Scope & Nature Of Indian Partnership Act,1932 and partnership law in India

Indian Partnership Act ,1932
Historical :
The Indian Partnership Act was enacted in 1932 and it came into force on 1st day of October, 1932[1]. The present Act superseded the earlier law relating to Partnership, which was contained in Chapter XI of the Indian Contract Act,1872. The Act is not exhaustive. It purports to define and amend the law relating to Partnership.[2]

A Partnership arises from a contract, and therefore , such a contract is governed not only by the provisions of the Partnership Act in that regard , but also by the general law of contract in such matters, where the Partnership Act does not specifically make any provision. It has been expressly provided in the Partnership Act that un repealed provisions of the Indian Contract Act , 1872 , save in so far as they are inconsistent with the express provisions of this act , shall continue to apply.[3] Thus, the rules relating to offer and acceptance , consideration , free consent , legality of object ,etc, as contained in the Indian Contract Act are applicable to a contract of Partnership also. On the other hand , regarding the position of minor , since there is specific provision contained in Section 30 of the Indian Partnership Act , the minor’s position is governed by the provision of the Partnership Act.

What Is The Nature Of Partnership?
Partnership is a form of business organization , where two or more persons join together for jointly carrying on some business. It is an improvement over the ‘Sole –trade business ’, where one single individual with his own resources, skill and effort carries on his own business. Due to the limitation of resources of only a single person being involved in the sole-trade business , a larger business requiring more investments and resources than available to a sole-trader, cannot be thought of in such a form of business organisation. In partnership, on the other hand , a number of persons could pool their resources and efforts and could start a much larger business, than could be afforded by any of these partners individually . In case of loss the burden gets divided amongst various partners in a Partnership.

Criteria Of Partnership :
Any two or more than two persons can join together for creating Partnership. Section 11 of the Companies Act , 1956 imposes limit as to maximum number of persons in a partnership for the purpose of carrying :
· Banking Business – There can be maximum of 10 persons
· Any other purpose – There can be maximum of 20 persons.

If the number of members in any association exceeds the above stated limit , that must be registered as a company under Companies Act ,1956 otherwise that will be considered to be an illegal association.

As against partnership, where the maximum number of partners can be 10 or 20 , depending on the nature of partnership business, there could be possibly much larger number of members in a company.
· In Private Company – Here there can be maximum of 50 members
· In Public Company – Here there is no such limit to the maximum number.

Therefore , if a much larger business than could be afforded by only 10 or 20 persons , is sought to be carried on , a company works out to be better form of business organization than partnership . For instance , there could be a public company having 1,00,000 members , each one of them having contributed just Rs.10 , and thus having a capital of Rs. 10,00,000 for its business. A Company , as a form of business organization may be better than a partnership in another way also. It is an artificial person, distinct from its members , and has much longer life than that of a partnership, whereas the partnership being nothing but an aggregate of all the partners, partnership has much smaller span of life than a company. In the case of a Company, the liability of a member (shareholder) is limited to the extent of the amount of shares purchased by him, whereas in case of Partnership, the liability of every partner in unlimited, and this factor is of great advantage in case of a Company , from the point of view of risk of investors in the business.

Advantage Of Partnership over A Company : 
1. For the creation of partnership just an agreement between various persons is all what you require. In case of a company a lot of procedural formalities which have to be gone through before a company is created.

2. The partners are their own masters for regulating their affair. A company is subject to a lot of statutory control.

3. For dissolution of partnership , a mere agreement between the partner is enough But that is not the case of a company which can be wound up by only after certain set of procedure is followed.

4. Since all the profits are to be pocketed by the partners in a partnership firm, there is a great incentive for the partners to make business successful But that is not in case of a company.

5. In a Partnership the persons who have entered into are individually called partners and collectively a firm. A partnership firm does not have a separate legal personality. A company is a legal entity different from its members.

6. A partnership firm means all the partners put together , if all the partners cease to be partners , e.g., all of them die or become insolvent, the partnership firm gets dissolved. A company being a person different from the members ,the members may come and go but the company’s life is not affected thereby.

7. The shareholder of a company can transfer his share to anybody he likes but a partner cannot substitute another person in his place unless all the other partners agree to the same. Similarly, on the death of a member of a company his legal representatives will step into his shoes for the purpose of the rights in the company, but on the death of a partner his legal representatives do not get substituted in his place of partnership.

8. The minimum number of members in partnership in two and maximum in case of partnership carrying on banking business is 10 and in case of any other business is 20.In the case of a private company the minimum number is 2 and the maximum is 50 whereas in the case of a public company the minimum number should be 7 but there is no limit to the maximum number and therefore, any number of persons can hold shares in a public company.

