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NOTES|Some Basic QnA Related To Partnership Act,1932 That Might Be Important To You

Q. | Is the sharing of profit conclusive proof of partnership?

A. | Under section 4 of the partnership act 1932, it is defined that partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Persons who have entered into a partnership with one another are called individually partners and collectively a firm, and the name under which their business is carried on is called the firm name. To determine whether a partnership exists between a group of persons, we have to look at the real relation between them as shown by all relevant facts taken together. It further says that sharing of profits or of gross returns arising from a property owned jointly by them does not by itself make them partners.

Illustrations –

1. A and B buy 100 bales of cotton to sell later on profit which they agree to share equally. A and B are partners in respect of such cotton.

2. A and B buy 100 bales of cotton together for personal use. There is no partnership between A and B.

3. A, a goldsmith, agrees with B to buy and provide gold to B to work on an ornament and to sell and that they shall share the profit. A and B are partners.

4. A and B are carpenters working together. They agree that A will keep all the profits and will pay B a wage. They are not partners.

5. A and B jointly own a ship. This circumstance does not make them partners.

Q. | What are the mutual rights and liabilities of the partners?

A. | The rights, duties, and liabilities of partners make the mutual relationship between the partners more clear. Partners can themselves determined their rights by contract, but the partnership act confers certain rights upon the partners. The rights and liabilities of partners can be illustrated as:-

Rights of Partners

i) The right to take part in the conduct or management of the business: Every partner, irrespective of the amount contributed by him, has an inherent right to participate in the conduct of the business of the firm. However, by mutual agreement, some partners may be restricted to take part but, the right to participate in the management must be available to all.

ii) Right to be consulted & to take decisions by a majority: Before taking up any major decisions, it is the right of the partners to be consulted and heard. Any disagreement should be solved by majority decision. But, no change in the nature or constitution of the business can be done without the consent of all partners.

iii) Right of access to books: Every partner has a right to have access to and to inspect and copy the books of a firm.

iv) Right to share the profits: Every partner has a right to share the profits equally unless otherwise agreed upon, and bear the losses as well.

v) Right to receive interest on capital: If the partnership deed so decides that a partner is entitled to receive interest on capital at a fixed or certain rate, he has a right to receive it but, only out of profits.

vi) Right to be indemnified: Every partner has a right to claim indemnity from the firm in respect of payments made or liabilities incurred by him in the ordinary and proper conduct of business and in emergency to protect the firm from loss, provided the act should be such as would have been done by a person of ordinary prudence, in his own case and under similar circumstances.

vii) Right to receive interest on advances: If a partner makes any advances beyond the amount of capital he has agreed to subscribe, he has a right to claim interest at the rate of six percent per annum.

viii) Right to act in an emergency: A partner has every right and authority to act in an emergency, in order to protect the firm from loss, and the firm would be bound by such an act, provided the act would similar in his own case, under the same situation.

ix) Right to apply to the property of the firm for a business of the firm: Subject to contract between the partners, every partner has a right to apply and use the property of the firm exclusively for the business of the firm.

x) Right to apply to the property of the firm for a business of the firm: Subject to contract between the partners, every partner has a right to apply and use the property of the firm exclusively for the business of the firm.

xi) Right to prevent the introduction of a new partner: Every partner has a right to prevent the introduction of any new partner in the firm. No person can be admitted into partnership firm without the consent of all the partners.

xii) Right to retire: A partner has a right to retire with the consent of all the partners. If the partnership is at will, he has the right to retire by giving due notice in writing to all other partners.

xiii) Right not to be expelled: A partner has a right not to be expelled by any majority of partners without any cause.

xiv) Right of an outgoing partner to carry on a competing business: Every partners has a right to carry on a business, similar to the partnership business, after his retirement with certain restrictions being that he cannot use the firm name, represent himself as carrying on the business of the firm or solicit the customs of persons who were dealing with the firm before he ceased to be a partner.

xv) Right of outgoing partner in certain cases to share subsequent profits: If any partner of the firm dies or otherwise ceases to be a partner and the continuing partners continue to carry on business with the property of the firm, without any settlement being given to the outgoing partner, then in the absence of any contract, he himself or his representative are entitled to a share of profits made since he ceased to be a partner, as may be attributable to the use of his share of property or to interest at six percent per annum of his share in the property of the firms.

Liabilities of Partners

i) Joint & Several: Every partner is liable jointly and severally for all the acts of the firm done while he was a partner. The liability of a partner is always unlimited.

ii) Liability for losses causes by HIM: Every partner shall be liable to make good any loss caused to the firm by his fraud or willful neglect in the conduct of business. No partner can in any way exempt himself from such loss.

iii) Liability for secret profits: A partner is liable to account for and pay to the firm any private profits earned from the business of the firm or property or goodwill of the firm.

iv) Liability for profits from competing for business: If a partner carries on any business of the same nature and competing with that of the firm, he would be liable to account for and pay to the firm all profits made by him in that business.

v) Liability to render true accounts: A partner is liable to render true accounts to profit to other partners. He is liable to disclose any legal or illegal accounts which fall within the scope of business of the firm.

vi) Liability for losses of the firm: As a partner has a right to share the profits of the firm so is he liable to share the losses equally unless otherwise agreed upon.

