PARTNERSHIP DEED

ABSTRACT

Embarking on a business partnership journey requires an understanding of the basics and legal aspects. The Partnership Deed, an agreement guided by the Partnership Act of 1932, becomes crucial. It outlines partnership terms and conditions, stressing the need for a voluntary agreement, legal capacity, and open communication.

The article explains legal requirements for the formation of a partnership deed, emphasizing compliance, effective communication, and including dispute resolution methods.

Digging into the Partnership Deed details, the article also touches on the content of the partnership deed which includes bank account guidelines, capital contributions, profit and loss sharing, interest rates, partner rights and duties, rules for uncertain events, and additional business regulations. The article concludes by discussing the optional registration process in India and the outcomes of an unregistered deed.

When partners skip a formal partnership deed, default rules kick in, influencing financial arrangements. The article highlights the partnership deed’s importance as crucial evidence in legal matters, proving its role in clarifying partnership issues.

KEYWORDS

Partnership Deed, Indian Partnership Act of 1932, Purpose of Partnership deed, Stamp Act of 1989, Indian Evidence Act of 1872

INTRODUCTION

In the intricate tapestry of business alliances, where teamwork is key, the partnership deed emerges as the rulebook that keeps everyone on the same page. It guides partners through rights, responsibilities, and shared aspirations. Similar to the essential blueprint of a seafaring vessel, a well-crafted partnership deed guarantees a smooth business journey, avoiding the treacherous waters of confusion and discord. The partners are free to change the terms and conditions mutually agreed upon. In crafting this document, partners not only safeguard their individual interests but also foster an environment that nurtures growth, innovation and paves the way for shared success. This agreement may be oral or written. A template for partnership contains various clauses that must be present in the partnership deed during the drafting process. As such, the partnership deed serves as an essential pillar, shaping a cooperative, successful, and harmonious venture for all involved.

WHAT IS PARTNERSHIP?

Before delving into the details of a partnership deed, it is important to establish a comprehensive understanding of what a partnership is and the fundamental elements that constitute it. Section 4 of the Indian Partnership Act of 1932 talks about this.

SECTION 4– Definition of “partnership”, “partner”, “firm” and “firm name”.

“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”^[1].

ELEMENTS OF PARTNERSHIP

The definition of the partnership contains the five elements that must be present before a firm comes into existence. These are as follows-

PARTNERSHIP CONTRACT

A partnership is inherently contractual. It arises when two or more persons form an agreement. This agreement may be oral or written through ongoing actions and mutual understanding.

ASSOCIATION OF TWO OR MORE PERSONS

Partners are two or more individuals who join together to form a partnership. They are co-owners and share in the profit and loss of the business. Minors are generally not allowed to be partners, though exceptions exist. The maximum number of partners is not explicitly stated in the Act but is regulated by the Companies Act of 2013, allowing a maximum of 10 partners in a banking firm and 20 partners in other types of firms.

CARRYING ON BUSINESS (SECTION 12)

The firm must engage in some form of business, encompassing trade, profession, or occupation that requires the active participation of partners. The primary objective of the business should be to generate profits. Any firm engaged in charitable work, lacking an intention to earn profits, does not qualify as a partnership.

PROFIT SHARING

This is the fundamental aspect of a partnership. The specific ratio or method of profit-sharing is not paramount, but no partner can claim the entire profits exclusively. Conversely, the sharing of losses is not inherently essential; partners have the flexibility to decide whether losses will be shared among all partners. In the absence of explicit agreements, losses are typically apportioned based on the profit-sharing ratio.

MUTUAL AGENCY (SECTION 13)

This is a critical element of partnership which implies that each partner serves as both a principal and an agent for all other partners. The act of one is considered to be an act of all other partners and hence binds them establishing a foundational principle of mutual agency.

In K.D. Kamath and Co. Vs. Commissioner of Income Tax, Mysore^{^[2]}, The Honourable Supreme Court held the following two essential conditions to be satisfied –

There should be an agreement to share profits and losses of business among the partners, and
The business must be carried on by all or any of them acting for all applying the principle of mutual agency here.

WHAT IS A PARTNERSHIP DEED?

A Partnership Deed under the Partnership Act of 1932 is a written agreement between individuals sharing a common intention to conduct business as partners, entailing the sharing of profits and losses. This document contains the terms and conditions of the partnership. While the Partnership Act allows for both written and oral partnership agreements, a written format is referred to as a partnership deed. The document may take any suitable format and must bear the personal signature of each partner or that of their authorized representative. If the partnership is officially registered, the deed must be formally recorded with the Registrar of Firms.

