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This article is written by Rishika Rathore, a student of B.A. L.L.B, from the School of Law, Jagran Lakecity University, Bhopal. It is going to explore the key points through which Indian Partnership Act, 1932 eased out the actions in business for partnership firms.  

Introduction

An organization that engages in commercial, industrial, or professional activities, with the aim of profit, charity, or social welfare, is called a business. A partnership can be an absolute choice if any business is going to be owned and driven by numerous people. A partnership is a conventional contractual arrangement by two or more individual entities to run and operate a business to share its profits. The overall sense of partnership is a joint action by multiple parties to set up an endeavour. The parties may be non-profit organizations, businesses, individuals, medical or law professionals, governments, etc. This article comprises the study of the partnership in the light of the Indian Partnership Act, 1932, along with the historical background and significance of the same. The different kinds of partnerships, their importance, and their benefits will also be added to the bargain.    

Indian Partnership Act, 1932

Partnership firms in India are regulated by the Indian Partnership Act, 1932. Section 4 of the Act defines partnership as – Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any one of them acting for all”. This Act interprets the structure of the partnership by laying out all essential provisions to run a partnership firm. 

Description of partnership 

In a partnership firm, two or more persons assemble to execute a business to earn profits and share it, along with the liabilities (if any). The individuals owning the partnership are called partners. The partners collaborate their respective capital resources and work collectively to maintain or run their business. Mere co-ownership will not constitute a partnership. Section 12 of the Act states that a partnership must be formed to carry out any lawful business. Some examples of partnership firms are Maruti Suzuki, Hindustan Petroleum, Redbull and GoPro, etc.

History of the Act

Initially, the provisions of the partnership were proposed under the Indian Contract Act, 1872, under Chapter XI, from Section 239 to 266. It was an arrangement based on the practices and customs of commercial people and traders in India, following English principles of law. But, with the advancement of trade and commerce among Indian business sectors, such arrangements felt insufficient and outdated. The requirement of a separate partnership was felt. Therefore, the Indian Partnership Act, 1932 was passed by the legislature and received the green flag on 18th April, 1932 and came into force on 1st October, 1932. 

Through this Act, Sections 239 to 266 of the Indian Contract Act were revoked. The previous provisions about the partnership were based on the rules incorporated in the Draft Contract Law Report (1866), of the Third Law Commission, 1861, chaired by Lord Romilly. But, the advanced Partnership Act was modified and established based on the English Partnership Act, 1890

Types of partnership in India 

There are three main types of partnerships that are adopted by business organizations:

General partnership 

In this type of partnership, all partners have the right to make decisions about the functioning and administration of the firm. The partner’s liability is unlimited but it acts as a stumbling block in situations where financial loss or blunder occurs because the private assets of all the partners can be forfeited or ceased to pay the debts and claim credits, even if such loss or blunder is caused by a single partner. 

In the case of State Bank of India v. M/s. Simko Engineering Work (1800), it was cited that a partnership firm has no separate entity of its own and all the liabilities and actions of one partner will be binding to all other partners, as per the provisions of Section 20 and Section 22 of the Partnership Act. Although there is an exception to Section 20, which says that if partners extend or restrict the implied authority of any partner by making a contract, then the onus to prove such restriction will be on the part of the partner who claims it. 

The General Partnership is additionally divided into three categories:

  • Partnership at will – Normally, when a partnership is initiated, it is based on the partner’s decision to decide the period of its existence. When the partnership is created without discussing any specific period, it is known as a partnership at will. Under Section 7 of the Partnership Act, two necessities need to be fulfilled:

(A) No agreement about the confirmation of a fixed period of partnership.

(B) No direct or indirect clause regarding confirmation of partnership.

  • Particular Partnership – This kind of partnership is initiated with an ultimate goal to carry out a particular undertaking. Some partnerships are created to finish a particular project, contract-based assignments, or a specific business, then such collaborations are known as particular partnerships under Section 8 of the Act. 
  • Partnership for a fixed period – When partnerships are created for a fixed period and then after the expiration of such period, the partnership dissolves.  

Limited Liability Partnerships

In limited liability partnerships, the liabilities of partners are limited to each partner following their willful contributions in the firm. Thus, the personal assets of partners cannot be ceased to pay back the firm’s debts. The Limited Liability Partnership Act, 2008 was published in the official gazette of India and came into force on 31st March, 2009. LLP is treated like any other partnership firm in terms of taxation, but the provisions of the Indian Partnership Act do not apply to it. 

Registration-based partnerships

  1. Registered Partnership – If a partnership firm gets itself registered in the Registrar Office, having authority over the place of business of the firm, then such partnership is said to be registered. 
  2. Unregistered firm – Registration of a partnership firm is not mandatory under the law of the Indian Partnership Act. Thus, if a partnership firm is executed based on an agreement among the partners, without registering the firm, then it will be called an unregistered partnership. 