9. The liability of the members of a company is limited but the liability of the partners is unlimited.

Indian Partnership Act .1932
Preamble—Scope And Purpose
The preamble is an admissible aid to construction . It throws light on the intent and design of the legislature and indicates the scope and purpose of the legislation itself.[4] But it cannot be used to control or qualify precise and unambiguous language of the enactment . It is only when there is a doubt as to the meaning of a provision, that recourse may be had to the preamble to ascertain the reasons for the enactment and hence, the intention of Parliament.[5]

Scope:
The scope of a partnership is primarily a question of the intention of the partners. There is no restriction on the exercise of such powers as it chooses at any time to exercise, except such prohibitions on illegal, immoral or fraudulent conduct as apply equally to individuals.
1- A partnership may itself be a member of another firm if the partners of the constituent firm consent thereto.

2- If it appears that all the partners have either authorized or ratified the contract, no further question as to its validity ordinarily remains. The cases where the question of the validity of partnership contract arises is where one partner has made the contract without specific authority from his co-partners. As to their implied scope partnerships may he divided into the classes of the non-trading and the trading. Some powers can be exercised by partners in partnership of either type. Thus a partner may retain an attorney protect the interests of the firm.

Definition Of Partnership:
Section 4 of the Indian Partnership Act ,1932 defines ‘Partnership’ as under[6] :
‘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 ’

Essentials Of Partnership :
According to Section 4, the following essentials are necessary to constitute a ‘Partnership’.
1. There should be an agreement between the persons who wants to be partners.
2. The purpose of creating partnership should be carrying on of business
3. The motive for the creation partnership should be earning and sharing profits.
4. The business of the firm should be carried on by all of them or any of them acting for all, i.e., in mutual agency

When all the above elements are present in certain relationship that is known as ‘partnership’. 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’.

Elements Of ‘Partnership’:
The definition of ‘partnership ‘ contains three elements :[7]
1. There must be an agreement entered into by all the persons concerned.[8]
2. The agreement must be to share the profits of business ; and
3. The business must be carried on by all or any of the persons concerned , acting for all.

Illustrations :
a) A and B buy 100 bales of cotton , which they agree to sell for their joint account. A and B are partners in respect of such cotton.[9]
b) A and B buy 100 bales of cotton , agreeing to share it between them. A and B are not partners.
c) A agrees with B, a goldsmith , to buy and furnish gold to B , to be worked on by him and sold , and that they shall share in the resulting profit or loss. A and B are partners.

Partnership Agreement – Oral , Written Or By Conduct
The Supreme Court has , construing the provisions of section 4 , observed that a partnership agreement is the source of a partnership , and it also gives expression to the other ingredients defining the partnership , specifying the business agreed to be carried on ,the persons who will actually carry on the business , the shares in which the profits will be divided , and several other considerations which constitute such an organic relationship . A partnership agreement therefore , identifies the firm and each partnership agreement may constitute a distinct and separate partnership. That is not to say that a firm is corporate entity or enjoys a juristic personality in that sense. However , each partnership is a distinct relationship. The partners may be different and yet the nature of the business may be the same , the business may be different and yet the partners may be the same. The intention may be to constitute two separate partnerships and therefore , two distinct firms , or to extend merely a partnership , originally constituted to carry on one business , to the carrying on of another business. The intention of the partners will have to be decided with reference to the terms of the agreement and all the surrounding circumstances , including evidence as to the interlacing or interlocking of management , finance and , other incidents of the respective business.[10]

Agreement of partnership need not to be express , but can be inferred from the course of conduct of the parties to the agreement. The firm rule is that once the parties entering into the partnership are clearly described in the instrument , there is no scope for further inquiry to find out by some process or casuistry , if any of the parties has got obligation to others for the purpose of inducting those others to whom any of the parties may be accountable in law , into the arena of partnership and for treating them as partners under the law.[11] If , the parties to an agreement have not agreed on the date of commencement of the partnership , it cannot be said that they have become partners.

The Supreme Cour, in Tarsem Singh v Sukhminder Singh[12], has held that it is not necessary under the ;aw that every contract must be in writing. There can be an equally binding contract between the parties on the basis of oral agreement, unless there is a law which requires the agreement to be in writing.

The relations inter se , among the promoters of a company , are not the same as the relations between partners. Persons entering into contract are not , on the authority of Keth Spicer Ltd v Mansell, necessarily to be viewed as partners. However , if they perform a large number of acts as part of the promotion , the court might come to a different conclusion.

