Study Material Partnership Semester 3

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These notes are prepared by Radhika Seth, Law Centre 2. This is meant only for personal use of students. It is not meant for public or wholesale distribution. TH

VOTE FOR MY PANEL ON 13 SEPTEMBERELECTION DAY. RADHIKA SETH

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ANUBHAV SINGH

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AMIT RANJAN

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RADHIKA SETH, PLEASE VOTE , BALLOT No. 2

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2 the nature of partnership definition of partnership the first part of section 4 of the Indian partnership act, 1932 defines partnership as follows:—

"partnership" is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. the second part of section 4 states that "persons who have entered into partnership with one another are called individually "partners" and collectively individually collectively "a firm", and the name under which their business is carried on is called the "fir "firm m name". "partnership" has not been found easy to define. eminent jurists and the definition of partnership adopted in section 4 of the indian partnership act. 1932 is that suggested by pollock with only a slight change. it brings out very clearly the fundamental principle of mutual agency, e.g., the partners, when carrying on the business of the firm, are agents as well as principals. thus it is probably the most business-like definition of the term "partnership." it also suggests that partnership is not an agreement itself or an association of persons but is the relation arising out of an agreement.

partnership is the relation—partnership is regarded differently by different persons either a contract between persons or an ass associ ociati ation on of per persons sons or as a combination combination of capital, capital, labour labour or skill skill by two or more more persons persons or as a relation relation between between persons. persons. it cannot be regarded as a contract between persons because partnership arises out of contract and it is not the contract itself. although association is the result of partnership it .is better to use the word relation because association denotes many other forms of unions and combinations of persons. as said earlier it is not necessarily combination of capital, labour or skill or some or all of them because every partner need not contribute capital, labour or skill or some or all of them. therefore, partnership is the relation arising out of contract and not the contract itself. essentials of partnership an analysis of the definition gives the following essentials of partnership: 1. there must be be two or more persons as principals carrying on a business. 2. partnership is the result of an agreement. 3. it is organized to carry on a business. 4. the persons agree to share the profits of the business. 5. the business is carried on by all or any one of them acting for all these essentials are discussed below:

1. two or more persons partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. thus for a partnership to exist there must be two or more persons as principals carrying on the business. if a

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2

2 the nature of partnership definition of partnership the first part of section 4 of the Indian partnership act, 1932 defines partnership as follows:—

"partnership" is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. the second part of section 4 states that "persons who have entered into partnership with one another are called individually "partners" and collectively individually collectively "a firm", and the name under which their business is carried on is called the "fir "firm m name". "partnership" has not been found easy to define. eminent jurists and the definition of partnership adopted in section 4 of the indian partnership act. 1932 is that suggested by pollock with only a slight change. it brings out very clearly the fundamental principle of mutual agency, e.g., the partners, when carrying on the business of the firm, are agents as well as principals. thus it is probably the most business-like definition of the term "partnership." it also suggests that partnership is not an agreement itself or an association of persons but is the relation arising out of an agreement.

partnership is the relation—partnership is regarded differently by different persons either a contract between persons or an ass associ ociati ation on of per persons sons or as a combination combination of capital, capital, labour labour or skill skill by two or more more persons persons or as a relation relation between between persons. persons. it cannot be regarded as a contract between persons because partnership arises out of contract and it is not the contract itself. although association is the result of partnership it .is better to use the word relation because association denotes many other forms of unions and combinations of persons. as said earlier it is not necessarily combination of capital, labour or skill or some or all of them because every partner need not contribute capital, labour or skill or some or all of them. therefore, partnership is the relation arising out of contract and not the contract itself. essentials of partnership an analysis of the definition gives the following essentials of partnership: 1. there must be be two or more persons as principals carrying on a business. 2. partnership is the result of an agreement. 3. it is organized to carry on a business. 4. the persons agree to share the profits of the business. 5. the business is carried on by all or any one of them acting for all these essentials are discussed below:

1. two or more persons partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. thus for a partnership to exist there must be two or more persons as principals carrying on the business. if a

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3 business is carried on by several individuals on behalf of a single person, there will be no partnership, but if it is run by one person (or more) on behalf of himself and others there may be a partnership. thus a sleeping or dormant partner may be carrying on a business for the purposes of the act. a contract of partnership may be entered into by every person who is competent to contract. a person ordinarily enters into a contract of partnership in his individual capacity. but sometimes he may be a karta of a joint hindu family. but where two kartas of two joint hindu families enter into a contract of partnership it will be a partnership between two kartas each being counted as one person, and other members of the family do not ipso facto become partners. the word 'persons' includes artificial as well as natural persons and there may thus be a partnership between a company and individual or between two or more companies. a partnership firm is not recognized as a separate legal entity therefore, where a firm enters into a contract of partnership with another firm or individual, all the members of the firms or firm become partners in their individual capacity. thus there must be at least two per sons, natural or artificial competent to contract acting as principals for the existence of partnership partner ship.. section 11 of the companies act, 1956 provides that the maximum number of persons who can enter into a contract of partnership partnership in the the case of banking banking business business is ten, and for any any other business business twenty. twenty. any partne p artnership rship forme formed d in contr contravent avention ion of this section will be treated as illegal association. the section does not apply to joint hindu family as such carrying on a business and where a business is carried on by two or more joint hindu families, minor members shall be excluded in computing the number of persons. there can be a valid contract of partnership even though one of the partners is a benamidar of or represents some other person or persons.

2. agreement the definition of the partnership stresses that 'partnership is the relation between persons who have agreed......." agreed......." therefore, there must be an agreement entered by two or more persons to share the profits of a business. this element relates to the voluntary contractual nature of partnership. the partnership is not created by status. the term "agreement" will have to be taken in the sense in which it is defined in section 2 of the contract act. it must satisfy the requirements of a valid contract as stated in section 10 of the contract act. the agreement may be either express or implied. an express agreement means an agreement which is made by means of words, written or spoken, and an implied agreement means one which is inferred from the conduct of the parties. further the agreement must be of voluntary nature. thus a partnership may be created by means of an express agreement. if the agreement is in writing the instrument is called the partnership deed. writing is advantages, but it is not compulsory. an oral agreement to form a partnership is as valid as a written one. the existence of partnership can be inferred from the conduct of the parties involved. on the death of the sons the business came to the hands of their descendents and one of them demanded partition of the business as though it were a family property. on behalf of the defendant it was contended that since the property belonged to the partnership firm the claim should be for dissolution of the firm and not for partition. it was noted as facts that the business was in existence and it had been carried on since the death of its founder. one of the plaintiffs was earlier working as an employee and after receiving the share of an heir in the business by way of gift, he discontinued taking salary and instead given a share in the profits of the business. business. further, the other plaintiff plaintiff was taking less share of the profits instead of equal to which he was 4 entitled. taking all these circumstances into consideration, the court said, we are clearly of the opinion that the firm must be regarded as a partnership concern'. the muslim law does not recognize any such thing as a mohammedan joint family carrying on business as a legal entity. thus partnership can only arise as a result of an agreement (express or implied) between two or more persons. this element distinguishes partnership from noncontractual relations, such as joint hindu family. it is so essential that section 5 of the indian partnership act states that the relation of partnership arises from contract and not from status; and in particular, the member of hindu undivided family carrying on a family business as such or a burmese buddhist husband and wife carrying on business as such are not partners in such business. joint joi nt hin hindu du fa famil milyy busi busine ness ss—in case of joint hindu family business, the relation of the member with each other, as also their rights and liabilities, are substantially governed by hindu law and not by the general law of partnership embodied in indian partnership act, 1932. the term family business means (a) an ancestral business, i.e., a business which descends like other

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4 property on the member of a joint hindu family from father, grandfather or great grandfather; and (b) a new business started by the managing member or by the members of a joint hindu family with the aid of ancestral or joint hindu family (niamat rai verses. din dayal. it may be noted that according to hindu law a male child of a hindu acquires an interest in family business by birth. similarly, a burmese buddhist husband and wife become on marriage joint owners of a business which they or any of them are conducting. thus a joint hindu family carrying on family business cannot be a partnership of itself. this does not mean that there can be no partnership between members of joint hindu family to carry on a family business in partnership. but where it is so alleged it will be required to be established by proper evidence in the light of definition of partnership as given in section 4 of the act. a joint hindu family is not a juristic person for all purposes and thus cannot enter into partnership with either another joint hindu family or individual but there can be a partnership between two karlas or managers of two joint hindu families, the partnership being between the two kartas or managers and not between the families (uday chand verses. thansing, ). in pichappu chettiar verses. chokalingam pillai, it was held that where a managing member of a joint family enters into partnership with a stranger the other member of the family do not ipso facto become partners in the business, in such a case the family as a unit does not become a partner, but only such of its member as in fact enter into a contractual relation with the stranger. thus one or more member of a joint hindu family may enter into a contract of partnership with a stranger and they qua the stranger become partners. this view was also approved by the supreme court in charandas haridas verses. commr of income-tax, bombay,.

thus a partnership cannot be created without an agreement between persons. the act does not provide the form of partnership agreement. thus it may be either written or oral or may be inferred from the conduct of the persons. where there is no written agreement or any other documentary evidence of the existence of partnership, it can be inferred from the conduct of the persons, the mode in which they deal with each other or with other people, the account books of the business, the testimony of clerks, agents and other persons, by letters and admissions, and by any other mode by which facts can be established. in this connection section 6 states that "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." the agreement must be enforceable by law. as stated earlier it must have all the essential elements of valid contract as laid down in indian contract act, 1872. the agreement must be lawful. the persons must be competent to contract there can not be a partnership consisting of one adult and one minor or a partnership consisting of all minors. there must be at least two adult members as partners. as regards consideration it is stated in lindley on partnership that "any contribution in shape of the capital or labour, or any act which may result in liability to third parties, is a sufficient consideration to support such an agreement." mere use of the word 'partner' or partnership in an agreement does not necessarily show that there is a partnership. 3. carrying on of business

a partnership for the purposes of the partnership act means a business partnership in order that an agreement to share the profit may constitute partnership such profit must arise out of a business. thus there must be an agreement to share the profits of a business and for this purpose business 'includes every trade, occupation and profession' (section 2). thus the word business has been used in a very wide and extensive sense. virtually any commercial activity or adventure amounts to a business for the purposes of the act. in smith verses anderson, 15 ch d 247, james l.j. said that the term business must be taken in a practical sense, i.e., in a sense in which men of business would use that term. thus it refers to any activity which if successful would result in profit. section 8 of the act provides that there may be partnership-even in a single adventure or undertaking. therefore, it is not necessary that the business should consist of a long and permanent undertaking. for instance, where two persons agreed to produce a film and share the profits of hiring it out, it was held to be sufficient to form a partnership (mind verses roshan lal shorey, ). business must be in existence —whether temporary? or permanent, the business must actually have been embarked upon; until it is commenced, there is no partnership. an agreement to carry on business in future does not result in present partnership. for instance, in r.r.

sarna verses. reuben, the plaintiff deposited a sum of the money in the name of civil engineering co. with the kanpur municipal board for obtaining a licence to produce electricity. the licence was refused and money refunded. the other partner contended that it would be paid after meeting partnership liabilities. but it was held that there was no partnership as yet. thus "it is the carrying on of a business, not an agreement to carry it on, which is the test of partnership" (lindley on partnership, ed. 14 page 16). this principle applies to the promoters of companies as well. it is stated in lindley on partnership ed.

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5 14 page 19 that "persons who are working together to form a company although they may intend to become members of the company after its formations are not partners if this be the only relation between them; they are, it is true, engaged in a common object, and that object ultimately is to acquire profits; but their immediate object is the formation of a company, and even if the company is not to be incorporated they are only in the position of persons who intend to become partners, after the company is formed." promoters may, however, be partner in the business of promoting companies. a society for religious or charitable or social purposes is not a partnership. agreement to make a formal deed —in harichand verses. govind, (1923), it was held that where an oral agreement of partnership sti pul at es that a formal document sh oul d be drawn by a lawyer, the fact that no such deed is executed or its execution is delayed does not militate against the existence of the firm, provided that some business operations have come into being. 4. sharing of profits the word "partnership" is derived from the word "to part”, which means "to divide". the division of profits is an essential condition for partnership. a person can claim himself to be a partner in a business only when he has a right to a share in the profits of the business. thus an agreement to share the profits of a business in the sense of the net gain resulting after payment of all outgoings is an essential element of partnership. it follows that societies and clubs, the object of which is not to earn profit, are not partnership and their members as such are not liable for each other's acts. it is stated in lindley on partnership 14th ed p. 13 that "the terms" "partnership" and "partner" are evidently derived from "to part" in the sense of to divide amongst or share, and doubtless the division of profits amongst the partner is the general, if not universal, object of partnership."

the act does not prescribe any particular manner of distribution of profits, monthly, yearly, or otherwise. the act does not prescribe the degree or kind of participation of profits, for, rent paid to a propertied member may be taken as his share of profit. girdharbhai verses. saiyed md. kadri,]. it is not necessary that the profits of the business should be shared at any particular time. partner can leave their profits in the business. they may also not to take whole of the profits for their own personal use and reserve a part of the profits for charitable purposes. thus what is to be looked at is the substance of the relationship between the parties and where it appears that in substance there is partnership, the mere fact that participation in profits is described in the agreement not as sharing profits but by any other expression, will not change the real relation between the parties. "the receipt by a per son of a share of the profits of a business or a payment contingent upon the earning of profits or varying w ith the profits earned in a business, does not of itself make him a partner with 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 widow or child of a deceased partner, as annuity, or (d) by a previous owner or part owner of the business, as consideration for the sale of the goodwill or share thereof, does not of itself make the receiver a partner with the persons carrying on the business "

in murlidhar verses. bansidhar, payment of salary out of profit to a retiring partner was held to be not sufficient for creation of partnership in the absence of mutual agency. thus sharing of profits is no longer the conclusive test of the existence of partnership.

sharing of loss. in raghunandan nanu kothare verses. hormasjee bezonjee bamjee, it was held that the partners may agree to share the profits in any way they like and partner can receive a fixed annual or monthly sum in lieu of a sum varying in accordance with the profits actually earned. the partners may also agree that only one of them will bear all loses of the business and this agreement applicable among themselves, for whatever their agreement may be, they would all be liable to outside parties.