Criteria of partnership under the Act

As per the definition of partnership under the Indian Partnership Act, 1932, the structure of partnership must consist following criteria:

  1. There must be a contract;
  2. between two or more persons;
  3. who agree to carry on a business;
  4. to share profits and;
  5. the business must be carried on with mutual agency among partners. 

There must be a contract 

A partnership does not come to light from status, operation of law or inheritance, but emerges as a result of a contract. Thus, a contract is the true foundation of a partnership. For instance, in a partnership, if a partner dies, his son can claim a share in the partnership property but cannot become a partner. If he wants to become a partner, he has to sign a contract for partnership with the consideration of other partners. Likewise in the business run by the Hindu Undivided Family, the members of the family cannot be called partners because their relation arises from status, not from the contract. 

Between two or more parties

No less than two individuals are essential to constitute a partnership, after all, it is an outcome of a contract. The Indian Partnership Act does not highlight any information about the maximum number of partners in a partnership firm. However, as per the provisions of the Companies Act, 2013, the maximum number of partners in a partnership firm should not exceed the number of 100. This limit used to be 20 for business partnerships, following the provisions Section 11 of the Companies Act, 1956. 

The persons competent to enter into a contract of partnership can be either natural persons (mortals) or artificial persons (companies). It should be marked down that a partnership firm is not considered as a legal person who has ‘a separate legal entity’ from its partners, therefore in the case of Dulichand v. Commissioner of Income Tax (1956), it was held that a partnership firm cannot be entered into a contract of partnership with another partnership firm or individual. 

Agree to carry on the business

The term “business” is used in a broader sense implying every occupation, trade, or profession. The collaboration made with the aim of charity will not be considered a partnership. For instance, if two persons bought a farm, contributing an equal amount of money, and then initiated a shelter for homeless children, such association would not amount to a partnership, but a co-ownership. 

Sharing of profits

If the business is initiated for a philanthropic cause (as per the above-mentioned instance), then it would not be considered a partnership because the sole purpose of a partnership agreement is to earn and share profits amongst all the partners. In the case of Raghunandan Nanu Kothare v. Hormasjee Bezonjee Bamjee (1926), it was held that partners are free to share their profits in any ratio they prefer and it is not essential for partners to share losses of the firm. Thus, any partner may voluntarily bear the losses incurred in the partnership. Moreover, the partnership deed should explicitly state the mode of sharing profits or losses and in the absence of such deed, the provisions of the partnership act would apply which implies that “all the profits and losses will be shared equally among all the partners”

Mutual agency

Under the provisions of the Partnership Act, every partner is both principal and agent for himself and other parties. Thus, the business of the partnership is carried on by either one or all the partners, representing the firm in each case. A partner can be bound to his acts as well as to his partner’s acts. This mutual agency allows every partner to run a business on behalf of other partners. 

Benefits of partnership 

The key benefits of a partnership firm are as follows: 

  1. Partners are their own masters supervising their affairs.
  2. An agreement is all you need to create a partnership.
  3. Having a business partner helps other partners to share the financial burden for expenses and capital expenditures needed to carry on the business.
  4. A mere agreement is enough to dissolve a partnership.
  5. By sharing the affairs, a partner lightens the load of another partner which creates a positive impact on personal as well as professional life.
  6. It’s not easy to have blind spots about the conduction of partnership, as several eye sets help to mark loopholes in the regulation of partnership. Moreover, the partnership helps to generate new perspectives or gain different outlooks about the overall conduction of the firm.
  7. Partners take great initiatives to make a business successful as huge profits will be equal to huge ratios of distribution.
  8. Unlike a company, a partnership does not have any separate legal entity, the partners are collectively known as a partnership firm. 
  9. The uncertainty of risk in a partnership is shared by all the partners, which makes them rational and responsible. 
  10. Aligning aims and objectives with partners strengthens the business along with providing greater growth opportunities. 

Conclusion

Alone we can do so little, together we can do so much” is a famous quote by Helen Keller, that metaphorically highlights the basic idea behind a partnership firm. In India, The Indian Partnership Act, 1932 provides a regulatory framework for all kinds of partnership firms. To compete in this world of competition, every business needs a shoulder to lean on for its growth and eased-out process. Partnerships allow a business to acquire diverse pieces of information and multiplied workloads due to various networks and continuous interactions among partners. Throughout the study, it can be observed that the Indian Partnership Act, 1932 has provided numerous provisions that regulate the partnership firm at each step, thus it would be right to conclude that the Partnership Act of India has facilitated the business for partnership firms. 

References


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