Partnership: Concept, Definition and Essentials

The concept of Partnership is an important area to explore before delving into the legal nuances of this vast arena. Having no legal entity still binding its constituents, called partners, this is the beauty of this concept.

I. Introduction – Concept and Definition of Partnership

A unique form of association, the partnership allows individuals to collaborate by maintaining their individual positions intact. As in a company, there is a separate legal person created, but here there is no such possibility.

This relationship is not governed by the general contract law but a special law namely, the Indian Partnership Act, 1932 culling out provisions from the Indian Contract Act, 1872.[1] Thus, the legislative act indicates the significance that is laid especially upon this relationship by law.

In the coming article, the legal provisions along with the nuanced definitional aspects would be considered so as understand what is meant by a partnership. Usually, one is aware of the general definition but the legal definition is much more deep and advanced. Each of those elements has to be paid attention to carefully.

II. Meaning

A partnership is defined as a relation between persons “who have agreed to share all the profits of the business carried on by all or any of them acting for all.”[2] As per section 4 of the Indian Partnership Act, 1932, when a person enters into partnership with another, he or she is called a partner. Collectively the partners are known as a firm.[3]

Hon’ble Supreme Court has laid down that the firm name is just a compendious method of describing the partners only.[4] The important test of partnership is the existence of mutual agency between the partners.[5] Hence, the material element would be the authority of a partner to act for the whole and bind the firm with his or her actions.[6]

If no mutual rights or obligations are created, an association amounting to that of a partnership would not exist. There must a common or several interests in something which is to be divided among the partners.[7]

There were various illustrations that were provided in section 239 of the Indian Contract Act, the earlier repository of the provisions concerning the partnership. One prominent example is where two persons purchase 100 bales of cotton together. They agree to sell for their joint account. Thus, in respect of such cotton, they would be considered as partners.[8]

III. Historical Understanding

This definition which surfaces in the present law has transposed from a variety of jurisprudential synthesis. Earlier, when the provisions concerning partnership were part of Chapter 11 of the Indian Contract Act, then it defined partnership as a “contract between persons”. This understanding was based on the definition proposed by Kent regarding Partnership.[9]

Kent’s exposition for the concept of the partnership was as follows,

“Partnership is a contract of two or more competent persons to place their money, effects, labor, and skill, or some or all of them, in lawful commerce or business, and to share the profit and bear the loss in certain proportions.”[10]

Jessel MR heavily criticised such a narrow definition of a vast concept like a partnership and thus pointed out that certain elements of the definition are subsidiary and superfluous.[11] Thus, Pollock proposed a change as it should be a relationship between parties and a business carried by all or any of them.

These words are today the inseparable part of the definition. The words on behalf of were added on account of Lindley’s definition.[12] The English Act regarding partnership has carried in the thoughts of the American writers[13] which had misguided the Indian lawmakers.

In England, a person could be a partner if carrying out the business in concert with others without the need for any personal gain. This was a position taken by the Privy Council in an Indian case, whereby it held partnership equivalent to an agreement to share profits in common. Thus, sharing was not distinguished from profit generation.[14]

But, the jurists later realised that not only a common business but also a common interest should be necessary to constitute a partnership.[15]

IV. Essential Elements

There are three important elements[16] that have been recognised in law which constitute the definition of partnership,

1. There needs to be an agreement[17] which has been entered into among all the people concerned.
2. The profits of the business must be shared through the agreement. The intent of the deed should only and only to carry on a business.[18] To prove the existence of a partnership, a receipt by a person showing the share of profits of business would be strong evidence to prove the same.[19]
3. The concerned business has to be carried on by all or any of them who is acting on behalf of all. Hence, in the latter case, the person performing the task would become the agent for the partnership and thus would account for all.[20]

The last element needs a bit of elaboration because of the confusion that is caused with regards to the explanation of the relationship of a partner qua his or her firm. Is it that of a master-servant or that of an employer-employee?

Hon’ble Supreme Court has answered the question by specifying that the position of a partner qua a firm is that of equality. It is not like that of a master-servant or employer-employee. It is because in such cases, there is an element of subordination.[21] Even if the partner takes some remuneration from the firm, the status does not change to that of an employee.[22]

V. Specific Instances

In this section, we will examine some typical situations which would prima facie raise a doubt in the mind of the reader as to whether it is a partnership or not. But, in a legal sense, the situations would have to be analysed.

In case the partnership agreement gives the responsibility to one of the partners or provides a further circumstance in which only one partner could perform the functions of the firm like operating bank accounts or borrowing for the firm. Would it be still considered a partnership?