As per the Stamp Act of 1989, the deed should be stamped properly.

PURPOSE OF PARTNERSHIP DEED

A partnership deed serves the following purposes:

Allocation of Profits and Losses: The partnership deed plays a pivotal role in determining the allocation of profits and losses among the partners. By specifying the agreed-upon profit-sharing ratios, the deed ensures fairness and transparency in the distribution of financial outcomes. This allocation may be based on capital contributions, effort, or other criteria established by the partners.
Capital Contributions and Ownership Interests: One of the fundamental purposes of a partnership deed is to document the capital contributions made by each partner. This includes financial investments, assets, or services contributed to the business. The deed further outlines the ownership interests of each partner, providing a clear understanding of their respective stakes in the partnership.
Decision-Making Authority: The partnership deed delineates the decision-making authority within the partnership. It specifies the process and mechanisms for making key business decisions, preventing conflicts, and ensuring that all partners are aware of their roles in the decision-making process. This clarity contributes to effective governance and operational efficiency.
Management and Operational Guidelines: The partnership deed outlines the management structure of the business and provides operational guidelines. It defines the roles and responsibilities of partners in managing day-to-day affairs, fostering a harmonious working relationship, and preventing misunderstandings that could arise from ambiguous expectations.
Dispute Resolution Mechanisms: An essential purpose of the partnership deed is to establish mechanisms for resolving disputes among partners. This may involve alternative dispute resolution (ADR) methods, such as mediation or arbitration, providing a structured and efficient process to address conflicts without resorting to costly and time-consuming legal proceedings.
Legal Compliance and Governing Law: To ensure the partnership operates within legal parameters, the partnership deed includes clauses requiring compliance with applicable laws and regulations. It may also specify the governing law, helping resolve legal matters and disputes according to a predetermined legal framework.

ABSENCE OF PARTNERSHIP DEED^[3]

If the partners do not adopt a partnership deed, the following default rules will be applicable:

Profits and losses will be shared equally.
Partners will not be entitled to a salary from the partnership.
No interest on capital will be payable to the partners.
Drawings made by partners will not incur any interest charges.
Partners, by mutual agreement, may receive 6% per annum interest on loans extended to the firm.

LEGAL REQUIREMENTS FOR FORMING A PARTNERSHIP DEED

There are various legal requirements for forming a partnership deed. Let’s elaborate upon them as follows:
1. Voluntary Agreement:

Partnerships are based on mutual consent. Each party involved should willingly agree to the terms and conditions outlined in the partnership deed. Coercion, undue influence, or fraud should not be involved in obtaining the consent of any of the partners. If any such elements are present, it can lead to the deed being challenged in court.

2. Legal Capacity:

All parties entering into a partnership deed must have the legal capacity to do so. This implies that they should be of sound mind, not be minors, and not be disqualified by law.

Sound mind ensures that the parties have the mental capacity to understand the implications of entering into a partnership, and minors are generally not allowed to enter into contracts.

3. Complete Disclosure:

Complete and honest disclosure is crucial for transparency and fairness in a partnership. All relevant information, including financial status, assets, liabilities, and other important details affecting the partnership, should be disclosed.

Failure to provide accurate information may lead to disputes and legal consequences.

4. Terms and Conditions:

The partnership deed must clearly outline the terms and conditions governing the partnership. This includes the profit-sharing ratios among partners, the decision-making process, the duration of the partnership, and any other critical aspects. Having these details explicitly stated helps in avoiding misunderstandings and conflicts among the partners in the future.

5. Compliance with Applicable Laws:

The partnership deed must adhere to all relevant laws and regulations governing partnerships in the business’s jurisdiction. This includes compliance with tax laws, business registration requirements, and any other legal obligations applicable to partnerships in the given jurisdiction.

6. Dispute Resolution Mechanism:

Including a dispute resolution mechanism in the partnership, deed is advisable to address conflicts efficiently. Common methods include arbitration or mediation, providing an alternative to lengthy and costly court proceedings. It helps in resolving issues amicably and maintaining the continuity of the business.

