firm of any matters relating to the affairs of the firm o"erates as a notice to the firm+ Such a notice binds only such "artners ho are there at the time hen the notice as gi*en+ Therefore- if some notice had been gi*en earlier- it ill not bind a "artner ho is introduced as a "artner after such notice+ Similarly- an outgoing "artner cannot ordinarily be bound by a notice relating to subse3uent matters+ oe*er- if a "ublic notice of dissolution of a firm or 2)

Se#tion ")


Page )+

Nature of Partnership ceasing of a "artner to be a "artner has not been gi*en- the "artners continue to be liable as before and notice in such cases may affect e*en those "artners ho are no more "artners+ 7(8 Lia#i$i"6 %!r "!r" an& :r!n*%'$ ac" BSec"i!n (

A "rinci"al is *icariously liable for the torts and the other rongful acts committed by his agent in the course of the business of the agency+ 8*ery "artner being an agent of the firm for the business of the firm- the same "rinci"le has been recognised by the Indian Partnershi" Act also+ Section 06 contains the folloing "ro*isions in this regard: ;#iability o the irm or $rongul ats o a partner  Bhere, by the $rongul at or omission o a partner ating in the ordinary ourse o the business o a irm or $ith the authority o his partners, loss or in4ury is aused to any third party, or any penalty is inurred, the irm is liable thereore to the same e!tent as the partner.< It has been noticed abo*e that for an act of the firm- e*ery "artner is liable and that includes liability for rongful acts also+ Section 06 s"ecifically "ro*ides regarding such liability+ It states that hereby the rongful act or omission of a "artner loss or injury is caused to any third "arty- or any "enalty is incurred- the firm is liable therefore to the same e,tent as the guilty "artner+ The rongful acts may be tort- fraud- negligence or misa""lication of money or misa""ro"riation of "ro"erty+ Section 07 e,"lains such liability se"arately in case of misa""lication of money or "ro"erty+ 7-8 Lia#i$i"6 %!r /ia$ica"i!n !% /!ne6 !r r!er"6 #6 a ar"ner BSec"i!n -

Section 07 recognises the liability of the firm for a "articular !ind of rong done by a "artner- i+e+- misa""lication of money or "ro"erty+ The "ro*ision is as follos: ;#iability o the irm or misappliation by partners  Bhere 6 "a% a partner ating $ithin his apparent authority reei'es money or property rom a third party and misapplies it, or "b% a irm in the ourse o its business reei'es money or property rom a third party, and the money or property is misapplied by any o the partners $hile it is in the ustody o the irm, the irm is liable to ma)e good the loss.<


Page )1

Nature of Partnership In this section to !inds of cases of misa""lication of money or "ro"erty ha*e been mentioned  @a >hen the money or "ro"erty has been recei*ed by a "artner and he misa""lies the same ithout accounting for it to the firmD and @b >hen the money or "ro"erty has been recei*ed by the firm from third "arty and the same is misa""lied by any of the "artners+ In either case the firm is liable to ma!e good the loss to the third "arty+


Page )2


*ISSOLUTION O4 A 4I! Cissolution of "artnershi" means coming to an end of the relation !non as "artnershi" beteen *arious "artners+ >hen one or more "artners cease to be "artners but others continue the business in "artnershi"- there is dissolution of "artnershi" beteen the outgoing "artners on the one hand and remaining "artners on the other+ The remaining "artners as beteen themsel*es still continue as "artners+ or e,am"le- hen the firm consists of A- B and ' and retires- there is dissolution of "artnershi" beteen A and others but "artnershi" as beteen B and ' is not dissol*ed+ In such a case- there is dissolution of "artnershi" beteen some of the "artners only- but there is no dissolution of the firm+ According to Section /9- hen the dissolution of "artnershi" beteen all the "artners of the firm occurs- this is called dissolution of the firm+ or e,am"le- hen in a firm consisting of A- B- and ' all of them cease to be "artners ith one another- it amounts to dissolution of the firm+

