Introduction:

1. Voluntary Agreement

A partnership can only arise as a result of an agreement, express or implied,

between two or more persons. Where there is no agreement there is no
partnership. But a partnership cannot be formed with more than ten persons in
banking and twenty persons in other types of business.

2. Sharing of Profits of a Business:

The second element states the motive underlying the formation of a partnership.
It also lays down that the existence of a business is essential to a partnership.
Business includes any trade, occupation or profession. If two or more persons
join together to form a music club it is not a partnership because there is no
business in this case.

3. Mutual Agency:

The third elements is the most important feature or partnership. It states that
persons carrying on business in partnership are agents as well as principals. The
business of a firm is carried on by all or by any one or more of them on behalf of
all. Every partner has the authority to act on behalf of all and can, by his actions,
bind all the partners of the firm. Each partner is the agents of the others in all
matters connected with the business of the partnership.

Who can be a Partner:

2 A person:

Under the Indian partnership Act, a person may be partner if he has the capacity
to enter into a contract (“Capacity of parties”)

2 Minor:

A minor cannot be a partner. But in an existing partnership, a minor can be

admitted into a firm if all the partners of the firm agree.

2 Persons of unsound mind:

A person who is of unsound mind cannot become a partner.

2 Woman:

A woman can be a partner, married or unmarried. Of course a woman cannot be

a partner if she is a minor or she is of unsound mind.

2 Company:

In a company the capacity to enter into contract is determined by the

Memorandum and Articles of the Association of the company. The liability of the
members of a firm under the Partnership. Act, for the debts of the firm, is
unlimited. But a company cannot incur unlimited liability. Therefore a company
cannot become a partner of a firm.

2 An alien enemy:

An alien enemy cannot enter into a contract of partnership with a citizen of any
Country.

Classes of Partners:

Partners can be classified as below:

Active partner:

An active partner is one who actually participates in the business of the firm. A
person becomes a partner only by agreement.

Dormant, Sleeping or Nominal Partner:

These partners join the firm by agreement but do not take any active part in the
business. Their liabilities are same as of Active Partners.

Sub-Partner:

The transferee of a share of a partner’s interest in a firm is called a Sub-partner.

Suppose P, the owner of ½ of firm, transfers 1/2 of his share to Q. Q will be called
a sub-partner. His rights and liabilities are limited.

Classes of Partnerships:

Partnerships can be classified as below:

(a) Every partner has a right to take part in the conduct and
management of business.

(b) Every partner has a right to be consulted and heard in all matters
affecting the business of the partnership.

(c) Every partner has a right of free access to all records, books and
accounts of the business, and also to examine and copy them.

(d) Every partner is entitled to share the profits equally.

(e) A partner who has contributed more than the agreed share of
capital is entitled to interest at the rate of 6 per cent per annum. But
no interest can be claimed on capital.

(f) A partner is entitled to be indemnified by the firm for all acts done
by him in the course of the partnership business, for all payments
made by him in respect of partnership debts or liabilities and for
expenses and disbursements made in an emergency for protecting the
firm from loss provided he acted as a person of ordinary prudence
would have acted in similar circumstances for his own personal
business.

ADVERTISEMENTS:

(g) Every partner is, as a rule, joint owner of the partnership property.
He is entitled to have the partnership property used exclusively for the
purposes of the partnership.
(h) A partner has power to act in an emergency for protecting the firm
from loss, but he must act reasonably.

(i) Every partner is entitled to prevent the introduction of a new

partner into the firm without his consent.

(J) Every partner has a right to retire according to the Deed or with the
consent of the other partners. If the partnership is at will, he can retire
by giving notice to other partners.

ADVERTISEMENTS:

(k) Every partner has a right to continue in the partnership.

(l) A retiring partner or the heirs of a deceased partner are entitled to

have a share in the profits earned with the aid of the proportion of
assets belonging to such outgoing partner or interest at six per cent
per annum at the option of the outgoing partner (or his
representative) until the accounts are finally settled.
Relations of Partners to one another:

The Partnership Act lays down two general rules regarding the conduct of the
partners to one another.

Rules regarding the conduct of the business:

Subject to any agreement to the contrary, the following rules apply as regards the
management of a firm:

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.
and 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 rights to
express his opinion before the matter is decided but no change may be made in
the nature of the business without the 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.

Liability of a Partner:

The partner’s liabilities can be discussed in three categories.