CONTENT OF PARTNERSHIP DEED

A Partnership Deed can be established as an initial measure to define partner expectations and responsibilities before the commencement of business or later in the partnership’s existence. This could happen if no Partnership Deed was initially created, and the partners now seek to formalize or clarify the operational aspects of the partnership. Regardless of when the Partnership Deed is crafted, it will address the following aspects:

Name of the Partnership Firm: The name of the partnership is a crucial element as it represents the business legally. The partnership deed ensures compliance with the Partnership Act regarding the registration of the firm under a specific name. It prevents unauthorized use of the partnership’s name and helps establish its legal identity.
Purpose of the Partnership: Defining the purpose of the partnership in the deed is essential for clarity and alignment among partners. This section outlines the specific business activities or goals the partnership aims to achieve, providing a shared understanding and direction for all partners involved.
Partner’s Information: The comprehensive information of each partner, including their full name and address, is a fundamental component of the partnership deed. This ensures an accurate record of the parties involved, serving as a reference point for legal and communication purposes.
Establishment Date: The inclusion of the establishment date in the partnership deed establishes a clear timeline for the commencement of the business. This date holds significance for various legal and financial matters, including taxation and the calculation of partnership duration.
Duration of the Partnership: Clarifying the duration or potential expiry date of the partnership in the deed is crucial. It distinguishes whether the partnership operates at will, allowing partners to dissolve it at any time, or if there’s a fixed term for its existence, providing stability and predictability.
Bank Account Guidelines: The section on bank account guidelines details the necessary steps and requirements for opening a bank account for the partnership. It may specify whether a joint account is required, ensuring transparency in financial transactions and providing information about the bank’s name and location.
Capital Contributions of Each Partner: The partnership deed meticulously records the capital contributions made by each partner. This includes monetary contributions, as well as contributions in the form of assets or services. Clear documentation helps prevent disputes and provides a basis for determining profit-sharing ratios.
Profit and Loss Sharing Ratios of Every Partner: This section outlines how the profits and losses of the partnership will be distributed among the partners based on agreed-upon ratios. The ratios may be determined by factors such as capital contributions, expertise, or other agreed-upon criteria.
Interest Rates: The partnership deed specifies the interest rates applicable to loans provided by partners and the interest on capital. Additionally, it addresses the interest on drawings, which are amounts withdrawn by partners from the partnership’s profits, ensuring transparency and fairness in financial dealings.
Rights of Each Partner: The deed enumerates the specific rights granted to each partner based on their role and contributions. This includes the right to participate in management decisions, access partnership records, and share in the profits.
Duties of Each Partner: Clearly defining the duties of each partner is vital for effective collaboration. This section outlines the responsibilities and expectations of each partner, helping to avoid misunderstandings and ensuring a smooth workflow within the partnership.
Rules for Uncertain Events: The partnership deed establishes guidelines for addressing uncertain events, such as the retirement or death of a partner. This may include buyout provisions, procedures for valuing the departing partner’s interest, and the allocation of assets and liabilities in such situations.
Additional Business Rules: Any supplementary rules necessary for the smooth functioning of the business are included in this section. These rules may cover areas such as decision-making processes, dispute-resolution mechanisms, and procedures for admitting new partners.
Flexibility to Amend the Deed: The acknowledgment that the partnership firm can add or delete any clause or provision as per its needs adds flexibility to the partnership deed. This allows the document to evolve with the changing needs and circumstances of the business, ensuring its continued relevance.

TYPES OF PARTNERSHIP DEED^[4]

There are two types of partnership deeds and they are as follows:

General Partnership Deed- The General Partnership Deed delineates the terms for a general partnership. In this arrangement, each partner holds equal responsibility for managing the business, and they share joint liability for the firm’s debts and obligations.
Limited Partnership Deed- It establishes a limited partnership comprising both general and limited partners. General partners bear unlimited liability for the partnership’s debts, and they actively participate in business management. In contrast, limited partners enjoy limited liability and are not extensively involved in the day-to-day management of the business.

MODIFYING A PARTNERSHIP DEED

Making changes to a Deed is a flexible process that requires consent from all partners. When modifications are needed, a new Deed is created and signed by all partners, adhering to the Stamp Act. It is essential to legally validate the changes by registering the new Deed with the Registrar of Firms. This ensures that the updated terms and conditions are officially recognized.

In the case of Commissioner of Income Tax v. Ram Saran Inder Singh^{^[5]}, the structure of the original partnership was changed and this change was inculcated in the new partnership deed. However, the sharing of profits was not per the terms of the updated partnership deed. Hence, the Punjab and Haryana High Court ruled in favor of the cancellation of partnership deed.

HOW TO REGISTER PARTNERSHIP DEED IN INDIA?

Partnerships in India fall under the jurisdiction of the Partnership Act, of 1932. As per this act, the registration of partnership deeds is optional. It may be written or oral depending upon the discretion of partners. They have the option to register or not to register a partnership deed. However, if a partnership deed is unregistered, the partners will miss out on the benefits enjoyed by registered partnership agreements. The registration process can be undertaken before initiating business or during the partnership.

