Module 2: Nature of

Partnership
Presented by:
Varnika Taya
 ESSENTIALS OF PARTNERSHIP
 Section 4
 ESSENTIALS OF A PARTNERSHIP

1. Agreement
 Partnership comes into existence by way of an agreement.
 Section 5
 It arises from a contract and not from status. It is thus, different from HUF carrying
on family business or a Burmese Buddhist husband and wife carrying on business.
 Shri Arunkumar v. State of Maharashtra and Ors., Letters Patent
Appeal No. 510 of 2009 (Bombay HC; decided on 02.12.2022)
 Facts: Vijaykumar Jaiswal, Arunkumar Jaiswal (appellant) and Dinkarrao Gawande were partners of the firm M/s.
Akot Wine Mart. Dinkarrao expired in 1994 and Vijaykumar Jaiswal left the firm later. Therefore, the firm was
dissolved and the appellant became the sole proprietor. His name alone was continued in the licence for wine shop
(country and foreign liquor). The partnership was 'AT WILL'. Clause 10 of the partnership deed specified that
outgoing partners or legal heirs of the deceased partner are not entitled to claim goodwill or right of the firm. Further,
clause 11 provided that all license rights or any other rights would vest in the remaining partners if any partner retires
or dies. Government Circular dated 25.02.1994 provided that when original licence holder dies or is unable to
participate in the business due to disability, the consent of legal representatives has to be obtained while transferring
the licence. If the licence is in the name of the firm, consent of the legal representatives has to be obtained to delete
the name of the deceased partner. Kamlabai, wife of Dinkarrao Gawande, contended for inclusion of her name in
place of her husband's in the licence.

 Issue: Whether Government Circular would have prevalence over the clauses of partnership deed?

 Held: The partnership deed was executed between the partners who agreed to the terms. No right was reserved for
the legal heirs to claim in the licence and hence, Kamlabai is not entitled for such a right. Partnership is not a
heritable status but purely depends on contract. This legal position (as captured under Section 5 of the Partnership
Act) would prevail over the government circulars.
 The agreement may be written or oral, express or implied. It may also arise from the conduct of the
parties.
 Abdul Badsha Saheb v. Century Wood Industries (ASCU), AIR 1954 Mys 33: Two brothers living
together inherited certain properties on the death of their father. They did not divide the properties.
Rather they sold a garden of theirs for Rs 5,000 and invested the sum in a separate timber business.
There was no formal partnership agreement, but it appeared that they intended to share profits. The
business, however, failed before any profits could be made and the question of payment of liabilities
arose. It was held that they must bear the liabilities as partners. The court observed, an agreement of
partnership need not be express. It can arise out of mutual understanding shown by a consistent
course of conduct.
 Deed of Partnership: When the partnership agreement is in writing, it is called the deed of
partnership. Writing is not prescribed by the Partnership Act not even for getting the firm registered
under the Act with the Registrar of Firms.
 Capital contribution by partners is not mandatory: A person can become a partner without having
to make any contribution towards the capital of the firm. A person may contribute his know-how, or
intellectual property rights, or skill and experience or even sheer labour in consideration of becoming
a partner.
2. Business
 Refer to Module 1 for definition. Partnership Act recognizes only business partnerships.
 Fallacy in the definition of business – while every trade may be a business, every occupation or profession is
not
3. Sharing of profits
 Earlier profit sharing was a determinative test for partnership. Every man who received any portion of the
profits of a business had to incur therein the liability of a partner.
 This was changed in Cox v. Hickman, (1860) 8 HLC 268, after which it was held that sharing of profits is only
a prima facie evidence of the existence of a partnership. The conclusive test is that of mutual agency.
4. Mutual Agency
▪ If the person carrying on the business acts not only for himself but for others also, in a way that they stand in
the position of principals and agents, they are partners.
5. Maximum Number of Partners – 100 partners (Section 464 of Companies Act, 2013) (Every member of the
contravening partnership shall be punishable with fine which may extend to one lakh rupees and shall also
be personally liable for all liabilities incurred in such business.)
 Cox v. Hickman, (1860) 8 HLC 268
▪ Facts: Mr. Smith and his son were carrying on partnership business as M/s. Smith and son. Owing
(due) to financial difficulties, they assigned the business to their creditors and executed an
agreement/ document to the effect. According to the agreement, the business was to be managed by
five trustees representing the creditors under the name of 'Stanton Iron Co'. The trustees included
Cox and Haywood. The net income/profit (after paying off the creditors) was to be distributed by the
trustees. After all the creditors had been paid off, the business had to be re transferred to M/s. Smith
and son. The creditors were empowered to discontinue the business or to make rules for conducting
the business. While the business was being managed by the trustees, Hickman, plaintiff in this case
supplied goods to the firm (and drew a bill, which was accepted by Haywood i.e. Haywood had
undertaken to pay) Cox did not accept the trusteeship and did not take part in the transaction.
Hickman sued the firm for payment treating Cox and Haywood as partners.
▪ Issue: Whether there is a partnership between the traders who were in essence the creditors of the
firm?
▪ Held: It was held that they were not partners and, therefore, Cox was not liable. The creditors,
instead of taking legal proceedings, came to an agreement about the way in which their claims
should be satisfied. That did not make them partners. They did not intend on becoming mutually
liable in relation to each other or the firm.
 REAL RELATIONSHIP OF AGENCY AND NON-
PARTNERSHIP INTERESTS
 Section 6.