MO+ES OF +ISSOLUTION BSec"i!n 32 D 33 A firm may be dissol*ed in the folloing ays: @. By agreement+ @0 'om"ulsory dissolution+ @/ On ha""ening of certain contingencies+ @? By notice+ @F By the 'ourt+ @. +i!$'"i!n #6 a*ree/en" J Section ?K ;Dissolution by greement   irm may be dissol'ed $ith the onsent o all the partners or in aordane $ith a ontrat bet$een the partners.
Se#tion +8


Page )9

Nature of Partnership @i

>ith the consent of all the "artners- or

@ii

In accordance ith a contract beteen the "artners+

As "artners can create "artnershi" by ma!ing a contract as beteen them- they are also similarly free to end this relationshi" and thereby dissol*e the firm by their mutual consent+ >hen all the "artners so agree- they may dissol*e the firm at any time they li!e+ Sometimes there may ha*e been a contract beteen the "artners indicating as to hen and ho a firm may be dissol*ed- a firm can be dissol*ed in accordance ith such a contract+ or instance- if the contract beteen the "artners "ro*ides that on a 6 months5 notice by a "artner the firm may be dissol*ed- then in accordance ith this contract- a "artner could gi*e 6 months5 notice and get the firm dissol*ed+ @0 C!/'$!r6 &i!$'"i!n JSection ?.K Section ?. mentions certain e*ents on the ha""ening of hich there is com"ulsory and if the "artners ant to continue in "artnershi" by agreeing to the contrary they cannot "ossibly do that+ Section ?. is as under: ;Compulsory dissolution o the irm   irm is dissol'ed 

"a% by the ad4udiation o all the partners or o all the partners but one as insol'ent, or "b% by the happening o any e'ent $hih ma)es it unla$ul or the business o the irm to be arried on or or the partners to arry it on in partnership 2 +ro'ided that, $here more than one separate ad'enture or underta)ing is arried on by the irm, the illegality o one or more shall not o itsel ause the dissolution o the irm in respet o its la$ul ad'entures and underta)ings.< According to Section ?.- therefore- com"ulsory dissolution occurs under the folloing circumstances: @i

>hen all the "artners or all e,ce"t one are adjudicated insol*ent- the firm is

com"ulsorily dissol*ed+ >e ha*e already noted that hen a "artner is adjudicated insol*enthe ceases to be a "artner+ Therefore- hen all the "artners or all e,ce"t one are adjudicated


Page )7

Nature of Partnership insol*ent- there is no 3uestion of "ersons remaining "artners ith one another and- thereforethere has to be dissolution of the firm+ @ii

If the business of the firm though laful hen the firm came into e,istence-

subse3uently becomes unlaful- there has to be dissolution of the firm+ This "ro*ision is based on the rules of the la of contract+ or a *alid contract the object and consideration ha*e to be laful as defined in Section 0/- Indian 'ontract Act+ Section F6 of the 'ontract Act further "ro*ides that hen the contract to do an act becomes unlaful after ma!ing the contract- such a contract becomes *oid+ or e,am"le- a number of "ersons join together as "artners to sell li3uor in a certain area+ Subse3uently- the
21

Se#tion +"


Page )6

Nature of Partnership not be dissol*ed- but the business of the firm ill be continued as before+ The contingencies mentioned in this Section are: @i

