Did you know that first case of Partnership was observed in 14th Century in the year 1383 by Francesco di Marco Datini who was a merchant. Merchants remind me of the Barter System, ever wonder what was the Secondary importance of this system, apart from the presumable completion of needs, wants, and demands? Definitely, money flow is not the answer as it came into existence very late. Exactly, the topic which we have in hand, the Partnership, where two or more people come together and work for completing the demand of each other. Though partnership is little bit different as the rules were formed later owing to the higher amount of suits and frauds occurring in this arena.
While we know little bit about the Partnership, let us dig more deep into questions like – What is the Indian Partnership Act; what are requisites of a partnership; what could be the true test of Indian Partnership and how many sections are there in the Act?
The Indian Partnership Act (the Act) was earlier a part of the Indian Contract Act, 1872, later when the Act was passed – from S. 239 to S. 266 of Contract Act were repealed, as they dealt with partnership and due to increase in Trade and Commerce with India, these sections were fewer to regulate it and higher demand for the for a newer act was felt by British people. Soon after it, the Act received its assent from legislation on 8th of April, 1932. Except for the S. 69 (passed in 1933) of the Act, the entire act came into existence from 1st of October, 1932. The Act is similar to the English Partnership Act, 1890, as when the Act came India was under Colonial rule.
This was the brief History of the Indian Partnership Act, 1932. Let’s now get going with the terms and sections of the Act. In the Act there are total of 74 sections which deal with various parts of partnership like – Mutual Agency, essentials of partnership, partnership property, partnership firm, status of partners, different types of partnership, minor’s role in partnership, dissolution of partnership firm, registration of partnership, suits related to partnership property and firm, etc.
The S. 1, as it is obvious, mostly, tells about the name of the Act and what are the extent of its boundaries, before 2019, it was not applicable to the state of Jammu and Kashmir, though these words were omitted by the Act 34 of 2019.
S. 4 of the Act deals with the definitions of the Partnership, partner, firm and firm name. Suppose, A, B, C and D come together and work together, where A gives a part of hid house for working, B invests his knowledge, C provides the technology required and D manages the finance and income, they will be considered as “Partners”, though sometimes it is not necessary that a Partner shall share or invest something, it could be his/her mere existence which brings profit to the firm. So, the section says – Persons who have entered into 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”.
As far as the above example is concerned, 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. So, this definition clearly gives us the requisites for formation of a Partnership Firm, which are as follows –
- There has to be two or more person, a single person can’t form a partnership firm.
- They have to share profits, like if A and B are partners and earn some profit, it shall be shared accordingly. Though, it is interesting to note that, only profit is shared and not the Losses which must have been incurred by the firm.
- There has to be a business, by business it’s meant that there has to be some purpose of partnership, two aimless person working on nothing can not form a firm.
- Mutual Agency; One or all can carry out the business, it’s not compulsory for all of the partners to be the part of business activities, one can just act as a brand ambassador and still be the partner (though not all brand ambassadors are partner), it’s the agreement which matters and not carrying any kind of business. (This is the Unique feature of Partnership and is not present in other entities like, Joint Hindu Family, Associations, etc.)
Though, it’s very clearly said in the Act, that profits are to be shared in it, but no one is liable to share the losses, as if A incurred a loss for the firm, B, C and D are not liable to share it, though, it might be shared if they want to. Also, simply taking share from the profit of business, doesn’t lead to partnership between the two, Mutual Agency has to be there.
Partnership arises from the Agreement and not from the status, which means, it’s not a family business and it highly differs from the Joint Hindu Family. Also, it’s said that in partnership, liability of partner is Unlimited and it’s contractual. Which makes it clear, that all Partnerships are Contract but all contracts are not Partnership.
Mutual Agency is the Cardinal Principle of partnership; law of partnership is the branch of law of agency (and law of contract, as told earlier) and the conclusive evidence of it is Mutual Agency. As held in Cox v. Hickman, which made it very clear that profit sharing is not the true test of partnership, but, it is mutual agency.
Did you know, partnership could be of 2 to infinite person as there is no limit defined in the Act. However, it is not completely true, as according to S. 464 of the Companies Act, 2013 says number of members shall not exceed 100, whereas, the rule given the Companies (Miscellaneous) rules, 2014 makes it limited to 50!
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