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6 5. mutual agency

the last words in the definition of partnership in section 4 stress that the business may be carried on by all or any of them acting for all. it means that partners when carrying on the business of the firm are agents as well as principals. an 4 agent' is a person employed to do any act for another or to represent another in dealings with third persons. the person for whom such act is done, and who is so represented, is called the "principal". (section 182 of the indian contract act, 1872). this element of mutual agency is the most important factor in determining the true relationship between persons carrying on any business common between them. relationship of mutual agency between the partners is the real or conclusive test of partnership. this is the principle of cox verses hickman, (1860). the facts of this case were as follows:—

mode of determining existence of partnership section 4 of the act defines partnership. section 6 prescribes the mode of determining the existence of partnership. section 5, as discussed earlier, and the two explanations to section 6 contain some useful explanatory rules for the guidance of the courts in doing so. the courts must, in the first instance apply the provisions of section 4 and section 6 while determining the existence of partnership. the courts must also seek assistance of other sections of the act and particularly section 5 and the two explanations to section 6, section 6 is reproduced below: —

"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 partners as shown by all relevant facts taken together. explanation /.—the sharing of the profits or of gross returns arising from property by persons holding a joint or common interest in that property does not of itself make such persons partners. explanation 2.—the receipt by a person of a share of the profits of a business, or of a payment contingent upon the earning of profits or varying with the profits earned by a business, does not of itself make him a partner with 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 widow or child of a decreased partner, as annuity, or (d) by a previous owner of the business, as consideration for the sale of the goodwill or share thereof, does not itself make the receiver a partner with the persons carrying on the business." the law to determine the existence of partnership was stated in ross verses. purkyns, (1875) l.r. 20 eq. 331, at page 335 jessel, mr., as follows: — "it is said (and about that there is no doubt) that the mere participation in profits inter se affords cogent evidence of partnership. but it is now settled by the cases of cox verses hickman (1 860) 8 hl cas 268; bullen verses. sharp, (1865) lr 1 cp 86 ex ch and mollow march and co. v: court of wards, (1872) lr 4 pc 419, sup. vol. ia 86, that although a right to participate in profits is a strong test of partnership. and there may be cases whereupon a simple participation in profits there is a presumption, not of law, but of fact, that there is a partnership, yet whether the relation of partnership does or does not exist must depend upon the whole contract between the parties, and that circumstance is not conclusive." section 6 has restated the law as stated above. the section also prescribes the manner in which general principle is to be applied to particular circumstances. thus the question whether a relation of partnership exists or not depends upon the real intention and contract of the parties as appearing from the whole facts of the case and not merely on their expressed intention. two persons in a written agreement may have stated that they are not partners, yet they may be held to be partners, or they may have stated that they are partners and yet may not be held to be partners. thus in considering whether a partnership was intended or not, the court is not bound by the terminology used by the parties. the supreme court in its decision in m p. davis verses. cait, refused to accept that the relations created by a declaration of partners were those of partners.

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7 it determining whether partnership exists between a number of persons, the court must have regard to the real relation between them. the real relation between them is to be ascertained from all relevant facts taken together. the court must consider all the facts and circumstances of the case and draw an inference from them as a whole without attributing undue weight to any one of them. the cumulative effect of all the facts and circumstances should be considered while deciding the existence of partnership.

the real relation or intention of the parties is to be deduced from the written agreements, if any, verbal agreements, together with surrounding circumstances at the time when the contract was entered into, conduct of the parties, as well as other facts that may be relevant, such, for instance, as the right to control the property, the manner in which accounts of the business are kept, the right to receive profits and the liability to share the losses. it is stated in lindley on partnership, ed. 14 page 12, that "as partnership, even for long terms of years, very often exist in this country without any written agreement, the absence of direct documentary evidence of any agreement for a partnership is entitled to little weight. as between the alleged partners themselves the evidence relied on, where no written agreement is forthcoming, is their conduct, the mode in which they have dealt with each other, and the mode in which each has, with the knowledge of the other, dealt with other people. this can be shown by books of accounts, by the testimony of clerks, agents, and other persons, by letters and admissions and in short, by any of the modes by which facts can be established." as said earlier the true test for determining whether a person receiving a share of profits of a business is or is not a partner is to see whether there is a relationship of mutual agency between him and other concerned person or persons. the test is one of agency and authority. to constitute a partnership there must be community of benefit and not a conflict of interest as in the case of debtor and creditor* sharing of profits is a strong evidence of partnership but in no sense conclusive or even presumptive evidence of it. although section 2 (3) of the (english) partnership act, 1890 states that receipt by a person of a share of the profits of a business is "prima facie" evidence that he is a partner in the business, but section 6 of the indian partnership act, 1932 deliberately avoids the use of the expression "prima facie " and emphasizes that real relation is to be determined by examining all relevant facts together. the use of the expression "prima facie" has been criticized by sir fredric pollock in his work on partnership, 14th ed. page 17-18. he observed. "it is to be regretted that the learning and scholarship of both houses of parliament were not able to devise a better english equivalent for the barbarous "prima facie " which though common and convenient in everyday professional use, is hardly becoming an act of parliament, and not being a term of art known to the law, is capable of leading to ambiguity." section 4 of the act defines partnership is silent about sharing of losses. it means community or sharing of losses is not essential for partnership. thus sharing of losses is a legal consequence arising out of the relation and is not a test of a partnership. two partners may agree that one of them only shall bear all losses of the business. such agreements are usually made where the entire business is to be conducted by one of the partners. sharing of losses of a business, though not essential for partnership, is nevertheless a very important incident of the relation. an unqualified agreement to share a definite proportion of the losses is a very strong evidence of partnership. where persons have agreed to share the profits as well as losses of a business partnership have almost always been inferred [chokalinga verses. muthuswami, (1825) 48 mad lj 518; manbharibai verses b.r. mill (1956) nag 225; bansi ram verses. jagon math, brett verses. beckwith ]. although partnership usually results from a combination of capital, labour or skill, the contribution of capital by partners of the existence of any partnership property is not essential for the existence of partnership between them. sometimes there is partnership in the profits and the property with which the business is carried belongs only to one of the partners or is the property of the partners without its being treated as property of the firm. two or more separate firms by the same partners—in commissioner of sales tax verses. k. kelukutty, (1985), it was held that an agreement between the partners to carry on a business and share its profits may be followed by a separate agreement between the same partners to carry on another business and share the profits therein. the intention may be to constitute two separate partnerships and therefore two distinct firms or to extend merely partnership, originally constituted to carry on one business, to the carrying on of another business. it will depend on the intention of the partners. the intention of all the partners will have to be decided with reference to the terms of the agreement and all surrounding circumstances, including evidence as to interlacing or interlocking of management, finance and other incidents of the respective businesses. in cit verses. g. parthasarthy naidu, (1998) , two firms were held two different legal entities for the purposes of assessment under the income tax act, 1961 as the partners have expressed their intention to such effect, there was no interlacing or intermixing between the two firms and the business of the two firms was different.

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8 section 6 in its two explanation gives the list of persons who may be interested in the profits of a business who do not by that reason alone become partners. these have been explained below:—

1. joint-owners sharing gross returns (explanation 1 to s 6) explanation 1 to section 6 states that "the sharing of profits or of gross returns arising from property by persons holding a joint or common interest in that property does not of itself make such persons partners." similarly section 2(1) of the (english) partnership act, 1890 provides that joint property, common property, or part ownership does not of itself create a partnership as to anything so held or owned, whether the owners do or do not share any profits made by the use thereof. but the distinction between co-ownership and partnership becomes very obscure when co-owners employ their property with a view to profit. "the test to determine whether co-owners sharing the profits of any property are partners or not is to inquire whether there is really a common business and whether the business is being carried on by one or more of them, acting for air (law of partnership in india by desai, 5th ed. page 45). the profits contemplated in the definition of partnership means net profits and not what are sometimes referred to as gross returns or gross profits.

in sutton and co. verses. grey, (1894), a firm of stockbrokers had entered into an agreement with one g, who was not a stockbroker, that he should introduce clients to them, and that they should transact business on the stock exchange for such clients, on the terms that g, should receive one half of the commission earned by the firm in respect of such transactions and should pay the one-half of the loss thereby incurred. held, that no partnership existed between the firm and g, for no partnership was intended, and the commissions to be divided were gross returns, not profits. also see cox verses. coulson,. explanation 1 to section 6 has often been illustrated by courts by referring to the following statement in lindley on partnership, 11 ed. page 35: lindley and banks on partnership, 16th ed. 1990 page 66: "if several persons jointly purchase goods or resale with a view to dividing the profits arising from the transaction a partnership is thereby created. but persons who join in the purchase of goods not for the purpose of selling them again and dividing the goods themselves are not partners. " this statement was cited by the andhra pradesh high court in narayana verses. setharamayya, . in the course of his judgement in this case bhimasankaram j said: "having regard to the fact that the subject-matter of the purchase in this case is a decree, it is difficult to see how it could be described as a purchase of goods for resale. nor it could be described as having been purchased for the purpose of dividing the goods themselves. it seems to us in this case what the parties contemplated was nothing more than taking their shares of the net returns obtained by the execution of the decree which is the common property, and that there is no question of an agreement of partnership." in goving nair verses. magar 1948 1 mad. 343, two persons jointly purchased a tea shop and also purchased some more pottery and utensils for the job. each of them contributed one-half of the total expenditure. the shop was then leased out on rent which was shared equally by them. it was held that they were co-owners and not partners as they never carried on any business. the madras high court speaking through satyanarayan rao j said: "nothing more is done by the parties than utilizing the common property and obtain a return for such use by leasing the property for rent. the contribution made by the plaintiff and the defendant towards the price for the acquisition of the property in equal proportion would make them coowners and not partners. they never carried on any business but only obtained a return by using the property. the distinction between part-ownership and partnership is no doubt very difficult to define." his lordship cited the following statement from lindley on partnership, 10th ed. page 32: "if each owner does nothing more than take his share of the gross returns obtained by the use of the common property, partnership is not the result." (c) widow or child of a deceased partner receiving annuity —an agreement to pay annuity out of the profits to the widow or child of a deceased partner does not make her or the child a partner in the firm. in holme verses, hammond, (1872) lr 7 ex. 218, three persons agreed to become partners for seven years, and to share profits and losses equally. they also agreed that if a partner died within seven years, the survivors should continue the business and pay to the executors of the deceased partner the same share of the profits which he would have had if living. one of the partners died and his share of the profits was paid to his executors as provided by the agreement although executors took no part in the management of the business. the plaintiff sued the executors in respect of a contract made by the surviving partners after the death of the deceased partner, but it was held that the executors were not liable as they were not partners. there was no evidence whatsoever to establish a contract of partnership between the executors and the surviving partners; there was no mutual agency between them.

(d) seller of goodwill receiving share of profits. —the seller of goodwill receiving a share of the profits of a business would not by reason only of such receipt be deemed to be a partner of the person carrying on such business, or be subject to his liabilities. in rawbinson verses clarke, (1846) 153 er 860, a doctor sold the goodwill of his medical practice to a purchaser but agreed that he would continue to attend to his

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9 old profession and introduce patients, he being allowed a certain share of the profits. it was held that there was no partnership. a similar case is that of pratt verses. strick, 17 to 459.

salaried partner instekel verses ellice, (1973) i all er 465, megarry j of the chancery division observed that "the term 'salaried partner' ...... is a convenient expression which is widely used to denote a person who is held out to the world as being a partner, with his name appearing as a partner on the note paper of the firm and so on. at the same time he receives a salary as remuneration, rather than as a share of the profits, though he may, in addition to his salary, receive some bonus or other sum of money dependent on the profits." but within the partnership it may be important to know whether a salaried partner is mere employee or a true partner. lindley (the law of partnership,13th ed., 1971) pages 13,14,18 seems to lean towards saying that a salaried partner is not a true partner. on the other hand, pollock (the law of partnership, 15th ed. 1952 pages 9-11) says this".......it is thought that a salaried partner is a true partner notwithstanding that he is paid a fixed salary irrespective of profits and that as between himself and his copartner he is not liable for the partnership debts." the concept of a salaried partner has found further recognition in the decision of megarry j of the chancery division in stekel verses ellice, (1973) 1 all er 465. his lordship said: "it is impossible to say that as a matter of law a salaried partner is necessarily a partner in the true sense. he may or may not be a partner depending on the facts. what must be done is to look at the substance of the relationship between the parties." in this case s (the plaintiff) joined e (the defendant) in a firm of chartered accountants as a salaried partner; property, profits and goodwill, including clientage, remaining that of e. all losses were to be borne by e. they were not to engage in any other business. it was held that s no doubt became a partner, but he was not entitled to dissolution as he had no interest in assets. the learned judge said: "certainly the relationship between the parties under the agreement seems to satisfy the statutory definition as being the relation which subsists between persons carrying on a business in common with a view of profit. true again, the plaintiff had no share of the profits and so there is no prima facie evidence that he is a partner in the business; but the absence of one possible head of prima facie evidence does not negate the other evidence of partnership." thus dr. avtar singh in his book law of partnership, ed. 2, page 82 states that "a person who occupies the position of a partner remains a partner whatever is the mode in which profits are shared with him and a person who occupies the position of a servant or agent remains so whatever be the mode in which the remuneration is paid to him. thus the position which is granted to the person in question in the business set up is the most important factor in determining whether that person is a partner or not." in regional director es1c verses. ramanuja match industries, it was held by the supreme court that firms being not a corporate entity its partners are not its employees, even if they are drawing remuneration for their services.

partnership and co-ownership according to explanation i to section 6 of the act "the sharing of profits or of gross returns arising from property by persons holding a joint or common interest in that property does not of itself make such persons partners. " thus, if two persons jointly own a house, they remain as co-owners of the house but not as partners. even if they should agree to let out the house and share the rent, they continue to be co-owners in the absence of the application of the principle-of agency. the following are the main points of distinction between partnership and co -ownership: 1. mode of creation. —co-ownership is not necessarily the result of agreement, whereas partnership is.

2. community of profit or loss. —co-ownership does not necessarily involve community of profits or of loss, but partnership does.

3. transfer of interest. —one co-owner can, without the consent of the other, transfer his interest to a stranger. a partner cannot do this.