Construction Of Partnership Agreements :
It is settled canon of construction that a contract of partnership must be read as a whole and the intention f the parties must be gathered from the language used in the contract by adopting harmonious construction of all the clauses contained there in . The cardinal principle is to ascertain the intention of the parties to the contract through the words they have used , which are key to open the mind of the makers. It is seldom that any technical r pedantic rule of construction can be brought to bear on their construction. The guiding rule really is to ascertain the natural ad ordinary sensible meaning to the language through which the parties have expressed themselves , unless the meaning leads to absurdity. A partnership deed must be constructed reasonably.

Determining The Existence Of Partnership : 
In Ross v. Parkyns[13] Jessel ,M.R., stated the law as follows : “ It is said (and that there is no doubt ) that the mere partcipation in profit inters se affords cogent evidence of partnership. But it is now settled by the case of Cox v. Hickman ,Buller v. Sharp that although a right to participate in profits is a strong test of partnership , and there may be cases where upon a single presumption , not of law , but of fact , that there is a partnership , yet whether the relation of partnership does or does not exists must depend upon the whole contract between the parties , and that circumstances is not conclusive. ”. the law as stated above has been restated in this section. The section also indicates the manner in which the general principle to be applied to a particular circumstances. The question whether the relation of partnership does or does not exist, “ must depend on the real intention and contract of the parties.

Explanation I – The mere fact that a person is entitled to a share in the profits does not make him a partner , because the real relationship may be one of debtor and creditor.

Importance Of Partnership:
A Partnership Agreement is a voluntary contract between two or more persons to enter into a business relationship between or among one another with the intention of carrying out the said business and sharing its profits/losses among themselves as agreed to in the document.

The parties to the agreement are referred to as Partners. The Partners agree to put all their capital, labour and skills towards achieving maximum gains from the venture. A Partnership Agreement will also spell out the manner in which it may be dissolved and must be signed and followed by each of the Partners.

A Partnership Agreement is defined as being an arrangement that is agreed to by all parties to the transaction and is an effectual method of helping each of the partners to:

• Agree to share a vision to collaborate together
• Set up mutually acceptable goals
• Specify the basis on which to begin working together
• Make sure that each of the partners are clear about about what needs to be achieved
• Assess the effectiveness of the agreement
• Bring out issues related to accountability and responsibility
• Lay a strong foundation that can sail through difficulties and testing times ahead

A partnership should begin small and slowly expand. It should be growing from year to year with annual reviews along the way to continuously improve it. There is no hard and fast way of writing out a Partnership Agreement but face to face discussions among partners, specifying special issues and setting these down in writing before actually drafting them into the document are some worthwhile preliminary steps worth following. The document , and any changes thereto, should be formally approved and signed by all the partners and dated.

The Partnership Agreement should begin with the name of the business as well as the nature of the business. The principle place of business should be to the address of the place of business. The date when the arrangement was made between the Partners and the term of its operation need to be expressly laid down in the agreement.

The amount of capital that the Partners will invest in the business will be held in a separate capital account and neither of the Partners will be able to withdraw any money from it. And, finally each individual capital account will be maintained in accordance with the profit sharing capabilities of the Partners as set forth in the agreement.

The income statement of the partnership shall be made individually in the names of each Partner and the profits/losses will be shared in accordance with the terms agreed to by each individual. Partnership profits or losses will be charged to the individual income accounts of the Partners. Partners are not entitled to draw any salary, but may draw upon their income accounts for any monies needed as defined in the partnership agreement.

The partnership may be voluntarily dissolved at any time with the mutual consent of the partners. In such an eventuality, the withdrawing partner should move reasonably swiftly to facilitate the liquidation. In case a partner was to die, the remaining partners will have the option to either liquidate the partnership or to buy out the share of the deceased partner.

Conclusion & Suggestion 
In my opinion Partnership is very important because in day to day activities we enter into partnership agreements and by making partners big goals are achieved with the help of joint and more number of people. The joint efforts of all the member results in successful accomplishment of tasks and that task or job can be easily afforded. Division of work leads to increase in efficiency at work among different partners.

When some job is done by consent of all the members and if some profit is earned then it is shared among the different partners. And similar is the case when some loss occurs then that is also beard among all the members and its not that only one has to take responsibility or give compensation. So in my view Partnership is a good form of doing business than a company which is owned by a single person.

Partnership is one of the oldest forms of business relationships. Though limited liability companies have replaced partnership firms in complex businesses, partnerships are still preferred by professionals and small trading and business enterprises in India and abroad.

