This article is written by Arkadyuti Sarkar, a student currently pursuing his B.A. LL.B from Shyambazar Law College under the University of Calcutta. This article talks about the Partnership Property in the Partnership Act.
Let us now attempt towards obtaining a comprehensive idea about partnership property, and other relevant topics, like the role of the partners in a partnership business or interest of the partners over a partnership property post-dissolution.
According to Section 14 of the Indian Partnership Act, 1932, depending upon the contract between the partners, the property of the firm includes all the property which was originally brought into the stock of the firm, or acquired through purchase or some other means. It also includes all the rights and interests which are associated with such property. Such property should have been acquired by or for the firm, or for the purposes and in course of the business of the firm. Such property of the firm or partnership property includes the business goodwill.
In absence of the contrary intention, such property along with the rights and interests which have been acquired with the monetary fund of the firm shall be deemed to be acquired by the firm.
Simply put, a partnership property consists of the following items in the absence of any agreement to the contrary between the partners of a firm-
- All property along with the inherent rights and interests that the partners purchase as their contribution to the common business, in the common stick.
- All property along with the inherent rights and interests, that a firm purchases for itself or for the purpose in course of its business.
- Goodwill of the business.
Illustration: X, Y, and Z are partners in a firm named A, located at Kolkata. For the purpose of establishing another office of the firm in Delhi, a new office is rented using the firm’s capital. This new rented property is an example of a partnership property.
In Boda Narayana Murthy & Sons v. Valluri Venkata Suguna & Others; the partners in a partnership business purchased a property individually and not using any sort of funds from the partnership. Disputes arose when the respondents claimed that the property so purchased using every partner’s individual monetary support belongs to the partnership firm.
The High Court of Andhra Pradesh held that to become a property of the firm, such property must have been brought into the stock of the firm by the partners originally, during the formation of the firm or was subsequently acquired by purchase or any other means, in the course of business of the firm.
In Addanki Narayanappa & Anr v. Bhaskara Krishtappa & 13 Others; here the plaintiffs and the defendants, Addankis and the Bhaskaras, are two Hindu Undivided families who entered into partnership business of hulling rice, decorating peanuts, etc.
In the course of the business the partners acquired some lands for the business purpose. Now such acquisition was made by payment of money by individual partners. A dispute spiked between the plaintiffs and respondents regarding whether the properties acquired in the course of business excluding the business funds are owned by the partnership business or by individual shareholders.
The Supreme Court held that property belonging to the partners or any one of them is incapable of being deemed as a partnership property, merely of being used for business purposes, and thus cannot be deemed as partnership properties.
Meaning of goodwill
Section 14 mentions that for the purpose of deeming an acquired property by a firm as a partnership property, such acquisition shall also include acquisition made for the purposes of goodwill of the firm’s business. Therefore, it is necessary to appreciate the meaning of Goodwill.
The term goodwill is defined nowhere in the Indian Partnership Act, 1932.
According to Lindley, the term goodwill is generally used for denoting the benefit arising from the connection and reputation, and its value is what can be received for the chance of being able to keep and improve the connection.
In simpler words, goodwill refers to the reputational value of a firm built over time, with respect to the expected future profits over and above the normal profits accrued over the conduct of the same class of business. A well established firm makes a good market name, generates trust with the customers and also has more business connections in comparison to a newly established business. Therefore, the monetary value of this advantage that a buyer is ready to pay is termed as Goodwill.
The buyer making higher payments, expects to make super profits in comparison to the profits earned by other firms. Therefore, it can be inferred that goodwill exists only in case of firms making super profits but is non-existent in case of firms making nominal profits or losses.
Illustration- A is a buyer, wanting to avail a legal service. He has 2 options: firm Y & firm Z. Firm Z has a better reputation compared to Firm Y. Therefore, A is more likely to go to Firm Z for availing the legal service. So, firm Z has better goodwill over firm Y and is likely to make a higher amount of profit. This goodwill of firm Z is intangible partnership property.
Application of property
According to Section 15 of the Indian Partnership Act, 1932, depending upon the contract between the partners, the property of the firm shall be held and used exclusively for business purposes by the partners.
In simpler words, the property of the firm which has been acquired by the firm for the business purposes shall be used only for such business purposes and nothing else.
Illustration: A law firm rents an office at Pune, for the purpose of conducting business. Thus, according to the provision of section 15, the rented office shall have to be used exclusively for the purpose of conducting business and nothing else.
In Reddi Veerraju v. Chittori Lakshminarasamma & others, the High Court of Andhra Pradesh observed that the rights enjoyed as joint owners by the partners are restricted by sections 14 & 15. The partnership property thereby acquired is not usable for any purpose other than that of partnership business. In this case the plaintiffs had mortgaged some money to the defendants for the purpose of partnership business. The mortgage claim had however been extinguished since no claim was made within the period of limitation.
Presumption about property
In re Adarji Mancherji Dalal, the High Court of Bombay ruled that for constituting a partnership property it is unnecessary that a property should be brought for the purpose of partnership business. The Court also went on to note that a partner is a trustee of the partnership property standing in his name, and no partner is a beneficiary in any particular estate or property, until the dissolution of the partnership.