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10 4. business—business is necessary for existence of partnership; mere co-ownership is not a business and it can also exist without business. 5. mutual agency.—mutual agency is a pre-condition for the existence of partnership; but mere co-owners are not business agents and therefore one co-owner can act for oneself and not on behalf of the other part owners. 6. remedy.—a co-owner can sue the other part-owner for division of the joint property. partners, on the other hand, can sue only for dissolution and accounts and not for direct division of assets among them. (see champaran cane concern verses. state of bihar, and laxmibaiverses. roshanla.

partnership and joint hindu family business although a joint hindu family firm resembles a partnership, section 5 of the act expressly excludes it from the purview of partnership by declaring that "the relation of partnership arises from contract and not from status, and in particular, the members of a hindu undivided family carrying on a family business ... are not partners in such business " however, it was observed by the supreme, court in commissioner of income tax 9m.p verses hukumchand mannalal and co. (1971), that "one or more members of a hindu undivided family may enter into a contractual relation in the nature of a partnership with a stranger and they qua the stranger become partners. the contract act imposes no disability upon them in the matter of entering into a contract inter se or with a stranger. if the relationship as is referred to in section 4 of partnership act exists, partnership will not be invalid merely because two or more of the persons agreed to share the profits of the business, are members of a hindu undivided family." since under the income-tax act, a hindu undivided family is a distinct entity apart from its members, and it is assessable separately, registration was granted to the firm in the case referred to above. it is true, that the manager of the family business can enter into a partnership agreement with a stranger. but then, the other members of the joint family do not automatically become partners in the business. this is so even if some members of the family enter into partnership with a stranger. it is, therefore, necessary to distinguish this type of firm with a partnership governed by the act. the following are the points of distinction between the two:

1. mode of creation—a partnership arises on the basis of a contract as stated in sections 4 and 5 of the act. a joint hindu family firm arises on the basis of status, i.e. by the operation of law, upon the fact of marriage, birth or adoption. 2. admission of new members—no new partner can be admitted into partnership without the consent of all the existing partners. the membership of a joint hindu family firm is automatic by the birth or in case of adoption into the family of male members if that family is carrying on a business. a minor can also be a member. thus the membership of a joint hindu family keeps changing, whereas in the partnership the members remain more or less fixed and constant.

3. management and representative capacity—while in a partnership all the members are entitled to take an active part in the management of the business, in the case of a joint hindu family business it is only the manager or karta who is the senior male member entitled to manage the business. the other members of the family do not have the representative capacity as held by sarkaria j in nanchand gangaram selhji verses. mm. sadalge, (1976) 3 scr 287. in partnership, as stated in section i 8, every partner becomes an agent of the firm for the purposes of the business of the firm. there is mutual agency among partners. the existence of mutual agency enables partner to bind the other partners for the acts done by him in the ordinary course of the business of the firm. 4. nature and extent liability—according to section 25 every partner is liable jointly with others as well as personally for the acts of the firm. in case of the joint hindu family business the members are not personally liable. the liability of the members of a family is limited to their share in the property and profits of the family business. it is only the manager or karta who is personally liable to an unlimited extent. in case of partnership the liability of the partners is unlimited. 5. mode of effecting separation —in case of partnership the remedy against each other is a suit for dissolution of the firm, whereas in case of joint hindu family the remedy is a suit for partition of the family assets. a family is not dissolved; it can split into smaller units. 6. number of members—in case of partnership the maximum number of partners is ten for partnership 'doing banking business and twenty in any other business. but there is no such limit in case of joint hindu family business.

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7. right to share in the profits —a partner has right to demand his share of profits of the business; but a co-parcener has no such right. he can only demand partition and separate himself from the family business. 8. death of a partner or member —the death of a partner brings about the dissolution of partnership unless there is a contract to the contrary as per section 42; but the death of a co-parcener does not dissolve the joint family business. (see nanchand gangaram verses. mallappa mahalingappa sadalge, lachman das verses cit, and chandrakant manilal shah verses. cit, ). partnership and company

although a joint stock company is, like a partnership in or an association of persons, differs from partnership in the following respects:

1. formation—a partnership is governed by the partnership act while a joint stock company is governed by the companies act. the formation of a partnership is relatively easy while a company has to observe a number of legal formalities connected with its formation. 2. registration—a partnership may or may not be registered. however, a joint stock company must be registered. the certificate of incorporation is a conclusive evidence of the registration of a company. an unregistered company becomes either a partnership or an illegal association, depending upon the number of members. 3. legal status—a partnership is not a distinct legal entity. persons who have entered into partnership with one another are called individually partners and collectively a firm. in a case of a company, however, the members are quite distinct from the company, which is a juristic person. in other words, a company is an artificial person in the eyes of law enjoying a distinct entity apart from its members. 4. nature of contract—the agreement between persons that brings a partnership into existence may, or may not be in writing. if it is in writing, it becomes a private document. as such, outsiders cannot have recourse to its contents. however, the agreement that brings a company into existence, known as the memorandum of association, must be in writing. it is also a public document. 5. number of members—in the case of a partnership business engaged in banking activity, the maximum number of members is ten. in the case of other types of business, however, the maximum is twenty. the minimum is, of course, 2. in the case of private joint stock company, the minimum number of members is 2, while the maximum is 50 excluding the employees. in a public company, however, the minimum is seven and the maximum is unlimited. 6. liability—the liability of a partner is joint, several and unlimited, but the liability of a member of a company is limited to the face value of the shares held by him, or the amount guaranteed by him, depending on whether the liability of the members is limited by shares or by guarantee. 7. objects—a partnership may engage itself in any business, which the partners like whereas a company can engage itself only in the business mentioned under the object clause of the memorandum. thus, this clause restricts the powers of a company with regard to the nature of the business, which it could undertake. 8. capital—the capital contributions by the partners can be altered freely but, the capital of a company cannot be altered except by observing the legal formalities laid dawn in the companies act* 9. property—the partnership property belongs to all the partners as such, the property of the firm is the property of the partners. in case of a company, however, the property belongs to the company and not to the members. 10. management—in the case of a partnership, every partner is entitled to take part in the management of partnership business. in the case of a company, the management of its affairs is entrusted to a board of directors duly elected by the members.

11. agency—principal-agent relationship is the essence of a partnership. every partner is an agent of the firm to make contracts on behalf of the firm. in the case of the company, however, no member is agent of the company or of any other member. consequently, no member can make contracts on behalf of the company. such a power -vests only with the directors who have to act intra vires the memorandum and articles.

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12 12. transfer of shares—a partner cannot transfer his interests in the partnership without the consent of the other partners. if he does so without the consent of any others, the partnership is deemed to have been dissolved. a shareholder, however can, effect a transfer of his shares without the consent of any other member. while the shares of a public company are freely transferable, those of a private company can be transferred, subject to restrictions -imposed on the same.

13. dissolution—while a partnership is dissolved by the death or insolvency of a partner, a company is not affected by any such contingency. a company enjoys perpetual existence. 14. accounts and audit—the accounts of a partnership need not be got audited and disclosed to the public. in the case of the company, however, its accounts should be got audited and placed before the members and a copy of the same should be sent to the registrar of companies. further, in the case of public companies, accounts are also made available to the public. meaning of "partners'% "firm" and "firm name" according to first para of section 4 "partnership" is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. thus a partnership is an abstract legal relationship that exists between the partners. according to second para of section 4, persons who have entered into partnership with one another are called individually "partners" and collectively a "firm", and the name under which their business is carried on is called the "firm name". thus, a firm is only an aggregate of the individuals who are partners in a business. it is not a distinct legal entity, but a name given to the partners collectively. it is impossible to think of a firm apart from the members constituting it. the property of the firm belongs to the partners jointly. the death or insolvency of a partner puts an end to its existence, and persons who deal with the firm do so with the partners jointly. the firm does not carry on the business, but only the partners who do so in the name of the firm. according to lindley (lindley and barks on partnership, 16th ed., page 26) legal notion of the firm is different from that of its commercial or mercantile notion. legal notion—a legal-notion of the firm is hyper-technical and different. in india a firm is not a person; it is not an entity; it is merely a collective name for the individuals who are members of the partnership. it is neither a legal entity, nor it is a person. it is not a juristic persons to be taken cognizance of as such by the law. it has been held in a number of cases that a firm as such cannot be a member of a partnership. thus a firm cannot be a partner. however, individual members can enter into partnership with other individuals or with the partners of another firm. a contract entered into in the name of a firm is really a contract entered by all the partners thereof in dulidhand verses. cit, s.r. das cj in a decision of the supreme court observed that the word "person" in section 4 of the indian partnership act, 1932 contemplates only natural or artificial, i.e. legal persons and a firm is not a person and as such not entitled to enter into a partnership with another firm or hindu undivided family or individual. the learned chief justice, inter alia, referred to the case of bhagwanji morarji goculdas verses. alembic chemical works ltd., air 1948 pc 100, where similar views were expressed by the privy council. in bhagwanji case it was held that "the indian act, like the english act avoids making a firm a corporate body enjoying the right of perpetual succession. the agreement of 7th december 1907 was made between the company and four named individuals, and when all of these four individuals had ceased to be members of the firm, there was no priority between the company and the firm as it then existed."

firm's personality for tax purposes—under the income-tax act, a firm is a unit of assessment, but even so, it has been pointed out by the supreme court in keshvji rauji co. verses. cm (1990) , that the firm is not a full-fledged person. in commissioner of sales tax verses. k. kelukutty (1985), it was held under the provisions of the tax law that a firm is an assessable entity separate and distinct from the individual partners, does not confer a corproate entity or juristic personality on the firm. the principle of separate entity does not go beyond the purposes of the scheme providing for the assessment of partnership income. beyond the area within which the principle operates, the general law, that is to say, the partnership law holds undisputed domain. similarly in mahabir cold storage verses. cit, it was held that a registered partnership firm is neither a person nor a legal entity. firm cannot be partner of another firm though its partners can be in their individual capacity. either under the repealed income tax act or the income tax act, 1961, a firm is liable to be separately assessed to tax as well as all its partners if they have taxable income. partial recognition of personality —the income-tax act, as stated above, recognizes and confers upon the firm the status of an assessee, provided the firm is registered under that act. the partnership act also contains provisions which recognize

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13 the continuity of the firm despite the reconstitution of the firm as per section 17 and recognition of provisions relating to incoming and outgoing partners code of civil procedure (order xxx) enables the firm to sue and be sued in its own name. in the words of s.r. das cj of the supreme court: "again in taking partnership accounts in administrating partnership assets, the law has to some extent, adopted the mercantile view and that of the partners only in cases they cannot be met and discharged by the firm out of its assets ... conversely, separate property of a partner is applied first in payment of his separate debts and the surplus, if any, applied first in meeting the debts of the firm." partners are not employees.—the supreme court has held in champaran cane concern verses. state of bihar, the partners of a firm are not its employees, even if they are drawing rememberation for their services as the firm is not a corporate entity. mercantile notion—as per the legal notion discussed above a firm is not an entity or person in law, but is merely an association of individuals and a firm name is only a collective name of those individuals who constitute the firm. but merchants tend to regard the firms as something different from them. for example, they talk of the name of the firm, assets of the firm, debts and liabilities of the firm and so on. if a partner introduces capital in the firm his account is credited and conversely when money is withdrawn by a partner from the firm his account is debited. partners may be, sometimes, creditors of the firm or its debtors. the firm is treated as the real businessman and its partners as its working parts.

restriction on number of partners the restriction on the maximum number of partners is contained in the companies act, 1956. as per the companies act, partnerships should not have large number of members because unidentified number of members can create complex problems of rights and liabilities of the members inter se and in respect of their relations with others. therefore, section 11 of the companies act, 1956 provides that no company, association or partnership consisting of more than 20 persons (10 in case of banking business) shall be formed for the purpose of carrying on any business that has for its objects the acquisition of the gain for itself or for its members unless it is registered as a company under the companies act or is formed in pursuance of some other law, thus if there is a partnership firm consisting of more than 20 partners (10 in case of banking business) and it is not registered as a company, it becomes an illegal association.. the section, however, does not apply to a joint hindu family carrying on business. consequences of illegal association. — following are some of the consequences of illegal association. 1. every member of such an association shall be personally liable for all liabilities incurred in the business. 2. members of an illegal association are punishable with a fine which may extend to one thousand rupees. 3. members of an illegal association cannot maintain an action in respect of any contract made by it. 4. there can be no suit between the members of an illegal association for dissolution or for rendition of accounts. in badri prasad verses. nagarmal, an association of cloth merchants consisting of 25 members was held to be an illegal association. it was further held that members have no remedy against each other in respect of contracts which the law declares to be illegal. the supreme court in the aforesaid quoted with approval the decision of the privy council in senaji kapurchand. pannaji devichand,.

duration or types of partnership 1. partnership at will section 7 of the act provides as follows:

where no provision is made by contract between the partners for duration of their partnership, or for the determination of their partnership, the partnership is "partnership at will".

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14 section 7 provides that where there is a provision in the contract for the duration of partnership, the partnership is not at will. similarly, if there is a provision in the contract for the determination of partnership, it is not partnership at will. thus section 7 recognizes two exceptions to the partnership at will. the duration of partnership can be expressly provided in the contract or it may be implied from the conduct of the parties. the same principle applies to a case determination. in uduman verses. aslum, (1991) the partnership deed provided that the partnership was to continue till there were two partners. the supreme court held that this was a provision as to duration and therefore, the firm was not "at will". therefore, a suit for dissolution on the basis of notice was not maintainable. in karmuthu thiagarajan chettiar verses. em muthappa chettiar, the partnership deed provided that in case of death or retirement of a partner his legal heirs would be admitted on the same terms; that the death would not dissolve the firm and the same would be carried on by the remaining partners along with legal heirs; that retirement would require six months' notice; that on retirement etc. there would be no valuation of assets and the outgoing partner would get only the amount standing to the credit side of his account at the time. the supreme court held that the partners never intended that the partnership be dissolved at the sweet will of any of the partners, rather their intention was that the business should continue as long as possible, notwithstanding death or retirement of the partner. section 32(l)(c) of the act provides that a partner may retire where the partnership is at will, by giving notice in writing to all other partners of his intention to retire. section 43(1) provides that where the partnership is at will, the firm may be dissolved by any partner by giving notice in writing to all other partners of the intention to dissolve the firm. section 43(2) provides that the firm is dissolved as from the date mentioned in the notice as the date of dissolution or, if no date is mentioned, as from the date of communication of the notice.