8,"iration of the "artnershi" term-

@ii

'om"letion of the ad*enture-

@iii

Ceath of a "artner- and

@i*

Insol*ency of a "artner+

@i E!piration of the partnership term  hen the Partnershi" had been constituted for a fi,ed term- it continues ob*iously for the contem"lated term and ould be dissol*ed on the e,"iry of such term+ If the "artners so li!e they may agree to the contrary and continue the business e*en beyond that time+ Such an agreement may be e,"ress or im"lied+ If a fresh term is not sti"ulated- then it ill be considered to be a "artnershi" at ill+ Gnless otherise agreed- the same mutual rights and duties continue for the e,tended "eriod as they ere there before the e,"iry of the term+ @ii +ompletion of the adventure  Partnershi" created for some s"ecific ad*entures or underta!ings come to an end on the com"letion of such ad*entures or underta!ings+ Thus- hen the "artnershi" as created s"ecifically for carrying out contract of construction of a road and the road as com"leted on 0?+7+.96/ and the final bill "re"ared on .2+0+.96F- the "artnershi" stood dissol*ed on .2+0+.96F+ The suit for dissolution filed ithin / years of .2+0+.96F as held to be ithin time+ 66 There can- hoe*er- be an agreement by hich the "artnershi" may not be dissol*ed and the business may be continued for some other ad*entures or underta!ings after the com"letion of the earlier ones+ Gnless otherise agreed- the same mutual rights and duties beteen the "artners continue in res"ect of their relationshi" for the ne ad*entures and underta!ings also+ @iii 4eath of a partner  Ceath of a "artner results in the dissolution of the firm unless the remaining "artners agree to the contrary+

22

/aya!a! /. arjiwandas, AI! 567)

Page +8

Nature of Partnership Section ?0 of the Partnershi" Act- .9/0 "ro*ides that a firm stands dis sol*ed on the death of a "artner+ oe*er- a firm ould not stand dissol*ed if there is a contract to the contrary beteen the "artners+ It is not necessary that such a contract must be e,"ress+ The contract may be im"lied and can also be s"elt out from the conduct of the "artner subse3uent to the death of a "artner+ In +a$an -andlal gar$al *. sian Dye Chemials 67- subse3uent to the death of a "artner- the defendant firm entered into an agreement ith another firm+ A suit as filed after the death of a "artner- shoing that the firm continued to e,ist and the other "arty to the suit also considered it to be a "artnershi" firm+ The Bombay igh 'ourt held that the firm ould be held to e,ist on the date of institution of the suit+ The 'ourt said that in *ie of Section 69  A inserted by the (aharashtra Act- .92? in the Indian Partnershi" Act - .9/0- non  com"liance of the "ro*isions Section 6/ of the Partnershi" Act- .9/0did not ha*e effect of cancellation of registration of the firm- it merely resulted in im"osition of "enalty under Section 69  A+ The 'ourt thus- ruled that here there is a contract to the contrary e,"ress or im"liedamong the "artners- a irm ould not stand dissol*ed automatically on the death of one of one of its "artners+ @i* "nsolvency of partner  >hen a "artner is adjudicated insol*enthe ceases to be a "artner+ The firm is also dissol*ed unless there is an agreement beteen the remaining "artners to the contrary+ This "ro*ision has to be read along ith Section ?.@a hich states that hen all or all e,ce"t one "artner becomes insol*ent- there is com"ulsory dissolution of the firm+ If- thereforethere are only to "artners and one of them is adjudicated insol*ent- there is com"ulsory dissolution under Section ?. and there is no 3uestion of there being a contract to the contrary ma!ing the firm to continue+ @? +i!$'"i!n #6 n!"ice in ?Par"nerhi a" :i$$ JSection ?/K ;Dissolution by notie in ;+artnership at $ill<  "1% Bhere the partnership is at $ill, the irm may be dissol'ed by any partner gi'ing notie in $riting to all the other partners o his intention to dissol'e the irm. "5% The irm is dissol'ed as rom the date mentioned in the 29