 Section 6 follows the principle of Cox v. Hickman, (1860) 8 HLC 268, wherein it was observed that:

The liability of one partner for the acts of his co-partner is in truth the liability of a principal for the acts of his
agent. Where two or more persons are engaged as partners in any ordinary trade, each of them has an
implied authority from the other to bind all by contracts entered into according to the usual course of
business in that trade. Every partner in trade is, for the ordinary purposes of the trade, the agent of his co-
partners; all are, therefore, liable for the ordinary trade contract of the other. The public have a right to
assume that every partner has authority from his co-partners to bind the whole firm in contracts made
according to the ordinary usages of trade.
 Non-partnership interests:

1. Joint owners sharing gross returns (Explanation 1)

2. Lender of money receiving profits (Explanation 2 (a))
3. Servant or agent receiving profits (Explanation 2(b))
4. Widow or child of deceased partner (Explanation 2(c))
 PARTNERSHIP FIRM
 WHAT IS A FIRM?
 Firm – partners are collectively known as a firm. A firm is thus a collection of partners.
 It is not a legal entity separate and distinct from partners and is only a compendious
description of individuals who compose the firm. (Comptroller & Auditor-General v.
Kamlesh Vadilal Mehta, (2003) 2 SCC 349)
 When a partner dies or becomes insolvent the firm is dissolved. The assets of the firm
are joint property of the partners and the partners are personally liable for all the
business obligations of the firm.
 FIRM NAME
 Firm name – name in which the partners of a firm carry on their business.
 A firm name should not be misleading – it should not be identical with or too closely
resembling the name of another firm, or with the trade mark of the goods produced by
another firm.
 PARTNERSHIP AND CO-OWNERSHIP

PARTNERSHIP CO-OWNERSHIP

A partnership can arise only by way of an agreement. A co-ownership may arise in any other way.

Business is necessary for the existence of a

Co-ownership can exist without business.
partnership.

Partners are mutual agents. Co-owners are not mutual agents.

A partner cannot sell his share without the consent of A co-owner can sell his share without the consent of
the others. the others.

A partner can sue his co-partners for dissolution and

A co-owner can sue for partition of the joint estate.
accounts.
 PARTNERSHIP AND JOINT FAMILY BUSINESS

PARTNERSHIP JOINT FAMILY BUSINESS

A family cannot be created by contract. It always arises by

A partnership cannot arise without contract.
operation of law.