HOW IS REGISTRATION DONE?

Making an application to the Registrar: An application, accompanied by the prescribed fee and a copy of the partnership deed, can be submitted to the registrar of the area where the business is located or intended to be situated by any partner of the firm. All partners are required to sign this statement. Such a statement should contain:
Name of the firm
Principal place of business
Any other place where the business is carried on
Duration of partnership firm
Name and address of all partners of a firm
The date on which each partner joined the firm
Verification: Verification is required for each partner who has endorsed the statements. Furthermore, it is stipulated that the name of the firm should not bear any resemblance to terms such as Crown, Emperor, King, Royal, Emperors, or any other words indicating government approval or endorsement.

Section 59 states that when the Registrar is satisfied that the conditions of Section 58 are complied with then he shall record an entry of the statement in a register called the Register of Firms, and shall file the statement^[6]

DOCUMENTS REQUIRED FOR DEED^[7]

The documents required are as follows:

PAN card of the partners.
Address proof of all the partners, such as Aadhar card, Voter ID, etc.
Address proof of the firm

IS THE PARTNERSHIP DEED ADMISSIBLE AS EVIDENCE?

In Indian law, the Indian Evidence Act, of 1872, governs the admissibility of evidence. Section 68 of the Indian Evidence Act deals with the proof of the contents of documents. A partnership deed can be admitted as evidence under this section as it holds evidentiary value and can be used to support or prove relevant matters concerning the partnership, provided certain conditions are met. The partnership deed is documentary evidence and it can be used in litigation to prove any important point to the partnership firm^[8]. The document’s contents need to be proved either by primary or secondary evidence.

In the Mangilal v. Suganchand^[9] case, the Supreme Court of India emphasized the importance of the partnership deed as a primary piece of evidence to establish the terms and conditions of a partnership. The court held that the partnership deed is a crucial document and can be admitted as evidence to determine the parties’ rights and obligations.

DIFFERENCE BETWEEN PARTNERSHIP DEED AND ARTICLES OF PARTNERSHIP

Both partnership deed and articles of partnership serve distinct roles in guiding the partnerships. The Partnership deed is a detailed legal agreement covering various aspects of the partnership like the name of the firm, details of partners, business location, bank account guidelines, etc. On the other hand, the Articles of Partnership are broader, focusing on overall governance which is adopted at the start. While a partnership deed delves into specific areas, Articles provide a general framework for the smooth running of the business. Both documents are required for a well-regulated partnership.

CONCLUSION

To conclude, a partnership deed acts as the compass for partners venturing into business together. It’s a written agreement, shaped by the Partnership Act of 1932, outlining how individuals team up, share the ups and downs, and strive for common goals. While the law allows spoken agreements, having these terms in writing, within the partnership deed, provides a clear roadmap. It’s more than a document; it’s a pledge to fairness and cooperation. So, whether partners put pen to paper or just shake hands, the partnership deed becomes the backbone, ensuring everyone’s on the same page for a successful and harmonious business journey.

REFERENCES

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^[1] Indian Partnership Act, 1932, § 4, No. 9, Acts of Parliament, 1932 (India).

^[2] K.D. Kamath and Co. Vs. Commissioner of Income Tax, Mysore, (1971) 2 SCC 873

^[3] TOPPR., https://www.toppr.com/guides/principles-and-practice-of-accounting/partnership-deeds/ (last visited Jan 3, 2024)

^[4] Mayashree Acharya, Partnership Deed – Format, Meaning, Contents, Registration, Importance, CLEARTAX (Oct. 25, 2023), https://cleartax.in/s/partnership-deed-format-download

^[5] Commissioner of Income Tax v. Ram Saran Inder Singh, 1973 87 ITR 224 P H

^[6] Richa Goel, The Partnership Act, 1932, IPLEADERS ( Nov. 1, 2022), https://blog.ipleaders.in/the-indian-partnership-act-1932/

^[7] Mayashree Acharya, Partnership Deed – Format, Meaning, Contents, Registration, Importance, CLEARTAX (Oct. 25, 2023), https://cleartax.in/s/partnership-deed-format-download

^[8] LEGAL STUDY MATERIAL, https://legalstudymaterial.com/what-is-partnership-deed/ (last visited Jan. 2, 2024)

^[9] Mangilal v. Suganchand, AIR 1965 SC 101

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Published by Admin on January 19, 2024January 19, 2024