Liability of the firm for wrongful acts of a partner:

Where, by the wrongful act or omission of a partner acting in the ordinary course
of the business of a firm, or with the authority of his partners, loss or injury is
caused to any third party, or any penalty is incurred, the firm is liable therefore to
the same extent as the partner.

Liability of firm for misapplication by partners:

Where a partner acting within his apparent authority receives money or property
from a third party and misapplies it, or a firm in the course of its business
receives money or property from a third party, and the money or property is
misapplied by any of the partners while it is in the custody of the firm, the firm is
liable to make good the loss.

Dissolution of Firms:

A firm may be dissolved on any of the following grounds:

By agreement. A firm gray be dissolved any of with the consent of all the
partners of the firm Partnership is created by contract, it can also be terminated
by contract.

Compulsory Dissolution.

A firm is dissolved

1. by the adjudication of all the partners or of all the partners but one as insolvent,
or
2. by the happening of any event which makes the business of the firm unlawful.
But if a firm has more than one undertaking, some of which become unlawful and
some remain lawful, the firm may continue to carry on the lawful undertakings.

On the happening of Certain Contingencies

Subject to contract between the partners firm is dissolved

1. if constituted for a fixed^ term, by the expiry of that term

2. if constituted to carry out one or more adventures or undertakings, by the
completion thereof:
3. by the death of a partner
4. by the adjudication of a partner as an insolvent.

The partnership agreement may provide that the firm will not be dissolved in any
of the aforementioned cases. Such a provision is valid

a By notice:

Where the partnership is at will, the firm may be dissolved by any partner giving
notice in writing to all other partners of his intention to dissolve the firm. The firm
is dissolved as from the date mentioned in the notice as the date of dissolution,
or, if no date is mentioned, as from the date of communication, of the notice.

a Dissolution by the Court:

At the suit of a partner, the court may dissolve a firm on any one of the following
grounds:

a. Insanity:

If a partner has become of unsound mind. The suit for dissolution in this case can
be field by the next friend of the insane partner or by any other partner.

b. Permanent incapacity:

If a partner becomes permanently incapable of performing his duties as a

partner. Permanent incapacity may arise from an incurable illness like paralysis.
In Whitwell v. Arthur a partner was attacked with paralysis which on medical
evidence was found to be curable. Dissolution was not granted.

The suit for dissolution in this case must be brought by a partner other than the
person who has become incapable.

c. Guilty Conduct:
If a partner is guilty of conduct-which is likely to affect prejudicially the carrying on
of the business, regard being had to the nature of the business. To justify
dissolution under this clause the misconduct must be of such a nature as to
affect adversely the particular business concerned. Misconduct which affects one
business may not affect another business. Therefore the court must take into
account the nature of business that1 the partnership carries on. The test
generally applied is whether the act complained of is likely to affect the credit and
custom of the particular business.

The suit for dissolution on the ground mentioned in this clause must be brought
by a partner other than the partner who is guilty of misconduct.

Examples:

The partner of a firm of solicitors was convicted of traveling on the railway

without a ticket and with intent to defraud. It was held that since the conviction
was for dishonesty, it was likely to be detrimental to the partnership business and
dissolution was granted. Carmichael v. Evans.

In English cases dissolution has been granted for the following acts conviction for
an offence involving moral turpitude ; misapplication of the monies of a client by a
solicitor ; adultery by a doctor ; speculation in shares by the partner of a regular
mercantile business.

Persistent Breach of Agreement. If a partner willfully and persistently commits

breach of the partnership agreement regarding management, or otherwise
conducts himself in such a way that it is not reasonably practicable for the other
partners to carry on business in partnership with him.

The suit for dissolution in cases coming under this clause is to be brought by a
partner other than the partner guilty of the acts complained of.

Example:

In English cases the following acts have been held to be suffices ground for
directing dissolution: refusing to account for monies received taking away the
books of account; the application of monies belonging to the firm in payment of
his private debts; continued quarrelling, and such a state of animosity as
precludes reasonable hopes of reconciliation and friendly co-operation Transfer
of whole interest. It a partner has transferred the whole of his interest in the firm
to an outsider or has allowed his interest to be sold in execution of a decree.
Transfer of a partner’s interest does not by itself dissolve the firm. But the other
partners may ask the court to dissolve the firm if such a transfer occurs. Only the
transfer of the entire interest of the partner gives ground for action. The transfer
of a part of the partner’s interest does not provide any ground for dissolution. The
formation of a sub-partnership is, therefore, not a ground for dissolution.