Q. | What are the liabilities of the partners after dissolution?

A. | According to section 45 of the partnership act 1932, until public notice is given of the dissolution, partners remain liable for their acts as they were before dissolution. It is therefore essential to give notice of dissolution if the partners want to escape liability for the acts of the firm.

Q. | What is the implied authority of a partner? Can it be restricted?

A. | If two or more agree to carry on a business, each of them is a principal and each is an agent for the other. Further, each is bound by the other's contract in carrying on the trade as much as a single principal would be bound by the act of an agent. This principle has been incorporated in section 18 of IPA 1932. It says that a partner is the agent of the firm for the purposes of the firm. Its complementary principle is incorporated in section 25 which says that every partner is liable jointly with all other partners and also severally for all acts of the firm done while he is a partner.

This brings us to the implied authority of the partners. Since a partner is an agent of the firm, his act binds every other partner and the firm. For example, if a partner A gives a check in the firm's name to a creditor and if the check is unpaid, partner B is equally liable even though B's signature does not appear on the check. This authority to bind the firm is called "implied authority". It has been incorporated in section 19 of IPA 1932, which says that the act of the partner which is done to carry on, in the usual way, a business of the kind carried on by the firm, binds the firm.

Power of implied authority also has the following restrictions -

There are two kinds of restrictions - Statutory restrictions, as imposed by section 19 (2) and Restrictions imposed by the partnership deed and those imposed by the agreement between the partners. Statutory restrictions are binding upon all the partners whether they know them or not, while the second type of restrictions are applicable only when the partners have knowledge about them.

Statutory restrictions - In the absence of any usage or custom of trade to the contrary, a partner is not allowed to -

1. Refer a dispute to arbitration.

2. Open a banking account on behalf of the firm in his own name.

3. Compromise or relinquish any claim or portion of the claim by the firm.

4. Withdraw a suit or proceeding filed on behalf of the firm.

5. Admit any liability in a suit or proceeding against the firm.

6. Acquire immovable property on behalf of the firm.

7. Transfer immovable property belonging to the firm.

8. Enter into partnership on behalf of the firm.

Contractual Restrictions - As per section 20, Partners may, by contract, put additional restrictions or give additional powers to the partners. However, any act which falls under the implied authority but is restricted by the contract will bind the firm unless certain conditions are satisfied. A firm can avoid its liability in such a case, if the person dealing with the partner knows the restriction or the person dealing with the partner does not know or does not believe that the partner is a partner in the firm.

Q. | Can a partner be expelled? If so, when?

A. | According to section 33 of the partnership act 1932,

1. A partner may not be expelled from a firm by any majority of the partners, save in the exercise in good faith of powers conferred by contract between the partners.

2. The provisions of sub-sections (2), (3) and (4) of section 32 of partnership act 1932, shall apply to an expelled partner as if he were a retired partner.

Q. | Is the registration of a partnership firm compulsory? What are the consequences of non-registration? What is the procedure for registration?

A. | Under this partnership act 1932, registration of firms is not compulsory. There is no penalty for not registering. However, the effects of non-registration are so severe that usually, firms opt to register.

Consequences of not registering

1. Suits between partners and Firm - A per Section 69 (1) unless a firm is registered and the party is shown as a partner, no suit can be filed by or on behalf of any partner against the firm.

2. Suit between a firm and third parties - Until the firm is registered, no suit can be filed by the firm against third parties.

3. Bar to claim set off and other proceedings - According to section 69(3), the suit cannot be filed for a claim of set-off or other proceedings to enforce a right arising from a contract.

Procedure for registration

Registration of a firm can be done any time by sending a statement in the prescribed form by post or delivering to the registrar of the area in which any place of business of the firm is situated or proposed to be situated. The form should also be accompanied by the prescribed fee. The form must contain -

1. Firm name

2. Place or principal place of the business of the firm.

3. Names of any places where the firm carries on business.

4. Date when each partner joined the firm.

5. Names in full and permanent address of the partners.

6. Duration of the firm.

The statement must be signed by all of the partners or by their agents specially authorized in this behalf. Each person signing the statement shall also verify it in the manner prescribed. There is a restriction on the name of the firm that it cannot contain certain words such as Crown, Emperor, Empress, the king that give the impression that the firm is associated with the govt.

When the registrar is satisfied that the provisions of section 58 have been fulfilled, he shall record an entry in the Register of Firms and shall file the statement.

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