in narayan lal bansilal pitti verses. tarabai motilal, (1970), the partnership business, was agreed to be for two years; whether this was extended for another three years or whether there was an agreement under which one partner was to pay out the other, over this question the trial court dismissed the suit, the high court reserved it and the supreme court restored the order of the trial court. it was held that there was no agreement to extend the partnership for the next three years. in gobardhan chakraborty verses. abani mohan, a firm formed for obtaining a licence for running a cinema hall has been held to be partnership at will. 2. particular partnership

section 8 of the act provides as follows: a person may become a partner with another person in particular adventure or undertaking

section 8 of the act makes it clear that there can be a partnership in a single venture and brief business venture provided the requisites of partnership as given by section 4 are present. under section 4 there must be a "business" and there must be an agreement to share the profits of that business, and the business must be carried on by all or any of the partners acting for all. thus relation of partnership need not be a permanent bond. in karmali abdulla verses. vora karirnji jiwanji, (1995), karim (delhi merchant) and rashid (bombay merchant) decided to have a joint speculation in brown sugar to be shipped from mauritius to hong kong. the preamble to their agreement declared that their purpose was doing business in partnership. purchases were to made jointly in mauritus by either of them after consultation with the other and after taking advice from bombay houses. a ship was then to be chartered after consultation, and loaded with the purchased sugar and dispatched to hong kong, there was a loss in the very first transaction. one of the merchants became bankrupt. the question was whether the other merchant was liable for a bill drawn by the former in connection with the consignment. lord dunedin held that there was a partnership. his lordship further held that it was a partnership of limited character. an instance of particular partnership was before the supreme court in gherulal parekh verses. mahadeo das, air 1959 sc 781. in this case, the appellant and the respondents entered into a partnership to carry on wagering contracts with two firms of hapur for a particular season only. they agreed to make the contracts in the name of the respondent on behalf of the firm and to divide the profit and loss resulting from the transactions in equal shares. the respondent entered into 32 such contracts and the net result of these was a loss. since the respondent had to pay the full amount due to the merchants at hapur, he wanted the appellant to bear his share of loss. since the appellant denied his liability, the firm was dissolved and

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15 the respondent sued the appellant for settlement of accounts of the dissolved firm. the supreme court held that in the present case the partnership was not unlawful within the meaning of section 23 of the contract act, and therefore, the appellant was liable to bear his share of the loss. it was further held that it was a valid particular partnership, and section 42 of the partnership act was applicable in the present case. in k. jaggaiah verses venkatasatyanarayana, it was held by the, andhra pradesh high court that "test is not whether the venture consists of a single transaction or more but whether the venture is capable of being participated by more than one individual considering its activity." in this case the plaintiff and the two defendants jointed together and obtained a contract for the maintenance of a road between two mile stones. it was held that there was a partnership between the plaintiff and the two defendants. the court said that road building activity though arising out of a single contract was spread over a particular period and the firm had to employ, certain workers, supervise the work, finalise the work and get approval from the government and all that meant 'carrying on of business' under section 4 of the act. thus there may be partnership limited to purchase and sale of particular jewels, the working of a particular patent, the development of a parcel of land, the exploitation of a contract of service, sowing, cropping and harvesting and sale of a particular crop. similarly there may be a partnership between two advocates in a particular case. however, the rights and liabilities of partners in these cases are limited as compared to general partnership.

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3 partnership property there are various reasons to determine the joint property of the partners that is the property of the firm as opposed to the personal property of the partners. for instance, section 49 provides that on the dissolution of a firm, "where there are joint debts due from the firm, also separate debts due from any partner, the property of the firm shall be applied in the first instance in payment of debts of the firm, and if there is any surplus, then the share of each partner shall be applied in payment of his separate debts or paid to him. the separate property of any partner shall be applied first in the payment of his separate debts and the surplus (if any) in the payment of the debts of the firm." secondly section 15 provides that "subject to contract between the partners, the property of the firm shall be held and used by partners exclusively for the purpose of the business of the firm." section 28(2) of the provincial insolvency act (section 17 of the presidency towns insolvency act) provides that where a person carrying on business with others becomes insolvent his share in the property of the firm vests in official receiver or assignee for the benefit of his creditors. the question of determining the partnership property may also arise in case of dispute between the partners themselves. what is partnership property mainly depends on agreement of partners. such an agreement may be express or may be implied from the facts and circumstances of the case. section 14 of the partnership act which lays down rules for ascertaining the intention of the parties for this purpose is reproduced below;—

"14. subject to contract between the partners, the property of the firm includes all property and rights and interests in property originally brought into the stock of the firm, or acquired by purchase or otherwise, by or for the firm, or for he purposes and in the course of the business of the firm, and includes also the goodwill of the business. 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." thus the section lays down the following rules:—

(1) property originally brought in. unless different intention appears, the property of the firm includes the property and rights and interests in property originally brought into the stock of the firm. in robinison verses. ashton, (1875), the owner of a mill agreed to carry on the manufacture in partnership with others, and was credited in accounts of the firm with the value of the mill as his capital. from time to time sums were spent in making additions to and improvements in the mill: and in the annual balance sheets the mill was entered as an asset at the original value, increased by the amount so expended. it was held that the mill had become the property of the firm. (2) property subsequently acquired. the property of the firm includes, unless there is a different intention, what is added to the common stock of the firm from time to time by or for the firm, or for the purposes and in the course of the business 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. for example if a partner buys shares in his own name with the money and on account of the firm. the shares are partnership property, exparte hinds,' (1849) 3 d.g. and s.m. 613. if a partner buys, land with partnership money for his sole benefits and debits himself in the firm's books becomes a debtor to the firm for the amount of the purchase money, smith verses. smith . when a property is purchased with the money belonging to the firm and also in the name of the firm it is of the firm. where a property is purchased with the money belong to the firm, but in the name of a partner, he will be deemed to hold the property in trust for the firm, unless he can show that he holds it for himself alone.

(3) partner's property in firm name. when the personal property of a partner is being used in the business of the firm it is a question of fact to be determined by reference to the partner's intention whether it has become the property of the firm. in

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17 robinson verses ashton, (1875) lr 20 eq 25, the owner of a cotton mill agreed to carry on the business in partnership. the business was carried on at his mill. he was credited with the value of the mill property and he was allowed interest on it. from time to time sums were spent by the firm in making additions to and improvements in the mill. new buildings were created on lands acquired by the firm. in the annual balance sheets the mill was entered as an asset at the original value, increased by the amount so expended, but less than a certain amount for depreciation. it was held that in the absence of special agreement, the mill was an asset of the partnership. therefore, the profit on sale of the mill was held to be profit divisible amongst the partners in their profit sharing ratio.

4. partner's tenancy rights: section 14 requires that there must be some evidence either in terms of the agreement or, conduct of the partners to show that the property stood converted into the common hotchpotch. in helper girdharbhai verses saiyed mohammad, air 1987 sc 1782, it was held that if there was a partnership firm of which tenant of the premises in which the business of the firm was carried on has been the partner, the fact of carrying on of business of the partnership in the demised premises would not ipso facto tantamount to sub-letting, transfer of interest on assignment, inviting forfeiture of the leasehold or tenancy rights. similarly in budhalal chhotalal zavery verses lalavatiben ratilal, (1994), use of a shop for partnership purposes by the tenant of the shop who was also a partner of the shop did not amount to subletting or assignment so as to invite forfeiture of the tenancy. in jayalakshmi verse. shanmugham, air 1988 ker 128, it was held that the property of a partner whether it be in the shape of a tenancy right or anything else, cannot become the property of the firm by the mere fact that it was being used in business. only such properties answering the description in section 14 of the partnership act will be partnership properties. all joint properties need not necessarily be partnership properties. in chennuru gavararaju chetty verses. chennuru sitamamnrthy chefty, (1959) , it was held that there is no absolute rule of law or equity that a renewal of a lease by one partner must necessarily ensure for the benefit of all the partners.

5. conversion of joint into separate estate: "it is competent for partners by agreement amongst themselves to convert that which was the partnership property into the separate property of an individual partner or vice versa. and the nature of the property may thus be altered by way of agreement to that effect. moreover, as the ordinary creditors of an individual have no lien on his property, and cannot, prevent him disposing it off as he pleases, so the ordinary creditors of a firm, have no lien on the property of the firm so as to be able to prevent it from parting at with that property to whomsoever it chooses." lindley on partnership, (page 457 of 14th edition). the agreement must be executed, and not executory merely. in riffin, ex parte, (1801) 6 ves 119, allocation of joint property to a partner on dissolution of the firm, the property was held to be personal property of the partner. 6. goodwill: section 14 specifically lays down that unless there is a contract to the contrary, the goodwill of the business is to be regarded as the property of the firm." the term "goodwill" is not defined in the act. lord macnaghten in inland revenue commissioners verses muller & co. margarine ltd. (1901) ac 217 observed that the term "goodwill" is a thing very easy to describe but very difficult to define. in trego verses hunt (1896) ac 7, goodwill was described as advantage which is acquired by business beyond the mere value of the capital stock fund or property employed therein in consequence of general public patronage and encouragement which it receives from constant or habitual customers. it was further held that it is composed of a variety of elements and is bound to differ in its composition in different trades and different business in same trade. the goodwill can be an advantage connected with the premises in which the business was previously carried on. goodwill of a firm is a part of the property of the firm and can be sold either separately or along with the other property of the firm. in this respect section 55 of the indian partnership act, 1932, provides as under: "55 (1) in settling the accounts of a firm after dissolution, the goodwill shall, subject to contract between the partners, be included in the assets, and it may be sold either separately, or along with other property of the firm. (2) where the goodwill of a firm is sold after dissolution a partner may carry on a business competing with that of the buyer and he may advertise such business, but subject to agreement between him and the buyer, he may not—~ (a) use the firm name (b) represent himself as carrying on the business of the firm, or (c) solicit the custom of persons who were dealing with the firm before its dissolution.

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18 (3) any partner may upon the sale of the goodwill of a firm, make an agreement with the buyer that such partner will not carry on any business similar to that of the firm within a specified period or within specified local limits, and notwithstanding anything contained in section 27 of the indian contract act, 1872, such agreement shall be valid if the restrictions imposed are reasonable: section 53 also protects the buyer of a goodwill when it allows him to use the firm name even before the affairs of the firm are completely wound up after the dissolution of the firm. it provides as follows: — "53. after a firm is dissolved, every partner or his representative may, in the absence of a contract between the partners to the contrary, restrain any other partner or his representative from carrying on a similar business in the firm name or from using any of the property of the firm for his own benefit, until the affairs of the firm have been completely wound up: provided that where any partner or his representative has bought the goodwill of the firm, nothing in this section shall affect his right to use the firm name." inkeshvji ravi & co. c. i. t. ( 1990) it was held that a firm under the general law is not a distinct legal entity and has no legal existence of its own. the partnership property vests in all the partners and in that sense every partner has an interest in assets of the partnership. however, during the subsistence of partnership no partner can deal with any portion of the property as his own. there is no relationship of master and servant between a firm on the one hand and its partners on the other. the supreme court further held in the aforesaid case that if in substance interest paid by the firm to a partner are mere expressions of the applications of the funds or profits of the partnership and which having regard to the community of interest of the partners, are mere variations of the method of adjustment of the profits, there should be no impediment in treating them as part of the same transaction if, otherwise, in general law they admit of being so treated. this general law will prevail unless departed from any special statutory provision. in ced verses. mrudala naneshchandra, the supreme court held that the "goodwill of the firm after the death of a dying partner does not get diminished or extinguished. whoever has the benefit of that firm has the benefit of that value of goodwill."

7. nature of partners' interest in property: "since a firm has no legal existence the partnership property will vests in all the partners and in that sense every partner has an interest in the property of the partnership. during the subsistence of partnership, however, no partner can deal with any portion of the property as his own. nor can he assign his interest in a specific item of partnership property to any one. his right is to obtain such profits, if any, as fall to his share from time to time and upon the dissolution of the firm, which remain often satisfying the liabilities as set out in section 48." madmolkar, j., at page 1303 in narayanappa verses. bhaskara krishnappa,. 8. abandonment of interest by partner: the doctrine of laches is of great significance where persons have agreed to become partners, and one of them has unfairly left the other to do all the work and then there being profit comes forward and claim a share of it (lindley on partnership, 12th edition page 499-500] a partner having abandoned his right cannot claim share in the decretal amount [gattu lal verses gulab singh (1985)]. in the aforesaid case the deed of partnership of a firm enjoined the partners to provide funds to the co-partner to enable him to file a suit against a third person. one of the partners did not provide funds and instead adopted a non-cooperative approach. the co-partner proceeded with the action out of his own funds. the non-cooperative partner was held not entitled to claim any show in the decretal amount.

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19

4

relations of partners to one another duties of partners duties of the partners can be broadly divided into the following two categories: 1. absolute duties 2.duties subject to contract to the contrary. 1.

absolute duties

section 9 and 10 reproduced above, have imposed certain duties which cannot be varied by agreement between the partners. these duties are discussed below:— 1. duty to carry on the business to the greatest common advantage and to be just and faithful to each other. section 9 provides that partners are bound to carry on the business of the firm to the greatest common advantage and be just and faithful to each other. duty to carry on the business to the greatest common advantage and the duty to be just and faithful to each other are two sides of the same coin, which is the duty of good faith. all the endeavors of a partner must be to secure the maximum profits to the firm. he should not try to make a personal profit for himself at the cost of his co-partners. duty to carry on the business to the greatest common advantage must be read along with the provisions of section 16. if a partner makes any personal profit, he has to account for it to the firm, as making personal profit would be acting not to the greatest common advantage.

2. duty to render true accounts and full information affecting the firm. according to section 9 a partner is bound to render true accounts and full information of all things affecting the firm to his co-partners or their legal representatives. in other words the partners must make a full and frank disclosure of facts affecting the affairs of the firm to each other. the duty to render accounts is not confined to submitting statements of accounts, but it includes the duty to handover to the firm the balance of the moneys of the firm which have come in the hands of a partner. he must also be ready to explain to his other partners the true accounts and produce vouchers relating to everything coming into his hands. if a partner is in possession of more information about the things affecting the firm, he should disclose it to his copartners. a leading case on this point is law verses law, (1905) 1 ch. 140. in this case a partner sold his share in the assets of the firm to his co-partner. subsequently, he (the vendor) discovered that material information had been concealed from him. although he was entitled to set aside the sale, he agreed to modify the original bargain. it should be noted that after electing to modify the original bargain, he is bound by that election, and neither he nor his representative after his death can repudiate the sale.