The clear answer is yes. It is because; the only condition is the fulfilment of the essentials specified. Even if one parent is reposed with the duty to perform the collective obligations, it would not destroy the nature and status of the partnership that is existing in the firm.[23]

Another situation is that of a husband having the custody and entrustment of the stridhan of his wife. Would such an act of putting the articles in possession of another spouse constitute a partnership?

If one looks at section 4 of the Indian Partnership Act again and then looks at this situation, it is clear that such an entrustment in the hands of the husband does not create any rights or entitlements for the husband. Thus, there would be no partnership created.[24]

Now, suppose that a purported partnership is being entered into through an agreement whereby one partner has no share in either the profits or the losses of the business. This situation on the face of it is not a partnership since the second very important essential is being missed out, as mentioned above, i.e., of the sharing of profits.[25]

On similar lines, the relation among promoters of a company cannot be said to be equivalent to the relationship of partners.[26] For the process of setting up a limited company, persons entering into contracts jointly cannot be considered partners.[27]

The essential of an agreement to share profits has been mentioned above.[28] If a debtor’s trade is being supervised by the creditor and they have agreed to pay the creditor out of the profits, the creditor cannot be considered to become the partner of the debtor.[29] Similarly, a receiver appointed by a trustee for a debenture holder does not become the partner for there is no liability.[30]

VI. Usage of word PERSON

This is a peculiarity present in section 4 of the Indian Partnership Act, whereby, the relation of partnership is said to constitute among persons.[31] Since the definitional section of the statute is silent as to what is a person, one would have to turn to the external aid to interpretation that is the General Clauses Act, 1897.

It stipulates that “a person shall include any company or association or body of individuals whether incorporated or not”.[32] But if this definition is imported into the wordings of section 4 of the partnership act and equated with the meaning of partnership, Hon’ble Supreme Court has held that the section will become totally repugnant to the very subject of partnership law.[33]

It shows and proves that any person, whether natural or juristic can form a partnership. There exists no reason as to why a joint-stock company can be restricted from entering into this relation. The classic case of two incorporated companies (English and German) carrying on business in partnership illustrates the proposition.[34]

But Calcutta High Court has clarified that in a regular sense of partnership, it would not be permitted for incorporated companies to enter into such partnerships in a technical sense.[35] Hence, the High court has carefully distinguished the Indian position of law from the English position.

It is because in the latter case, even companies can form partnerships. The financial and other operations mentioned in the Memorandum of Association would constitute the partnership business.[36] But, this does not prohibit companies in India to work together through joint boards and combinations without any further collaboration.

VII. Requisite Number of Partners

Now the question arises as to how many persons can validly constitute the relation of partnership? It is obvious that there cannot be a partnership with only one person or partner since it would leave no element of association between persons.[37] Hence, there has to be at least two persons for a partnership.

One must also remember that the representative and the individual capacity for the purpose of constitution of partnership cannot be distinguished. It means if several people on behalf of a single person run a business, it cannot be said to constitute a valid partnership.[38]

Similarly, beneficiaries of a trust cannot be said to constitute a partnership in the name of an investment trust.[39] A person can also NOT be a partner with a wakf, for the simple reason that a wakf is not a person.[40]

VIII. Agreement of Partnership

The agreement which the partners use to enter into a firm is considered as the source for the concept of partnership. But it is not to be taken at the face value. It is because; the intention of the partners holds greater value. It is deciphered from terms of agreement combined with surrounding circumstances, like management and finance.[41]

Form of agreement

It can be express or even implied, that means, to clearly infer from the course of conduct of the parties.[42] The legal standard is that there should be no further scope of an inquiry into the question of the existence of partnership since the relationship should be described in the instrument.[43]

Since it is the exposition of the Supreme court ruling that every contract need not be in writing, an oral agreement of partnership would be equally binding unless a law exists which requires the agreement to be in writing.[44]

Legal Entity

To understand the concept of partnership, it becomes important to investigate the legal nature of the very existence of the same. Whether it is a separate legal entity like that of an incorporated company?

The answer is a clear NO. It is because a partnership is considered merely as a collective form or association constituted by its partners.[45] It is categorically laid down that it is not an independent legal entity.[46] Rather it would be better to say that “it is just a convenient name to carry out business by the partners.”[47]

For this reason, the past experience of the partners is considered as the experience of the firm. Thus, in matters pertaining to the award of tenders, this would attain importance.[48] Since a firm is not a legal entity, it cannot be considered as eligible for entering into relations of partnership with other firms.[49] Hence, when a firm sues, it is considered as a suit filed by the partners and not the firm.[50]

Conclusion

A partnership is an important legal concept that makes the constituents of this association, namely, the partners, liable even while they maintain their individual capacity. Though a legal entity is not created the collective act of carrying on the business makes it possible for the firm to survive.

