Shaheed Sukhdev College of Business Studies

Assignment on Legal Aspect for Financial Manager-1

Partnership
(With Respect to The Indian Partnership Act,1932)

Submitted to: Submitted by:

Mrs. Kishori Ravi Shankar Karanbir Singh

Randhawa(16001)

Anand
Kaithwas(16062)

BFIA-1
 What is Partnership?

The Indian Partnership Act was passed in 1932 to define and amend the law relating to
partnership. Indian Partnership Act is one of very old mercantile law. Partnership is one of
the special types of Contract. Initially, this was part of Indian Contract Act itself (Chapter IX
- sections 239 to 266), but later converted into separate Act in 1932.The Indian Partnership
Act is complimentary to Contract Act. Basic provisions of Contract Act apply to contract of
partnership also. Basic requirements of contract i.e. legally enforceable agreement, mutual
consent, parties competent to contract, free consent, lawful object, consideration etc. apply to
partnership contract also.

According to section 4 of the Partnership Act of 1932, "Partnership is defined as the

relation between two or more persons who have agreed to share the profits and losses
according to their ratio of business run by all or any one of them acting for all”. A
partnership is a strategic alliance or relationship between two or more people. Successful
partnerships are often based on trust, equality, and mutual understanding and
obligations. Partnerships can be formal, where each party's roles and obligations are spelled
out in a written agreement, or informal, where the roles and obligations are assumed or
agreed to verbally. You may be able to choose your partner or, as is often the case, your
partner may be assigned to you. 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".

Who can become a Partner?

 A contract of partnership may be entered into by every person who is competent to

enter into a contract (sec 11 of the Indian Contract, 1872).
 A corporation, a registered company, can enter into contract of partnership as a single
individual but not as a group of individuals comprising it.

Who cannot become a Partner?

 Alien Enemy: An alien enemy cannot enter into a contract of partner ship with an
Indian subject. An alien friend ca do so.
 Minor: Minor cannot become a partner in a firm but with consent of all partners, he
may be admitted to the benefits of partnership.
 Person of unsound mind: a person of unsound mind is not competent to enter into a
contract of partnership.
 Essential Elements of Partnership

1. No. of Partners: At least two members are required to start a partnership business. But the
number of members should not exceed 10 in case of banking business and 20 in case of other
business. If the number of members exceeds this maximum limit then that
business cannot be termed as partnership. This restriction is placed by the companies act and not
the partnership act.
2. Agreement: Whenever you think of joining hands with others to start a partnership business,
first of all, there must be an agreement between all of you. This agreement contains-
 the amount of capital contributed by each partner;
 profit or loss sharing ratio;
 salary or commission payable to the partner, if any;
 duration of business, if any ;
 name and address of the partners and the firm;
 duties and powers of each partner;
 nature and place of business; and
 any other terms and conditions to run the business.

To avoid misunderstanding, it is desirable that the articles of partnership be prepared in writing

with legal assistance. The articles of partnership should cover the rights, duties, obligations and
the arrangements which the parties have mutually agreed upon.

1. Lawful Business: The partners should always join hands to carry on any kind of lawful business.
To indulge in smuggling, black marketing, etc., cannot be called partnership business in the eye
of the law. Again, doing social or philanthropic work is not termed as partnership business.

2. Competence of Partners: Since individuals join hands to become the partners, it is necessary
that they must be competent to enter into a partnership contract. Thus, minors, lunatics and
insolvent persons are not eligible to become the partners. However, a minor can be admitted to
the benefits of partnership i.e., he can have a share in the profits only.

3. Sharing of Profit: The main objective of every partnership firm is sharing of profits of the
business amongst the partners in the agreed proportion. In the absence of any agreement for the
profit sharing, it should be shared equally among the partners.

4. Unlimited Liability: The liability of partners is also unlimited. That means, if the assets of the
firm are insufficient to meet the liabilities, the personal properties of the partners, if any, can also
be utilised to meet the business liabilities.

5. Voluntary Registration: It is not compulsory that you register your partnership firm. However,
if you don’t get your firm registered, you will be deprived of certain benefits, therefore it is
desirable. The effects of non-registration are:
  Your firm cannot take any action in a court of law against any other parties
forsettlement of claims.
 In case there is any dispute among partners, it is not possible to settle the disputes
through a court of law.
 Your firm cannot claim adjustments for amount payable to or receivable from any other
parties.

1. No Separate Legal Existence: Just like sole proprietorship, partnership firm also has no
separate legal existence from that of it owners. Partnership firm is just a name for the business as
a whole. The firm means the partners and the partners collectively mean the firm.