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20

3. duty to indemnify for fraud. section 10 provides that "every partner shall indemnify the firm for any loss caused to it by his fraud in the conduct of the business." the section makes the liability, to indemnify' for fraud absolute and not subject to contract, i.e. partners are not allowed to contract themselves out of liability for fraud. though partners may agree amongst themselves that the extent of a partners liability to his co-partners is to be limited or that he is not liable to compensate them for loss occasioned by his wrongful act, omission, neglect, want of skill, misconduct or negligence, but it is not open to them to contract themselves, or any one of them, out of liability for loss occasioned to the firm by fraud. the purpose of section 11 is to induce partners to deal honestly with the customers of the firm. if for example, a partner in the ordinary course of the business of firm, commits a fraud upon a customer of the firm, for which the firm (including the innocent partners) is held liable, the firm is entitled to recover indemnity from partner guilty of the fraud. in campbell verses campbell (1834) 12 sh (city of seas) 573, scot, the managing partner of a distillery purchased certain quantity of illicit whisky on behalf of the firm. the plaintiff partner, who did not take part in the conduct of the business of the firm, had no knowledge of the purchases. the firm had to pay penalties for purchase of illicit whisky. they were held liable jointly and severally to indemnify the plaintiff against the amount so paid and interest on it.

2. duties subject to contract to the contrary the following duties of the partners as laid down in the act are applicable in the absence of a contract to the contrary:

1. duty of due diligence. section 12 (b) provides that subject to contract between the partners, "every partner is bound to attend diligently to his duties in the conduct of the business." diligent functioning means working with careful effort and absence of carefulness is negligence. but section 13 provides liability only where there is willful negligence. 2. duty to indemnify for wilful neglect. section 13 (f) provides that subject to contract between the partners, "a partner shall indemnify the firm for any loss caused to it by his wilful neglect in the conduct of the business of the firm". unlike the duty to indemnify for fraud under section 10, a partner can contract himself out from this duty. to attract clause (f) the loss caused to the firm must be by partner's wilful neglect. mere neglect on the part of partner, i.e. a mere inadvertence or accident, is not sufficient to attract application of this clause and the loss caused has to be due to wilful neglect, i.e. a deliberate, intentional and purposeful commission or omission of a certain act. in case such wilful neglect amounts to fraud provisions of section 10 are attracted. 3. duty to work without remuneration. according to section 13 (a), subject to contract between the partners, a partner is not entitled to receive remuneration for taking part in the conduct of the business. 4. duty to contribute to losses. section 13(b) providers that subject to contract between the partners, the partners are bound to contribute equally to the losses sustained by the firm. 5. duty to apply the property of the firm for purposes of the business of the firm. section 15 provides that "subject to contract between the partners, the property of the firm shall be held and used by the partners exclusively for the purposes of the business." thus it is a duty of the partners that the property of the firm shall be held and used by them exclusively for the purposes of the business of the firm. if a partner uses the property of the firm for his personal purposes he will be accountable to the firm as per section 16, for any private advantage obtained by him. however, the failure of the partner to submit an account of use of partnership property for personal use will not make him liable for criminal breach of trust under section 409 of the indian penal code. in yelji raghavji verses. state of maharashtra, air 1965, sc 1433, a partner who was assigned the work of realizing the dues of the partnership, failed to deposit in bank some collections, the supreme court held that he was not liable for criminal breach of trust under section 409, ipc as he was authorised by other partners to spend the money for the business of the firm. 6. duty to account for personal profits. section 16 provides that subject to contract between the partners,— (a) if a partner derives any profit for himself from any transaction of the firm, or from the use of the property or business connection of the firm 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 with that of the firm, he shall account for and pay to the firm all profits made by him in that business. thus the section lays down the following two of the most important duties. they are: (a) duty to account for secret profits, and

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21 (b) duty not to compete. a. duty to account for secret profits. according to section 16 (a) a partner is liable to account for profits derived for himself arising out of the following:—

(1) from any transaction of the firm; (2) from the use of property of the firm; (3) from use of business connection of the firm; and (4) from use of the firm name. thus section 16 (a) gives a fairly wide coverage to the liability to account for personal profits. the advantages arising from things connected with the firm should belong to all the partners and not merely to the partner whose mechanism brings them about. a partner being an agent, makes a profit out of the concerns of his principal, and while acting for him, he must disclose it to the principal; he cannot make a profit out of his principal's business for himself. one of the aspects of his duty is that there should not be a conflict of partner's personal interest with his duty to the firm. for example, if he is authorised to purchase something for the firm he should not supply from his own stock, and if he is asked to sell something for the firm, he should not purchase for his personal use without first informing the other partners. (see bently verses craven, discussed earlier). in gordon verses holland, (1913) 82 lj pc 81, a partner, improperly and without the knowledge of the other partner, sold 'partnership property to a bonaflde purchaser for value and without notice. the partner afterwards purchased the property from him. the partner was held liable to account for profits by subsequent dealings, with the property. b. duty not to compete. section 11 (2) provides that notwithstanding anything contained in section 27 of the indian contract act. the partners may agree that they, or some, or any of them, shall not carry on any business other than that of the firm while he is a partner in the firm. section 16 (b) of the indian partnership act provides that if a partner carries on any business of the same nature as and competing with that of the firm, he shall account for all profits made by him in that business.

rights of partners subject to contract between the partners, the indian partnership act confers the following rights upon all the partners: 1. right to take part in the conduct of the business [section 12(a)|. subject to contract between the partners, every partner has a right to take part in the conduct of the business of the firm. this right cannot be taken away except by a contract. unequal capital contribution or no capital contribution is no bar to his right. it is sometimes provided by express agreement that this or that partner will not take active part in the conduct of the business and also for payment for salary to managing or active partner. 2. right to be consulted [section 12(c)|. subject to contract between the partners, any difference arising as to ordinary matters may be decided by a majority of the partners, and every partner shall have the right to express his opinion before the matter is decided by the majority of the partners. this power, though not in itself of a judicial kind, is subject to the rule of natural justice. every partner must have an opportunity of being heard, and the decision must be made in good faith with a view to collective interest of the firm. further, no change may be made in the nature or place of the business without the consent of all the partners. thus in the cases of fundamental matters, the consent of all the partners becomes necessary. 3. right to have access to firm's books [section 12(d)]. subject to contract between the partners, every partner has a right to have access to and to inspect and copy any of the books of the firm. the term 'books', used is section 12 (d), is more comprehensive than the term 'accounts' used in section 30 (2) of the act. as such, no exception can be made to any books of the firm, even though a particular book may contain business secrets. this right can be exercised by the partner personally or by an agent, who is not objectionable. however, the extracts of the books should not be used by a partner for purposes hostile or injurious to the firm after he has ceased to be a partner. 4. right to share the profits [section 13(b)|. subject to contract between the partners, the partners are entitled to share equally in the profits earned, and shall contribute equally to the losses sustained by the firm. since this provision is subject to the contract between the partners, it is open to the partners to divide the profits and losses of the firm in a different ratio. the contract may provide that a particular partner will bear all the losses of the business. the contract to the contrary may even provide that one of the partners is to have a fixed salary.

5. right to interest (section 13(c) and section 13(d)|. unless otherwise agreed, the partners are not entitled to any interest on their capital. section 13(c) provides that where a partner is entitled to interest on the capital subscribed by him such interest shall be payable out of

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22 profits. section 13(d) provides that subject to contract between the partners, a partner making for the purposes 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 six per cent per annum from the firm. a partner has the right of interest on advances whether there are profits or not. but a partner is not entitled to interest after the date of dissolution. the contract may provide a different rate of interest. subject to contract between the partners, a partner is not entitled to receive remuneration for taking part in the conduct of the business [section 13 (a)]. 6. right to indemnity (section 13(e)|. subject to contract between the partners,. the firm shall indemnify a partner in respect of payments made and liabilities incurred by him—

(i) in the ordinary and proper conduct of the business, and (ii) in doing such act, in an emergency, for the purposes of protecting the firm from loss, as would be done by a person of ordinary prudence, in his own case, under similar circumstances.

7. right to use the property of the firm for the purposes of the business of the firm (section 15|. subject to contract between the partners, the property of the firm shall be held and used by the partners exclusively for the purposes of the business. if a partner uses the property of the firm for his own purposes, he will be liable to account to the firm for the profits, if any, that he may make. a contract of partnership is uberrimae fidei i.e., a contract of absolute good faith. 8. rights of an outgoing partner. the rights of an outgoing partner have been explained in a subsequent chapter. these rights are: (a) right to carry on competing business [section 36(1)]; and (b) right in certain cases to share subsequent profits [section 37]. instead verses. salt, (1825) 3 bing 101, a partner without the authority of the other partner, submitted a dispute to arbitration. the award passed on such submission was held not binding on the other partner as the submission to arbitration ordinarily does not come within the scope of a partner's authority so as to bind the other partners. similar was the decision in venkatachellam chetty verses. ratnanathan, the partner was not allowed to claim indemnity in the circumstances of the case. in thomas verses atherton, (1878) 10 ch d 185, the managing partner of a colliery worked beyond the boundaries of the colliery without making proper inquiries. the adjoining owner gave a notice to the managing partner to that effect. even after receiving the notice from the adjoining owner that he was committing a trespass, he recklessly continued such workings without consulting his co-partners, even though he had a bonafide belief that the adjoining owner had no title to the disputed areas. the adjoining owner brought an action before the arbitration for tress pass and awarded damages of £ 6,000. the co-partners refused to contribute. the managing partner filed a suit against them. the court of appeal held that the managing partner alone was liable for damages. in mahadeo verses patel verses. ganoo changoo patel, air 1925 bom 324, a partner was not allowed to recover from his co-partner a part of the losses suffered by the firm because they were due to his own failure to utilize the boats of the firm for plying purposes. insidhu narayan aiyangar verses. ramaswami, ilr 32 mad 203, it was held that the right to indemnity is not lost by the dissolution of the firm and it is immaterial whether there is or has been no settlement of accounts.

rights and duties of partners after change in the firm, after the expiry of the term of the firm and where additional undertakings are carried out the partners may continue the business after the retirement or death of a partner. similarly, a partnership formed for a particular period of time, may continue that business, even after the expiry of the time. again a partnership constituted to carry on a particular venture, may also continue even after the completion of the venture. section 17 of the act has laid down the rights and duties of the partners in these cases. they are as follows:

(a) after a change in the firm. where a change occurs in the constitution of a firm the mutual rights and duties of the partners in the reconstituted firm remain the same as they were immediately before the change, as far as may be. however, it is open to the partners to agree otherwise. (b) after the expiry of the term of the firm. where a firm constituted for a fixed term continues to carry on business after the expiry of that term, the mutual rights and duties of the partners remain the same as they were before the expiry, so far as they be consistent with the incidents of partnership at will.

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23 (c) where additional undertaking are carried out. where a firm constituted to carry out one or more adventures or undertakings carries out others adventures or undertakings, the mutual rights and duties of the partners in respect of the other adventures or undertakings are the same as those in respect of the original adventures or undertakings.

5

relations of partners to third parties implied authority of a partner a partner's authority may be express or implied. an authority is said to be express when it is given by words, spoken or written. it is implied where there is no express agreement between the partners, in which case, the law impliedly gives certain powers to a partner and also negatives certain other powers as regards partners. the word "implied" suggests that authority of a partner which is apparent from his position in a partnership firm in relation to the business of the firm. section 19 deals with the subject of implied authority of a partner. it is reproduced below: — "19. implied authority of a partner as agent of the firm.—(1) subject to the provisions of section 22, the act of a partner which is done to carry on, in the usual way, business of the kind carried on by the firm, binds the-firm. the authority of a partner to bind the firm conferred by this section is called his implied authority. (2) in the absence of any usage or custom of trade to the contrary the implied authority of a partner does not empower him to— (a) submit a dispute relating to the business of the firm to arbitration,

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24 (b) open a banking account on behalf of the firm in his own name, (c) compromise or relinquish any claim or portion of a claim by the firm,

(d) withdraw a suit or proceeding filed on behalf of the firm, (e) admit any liability in a suit filed on behalf of the firm, (0 acquire immovable property on behalf of the firm, (g) transfer immovable property belonging to the firm, or (h) enter into partnership on behalf of the firm." thus, section 19 provides for two rules: the first is the affirmative rule prescribed by sub-section (1) and the second is a negative rule provided by sub-section (2). sub-section (1) states that subject to the provision of section 22 the act of a partner which is done to carry on, in the usual way-business of the kind carried on by the firm, binds the firm. it means that the acts, in order to be within the implied authority of a partner, must be done—

(1) in the conduct of the business of the kind carried by the firm, and (2) in the usual way of such business (3) it is also necessary as provided in section 22 that the act must be done in the firm name or in any other manner expressing or implying an intention to bind the firm. it means that "what is necessary to carry on the partnership business in the usual way is the test of partner's implied authority to bind the firm." lindley on partnership 14th ed. page 255. as regards the nature of the business and the ordinary course of carrying it on, it is provided in lindley on partnership, 14th ed. 256, as follows:— "the question whether a given act can or cannot be said to be done in carrying on a business in the way in which it is usually carried on must evidently be determined by the nature of the business and by the practice of persons engaged in it. evidence on both of these points is therefore necessarily admissible, and, as may readily be conceived, an act which is common in the prosecution of one kind of business in the ordinary way may not be required for carrying on another business of a different character. consequently no answer of any value can be given to the abstract question can one partner bind his firm by such and such an act unless, having regard to what is usual in business generally, it can be predicted of the act in question either that it is one without which no business can be carried on, or that it is one which is not necessary for carrying on any business whatever. there are obviously very few acts of which any such assertions can be truly made. the great majority of acts practically all which give rise to doubt, are those which are usual in one business and not in another. take, for example, negotiable instruments: it is usual for one member of a firm of bankers to draw, accept, or indorse a bill of exchange on behalf of the firm, and to require that each member should put his name to it would be ridiculous. but it by no means follows, nor is it in fact true, that it is usual for one of several solicitors to possess a similar power; for it is no part of the ordinary business of a solicitor to draw, accept, or indorse bills of exchange. the question, therefore, can one partner bind the firm by accepting bills in its name (admits of no general answer; the nature of the business and the practice of those who carry it on (usage or custom of the trade) must be known before any answer can be given. moreover, what is "usual" may vary from time to time." for the purpose of implied authority the courts have made a distinction between a trading and a non-trading partnership. a business which involves buying and selling goods is regarded as a trading concern as it is necessary or useful for traders to borrow money and issue negotiable instruments, but not for professionals. a solicitor's firms, a firm conducting cinematograph theatre business, a firm of auctioneers, quarry owners or farmers have been held to be non-trading partnerships. in the absence of evidence showing usage, the implied power to borrow money or to bind the firm by putting the name of the firm to a negotiable instrument by partner if the above mentioned non-trading partnership has been denied to him. the firm will not be bound unless some actual authority or ratification can be proved. in this connection their lordships of the privy council in bank of australasia verses. breillat, (1847) 6 moc pc 152, at page 193 quoted story and laid down as follows:— "the general power of partners in ordinary trading partnership, and the restrictions upon such powers appear to us to be stated with great accuracy by mr. justice story in his treatise on partnership and agency, arid we willingly adopt his language. in the latter of these works (chapter vi, ss 124 and 125) the law is thus stated, section 124, "every partner is, in contemplation of law, the general and accredited agent of the partnership, or, as it is, sometimes expressed, each partner is prepositus negoties societatis, and may, consequently bind all other partners by his acts in all matters which ' are within the scope and object of partnership. hence, if the partnership be of a general commercial