AI! "887 o(:=


Page +5

Nature of Partnership notie as the date o dissolution or, i no date is so mentioned, as rom the date o the ommuniation o the notie.< >hen the "artnershi" is at ill as defined in Section 7- the "artners are not bound to remain as "artners or continue the "artnershi" for any fi,ed "eriod+ According to Section ?/- such a firm may dissol*ed by any "artner gi*ing notice in riting to all the other "artners of his intention to dissol*e the firm+ The notice must clearly and in unambiguous terms indicate the intention of the "artner gi*ing notice to dissol*e the firm+ Cissolution by a notice under this section ill be *alid e*en though one of the "artners to hom the notice is gi*en is insane+ >hen the "artnershi" as originally constituted for a fi,ed term- but the "artners continue the business e*en after the e,"iry of the term- unless otherise agreed- the "artnershi" is no deemed to be a "artnershi" at ill and- therefore- it can no be dissol*ed by a notice as stated in this section+ A notice for dissolution once gi*en cannot be ithdran unless the other "artners agree to the same+62 The notice for dissolution is a statutory re3uirement- and therefore- the re3uirements of Section ?/ ha*e to be satisfied+ Therefore- if a "artner rites a letter to his layer- ho also ha""ens to be his arbitrator- indicating that the dis"ute relating to the dissolution is to be referred to arbitration that ill not result in the dissolution of the firm- as in such a case there is no intention to dissol*e the firm by notice to the other "artners 69+ If the "artnershi" agreement sti"ulates the dissolution of the "artnershi" in a manner as may be mutually agreed beteen "arties- it cannot be said to be "artnershi" at ill+ Such a "artnershi" not being a "artner at ill cannot be dissol*ed unilaterally by one "artner gi*ing notice to other "artners- under Section ?/ of the Partnershi" Act 7+ Although a "artnershi" at ill can be dissol*ed by a notice- there is- hoe*er- nothing hich "re*ents the dissolution of such "artnershi" under the other "ro*isions of the Act+ Thus- a "artnershi" at ill could also be dissol*ed by mutual consent- insol*ency or death of a "artner 7.+

27

1enes /. L!oyd, 57 : "21 "i!o&ram hosh /. ita Rani, AI! 5676 Ca&: "1+ 98 *ohd. *oniru! asan /: *ohd. Ifti&ar #hmed, AI! "888 3au: 587 95 Sri Kishan upta /. Ram Bau upta, AI! 5668 A&&: 595 26


Page +"

Nature of Partnership In +. *en)atesarlu *. C. #a)shmi -arasimha Rao 75- the "artnershi" as a "artnershi" at ill+ oe*er- the "artnershi" agreement contained a clause to the effect that any dis"ute hich might arise ould be referred to arbitration+ The Andhra Pradesh igh 'ourt- referring to the "ro*isions of Section ? and ?/ of the Partnershi" Act- .9/0- held that the "artnershi"s could be dissol*ed ith the consent of all the "artners or as "er the terms of the agreement beteen the "artners+ The "artnershi"- in 3uestion- being #at ill%- the "etitioner had rightly e,ercised his right to dissol*e the firm- in accordance ith the "ro*isions of Section ?/+ >hen- once the firm as dissol*ed- the 3uestion of "lacing reliance on arbitration clause by the other "artners- did not arise the 'ourt ruled+ @F +i!$'"i!n #6 "he C!'r" JSection ??K Section ?? mentions certain grounds on hich a suit can be filed for the dissolution of the firm+ A sit for the dissolution for the firm- may be filed- by the innocent "artners and not by the "artner hose conduct- is the subject  matter for the suit+ The "ro*ision is as follos: # Dissolution by the Court  t the suit o a partner, the Court may dissol'e a irm on any o the ollo$ing grounds, namely 2 "a% that a partner has beome o unsound mind, in $hih ase the suit may be brought as $ell by the ne!t riend o the partner $ho has beome o unsound mind as by any other partner@ "b% that a partner, other than the partner suing, has beome in any $ay permanently inapable o perorming his duties as partner@ "% that a partner, other than the partner suing, is guilty o ondut $hih is li)ely to aet pre4udiially the arrying on o the business regard being had to the nature o the business@ "d% that a partner, other than the partner suing, $ilully or persistently ommits breah o agreements relating to the management o the aairs o the irm o the ondut o its business@ or other$ise so onduts himsel in matters relating to the business that it is not reasonably pratiable or the other partners to arry on the business in partnership $ith him@ "e% that a partner, other than the partner suing, has in any $ay transerred the $hole o his interest in the irm to a third party, or has allo$ed his share to be harged under the pro'isions o rule 9 o rder EE o the /irst Shedule to the Code o Ci'il +roedure, 9"

AI! "88" A:P: 2"


Page +)

