Indian Partnership Act 1932
Tarja Rabito
A partnership is a kind of business where a formal agreement between two or more people is made who agree to be the co-owners, distribute responsibilities for running an organization and share the income or losses that the business generates.
A general partnership comprises two or more owners to run a business. In this partnership, each partner represents the firm with equal right. All partners can participate in management activities, decision making, and have the right to control the business. Similarly, profits, debts, and liabilities are equally shared and divided equally.
In this partnership, includes both the general and limited partners. The general partner has unlimited liability, manages the business and the other limited partners. Limited partners have limited control over the business (limited to his investment). They are not associated with the everyday operations of the firm.
In most of the cases, the limited partners only invest and take a profit share. They do not have any interest in participating in management or decision making. This non-involvement means they do not have the right to compensate the partnership losses from their income tax return.
In Limited Liability Partnership (LLP), all the partners have limited liability. Each partner is guarded against other partners legal and financial mistakes. A limited liability partnership is almost similar to a Limited Liability Company (LLC) but different from a limited partnership or a general partnership.
Partnership at Will can be defined as when there is no clause mentioned about the expiration of a partnership firm. Under section 7 of the Indian Partnership Act 1932, the two conditions that have to be fulfilled by a firm to become a Partnership at Will are:
Therefore, if the duration and determination are mentioned in the agreement, then it is not a partnership at will. Also, initially, if the firm had a fixed expiration date, but the operation of the firm continues beyond the mentioned date that it will be considered as a partnership at will.
Most of the businesses in India adopt a partnership business, so to monitor and govern such partnership The Indian Partnership Act was established on the 1st October 1932. Under this partnership act, an agreement is made between two or more persons who agrees to operate the business together and distribute the profits they gain from this business.
The most important element in a partnership is the mutual agency, which states that every partner must be an agent and principal of himself and other partners. It says that business must be carried on by any or all of the partners.
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The Indian Partnership Act, 1932 passed by the legislation accepted it on 8th April 1932 and came into force on 1st October 1932. The ideas of partnership were first brought under the Indian contract act, 1872 under chapter XI (section 239-266) in an arranged form based on the operation and practice of traders and mercantile people of India according to English Principles of law. With the expansion of trade and commerce in India, it was perceived that these sections were inadequate and hence a need for a distinct Partnership Act was felt.
Consequently, the Indian Partnership Act, 1872 comprising the Partnership laws were revoked (these were based on the rules contained in the Report of Indian Law Commission lead over by Lord Romilly in 1866.The current Indian Partnership Act, 1932 is based on the English Partnership Act, 1890 with modifications.
If there is no partnership agreement or if that partnership agreement is silent as to the authority of a partner to act, then implied authority is inferred by the act of the partner done to carry on the business in the usual way.[2]
- The act must have been within the scope of partnership and it must relate to the normal business of the firm.
- The act must be such as is done within the scope of business of the firm in the usual way.
- The act must be done in the name of the firm or in any other manner expressing or implying an intention to bind the firm.
In the case of M. Rajagopal vs K.S. Imam Ali, AIR 1981 KERALA 36: The court held that when a partner signed a prenote describing himself as proprietor of the firm, then there is no liability to the firm.
Also, in Keighley, Maxsted and Co., vs. Durant, 1901 AC 240: the court held that even though an act may have been done without express authority of a partner does not empower him to do the following acts. These acts are otherwise called ultra vires acts and they do not bind the firm.
In spite of any such restriction, any act done by a partner on behalf of the firm which falls within his implied authority binds the firm which falls within his implied authority binds the firm, unless the person with whom he is dealing knows of the restriction or does not know or believe that partner to be a partner.
1. An admission on representation made by a partner concerning the affairs of the firm is evidence against the firm, if it is made in the ordinary course of business. (Sec. 23 of Indian Partnership Act, 1932)
2. Notice to a partner who habitually acts in the business of the firm of any matter relating to the affairs of the firm operates as notice to the firm, except in the case of a fraud on the firm committed by or with the consent of that partner. (Sec. 24 of Indian Partnership Act,1932)
If by the wrongful act or omission of a partner who is acting in the normal course of business of the firm or with the authority of his partners and by his acts, if any loss or injury is caused to any third party or any penalty is incurred, then firm is liable.
- A partner acting within the scope of his apparent authority receives money or property from a third party and misapplies it.
- The firm in the course of its business receives money or property from a third party and the same is misapplied by any of the partners while it is in the custody of the firm. [6]
It is clear from Section 6 that the sharing of profits is not the ultimate test for determining whether a partnership exists. The existence of a partnership depends on the actual intention of the parties and the contract drawn up by them. In some cases, an alleged partner might have a share in the profits of the business, but that does not by default make him a partner.
The earlier position was that the share of profits is the criteria for determining partnership, as held in the case of Waugh v. Carver (1973). The House of Lords overruled this decision in the case of Cox v. Hickman (1860). In this case, Lord Crownworth held that the real test of partnership is mutual agency among the members of the particular association. However, the factor of share of profits cannot be eliminated. Share of profits is certainly an important piece of evidence that helps to determine the existence of a partnership, but not the ultimate test.
When the partners fixed the duration of the partnership firm then after the expiration of the fixed period the partnership comes to an end. When the partners decided to continue with the partnership even after the expiry of the fixed period then it becomes a partnership at will.
When the partnership is created for completing any project or undertaking. When such an undertaking or project have been completed then partnership comes to an end. The partners have a choice to continue with the firm.
As per Section 31, no person can be introduced as a new partner to the firm without the consent of other partners. This is, however, subject to the provisions in the agreement of partnership and Section 30, which deals with minor partners.
Prior to 1932, the law of partnership was contained in Chapter XI of the Indian Contract Act, 1872. However, the Indian Contract Act did not contain provisions related to many aspects of the law of partnership, which called for the enactment of a separate statute that compensates for such inadequacies.
The Act does not consolidate the law of partnership into a complete single code, and hence it is not meant to be exhaustive. Section 3 of the Partnership Act provides that the provisions in the Contract Act that are not repealed and not inconsistent with the Partnership Act shall continue to be operative.
Section 1(3) provides that the Act comes into force on October 1st, 1932. The Act applies prospectively and not retrospectively. The same has been clarified under Section 74 of the Act which states that the Act shall not affect what has been done before its commencement.
Partners are two or more people who agree to carry on a business and share the profits and losses of the business. They are persons who join hands together with a common interest to start a business and share its future profits or losses.
A partnership deed is a written document among the partners related to the terms and conditions of the partnership business. It is a legal agreement between partners to run an enterprise. A partnership comes into existence by an agreement that may be written or oral. Thus a document that contains all the terms of the partnership as agreed to by the partners is called a Partnership Deed or Article of Partnership.
It is a document signed by all the partners, after which it should be duly stamped under the Indian Stamp Act, 1889, which makes it a legal document. A written deed serves as a piece of evidence in the Court of Law.
The partnership is governed by the Partnership Act,1932. The provisions of the partnership act are important to resolve unforeseen situations, which are not mentioned in the partnership deed or in the absence of the partnership deed. A partnership deed may have clauses that are contrary to provisions of the act. In such cases, the partnership is governed by the provisions of the deed and not the act. If the partnership deed does not contain a clause related to any problem in partnership, then it will be governed by the provision of the partnership act.
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