A new partner cannot be admitted into a partnership except with A person becomes the member of the joint family and gets an
the consent of all the partners. equal share in assets and profits by the mere fact of birth.

The members of a family are not mutual agents. The manager

Partners are mutual agents.
or Karta of the family is the only representative of the family.

Every partner, being an agent of the firm, has an unlimited

capacity to bind his co-partners into liability for trade The members of a family do not have such power.
obligations.

A coparcener is not personally liable for business obligations of

The liability of a partner is personal as well as joint.
the family. Only his share of assets and profits is liable.

The remedy of a partner for dissolution and accounts. The remedy of a coparcener is a suit for partition.
 PARTNERSHIP AND COMPANY

PARTNERSHIP COMPANY

A partnership is a collection or an aggregate of A company is a legal person.

the partners. A partnership is not a distinct legal
entity. It is only a compendium of its partners.
Partners of a firm are co-owners of its property. The shareholders of a company are not co-
owners of the company’s property.

Partners have to trade with unlimited liability. Companies are usually created with liability of
members limited by shares or guarantee.

A partnership has relatively low compliance A company has higher compliance standards.
standards.
 DURATION OF FIRM
 Partnership at will – Section 7.
 Basis the duration of a partnership firm: (a) fixed duration firm; (b) firm with duration not
specified. Partnership at will falls under second category.
 A partnership at will can last only so long as the members are willing to continue as partners.
Its survival is thus, dependent on the willingness of the partners.
 Partnership at will has following two characteristics:

a) A partner of a firm at will can retire from the firm at anytime by giving to his co-partners a
notice of his intention to retire. (Section 32)
b) A partner of a firm at will can dissolve it at any time by giving to his co-partners a notice of
his intention to dissolve the firm. (Section 43)
▪ It was observed by Justice Wanchoo in Karumuthu Thiagarajan v. E.M. Muthappa Chettiar,
AIR 1961 SC 1225: “Now Section 7 contemplates two exceptions to a partnership at will. The first
exception is where there is a provision in the contract for the duration of the partnership, the
second exception is where there is a provision for the determination of partnership. In either of
these cases the partnership is not at will. The duration of a partnership may be expressly
provided for in the contract; but even where there is no express provision, the courts have held
that the partnership will not be at will if the duration can be implied.”
▪ In Crawshay v. Maule, (1818) 1 Swan 495, the same principle was laid down in these words:
“The general rules of partnership are well settled. Where no term is expressly limited for its
duration, and there is nothing in the contract to fix it, the partnership may be terminated at a
moment’s notice by either party … Without doubt, in the absence of express term, there may be
an implied contract as to the duration of a partnership.”
▪ Continuation after expiry of term – Where a partnership firm is constituted for a fixed period
and, after the expiration of the term and without making any new agreement, the original contract
is prolonged by tacit consent; their partnership then become a firm at will.
 PARTNERSHIP IN SINGLE OR BRIEF BUSINESS
VENTURE

▪ Particular Partnership. Section 8.

▪ Karmali Abdulla v. Vora Karimji Jiwanji, ILR (1915) 39 Bom 261 (PC): Karim and
Rashid, two Bombay and Hong Kong merchants, resolved to have a joint
speculation in brown sugar to be shipped from Mauritius to Hong Kong. The
preamble to their agreement declared that their purpose was doing business in
partnership. Purchases were to be made jointly in Mauritius. They could be effected
by either of them after consultation with each other, and after taking advice from the
Bombay houses. A ship was then to be chartered after consultation, and loaded with
the purchased sugar and dispatched to Hong Kong. Invoices of the sugar were to be
so made that half of it would be deliverable to either firm and sent respectively to
each of the Bombay firms. The very first consignment of sugar proved to be a failure
and resulted in a loss. The question was whether one merchant was liable for a bill
drawn by the other in connection with the consignment, the other having become
bankrupt. Holding it to be an instance of partnership, the solvent merchant was held
liable as a partner.