The suit for dissolution on the ground mentioned in this clause must be brought
by a partner other than the partner whose interest has been transferred or sold.

Loss:

If thy business of the firm cannot be carried on except at a loss. Since the motive,
with which partnerships are formed, is acquisition of gain, the courts have been
given discretion to dissolve a firm in cases where it is impossible to make profits.

Just and Equitable clause:

If the court considers it just and equitable to dissolve the firm. This clause gives a
discretionary power to the court to dissolve a firm in cases which do not come
within any of the foregoing clauses but which are considered to be fit and proper
cases for dissolution.

Dissolution has been granted under the clause in the following cases deadlock in
the management; partners not on speaking terms; disappearance of the
substratum of the business.

Conclusion:

Under the above discussion, we can say that partnership business is a legal
business and its partners are also legal. Because they have to perform some
formalities. But except these the most important thing of this business is belief.
Without belief everything is baseless. As the partnership business is consist of
some partners. So, the partners must be honest and faithful to each other. If
there is lack of perfect relationship among the partners the business must be
dissolve. So, we can say that “Partnership Business is a Business Based on
Fiduciary Relationship.”

Relation of Partners with One Another

All partners are free to form their own terms and conditions with respect
to functioning in their partnership deed. The Indian Partnership Act,
1932 has also prescribed provisions to govern their relationship inter
se (amongst them), and these provisions are applicable if no such deed
exists. Let us take a look at the duties and the rights of partners.

Right to Determine Relationship

Partners can determine their mutual rights and duties by a contract
called partnership deed, which determines aspects of general
administration, such as which partner will do what work, what will be
their share in profits, etc. It may be varied by express or implied consent
of all the partners.

Such deed can be expressly made or implied by a course of dealing. For

example, if one partner checks accounts of the firm daily and others do
not object, his conduct will be presumed to be a right of all partners in
the absence of a written partnership deed between them. So they can
themselves determine the rights of partners.

Agreement in Restraint of Trade is Valid

Section 27 of the Indian Contracts Act, 1872 declares contracts in

restraint of trade as void. All agreements restraining exercise of a lawful
profession, trade or business are invalid.

Section 11 of Partnership Act, however, states that partners can validly

levy such a restraint on each other, but such restraint must be provided
for under the partnership deed. Partners can use this agreement to
prohibit each other from carrying on any business other than that of the
firm.

Effect on Rights and Duties after a change in Firm

The nature of the existing relationship between partners will be affected
whenever there is a change in the firm’s constitution. Such changes
occur in the following situations:

1. Change in constitution of the firm due to incoming or outgoing or

partner(s);
2. Expiry of the pre-determined term of the firm; and
3. Carrying out of additional business undertakings than originally
agreed upon.
Mutual rights and duties of the partners will continue to be the same as
they existed prior to such changes, but partners can change this by
making a fresh partnership deed.

Solved Examples for You

Question: Aman and Priya started a partnership firm for which they
contributed capital of Rs. 1 lakh and Rs. 50,000 each. Aman wants
interest on his capital as he has contributed more. Can he ask for such
interest?

Answer: Interest is payable on capital only if the deed states so. Aman
cannot claim an interest in the absence of a deed.
Question: A dispute arose between Aman and Priya with respect to
sharing of profits. Aman demands equal profits, but Priya wants more
as she works longer hours than him. Who is correct?

Answer: Profits must be shared in accordance with the ratio agreed

upon by them in their deed. They can change this ratio with mutual
acceptance. However, they are both entitled to equal share if no such
deed exists.

RELATION OF PARTNER
S Relation of Partners to OneAnother
The relation of partnership comes into existence by an agreement betwe
en the partners
and such an agreement usuallyprovides for the mutual rights and duties of
partners. The Deed
of Partnership usually contains the clauses with regard tothe conduct and
management of the
business, the contribution of capital by each partner, the proportion in w
hichprofits are to be shared, and the rights and duties of the partners
in the business. If there is no writtenpartnership agreement, their
relations, will be governed by the course of dealing among themselves.
Wherepartners fail to provide for their relations the rules laid down in th
e Partnership Act
will apply. It should beremembered that the partners, relations whether
governed by written
articles of partnership or defined by thePartnership Act can be changed by
the consent of all the partners.
The Partnership Act lays down the rights and duties of partners as fo
llows :