Definition and Nature of Partnership
The Partnership Act, 1932 was enacted by Parliament to regulate partnership firms in India. It is based on the English Partnership Act of 1890. It came into force on 1 October 1932.
Previously, the law relating to Partnerships was contained in the Contract Act, 1872, in its Chapter XI, Sections 239-266, but the provisions were not found satisfactory and hence the Chapter was repealed and a new and separate Partnership Act was enacted.
This Act extends to the whole of India except the State of Jammu and Kashmir.
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. This definition is contained in Section 4, Partnership Act, 1932 and states:
4. Definition of "partnership", "partner", "firm name".- "Partnership" is the relation between person who has agreed to share the profit of a business carried on by all or any of them acting for all.
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".
It quite clearly portrays the following four essential features of a partnership, namely:
1. That it is the result of an agreement.
2. That it is organised to carry on a business.
3. That the persons concerned agree to share the profits of the business.
4. That the business is to be carried on by all or any of them acting for all.
Section 6 of the Act determines the mode of partnership where it determines whether a group of persons is a firm or not, or whether a person is a partner in the firm or not. Regard is given to the real relation between the partners. Section 6 states:
6. Mode of determining existence of partnership- In determining existence of partnership- In determining whether a group of persons is or is not a firm, or whether a person is or is not a partner in a firm, regard shall be had to the real relation between the parties, as shown by all relevant facts taken together.
Explanation 1- The sharing of profits or of gross returns arising from property by persons holding a joint or common interest in that property does not of itself make such person partners.
Explanation 2- The receipt by a person of a share of the profits of a business, or of a payment contingent upon the earning of profits or varying with the profits earned by a business, does not of itself make him a partner with the persons carrying on the business; and, in particular, the receipt of such share or payment-
(a) by a lender of money to persons engaged or about to engage in any business,
(b) by a servant or agent as remuneration,
(c) by the widow or child of a deceased partner as an annuity, or
(d) by a previous owner or part-owner of the business, as consideration for the sale of the goodwill or share thereof, does not of itself make the receiver a partner with the persons carrying on the business.
As per the Act, it is essential or mandatory that every partner must invest some amount of capital in the form of cash. One can devote himself completely to the business of the firm and not bring in any kind of capital.
A partnership can be at will and there can also be a particular partnership. Section 7 of the Act deals with partnership at will and states:
7. Partnership at will- Where no provision is made by contract between the partners for the duration of their partnership, or for the determination of their partnership, the partnership is "partnership at will"
Where no provision is made in contract between partners, as to duration of their partnership, partnership is one at will.
While Section 8 deals with particular partnership and states:
8. Particular partnership- A person may become a partner with another person in particular adventures or understandings.
Essentials of partnership
As per the Partnership Act, there are three essential elements which are necessary to constitute a partnership, namely, there must be an agreement between all the persons concerned; the agreement must be to share profits of the business, and the business must be carried on by all or any of the partners acting for all. These are explained below:
1. Agreement: There must be an agreement or contract of partnership between two or more persons-the agreement from which the relationship of partnership may be expressed. It may also be implied by the act or conduct of the parties showing a mutual understanding between them. Hence, it can be oral or written.
2. Sharing profits of the business: There must be an existence of a business or trade with a motive of earning profits. The partnership and business must be done with an intention to earn profits. Without this, there can be no business.
There must be an agreement to share profits from the business. However, the agreement to share losses is not an essential element of partnership. If there is an agreement to share the losses too, this should be borne in the profit-sharing ratio.
3. Business carried on by all or any of the partners acting for all: In a partnership, each partner acts as a principal as well as the agent on behalf of other partners. Thus, it is essential to have a mutual agency.