PARTNERSHIP ACT

INTRODUCTION

The Indian Partnership Act, 1932 came into effect on the 1st day of October 1932 and was passed in 1931. This Act replaces the previous Indian Contract Act, Chapter XI, 1872.

It’s not comprehensive legislation. It is aimed at defining and amending the law of partnership. A partnership arises from a contract and thus the partnership agreement is not only governed by the provisions of The Indian Partnership Act, 1932 in that context, but also by general contract law in cases where no specific provision is made under The Indian Partnership Act, 1932. The Indian Partnership Act, 1932 expressly provides that unrepealed provisions of the Indian Contract Act, 1872, remain in force except in cases where it is inconsistent with express provisions under this Act. The provisions of the Indian Contract Act also apply for a partnership contract, hence the provisions on offer and acceptance, consideration, free agreement, legality, etc. On the other hand, the minor’s position is governed by the provisions of The Indian Partnership Act, 1932, a special provision is contained in Section 30 of the Indian Partnership Act, 1932.

SCOPE OF THE INDIAN PARTNERSHIP ACT

 the scope of a partnership is primarily a matter of partners’ intentions. The application of the powers it chooses to exercise at any time is not restricted except prohibition on illegal, immoral or fraudulent behavior that applies equally to individuals.

1. If consent is given by the constituent company’s partners, a partner may itself be a member of another company.
2. If the contract appears to be authorized or ratified by all partners, there usually is no further question as to its validity.

The cases where the partnership contract validity issue arises is where one partner made the contract without specific authority from his co-partners. Their implicit scope of partnerships may be divided into non-trading and commercial classes. Partners of either type can exercise certain powers in partnership. A partner can thus retain a lawyer to safeguard the interests of the company.

ESSENTIAL ELEMENTS OF PARTNERSHIP ACT

he essential elements of a partnership are the features that must be present to validate a partnership:

• Association of two or more persons

To form a partnership, there must be at least two people. All partners must be contractually competent. Therefore, the company is said to be dissolved if the number of partners in a company is reduced to one.

There are no limitations on the maximum number of companies in The Indian Partnership Act, 1932. Nevertheless, the Indian Companies Act 2013 establishes a limit on the number of  partners in a company as follows:

• For banking business, partners must be less than equal to 10.
• For any other enterprise, partners must be less than equal to 20.
• The partnership becomes illegal if the number of partners exceeds the limit.
• Agreement among the Partners

Section 5 of The Indian Partnership Act, 1932 states that “The partnership does not arise from the status of the law or the operation of the law but is the result of the agreement”.

The partnership is established by an agreement between two or several persons, i.e. a partnership agreement. An agreement may be either express (oral or written) or implied. Therefore, a partnership does not exist by status but by agreement. Rights and Duties of partners are defined as per agreement.

• Existence of Business Activity

The business has to be ongoing and legally binding. The partnership’s main motto is to operate and make profits. Partnerships are therefore not considered for people who work together for social or charitable work.

• Sharing of Profits

The main goal of a company is to earn a profit. These profits are shared in a pre-decided ratio among the partners.

If a person is not entitled to share income, he cannot be called a partner. But a partner is not liable according to an agreement to share the losses.

• Mutual Agency

Relations with a mutual agency means that all or any partner must conduct a company’s business. A partner is an agent of the other partner and can thus bind another partner through his act. A partner is also principally responsible for the actions of the other partners of the company

  Types of partnership

• Partnership at Will

If there is no clause to establish a partnership at the expiry of such a partnership, it is referred to as a partnership at will. In accordance with Section 7 of The Indian Partnership Act, 1932, two conditions have to be met for a partnership to be a partnership at will and they are:

• There is no agreement on a fixed period for the existence of a partnership.
• No provision is made for establishing a partnership.

If a partnership has been established and continues to operate beyond the fixed period, the partnership will become a partnership at will after the end of that term.

• Particular Partnership

A partnership can be formed for ongoing business or for a particular purpose. If the partnership is only formed to carry out one company or complete one undertaking, it is known as a particular partnership.

The partnership will be dissolved after the completion of the said venture or activity. The partners may, however, come to an agreement to continue the said partnership. But in the absence of this, when the task is complete, the partnership ends.

• Partnership for a Fixed Term

Now, during the establishment of a partnership, the partners may agree on the duration of this arrangement. This would mean that the partnership was established for a fixed period of time.

Therefore, such a partnership will not be called a partnership at will, it will be a partnership for a fixed term. The partnership ends after the expiration of such a duration.

However, there may be cases where the partners continue their business even after the expiry of the duration. They continue to share profits and there is a component of a mutual agency. Then in such a case, the partnership will be at will.

• General Partnership

When the purpose of forming the partnership is to carry out the business in general, it is said to be a general partnership.

Unlike a particular partnership, in a general partnership, the scope of the business to be carried out is not defined, so all the partners are accountable for all the actions of the partnership.

NATURE OF PARTNERSHIP

When two or more people join hands to set up an enterprise and share its gains and losses, they are said to be in partnership. Section 4 of the Indian Partnership Act 1932 states partnership as the ‘association between people who have consented to share the profits of an enterprise carried on by all or any of them acting for all’.

People who have entered into a partnership with one another are independently termed as ‘partners’ and comprehensively termed as ‘firm’. The name under which the trade is carried is called the ‘name of the firm’. A partnership enterprise has no distinct legal entity, apart from the partners comprising it. Hence, the vital features of the partnership are:

• Two or More Persons: In order to manifest a partnership, there should be at least two persons possessing a common goal. To put it in other words, the minimal number of partners in an enterprise can be 2. However, there is a constraint on their maximum number of people. By the uprightness of Section 464 of the Companies Act 2013, the Central Government is authorised to stipulate a maximum number of partners in an enterprise; however, the number of partners cannot exceed 100. The Central government has stipulated the maximum number of partners in an enterprise to be 50, under Rule 10 of the Companies (Miscellaneous) Rules, 2014. Hence, a partnership enterprise cannot have more than 50 people (partners)
• Agreement: It is the outcome of an accord between 2 or more people to regulate business and share its gains and losses. The agreement (accord) becomes the basis of the association between the partners. Such an agreement is in the written form. An oral agreement is evenhandedly legitimate. In order to avoid controversies, it is always good if  the partners have a copy of the written agreement.
• Sharing of Profit: Another significant component of the partnership is, the accord between partners has to share gains and losses of a trading concern. However, the definition held in the Partnership Act elucidates – partnership as an association between people who have consented to share the gains of a business, the sharing of loss is implicit. Hence, sharing of gains and losses is vital.