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25 nature, he may pledge or sell the partnership property; he may borrow money, contract debts, and pay debts on account of the partnership; he may draw, make, sign, endorse, accept, transfer, exchange cheques and other negotiable paper in the name and on account of the partnership." section 125: "the restrictions of this implied authority of partner to bind the partnership are apparent from what has been already stated. each partner is an agent only in and for the business of the firm; and therefore, his acts beyond that business will not bind the firm. neither will his acts done in violation of his duty to the firm bind it when the other party to the transaction is congnisant of, or cooperates in such breach of duty." in mathura nath verses. bageshwari rani, air 1928 cal 57, the business of the firm was of catching white elephants and the firm used to enter into agreements for hiring elephants for the purpose. a partner entered into a similar agreement for hiring an elephant. this act of the partner was held to be one of the kind of the business carried on by the firm.

thus a partner, in the case of a trading firm, in the exercise of his implied authority, can bind the firm by any of the following acts: (1) he may draw, make, sign, endorse, accept, transfer, negotiate and procure to de discounted, promissory notes, bills of exchange, cheques and other negotiable paper in the name and on account of the partnership firm. a partner of a non-trading firm does not ordinarily possess the power to bind his copartners by drawing or accepting bills of exchange. therefore, a partner of a nontrading firm cannot in the exercise of implied authority bind his copartners by giving a post-dated cheque. (2) he may borrow money for the purposes of the business of the firm, (3) he may pledge or sell moveable property of the firm, (4) he may buy goods on account of the firm which are necessary for or usually required for the purposes of the business of the firm, (5) he may receive payment of debts on account of the firm and give valid discharge by issuing a receipt for the same, (6) he may pay debts on account of the partnership firm, (7) he may employ servants for the partnership. (8) he may sue on behalf of the firm and for this purpose may engage a lawyer. similarly he can defend a suit brought against the firm and may engage a lawyer for this purpose. in an ordinary partnership, a partner may bind the firm by any of the acts mentioned in (4) to (7) above. all the partners of a firm can ratify an act of a partner, which has been done in excess of his implied authority or without any authority, provided the act is such that it can be legally done by the authority of all the partners previously given. statutory restrictions on implied authority sub-section (2) of section 19 provides certain acts which do not, in the absence on any usage or custom of trade to the contrary, fall within the implied authority of a partner. thus a partner is not authorised to do these acts without consulting the other partners. the sub-section says that "in the absence of any usage or custom of trade to the contrary, the implied authority of a partner does not empower him to — (a) submit a dispute relating to the business of the firm to arbitration, (b) open a banking account on behalf of the firm in his own name, (c) compromise or relinquish any claim or portion of claim by the firm. (d) withdraw a suit or proceeding filed on behalf of the firm. (e) admit any liability in a suit or proceeding against the firm, (f) acquire immovable property on behalf of the firm.

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26 (g) transfer immovable property on behalf of the firm. (h) enter into partnership on behalf of the firm." this sub-section has no statutory precedent but the legislature has deemed it expedient hoping that this will serve as a useful guide to many courts in india specially in the mofusil. these statutory restrictions are effective against all the persons whether a person contracting with the firm has knowledge of them or not. the above list is not exhanstive. extension and restriction of partner's implied authority section 20 provides that "the partners in a firm may, by contract between the partners, extend or restrict the implied authority of any partner". as stated earlier the act recognizes in section 11 that partners should have as much freedom as possible in regulating all matters pertaining their relation inter se.

therefore the partners may agree that one of them would have authority in excess of his implied authority; likewise they may agree to restrict the implied authority of an inexperienced or junior partner. this extension or restriction of a partner's implied authority can be done with the consent of all the partners and not by any one or even majority of the partners. thus the partners may, by mutual agreement, extend or restrict the implied authority of a partner, but so far as outsiders are concerned they cannot be affected by such limitations unless :—(1) they have actual notice of the same or (2) they did not know or believe that the person was a partner. paragraph two of section 20 provides this which is as follows:— "notwithstanding any such restriction, any act done by a partner on behalf of the firm binds the firm, unless the person with whom he is. dealing knows of the restrictions or does not know or believe that partner to be a partner." authority in an emergency section 21 provides that "a partner has authority, in an emergency, to do all such acts for the purpose of protecting the firm from loss as would be done by a person of ordinary prudence, in his own case, acting under similar circumstances, and such acts bind the firm." thus this section purports to extend the authority of a partner in an emergency. the authority of a partner to act in an emergency is similar to that of an agent in similar circumstances under section 189 of the indian contract act, 1872. under section 13(e) (2) a partner is entitled to be indemnified by the firm in respect of payments made and liabilities incurred by him for the purpose of protecting the firm from loss in an emergency provided that the partner has acted as a person of ordinary prudence would have acted under similar circumstances. this emergency is coextensive with his authority. mode of doing act to bind the firm liability of a firm for wrongful acts of a partner sections 26 and 27 of the act deals with the question of liability of the firm for the wrongful acts of a partner and for misapplication of money or property by a partner. section 26 provides for the liability of the firm for wrongful acts of a partner in general and section 27 provides for the liability for particular torts and breaches of trust by a partner, namely misapplication of money or property of third persons. section 26 is as follows: — "where, by the wrongful act or omission of a partner acting in the ordinary course of the business of a firm, or with the authority of his partners, loss or injury is caused to any third party, or any penalty is incurred, the firm is liable to the same extent as the partner." the liability of the firm under section 26 arises only (1) if the act is done in the ordinary course of the firm or done with the authority of the other partners or on behalf of the firm in its name and the firm subsequently ratifies them with full knowledge of what those acts were, and (2) the result of the wrongful act or omission is the injury to any third party, or any penalty is incurred.

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27 the rule is based on principle of agency. lord macnaghten in lloyd verses grace smith & co., (1912) a.c. 716 stated the principle in relation to the law of agency which is equally applicable as the principle of the partnership liability. his lordship said:— "it is now settled that a principal is liable for the fraud or any other intentional wrong of his agent acting within the scope of his authority, whether the fraud is committed for the benefit of the principal or for the benefits of the agent or whether the principal in fact derives any benefit or not. the only difference between the case where principal receives the benefit of the tortuous act, and the case where he does not, is that in the latter case the principal is liable for the wrong done to the person injured by his agent acting within the scope of his agency, in the former case he is liable on that ground and also on the ground that by taking the benefit he has adopted the act of his agent, cannot approbate and reprobate." the expression "acting in the ordinary course of the business of the firm" in section 26 has a wider scope than the implied authority under section 19. what is essential is that the act must be shown to have been done by a partner in the ordinary course of the business of the firm, i.e., done in conducting or carrying on the business of the firm, whether wrongful or unauthorized, would not absolve the firm from liability. even if the act is done not in the ordinary course of the business of the firm but is done with the authority of the partners of the firm, or the act is subsequently ratified” with full knowledge of the facts, the firm is liable. further, if one partner in conducting the business of the firm is guilty of breach of revenue laws, the partners are jointly and severally answerable for the consequent penalties, although they may not themselves have authorised or been parties to the wrongful act of their co-partner. in mellow verses shaw, (1861) 1 b&s 437, one of the partners in a coal-mine acted as a manager, and was guilty of personal negligence. his partner was held jointly liable for injury caused from the negligence. in blyth verses. fladgate, (1891) 1 ch 337, a partner of a firm of solicitors received money while acting within the scope of his duty. but he was negligent in investing the sum of money on a proper security. the security resulted in a loss to the plaintiff. all the partners were held liable though they had no personal knowledge of the transaction. in hamlyan verses. john housten & co., (1903) 1 kb 81, one of the two partners without the knowledge of his sleeping copartner, by bribery induced a clerk of the plaintiff, a competitor in trade, in breach of duty to his employer to give confidential information in regard to the plaintiffs business. it was in the ordinary course of the business of the firm to obtain such information by legitimate methods, and the partner acted in the interest of the firm. both partners were held liable to the plaintiff. in hiirruck chand verses. gobind lal, (1906) 10 cwn 1053, one of the partners received the stolen goods and credited the sale proceeds to the credit of the firm. it was held that both were liable for conversion to the owner of the goods. in sham sunder verses state of haryana, (1989) 4 scc 630, it was held that the principle of civil liability of partner under partnership act is not relevant to determine criminal liability. the court said that the persons entrusted with business of firm and responsible for conduct of business are alone liable to be prosecuted and not all partners. in ahmedbhai valad habibbhai verses. framji edulji, ilr 28 bom 226, it was held that a malicious prosecution by the managing partner of a firm does not render the other partners of the firm liable, unless it is shown that the firm was in some way or the other concerned in the prosecution and had instigated it. in petrie verses. lamont, (1841) car & m 93 np, a partner wrongfully ejected a tenant. the other partners were held not liable for the ejectment of tenant. it was further held in this case that a partner is not liable for the trespass of another partner unless committed with his knowledge or ratified by him. in rapp verses latham, (1819) 2 b & aid 795, the firm was held liable for the false representation, i.e. fraud, of his managing partner as it was connected with the business of the firm. in this case the plaintiff employed a firm of wine and spirit merchants for the purchase of wine on his behalf and to sell the same on commission. the managing partner, without entering into the purchase and sale transactions told to the plaintiff that he had sold a part of the wine so purchased at a profit and received advances from the plaintiff for further purchases. his partner was ignorant of all this. but he was held liable for the false representation of the managing partner. in citizen life association co. verses. brown, (1904) ac 428, a partner of a firm running a newspaper published a defamatory7 matter, he was held liable for defamation. liability of a firm for misapplication by partners.

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28 section 27 deals with one particular wrong, namely, misapplication by a partner of money or property of a third person received for or lying in the custody of the firm. the section provides: — "where— (a) a partner acting within his apparent authority receives money or property from a third party and misapplies it, or (b) a firm in the course of its business receives money or property from a third party, and the money or property is misapplied by any of the partners while it is in the custody of the firm, the firm is liable to make good the loss." section 27 envisages two types of cases. firstly where money or property is received by a partner within his apparent authority and misapplied by him and secondly, where money or property is received by the firm in the course of the business and misapplied by any of its partners. under clause (a) of section 27, to held the firm liable a partner must have received money or property while acting within his apparent authority and it must have been misapplied by that partner. it rhodes verses monies, (1895) 1 ch 235, r, a member of a firm of solicitors, was employed by a client of the firm to obtain for him a loan upon mortgage of his estate. r obtained the loan, but falsely stated to the client that the mortgages required collateral security. the client accordingly handed to r some share warrants payable to bearer to be used as collateral security. r subsequently misappropriated the share warrants and absconded, his partners had no knowledge of the deposit of the warrants from the same client in order to obtain loans for him, and the firm were in the habit of receiving from and holding for clients bonds payable to bearer, under these circumstances it was held that the transaction was clearly a partnership transaction, and that r's partners were liable for value of the shares misappropriated. in british homes assurance corporation ltd verses paterson, (1902) 86 lt 826 it was held that where the person entrusting his property to another deals with him as an individual and not as a partner, he cannot afterwards turn around so as to held his copartners liable. in this case the plaintiffs appointed a person as their solicitor in a mortgage transaction. the solicitor took another person (peterson) as his partner and gave notice of it to the plaintiffs. the plaintiffs (appellant corporation) paid no attention to the notice and continued to correspond with the solicitor in his own name. the solicitor paid the money into his own account and misappropriated it. the defendant (peterson) was not held liable for the solicitor's fraud. in cleather verses. jwisden, (1884) 28 ch d 340, there was a firm of solicitors. a partner of that firm received from a friend certain bonds payable to bearer for safe custody in the strong room of the firm. other partners knew nothing about it. he misappropriated the bonds. the firm was held not liable as the strong room was not meant for obliging friends and no partner had express or implied authority to receive bonds for that purpose. his remedy was confined to the individual partner whom he trusted. in plumer verses. gregory, (1874) lr 18 eq 621, the plaintiff paid £ 1300 to a firm of solicitors for specific investment and received an acknowledgement, signed by both the partners. the amount was intended to be invested in a specified security. subsequently, however, the plaintiff paid another £ 1700 to one of the partners for general investment in some other security. the fact of payment was not known to the other partner. the partner to whom the second sum was paid, died and both the sums were misappropriated by the other partner. it was held that the estate of the deceased partner was liable for £ 1300 only not for £ 1700 because the receipt of money for the purpose of general investment was not a part of the ordinary course of the solicitor's business. receipt by firm [clause (b)]

under clause (b) section 27, to hold the firm liable the money or property must have been received by the firm in the course of the business of the firm and the money must have been misapplied by any partner while it is in the custody of the firm. in blair verses bromley, 5 hear 542, two persons were in partnership as solicitors. a client entrusted one of them with money to invest on mortgage, and was told by him that it had been invested; whereas, in truth, the partner who had received the money had misapplied it. for many years the client was regularly paid interest by the solicitor who attended to the matter, and the fraud vas not discovered until he became bankrupt. the other partner who knew nothing whatever of the fraud, was nevertheless held liable to make the money.