The Indian partnership act of 1932 provides for a general form of partnership which is the most prevalent form in India, but, over time the general form of partnership has lost its charm because of the inherent disadvantages in it, the most important is the unlimited liability of all partners for business debts and legal consequences, regardless of their holding, as the firm is not a legal entity.

General partners are also jointly and severally liable for tortuous acts of co-partners. Each partner has the exposure of their personal assets being appropriated and liquidated to meet partnership dues. These are statutory position, which cannot be altered by contract inter-se, though at times subterfuges are resorted to by unscrupulous partners to avoid personal liability.

General partnership holdings are not easy to transfer; typically all other partners have to agree. Yet partnership is preferred in India, because of the ease of formation and lack of compliances involved.

The need for LLP:
The government has woken up from it slumber has acknowledged the disadvantages posed the general partnership and recognised the need for introducing LLP in India. To this end the government set up a Committee headed by Mr. Naresh Chandra which has come up with a framework for introducing LLP in India. The broad areas of analysis made by the Committee relate to:

1. Application of the LLP Regime;
2. Incorporation, Registration and Number of Partners;
3. Limited Liability;
4. Financial Safeguards; and
5. Tax Treatment of LLPs.
——————————————————————————–
[1] Sec 1 . The act came into force on the 1st day of October,1932 except Section 69, which came into force on the 1st day of October ,1933
[2] See Preamble to the Act.
[3] Sec. 3
[4] Poppatlal Shah vs. State Of Madras AIR 1953 SC 274
[5] Tribhuban Parkash Nayyar Vs. Union Of India (1969) 3 SCC 99.
[6] The present definition replaces Section 239 , Indian Contract Act which defined ‘Partnership’ as under :
‘Partnership is the relation which subsists between persons who have agreed to combine their property, labour or skill in some business , and to share the profits thereof between them.
The present definition is wider than the one contained in the Indian Contract Act in so far as it includes the important element of ‘ mutual agency ‘, which was absent in the old definition.
According to Pollock:
‘Partnership is the relation which subsists between persons who have agreed to share the profits of a business carried on by all or any way of them on behalf of all of them.’
[7] Dulichand Laxminarayan Vs. CIT AIR 1956 SC 354 ,Para 11 ; see also Pratibha rani Vs. Surajkumar AIR 1985 SC 628 ,(1985 ) 2 SCC 370 and Sanjay Kanubhai Patel Vs. Chief Controlling Revenue Authority AIR 2005 Bom 57,para8.
[8] Rampratap v Durgaprasad AIR 1925 Pc 293; Hemchandra Dev vs. Dhirendra Chandra Das AIR 1960 Cal 691.
[9] Birdichand v Harakchand 190 IC 613 , AIR 1940 Nag 211
[10] Deputy Commr Of Sales Tax (Law) Board Of Revenue (Taxes) vs. K Kelukutty AIR 1985 SC 1143 , from (1978) 2 ILR Ker 82
[11] CIT v Kedarmal Keshardeo AIR 1968 A&N 68 ; Aruna Group Of Estates , Bodinayakanur v State Of Madras (1962) 2 Mad LJ 294.
[12] (1998) 3 SCC 471 ,Para 13
[13] (1875) L.R. 20 Eq.331,335

Table Of Cases
· Poppatlal Shah vs. State Of Madras AIR 1953 SC 274
· Tribhuban Parkash Nayyar Vs. Union Of India (1969) 3 SCC 99.
· Dulichand Laxminarayan Vs. CIT AIR 1956 SC 354 ,Para 11
· Pratibha rani Vs. Surajkumar AIR 1985 SC 628 ,(1985 ) 2 SCC 370
· Sanjay Kanubhai Patel Vs. Chief Controlling Revenue Authority AIR 2005 Bom 57,para 8.
· Rampratap v Durgaprasad AIR 1925 Pc 293
· Hemchandra Dev vs. Dhirendra Chandra Das AIR 1960 Cal 691.
· Birdichand v Harakchand 190 IC 613 , AIR 1940 Nag 211
· Deputy Commr Of Sales Tax (Law) Board Of Revenue (Taxes) vs. K Kelukutty AIR 1985 SC 1143 , from (1978) 2 ILR Ker 82
· CIT v Kedarmal Keshardeo AIR 1968 A&N 68
· Tarsem Singh v Sukhminder Singh (1998) 3 SCC 471 ,Para 13
· Ross v. Parkyns (1875) L.R. 20 Eq.331,335

Nitish Banka

Nitish Banka is an advocate practicing in Supreme Court of India and can be reached at [email protected] or 9891549997