Nature of Partnership 1F8, or has allo$ed it to be sold in the reo'ery o arrears o land re'enue or o any dues reo'erable as arrears o land re'enue due by the partner@ "% that the business o the irm annot be arried on sa'e at a loss@ or "g% on any other ground $hih renders it 4ust and euitable that the irm should be dissol'ed.< The need for dissolution by the court arises hen all the "artners do not ant the dissolution+ The "artner or "artners ho ant dissolution can file a suit and the other "artners may contest same+ It may be noted that Section ??- hich "ermits a "artner to in*o!e the jurisdiction of the 'ourt for the dissolution of the firm- is not a subject to contract beteen the "artners "ermitted under section ..+ Therefore- a "artner can alays file a suit for the dissolution of the firm if his case is co*ered under section ??+ A suit for dissolution can be filed only hen one or the other ground mentioned in Section ?? is there+ 8*en hen there is a *alid ground for filing the suit for dissolution and a "artner accordingly files the suit- the court is not bound to decree dissolution as this section clearly "ro*ides that #At the suit of a "artner- the 'ourt may dissol*e the firm+% The grounds hich justify the filing of suit by a "artner for the dissolution of the firm as mentioned in Section ?? are as under: @a nsoundness of mind  >hen a "artner becomes of unsound mind- a suit for the dissolution of the firm can be filed+ Such a suit may be filed either on behalf of the "artner ho has become of unsound mind- or by any other "artner+ @b Permanent incapacity to perform duties  >hen a "artner becomes "ermanently inca"able of "erforming his duties as a "artner that is a good ground for a""lying to the court for dissolution of the firm+ >hen the inca"acity is not "ermanent- the 'ourt ould not grant relief+ In >hitell *+ Arthur- one "artner filed for the dissolution of the firm hen the other suffered from the "aralytic attac! and as thereby inca"acitated from "erforming his duties as a "artner+ It as found from medical e*idence that the inca"acity as not li!ely to be "ermanent as the defendant5s health as im"ro*ing+ The 'ourt did not grant the dissolution of the firm+ @c +onduct in&urious to partnership business  >hen a "artner is guilty of conduct hich is li!ely to affect "rejudicially the carrying on the business of the firm- the court may dissol*e the firm on that ground+ (isconduct need not be ith regard to the "artnershi" business- but the conduct should be such as should "rejudicially affect the "artnershi" business+ The acts of adultery by a "artner in a firm of ban!ers has been considered to be no ground for see!ing dissolution by the other "artners but that may Parijat Singh, CHANAKYA NATIONAL LAW UNIV!SITY

Page ++

Nature of Partnership be so if it is a firm of medical "ractitioners+ 'on*iction for a breach of trust- or the adultery by one "artner- ith another "artner5s ife are grounds for the dissolution of the firm+ @d Persistent breach of partnership agreement  >hen a "artner ilfully and "ersistently commits breach of agreements relating to the management of the affairs of the firm- or so conducts himself in matters relating to the firm5s business that it is not reasonably "racticable for the other "artners to carry on the business in "artnershi" ith him- a suit for the dissolution of the firm may be filed+ In Harrison *. Tenant 73- one of the "artners in a firm of solicitors ignored the other to "artners and declined to settle dis"utes by mutual consultation+ It as held that the conduct of one of the "artners being destructi*e of mutual confidence- hich could not restoredas a *alid ground for the dissolution of the firm+ Similarly- hen due to fre3uent 3uarrels- there is no ho"e of mutual coo"eration- or a "artner "re"ares false accounts and enters in the account smaller sum of money than actually recei*ed from the customers- or hen a "artner refuses to render accounts and ta!es aay the boo!s of accounts of the firm- or a "artner misuses "artnershi" funds for "aying "ersonal debtsthe court may order dissolution+ @e Transfer of the #hole of a partner7s interest  >hen a "artner has transferred the hole of his interest in the firm to a third "arty- it can be a ground on hich the court may dissol*e the firm+ Similar ould be the "osition hen a "artner has alloed his share to be charged under the "ro*isions of the 'i*il Procedure 'ode- or has alloed it to be sold in the reco*ery of the arrears of land re*enue or any dues as arrears of land re*enue+ It is necessary that the transfer must be of the hole of the "artner5s interest rather than merely a "art of it+ or dissolution in this case also the suit can be filed only by a "artner other than the one hose interest has been transferred+ @f 8hen the business can be carried on only at a loss  The object of e*ery "artnershi" is to ma!e "rofits+ If it a""ears that the business of the firm cannot be carried on e,ce"t at a loss- any of the "artners may a""ly to the court for the dissolution of the firm @g 8hen the dissolution is &ust and e1uitable  The 'ourt has been gi*en *ery ide "oer of dissolution+ A"art from ordering the dissolution of the firm on the grounds stated abo*e- the court has been *ested ith the "oer of dissol*ing the firms on any other ground hich renders it just and e3uitable that the firm should be dissol*ed+ In 9)