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29 it is necessary for the operation of the rule that the property should have reached the custody of the firm [tendering hundred watenvorks co. verses jones, (1903) 2 ch 615]. liability for holding out

it has long been established that a person who is not a partner becomes liable as if he were one to persons towards whom he so conducts himself as to lead them to act upon the supposition that he is a partner in point of fact. the partnership act 1932 contains the following section on this subject: "28. holding out—(1) anyone who by words spoken or written or by contract represents himself, or knowingly permits, himself to be represented, to be a partner in a firm, is liable as a partner in that firm to anyone who has on the faith of any such representation given credit to the firm, whether the person representing himself or represented to be a partner does or does not know that the representation has reached the person so giving credit." (2) where after a partner's death the business is continued in the old firm name, the continued use of that name or of the deceased partner's name as a part thereof shall not of itself make his legal representative or his estate for any act of the firm liable done after his death. meaning of holding out

the above section reproduces the doctrine of "holding out" which is a part of the law of estoppel as laid down in section 115 of the indian evidence act, 1872 which is as follows: "when one person has, by his declaration, act or omission intentionally caused or permitted another person to believe a thing to be true and to act upon such belief, neither he nor his representative shall be allowed, in any suit or proceeding between himself and such person or his representative to deny the truth of that thing." the principle under lying the rule was very clearly stated as early as in 1793 by eyre, c.j., in waugh verses carver, (1793) 2 h blacks 235, as follows:— "now a case may be stated in which it is clear sense of the parties to the contract that they shall not be partners, that a is to contribute neither labour nor money, and, to go still further, not to receive any profits. but if he will lend his name as a partner he becomes as against all the rest of the world a partner, not upon the ground of the real transaction between them, but upon principles of general policy, to prevent the frauds to which creditors would be liable, if they were to suppose that they lend their money upon the apparent credit of three or four persons, when, in fact, they lent it only to two of them, to whom without the others they would have lent nothing." according to the section if a person who is not a partner represents himself to be a partner in a firm or allows others to do it, he is estopped or prevented from denying this as regards persons who have acted on the faith of such representation. in such a case he is liable as a partner to such person. the motive of the representation or the state of the knowledge of the person making is immaterial. "moreover, if a person has been induced by promises of irresponsibility or by fraud to hold himself out as a partner with others, this circumstance does not relieve him from liability to third parties who have been induced by his conduct to trust him as well as them, and who had nothing to do with promises made to or the fraud practiced upon him." lindley on partnership 14th ed. page 107. to hold a person liable on the basis of holding out the following two elements must be present: (a) he must have by words, spoken or written, or by conduct represented himself or knowingly permitted himself to be represented as a partner in a firm. (b) credit must have been given to the firm on the faith of such representation. (a) representation

the representation on which a case of holding out is sought to be made may be made (1) by written or spoken words, (2) or by conduct, (3) or by knowingly permitting others, by words or by conduct, to make the representation. the representation must be that a person is a partner in a firm. for example, where a represents to b that he is a partner in the firm of x & co. b, on the faith of the representation, gives credit to x & co. the firm x & co. becomes insolvent. b can make a liable.

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30 an express representation takes place where a person allows his name to be used in the name, title or correspondence ‘of the firm. for example, in bevan verses national bank ltd., (1906) 2 tlr 65, one mw was manager of another business. the business was carried on under the name and style of mw & co. both mw and owner were held liable. the court laid down as follows: — "where a person carries on business in the name of an individual with the addition of the words "& co." and employs that individual as manager of the business to whom the entire management of the business is left, that does not amount to a holding out of that person as the sole owner of the business. it may amount to a holding out that he is a partner in the business/" in kirkwood verses. chetham & co., ( 1862) , a butter dealer, c, appointed a servant smith and started the business under name of c. smith & co. goods were supplied to this firm by the plaintiff. the court held both c and smith liable. in oriental bank of commerce verses. s.r. kishore & co., there were signatures of the person concerned on all the essential documents and all-round participation in business; he became liable by holding out. a.r. porter verses. w. incell, (1905) is a case on representation by conduct. the defendant gave loan to a person who established a cattle farm. the defendant took deep interest in the business and he used his personal influence to obtain a lease of premises for the farm. the defendant was constantly present there receiving parties and their demands. the plaintiff supplied certain goods to the firm under the impression that the defendant was a partner. he was held liable as a partner by holding out. holding out may also arise where a person "knowingly permits" 01 aiffers" himself to be represented as a partner. in tower cabinet co. verses ingram, (1949), a and b carried on business as household furnishers. b retired and a continued the business under the same name. after the retirement of, the appellant company supplied to the firm some furniture. the payment of furniture was never made. b's name appeared on the paper of the firm on which the contract was concluded. but that representation was made by a without b's knowledge and without his authority. the plaintiff company sought to hold b liable, but he was not held liable as he did not knowingly suffered himse lf to be so represented. the representation must move from the person making it or from a person duly authorised by him or the person making it must knowingly allows himself to be represented. the use of the words "knowingly permits" confine the liability only to cases where there is some act of authorization, express or implied, by the person sought to be held liable and mere omissive silence or passive a quiescence will not make out a case of holding out. but it is not necessary that there must be an express authority for being represented, the authority may be inferred from the conduct of the parties. mere silence at the time when a false representation as is made may amount that the person has allowed himself to be represented a person who has not authorised others to hold him as a partner with them, but who, knowingly as a fact they are so holding him out should attempt to stop them. lindley, 14th ed. page 109, in this connection says that until the law is settled remonstrance will be sufficient and the person need not advertise his dissent or apply for an injunction. (b) giving of credit on the faith of the representation it is not enough to establish that there is a representation or the person has permitted himself to be represented as a partner, it must also be established that the statement is relied upon by the person who has acted on it by giving credit to the firm on the faith of the representation. a person who gave credit to the firm, without knowing about the representation will not be permitted to take advantage of any such representation which came to his knowledge afterwards. but it is not necessary that the representation must have been given directly to the person giving credit to the firm on the faith of the representation. pollock in his book, digest of the law of partnership, 12th ed. p.62 states that there may be "holding out" without any direct communication by words or conduct between the parties. one who makes an assertion intending to be repeated and acted upon, or even under such circumstances that it is likely to be repeated and acted upon by third persons will be liable to those who afterwards hear of it and act upon it. in this connection lord wensleydale in dickinson verses. aalpy, (1829) 10 b & c 128 has observed as follows: "if it could have' been proved that the defendant had held himself out to be a partner not to the world, for that is a loose expression, but to the plaintiff himself, or under such circumstances of publicity as to satisfy a jury that the plaintiff knew of it and believed him to be a partner, he would be liable to the plaintiff in all transactions in which he engaged, and gave credit to the defendant upon the faith of being such partner. the defendant would be bound by an indirect representation to the plaintiff

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31 arising from his conduct as much as if he had stated to him directly and in express terms that he was a partner and the plaintiff had acted upon that statement," liability of retired partner. it is often seen that after a reconstitution of the partnership after their retirement or expulsion of a partner, the business of the firm is continued by the remaining partners or partner in the name of the old firm. in this connection section 32(3) based upon scarf verses. jardine, (1882) provides as follows: "notwithstanding the retirement of a partner from a firm, he and the partners, continue to be liable as partners, to third parties for any act done by any of them which would have been an act of the firm if done before the retirement, until pu bl ic notice is given of the retirement. provided that a retired partner is not liable to any third party who deals with the firm without knowing that he was a partner." thus a notice of retirement must be given either by the partner who retires or any partner of the reconstituted firm. if no such notice is given, the retiring partner will be liable for the subsequent act of the firm to all persons having knowledge of the fact of his being a partner. but he will not be liable for future acts of the firm to third parties dealing with the firm without knowing that he was partner. similarly, remaining partner who carry on the business would continue to be liable by estoppel to third parties for subsequent acts of the retiring partner which would have been binding on the firm if done by him when he was a partner. thus it is in the interest of both the retiring partner and the remaining partners of the reconstituted firm to give a public notice of retirement by any one of them. in lindley on partnership, 14th ed. page 111, it is stated that "if the firm name does not disclose the fact that the retiring partner is a member-of the firm the continued use of that name after his retirement will not, as a matter of fact, represent him as being a member of the firm except to persons who knew of his connection with it, and to such persons due notice of his retirement will terminate his liability for the future; but until and unless he gives such notice his liability to them will continue. if the firm name consists only of the surname of the retiring partner followed by the words "and co.", the continued use of that name will not, under ordinary circumstances, represent the retiring partner to be still a member of the firm or expose him to liability. if it appears from the firm that the retiring partner is a member of the firm, the continued use of that name will as a matter of fact represent him to be still a partner in the firm. if in such a case he omits to give due notice of his retirement his liability v4)l continue." it also often occurs that when a partner retires, a new partner is taken into the firm, the firm name remaining unchanged. according to lindley, 14th ed. page 113, in such a case the doctrine of holding out must be applied with care. lindley explains the legal position by taking an illustration which is reproduced below: — "suppose a and b carry on business under the name of x & co. neither a nor b holds himself out as a member of that firm to anyone who does not know his connection with it. if, therefore, a retires from the firm, and gives no notice of his retirement, he will still be liable to old customers who knew of his connection with x and co., and who continue to deal with it on the faith that a is still a member of it; but a will incur no liability to new customers of x & co. who have never heard of him. further, if on a's retirement c joins b, and b and c carry on business as x & co., even an old customer of x & co., who goes on dealing with it without notice of a's retirement or c's admission, cannot truly say that a ever held himself out as a partner with c or with both b and c; and consequently, even and old customer cannot maintain an action against a, b and c jointly for a debt contracted by x & co., after a's retirement. to allow him to do so would, indeed, be to give him the best of both words of partnership liability —apparent in the case of a and actual in the case of c —and it is appropriate that the customer should not be allowed to have it both ways when dealing with a firm whose name does not point to say specific members. the old customer can, in the case supposed, sue a and b on the ground that he dealt with x & co. on the faith of a and b being still the members of the firm; or he can sue b and c on the ground they are his real debtors; but he must elect between a and b on the one hand and b and c on the other; he cannot (in the case supposed) sue a, b and c on the ground that b and c are in truth x & co. and that a is estopped from denying that he is a member of that firm. this was decided in scarf verses. jardane. the case would be otherwise if a and b carried on business not in the name of x & co. but in their own names and a retired and gave no notice of his retirement, and c came in, and b and c carried on business with a's consent under the name of a, b and c. in such a case a would hold himself out as in partnership with both b and c, and would be estopped from denying it as against anyone dealing with the new firm on the faith of a being a member of it. further, if the old customer did not know of a's retirement, but did know that c had become a member of x & co., such customer would, it is apprehended, be entitled to sue a, b and c jointly for a debt contracted by x & co. after a's retirement and c's admission." no holding out in case of dormant, deceased or insolvent partner. no creditor can hold a retired partner liable whom he did not know to be a partner before the change in the firm, and who had ceased to be a partner in fact when the credit was

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32 given. thus a "dormant partner", i.e. one not generally not known to be a partner, may retire without giving a public notice of his retirement. but where his relationship with the firm was known to some customers public notice of his retirement must be given at least to them. section 28(2) provides that if a partner dies, arid the surviving partners continue the old business in the old name, this will not make the estate of the deceased liable, even to old customers for acts done by the survivors after the death of their late copartner. death is a notice by itself. section 34(2) provides that an insolvent partner ceases to be a partner on the date on which the order of adjudication is made and the estate of a partner so adjudicated is not liable for any act of the firm and the firm is not liable for any act of the insolvent done after the date on which the order of adjudication is made. not applicable to torts. the doctrine of "holding out" is not applicable in case of civil wrongs as it rests entirely on credit having been to the person whom it is sought to be made liable. applicability to expelled partner. section 33(2) provides that the provisions of sub. sections (2), (3) and (4) of section 32 shall apply to an expelled partner as if he were a retired partner. liability for acts of partner's done after dissolution. section 45(1) provides that the principle underlying the rule stated in section 32(3) is equally applicable to the case of a partner withdrawing from a firm which is dissolved and the business is continued by the remaining partners. it says that "notwithstanding the dissolution of a firm; the partners continue to be liable as such to third parties for any act done by any one of them which would have been an act of the firm if done before dissolution, until public notice is given of dissolution." effect of holding out if a person holds himself out as a partner of a firm, he becomes personally liable. but he is liable as a partner of the firm only to the person who has given credit and to the extent the credit has been given to the firm on the faith of his representation. he does not become a partner in the firm. rights of a transferee of a partner's interest

section 29 of the act provides as follows:— "(1) a transfer by a partner of his interest in the firm, absolute, or by mortgage, or by the creation by him of a charge on such interest, does not entitle the transferee, during continuance of the firm, to interfere in the conduct of the business, or to require accounts, or to inspect books of the firm, but entities the transferee only to receive share of profits of the transferring partner, and the transferee shall accept the amount of profits agreed to by the partners. (2) if the firm is dissolved or if the transferring partner ceases to be partner, the transferee is entitled, and for the purpose of ascertaining that share, to an amount as from the date of the dissolution." f

it is one o the fundamental principles of partnership law (recognized in section 31 of the act) that no person may be introduced as a partner without-the—consent of all existing partners. nor can a partner by transferring his own interest make any one else a partner in his stead without the consent of all existing partners. section 29 provides that a partner may transfer his share to a third person, absolutely or by way of security; but cannot make the transferee a partner; unless the other parties recognize the transferee as a partner. sub-section (1) gives a right of such transfer while the business of the firm is going concern. sub-section (2) deals with the rights and remedies in case of dissolution of the firm or the transferring partner ceasing to be a partner. a transferee of a partner's interest is not entitled, during the continuance of the partnership; (a) to interfere in the conduct of the business; or (b) to require accounts; or (c) to inspect the books of the firm; or (d) to challenge the account of profits agreed to by the partners; and (e) cannot sue for dissolution or for an account before dissolution. the transferee is entitled to receive the share of the profits of the transferring partner. on dissolution or on the retirement of the transferring partner, the transferee will be entitled, as against the remaining partners, (a) to receive the share of the assets of the firm to which the transferring partner was entitled and (b) for the purpose of ascertaining that share, for an account, as from the date of dissolution. the transferee is not bound by an arbitration clause in the partnership agreement and he can insist on his right for judicial accounts on dissolution, bonnin verses. neame (1910) 1 ch. 732.