In Noor Mohammed Mir v. Qadir Mir; here the plaintiffs had entered into a partnership business with the respondents and started a suit shop for tailoring business. After one of the plaintiffs died, the respondent continued to carry on the business under the same name. Disputes arose between the remaining plaintiffs and the respondents on this matter. The Court held that a partner’s property does not transform into partnership property merely because of being permitted for the use in conduct of partnership business.
Role of partners
The partners in a firm have the following ostentatious roles to play under the Indian Partnership Act, 1932-
- Observing Good Faith
Partners are obligated to continue the firm’s business to the greatest common advantage, being just and faithful to one another, and rendering true accounts and absolute information of all things affecting the firm to any partner or his legal representative.
- Indemnifying for loss
Every partner is liable to save other partners from loss caused by the fraud of a firm in carrying on the firm’s business. This provision is absolute, and not subject to the contractual terms between the partners. Any such clause in the partnership deed, exempting a particular partner from this indemnifying liability shall be invalid and unenforceable.
- Diligent participation in duties
Every partner is liable to diligently attend his duties in conducting the firm’s business.
- No remuneration claim
It is the prime liability of a partner to participate in the firm’s management business. Thus, none of them is entitled to any remuneration for such participation. However, usually some remuneration is allowed to the working partners if there is existence of some specific agreement to that effect.
- Indemnification for wilful negligence
Where one partner carries on the partnership business with wilful negligence, but without any fraudulent intention, thereby causing any loss to the firm, then such loss shall have to be compensated by that partner himself. However, any act done with bonafide intention shall not be deemed as wilful negligence.
- Sharing of losses
In absence of any contract to the contrary, every partner is equally liable to compensate for the firm’s losses.
- Holding and using the property of the firm
One of the imperative liabilities upon the partners in a partnership is to use the firm’s property exclusively for conducting partnership business. The partners may agree with variance but such disagreement must be endorsed by a specific agreement to that effect.
- Accounting for private profits
Every partner is accountable for the private profits accrued out of transactions of the firm, or its property, or goodwill, provided such profit has been made without the consent or knowledge of other partners.
- Acting within authority
Every partner is liable to act within the ambit of his actual or apparent authority. If he acts out of such scope and such act is unratified by the other partners, then he will be liable to other partners for any loss incurred upon them due to such excessive activity.
- Accounting for the process of a competing business
If any partner conducts a business of the same nature as that of the firm in which he holds his partnership, and such business is competing with that of the firm, then he shall be accountable for all the profits incurred by him in that competing business. However, if any such competing business is carried on upon the virtue of any contract with other partners, then there shall be no need for accountability.
- Not to assign his rights
A partner is not entitled to assign his rights or interests in a partnership firm to a third partner or an outsider, so as to make that outsider a partner in the firm’s business, without obtaining the consent of other partners. However, if such assignment has already been done, the assignee shall not be entitled to interfere in the conduct of the firm’s business, or require accounts, or inspect book of records of the firm, during the continuance of the firm.
The interest of partners after dissolution
To acknowledge the interest of partners in a partnership business after dissolution of such business, it is imperative to comprehend the meaning of dissolution.
The term dissolution remains undefined under the Partnership Act, 1932. According to Section 39 of this Act, the dissolution of partnership between all the partners of a firm is called the dissolution of a firm.
Dissolution of partnership of a firm is a process involving the termination of partnership relations between the partners of that firm. Such dissolution results in the cessation in the existence of the firm. It involves the discarding and disposing of all the assets of the firm, including settlement of accounts and liabilities.
Post dissolution, the firm becomes incapable of transacting with anybody except selling off the assets to realize the amount, pay the liabilities of the firm, and discharging the claims of the partners.
Now after appreciating the meaning of dissolution, let us check for the interest of the partners after dissolution.
- Representative Rights
According to Section 46, once the firm is dissolved, each partner or their representative shall be entitled against the remaining partners for having the firm’s property to pay off the debts and liabilities of the firm. If there is any excess property, after the payment of debts and liabilities, then such property shall be distributed among the partners or their representatives, according to their respective rights in the firm.
- Division of assets among the partners
According to Section 48(b)(iv), if there is any remaining assets even after applying the said assets in accordance with the provisions in clauses (i), (ii) & (iii) of Section 48(b), then such asset shall be distributed among the partners in the same proportion in which they were entitled to profit sharing.
So now let us summarize our learnings from this article. Any property acquired by a firm for the purpose of carrying on its business is a partnership property. Any property acquired by a firm for the purpose of carrying on its business shall be solely used for the purpose of such business and nothing else. Partners in a partnership business have various ostentatious roles to play. For eg: Observance of good faith; indemnifying for loss, participating in their duties in a diligent manner; no claim towards remuneration; indemnifying for wilful negligence etc. The partners shall have interests over the property and profits of a firm after dissolution. Provided that such interest shall only be available to them, on the remaining property, after the payment of all the debts and liabilities of the firm.
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