<5712= "5 >ea/: +7"


Page +1

Nature of Partnership bbot *+ Crump79- adultery by one "artner ith another "artner5s ife as held to be a good ground for the dissolution of the firm by the court+ >hen the "artnershi" deed "ro*ides for a""ointment of arbitrator for referring dis"utes to him- such arbitrator has also the "oer to decide as to hether a firm may be dissol*ed or not+

CONCLUSION 9+

<5798= 1 >eng: L:!: 586


Page +2

Nature of Partnership A "artnershi" is an arrangement here "arties agree to coo"erate to ad*ance their mutual interests+ Since humans are social beings- "artnershi"s beteen indi*iduals- businessesinterestbased organiHations- schools- go*ernments- and *aried combinations thereof- ha*e alays been and remain common "lace+ In the most fre3uently associated instance of the term- a "artnershi" is formed beteen one or more businesses in hich "artners @oners co labour to achie*e and share "rofits and losses+ Partnershi"s are also common regardless of and among sectors+ $on"rofit- religious- and "olitical organiHations- may "artner together to increase the li!elihood of each achie*ing their mission and to am"lify their reach+ In hat is usually called an alliance- go*ernments may "artner to achie*e their national interestssometimes against allied go*ernments ho hold contrary interests- such as occurred during >orld >ar II and the 'old >ar+ In education- accrediting agencies increasingly e*aluate schools by the le*el and 3uality of their "artnershi"s ith other schools and a *ariety of other entities across societal sectors+ Partnershi"s also occur at "ersonal le*els- such as hen to or more indi*iduals agree to domicile together- hile others are not only "ersonal but "ri*ate!non only to the in*ol*ed "arties+

Partnershi"s "resent the in*ol*ed "arties ith s"ecial challenges that must be na*igated unto agreement+ O*erarching goals- le*els of gi*eandta!e- areas of res"onsibility- lines of authority and succession- ho success is e*aluated and distributed- and often a *ariety of other factors must all be negotiated+ Once agreement is reached- the "artnershi" is ty"ically enforceable by ci*il la- es"ecially if ell documented+ Partners ho ish to ma!e their agreement affirmati*ely e,"licit and enforceable ty"ically dra u" Articles of Partnershi"+

>hile "artnershi"s stand to am"lify mutual interests and success- some are considered ethically "roblematic+ >hen a "olitician- for e,am"le- "artners ith a cor"oration to ad*ance the cor"orationNs interest in e,change for some benefit- a conflict of interest results+ Outcomes for the "ublic good may suffer+

Partnershi"s may enjoy s"ecial benefits in ta, "olicies+ Among de*elo"ed countries- for e,am"le- business "artnershi"s are often fa*oured o*er cor"orations in ta,ation "olicy- since di*idend ta,es only occur on "rofits before they are distributed to the "artners+ oe*erde"ending on the "artnershi" structure and the jurisdiction in hich it o"erates- oners of a "artnershi" may be e,"osed to greater "ersonal liability than they ould as shareholders of a


Page +9

Nature of Partnership cor"oration+ In such countries- "artnershi"s are often strongly regulated *ia antitrust las- so as to inhibit mono"olistic "ractices and foster free mar!et com"etition+
>I>LIO3!APHY Parijat Singh, CHANAKYA NATIONAL LAW UNIV!SITY

Page +7

Contract law Final Draft

Recommend Documents