2. Principal Agent Relationship: All the partners of the firm are the joint owners of the business.
They all have an equal right to actively participate in its management. Every partner has a right
to act on behalf of the firm. When a partner deals with other parties in business transactions,
he/she acts as an agent of the others and at the same time the others become the principal. So
there always exists a principal agent relationship in every partnership firm. A partner is an agent
for the acts that the he/she does on behalf of the firm, whereby he/she can bind the other partners
for such acts. The other partners would be the principals for such acts. With regard to the acts of
the other partners, he/she will act as the principal (since he as a partner is bound by the acts of
the other partners on behalf of the firm) Where a partner cannot be made responsible for the acts
of one or more other partners we cannot say they together form a partnership. This mutual
agency is what really decides whether there is a partnership or not. Thus it is said the "Mutual
Agency" is the real test of partnership.

3. Restriction on Transfer of Interest: No partner can sell or transfer his interest to any one
without the consent of other partners. For example - A, B, and C are three partners. A wants to
sell his share to D as his health does not permit him to work any more. He can not do so until B
and C both agree

4. Continuity of Business: A partnership firm comes to an end in the event of death, lunacy or
bankruptcy of any partner. Even otherwise, it can discontinue its business at the will of the
partners. At any time, they may take a decision to end their relationship.

Partnership at will - Where no provision is made by contract between the partners for the
duration of their partnership, or for the determination of their partnership, the partnership is
"Partnership at will. A form of partnership that arises where no fixed term has been agreed for
the duration of the partnership or the partnership has been entered into for an undefined term. A
partnership at will may be dissolved at any time by a partner serving notice on the other
partner(s). A partnership will be a partnership at will unless contrary intention can be proved, for
this, there must be an express or implied agreement that is inconsistent with the right which a
partner would otherwise have to determine the partnership by notice.

Rights and Duties of Partners

Rights:
A. With respect to conduct of Business:
 Every partner has a right to take part in the conduct of the business.
 Every partner is bound to attend diligently to his duties in the conduct of the
business.
 Any difference arising as to ordinary matters connected with the business 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, but no change may be made in
the nature of the business without any consent of all the partners and every partner
has a right to have access to and to inspect and copy any of the books of the firm.

A. Mutual Rights and Liabilities:

 A partner is not entitled to receive remuneration for taking part in the conduct of
the business.
 The partners are entitled to share equally in the profits earned, and shall contribute
equally to the losses sustained by the firm.
 Where a partner is entitled to interest on the capital subscribed by him such
interest shall be payable only out of profits.
 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
 The firm shall indemnify a partner in respect of payments made and liabilities
incurred by him.
 In the ordinary and proper conduct of the business, and
 In doing such act, in an emergency, for the purpose of protecting the firm
fro loss as would be done by a person of ordinary prudence, in his own
case, under similar circumstances and a partner shall indemnify the firm
for any loss caused to it by his willful neglect in the conduct of the
business of the firm.

A. Rights against personal profits named by parties:

 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
 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.

A. Rights subject to contract between partners:

 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,
 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 of
the partners remain the same as they were before the expiry, so far as they may
be consistent with the incidents of partnership at will
 where additional undertakings are carried out- where a firm constituted to carry
out one or more adventures or undertakings carries out other 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 undertaking.

Rules about interests and duties of partners:

 The interest of a partner in partnership property and a partner's rights and duties in
relation to the partnership are to be determined, subject to an express or implied
agreement between the partners, by the following rules:
 all partners are entitled to share equally in the capital and profits of the business
and must contribute equally towards the losses, whether of capital or otherwise,
sustained by the firm;
 the firm must indemnify a partner in respect of payments made and personal
liabilities incurred by the partner -
 in the ordinary and proper conduct of the business of the firm; or
 in or about anything necessarily done for the preservation of the business or
property of the firm;
 a partner who makes an actual payment or advance for the purpose of the
partnership beyond the amount of capital that the partner has agreed to subscribe
is entitled to interest at the rate of 7% per annum from the date of the payment or
advance;
 a partner is not entitled, before profits are ascertained, to interest on the capital
subscribed by the partner;
 a partner may take part in the management of the partnership business;
 a partner is not entitled to remuneration for acting in the partnership business;
 a person may not be introduced as a partner without the consent of all existing
partners;

 a difference arising as to an ordinary matter connected with the partnership

business may be decided by a majority of the partners but no change may be made
in the nature of the partnership business without the consent of all existing
partners;
 the partnership books are to be kept at the place of business of the partnership (or
the principal place if there is more than one) and a partner may, when he or she
thinks fit, have access to, inspect and copy the partnership books.
 This section does not apply to an incorporated limited partnership.