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References

[1] Indian Partnership Act, 1932, § 73, No. 9, Acts of Imperial Legislature, 1932 (India).

[2] Id. at § 4.

[3] Id.

[4] Deoha F. Guzdar v. C.I.T., AIR 1955 SC 74.

[5] Chimanram Motilal v. Jayantilal Chhaganlal, AIR 1939 Bom 410 (DB).

[6] Id.

[7] Rangaswami Goundar v. Easwarmurthi Goundan, AIR 1967 Mad 437.

[8] Birdichand v. Harakchand, AIR 1940 Ngp 211.

[9] Indian Contract Act, 1872, § 239, No. 9, Acts of Imperial Legislature, 1872 (India).

[10] Nathaniel Lindley, A Treatise on the Law of Partnership 14 (Sweet & Maxwell 1924).

[11] Pooley v. Driver, 5 Ch D 472.

[12] Nathaniel Lindley, A Treatise on the Law of Partnership 13 (Sweet & Maxwell 1924).

[13] UK Partnership Act 1860, 23 & 124 Vict. (Eng.).

[14] Mollwo, March & Co v. Court of Wards, (1872) LR 4 PC 419.

[15] CP Ambadas v. Kasabai, AIR 1925 Ngp 436.

[16] Pratibha Rani v. Surajkumar, AIR 1985 SC 628.

[17] Hemchandra Dev v. Dhirendra Chandra Das, AIR 1960 Cal 691.

[18] Seemaben v. Motibhai K Patel, 2015 SCC OnLine Bom 337.

[19] Taralakshmi Maneklal Thanawalla v. Shantilal Makanji Dave, 2015 SCC OnLine Bom 3967.

[20] Raghunath Sahu v. Trinath Das, AIR 1985 Ori 8.

[21] Regional Director, Employees’State Insurance Corporation v. Ramanuja Match Industries, (1985) 1 SCC 218.

[22] Id.

[23] KD Kamath & Co v. CIT, (1971) 2 SCC 873.

[24] Pratibha Rani v. Surajkumar, AIR 1985 SC 628.

[25] Nandu Mal v. Ramji Lai AIR 1952 Punj 403.

[26] Bacha F Gazdar v. CIT, AIR 1955 SC 74.

[27] Keith Spicer Ltd v. Mansell, [1970] All ER 462 (CA).

[28] Maliram Choudhury v. Jagannath Modi, AIR 1972 Ori 17.

[29] Cox v. Hickman, LR 4 PC 19.

[30] Gosling v. Gaskell, [1897] AC 575.

[31] Indian Partnership Act, 1932, § 4, No. 9, Acts of Imperial Legislature, 1932 (India).

[32] General Clauses Act, 1897, § 3 (42), No. 10, Acts of Imperial Legislature, 1897 (India).

[33] Dulichand Laxminarayan v. Commissioner of Income Tax, AIR 1956 SC 354.

[34] Hugh Stevenson & Sons v. AG fur Cartonnagen-Industrie, [1918] AC 230.

[35] Ganga Metal Refining Co Pvt Ltd v. CIT, AIR 1967 Cal 429.

[36] Newstead v. Frost, [1980] 1 WLR 135.

[37] Karumuthu Thiagarajan Cheetiar v. EM Muthappa Chettiar, AIR 1961 SC 1225.

[38] Holme v. Hammond, (1872) LR 7 Ex 218.

[39] Smith v. Anderson, (1880) 15 Ch D 247.

[40] Hossen Kasam v. CIT, (1937) 2 Cal 160.

[41] Deputy Commr of Sales Tax (Law) Board of Revenue (Taxes) v. K Kelukutty, AIR 1985 SC 1143.

[42] Chhotalal v. Rajmal, AIR 1951 Ngp 448.

[43] CIT v. Kedarmal Keshardeo, AIR 1968 A&N 68

[44] Tarsem Singh v. Sukhminder Singh, (1998) 3 SCC 471.

[45] MVV Satyanarayana v. Engineer-in-Chief (R&B), 2007 SCC OnLine AP 911.

[46] Indian Oil Corporation Ltd v. Shree Niwas Rammgopal, 2018 SCC OnLine Cal 4383.

[47] Sanjay Suganchand Kasliwal v. Jugalkishor Chhaganlal Tapadia, 2013 SCC OnLine Bom 1470.

[48] New Horizons Ltd v. Union of India, (1995) 1 SCC 478

[49] Malabar Fisheries Co v. CIT, AIR 1980 SC 176

[50] Purushottam Umedbhai and Co v. Manilal and Sons, AIR 1961 SC 325.

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1. Procedure to Institute a Suit By or Against a Partnership Firm