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33 in rajnikant hasmukhlal gohvala verses natraj theatre, it was held that "a transferee of a partner's interest in the firm cannot have a right to interfere in the conduct of the business but he can have a limited right to receive the share of profits of the transferring partners during the continuance of the firm. thus section 29 makes it abundantly clear that the rights of the transferee are on distinctly lower plain than those of his transferor. the transferee is not entitled to participate in the business but he has to content himself by receiving the share of the profits which might be calculated on the basis of the accounts agreed upon by the existing partners, which he is bound to accept. looking at the provisions of section 29 of the act, he cannot even question the correctness of the amount offered to him. even if the other partners of the firm are managing the business in a hopelessly bad manner, the transferee cannot do anything. he cannot even move for dissolution if the properties of the firm are being wasted or the business is running into losses. the transferee would get some right in the assets of the firm only in the event of dissolution of the firm and in that event he becomes entitled as against the remaining partners to receive the share of partnership property to which the transferor was entitled to and only in that event he is entitled to ask for an account but that too from the date of the dissolution." in the instant case the firm has not dissolved yet and therefore it was held that he cannot acquire interest in the partnership property till the firm is dissolved and cannot have any right to interfere in the management of the business. section 44(e) provides that where a partner, other than the partner suing, has in any way transferred the whole of his interest in the firm to a third party, the court may dissolve the firm. section 29 is subject to the terms of the partnership agreement. the transferee does not become a partner of the firm, and the transferor continues to be the partner along with other partners. in p. ananda verses. g. raja rao, one of the terms of the partnership deed of a, b, & c, was that if any of the partners desired to sell his share, he should sell it to the other two partners or any one of them for a reasonable price, and it was not permissible for him to sell the shares to others. a, one of the partners, retired selling his share to b, one of the other two partners. the remaining partners, b and c, continued as partners. after some years b died and c entered into partnership with the heir of b. thus the old partnership was dissolved but a new partnership was constituted between c and the heir of b on the same terms as contained in the original deed of partnership. subsequently c executed a sale dead in respect of his share to outsiders. the other partner objected to this. the firm was not registered. the court held that suit was barred under section 69 of the partnership act. under section 69 (1) no suit to enforce a right arising from a contract or conferred by the partnership act shall be instituted in any court by or on behalf of any person suing as a partner in a firm against the firm or any person alleged to be or to have been a partner in the firm unless the firm is registered and the person suing is or has been shown in the register of firms as partners in the firms. his lordship said:— "under section 29 of the partnership act a transfer by a partner of his interest in the firm does not entitle the transferee during the continuance of the firm to interfere in the conduct of the business, or to require accounts, or to inspect the books of the firm, but entitles the transferee only to receive the share of the profits of the transferring partner and the transferee shall accept the accounts of profits agreed to by the partners. in other words, the transferee does not become a partner of the firm, the transferor continuing to be the partner along with the other partners. there is no dissolution of partnership by such transfer. hence, the argument that by reason of the transfer, the partnership ceased to exist and therefore the plaintiffs cannot be considered to be suing as partners, has to be rejected." sub-section (2) of section 29 says that when the firm is dissolved or when the selling partner ceases to be a partner, by death and otherwise, the transferee will be entitled to receive the share of the assets to which the selling partner was entitled, and for the purpose of ascertaining that share he is entitled to an account from the date of dissolution. this is the statutory right of transferee of a partner's interest. in bhola nath verses. keso devi, it was held that the phrase "assets of the firm" in sub-section (2) means nothing else but the amount that remains after meeting the debts and liabilities of the partnerships out of the sale proceeds of the property belonging to the partnership and other amounts in the hands of the partnership. sub-partnership

when a partner (a) of a firm agrees with another (b) to share his (a's) share of profits with him (b), that results in a partnership between the partner (a) and that other (b). any partner can enter into such an agreement as it does not affect the position of other partners in reference to him. it is a sub-partnership between the partner (a) and the stranger (b). the stranger does not have any claims against the firm either as to profits or as to property. the stranger has rights only against the partner who has agreed to sub-divide his share of the profits with him. the agreement does not make the stranger a partner

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34 in the original firm. it makes the parties to it partners inter se. it does not affect in any way the other partners of the principal firm. the supreme court recognized the validity of sub-partnership in murlidhan verses. cat, in the instant case, sikri j quoted a passage from lindley on partnership, 99 (12th ed.) which deals with sub-partnership. minors admitted to the benefits of partnership the position of a minor in a partnership is dealt with in s.30 of the indian partnership act, 1932 which is reproduced below:— "30 minors admitted to the benefits of partnership.—(1) a person who is a minor according to the law to which he is subject may not be a partner in a firm, but with the consent of all the partners for the time being, he may be admitted to benefits of partnership. (2) such minor has a right to such share of the property and of the profits of the firm as may be agreed upon, and he may have access to and inspect and copy any of the accounts of the firm. (3) such minor's share is liable for the act of the firm, but the minor is not personally liable for any such act. (4) such minor may not sue the partners for an account or payment of his shares of the property or profits of the firm, save when severing his connection with the firm, and in such case the amount of his share shall be determined by a valuation made as far as possible in accordance with the rules contained in section 48: provided that all the partners acting together or any partner entitled to dissolve the firm upon notice to other partners may elect in such suit to dissolve the firm, and thereupon the court shall proceed with the suit as one for dissolution and for settling accounts between the partners, and the amount of the share of the minor shall be determined along with the shares of the partner. (5) at any time within six months of his attaining majority, or of his obtaining knowledge that he had been admitted to the benefits of partnership, whichever date is later, such persons may give public notice that he has elected to become or that he has elected not to become a partner in the firm. and such notice shall determine his position as regard the firm: provided that, if he fails to give such notice, he shall become a partner in the firm on the expiry of the said six months. (6) where any person has been admitted as a minor to the benefits of partnerships in affirm, the burden of proving the fact, that such person had no knowledge of such admission until a particular date after the expiry of the six months of his attaining majority shall lie on the persons asserting that fact. (7) where such person becomes a partner:— (a)

his right and liabilities as a minor continue upto the date on which he become a partner, but he also becomes personally liable to third parties for all acts of the firm done since he was admitted to the benefits of partnership, and

(b) his share in the property and profits of the firm firm shall be share to which he was entitled entitl ed as a minor. (8) where such person elects not to become a partner:(a)

his rights and liabilities shall continue conti nue to be those of a minor under this section section upto upto the date on on which which he he gives public notice,

(b) his share shall not be liable for for any acts acts of the firm done done after the date of the notice, not ice, and (c) he shall be entitled to sue sue the partners for his his share of the property and and profits in accordance accordance with sub-section sub-section (4).

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35

(9) nothing in sub-section sub-section (7) and (8) shall shall affect the provisions provisions of section 28." who is a min minor or a minor is a person who has not attained the age of majority according to the law to which he is subject. the age of majority of a person as regards matters other than marriage, divorce and adoption is provided by the indian majority act, 1875. section 3 of that act provides that every person domiciled in india shall be deemed to have attained his majority when he shall have completed his age of eighteen years, and not before. but in case of a minor of whose person or property or both a guardian has been appointed by a court, or of whose property the superintendence is assumed by a court of wards, before the minor has attained the age of 18 years, the age of majority shall be deemed to have been attained on the minor completing the age of twenty one years.

nature of minor's agreement an agreement enforceable by law i.e. a contract is an essential element for the existence of partnership. section 11 of the indian contract act. 1872, provides that a person must be competent to contract for entering into a contract. after mohori bibee verses. dharmodas ghose, pc (1903) 30 ia 114: ilr 30 cal 539 it is settled law in india that a minor is incompetent to contract within the meaning m eaning of the indian contrac contractt act, 1872. section section 30 of the indian indian partnership partnership act does not render render a minor competent competent to contract. therefore, a minor cannot enter into an agreement of partnership as an agreement with a minor is absolutely void. a guardian of a minor also cannot enter into an agreement of partnership on behalf of his ward to make a minor fullfledged partner.

admission of minor to benefits of existing firm sub-section (1) lays down that a minor cannot become a partner though, with the consent of all the partners for the time being. he may be admitted to the benefits of partnership in an existing firm. there must be either an express agreement between the partners to admit the minor to the benefits of partnership or there must be some positive conduct on their part from which it can be inferred that they agreed to so admit the partner. allotment of a share or distribution of a part of the profits of the firm to a minor or something of an analogous character is indicative of admission of a minor to the benefits of partnership. in shri ram sardarmal didwani verses. gourishanker, air 1961 bom. 136, it was held that there must be a partnership of at least twp partners before a minor can be admitted to the benefits of partnership. thus there are two pre-requisites of admission of a minor to the benefits of the partnership firm. they are: (1) there should be an existing firm and (2) all the partners must have consented the admission of a minor. in official assignee, madras verses. verses. pa pala lani niap appa pa chett chetty, y, (1918) ilr 41 madras 824, a hindu father started a business during the minority of his undivided son. the business was continued after the son became a major. the son helped his father in the business during his minority. he was taking active part after attaining majority. it was held that the mere fact that the minor rendered help in the joint family business is not enough to show that he was admitted to the benefits of partnership. therefore, the son was held not liable for debts incurred by the firm during his minority. to make him personally liable in debts incurred during minority it would be necessary to prove that there was a partnership and he was admitted into it. however, he was held liable in the debts incurred after attaining majority as he was taking active part in the joint family business. admission of a minor to the benefits of the partnership business implies some definite act such as the allotment of a share to him or the distribution of a part of the profits to him or something of an analogus character. it is something more than a mere incident, of birth in a particular family. in lachmi narayan verses. beni ram, there ram, there was a partnership firm of two partners. one of them died. it was held that the minor son of the deceased partner cannot enter into a contract with surviving partners to firm partnership. in c1t verses. dwarkadas khetan & co, it was held that a minor cannot cannot become a full fledged partner in an existing firm. in dhararn vir verses. verses. ja jaga gan n nath, nath, air 1968 punj 84, it was held that a minor is not a partner even if he is so described in the agreement. partnership agreement, to which a minor is party contrary to s.30 of the partnership act, would be involved. even for the purpose of taking accounts, effect cannot be given to such an invalid document qua the major partners as that will require re-writing of the contract and compelling the major partners to do something contrary to express terms thereof. in c1t verses. shah mohandas sadhuram, air 1966 sc 15, it was held that a partnership deed that attempts to make a minor a full-fledged partner is invalid to that. extent. it was further held in this case that as long as a partnership deed does not

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36 make minor a full partner it cannot be regarded as invalid on the ground that a guardian has purported to contract on behalf of a minor. earlier in cit verses shahjethaji phulchand, it phulchand, it was held that a guardian can agree on behalf of a minor for constituting a firm into which a minor would be admitted to the benefits of partnership (and not as full-fledged partner). position of minor so admitted before attaining majority

sub-section (2) provides certain rights of the minor during partnership. a minor admitted to the benefits of partnership is entitled to such share of the property and of the profits of the firm as may be agreed upon at the time of admission. he is also entitled to inspect and copy any of the t he accounts of the firm. sub-section (4) provides for the remedy to such minor to enforce his rights. it states that a minor cannot sue for his share of the property or profits except when severing his connections with the firm. the amount of the minor's share in such a case is to be determined as far as possible in accordance with the rules stated in section 48. the proviso to this subsection further safeguard the partners being saddled with a debt which the business cannot meet to convert a minor's suit into one for dissolution and for accounts as between all the partners. sub-section (3) lays down the extent of liability of such minor during minority. he is not personally liable for any act of the firm and his liability is confined only to the extent of his share in the property and profits of the firm which would include capital contributed on his behalf, if any. thus his liability is limited. therefore, he cannot be adjudged insolvent. a summary view of the rights and liabilities of a minor admitted to the benefits of partnerships is as under:— (1) right to share profits. a minor is entitled to the agreed share of the property and of the profits of the firm [s.30 (3)]. (2) right to access books of accounts. he has right of access to books of accounts. he can inspect and copy them. however, he cannot have access to any other book, if maintained by the firm, since the same may contain a secret of the firm and the minor's knowledge of the same may be detrimental to the interest of the firm [section 30(2)]. (3) right to sue for accounts or share after severing connection with the firm. a minor does not have the right to sue the partners for an account or payment of his share of property or profits till he remains in the firm. on severing connections with the firm, the minor becomes entitled to sue the other partners for accounts, payment of his share of profits and property [section 30(4)]. (4) liability of a minor. the minor's share of the profits and in the property of the firm is liable for the acts of the firm. he is not personally liable for any such acts [section 30(3)].therefore, if the assets of the firm are not sufficient to meet the liabilities of the firm, then, surplus private estate of other partners (and not that of the minor) will be used to meet the 'firm's debts. rights and liabilities of such minor on attaining majority a minor admitted to the benefits of partnership, according to sub-section (5) has a right to elect to become or not to become a partner in the firm at any time within six months of his attaining majority or of his obtaining knowledge that he had been admitted to the benefits of partnership, whichever is later, by giving a public notice to that effect, and such a notice will determine his position as regards the firm. proviso to this sub-section provides that if he fails to give such notice within the required period he will be deemed to have elected to become a partner in the firm. in shiva gouda rayji patel verses chanderkant neelkanth sadatge, it was held that "it is implicit in term of sub-section (5) of section 30 of the partnership act that the partnership is in existence. a minor after attaining majority cannot elect to become a partner of a firm which ceased to exist." thus, the minor cannot exercise the option where, before the expiry of vital six months, the firm is dissolved. dissolved. in such a case the minor would remain what he was, that is, a partner with share committed to liability, but no personal liability. section 45 applies only to partners of the firm. in this case a firm consisting of two partners. a minor was admitted to the benefits of the partnership firm. the appellant supplied certain goods to the firm on credit. before satisfying the claim of the appellant the firm was dissolved. subsequently the minor attained majority and did not exercise the option to become a partner. the appellant could not recover the dues from the partners. the minor was held not personally liable/

sub-section 6 provides that where any person has been admitted as a minor to the benefits of partnership in a firm, the burden of proving the fact that such person had no knowledge of such admission until a particular date, after the expiry of six months of his attaining majority shall lie on the person asserting the fact.

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37 sub-section (7) deals with the rights and liabilities of such minor where he becomes a partner either by his own election or by his failure to give notice within the stipulated period of six months or of his obtaining knowledge, whichever is later. it provides as follows:— (a) the rights and liabilities of such a person vis-a-vis other partners will continue as that of a minor upto the date on which he becomes a partner. but he becomes personally liable to third parties for all acts of the firm done since he was admitted to the benefits of partnership. (b) his share in the property and profits of the firm remains the same as that to which he was entitled as a minor. sub-section 8 deals with the rights and liabilities of a minor where he elects not to become a partner by giving a notice to that effect. the sub-section provides as follows:— (a) his rights and liabilities shall continue to be those of a minor under this section (section 30) upto the date on which he gives public notice. (b) his share shall not be liable for any acts of the firm done after the date of the notice.

6 incoming and outgoing partners sections 31 to 38 deal with the legal consequences which follow from the coming in of a new partner or the going out of an old partner. most of these sections allow a change in the constitution of the firm without any dissolution.

incoming partner (admission of partner) section 31 of the act provides:

"(1) subject to contract between the partners and to the provisions of section 30, no person shall be introduced as a partner into a firm without the consent of all the existing partners. (2) subject to the provisions of section 30, a person who is introduced as a partner into a firm does not thereby become liable for any act of the firm done before he became a partner." admission with unanimous consent and by nomination it is one of the fundamental principles of partnership law that no person may be introduced as a partner without the consent of all existing partners as partnership requires mutual trust and confidence. of course, if the partnership deed gives a right to a partner, to introduce a new partner it will be otherwise. thus, for instance, if the partnership agreement provides that

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Study Material Partnership Semester 3

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