IT S Essential Elements AND Rights OF A Partner IN A Firm

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Submitted to : Sir Danish |

Submitted by: Mahnoor Paracha

IT’S ESSENTIAL
BUSINES
S LAW ELEMENTS AND RIGHTS
OF A PARTNER IN A FIRM
Definition and Characteristics of Partnership

Section 4 of the Partnership Act defines a partnership as follows: “Partnership is the relation
between persons who have agreed to share the profits of a business carried by all or any of them
acting for all.” A partnership, as defined in the Act, must have three essential elements:

1. There must be an agreement entered into by two or more persons.


2. The agreement must be to share the profits of a business.
3. The business must be carried on by all or any of them acting for all.

Essential Elements of Partnership

1. Voluntary Agreement

The first element shows the voluntary contractual nature of partnership. A partnership can
only arise as a result of an agreement, express or implied, between two or more persons.
Where there is no agreement there is no partnership. But a partnership cannot be formed with
more than ten persons in banking and twenty persons in other types of business. A
partnership with persons exceeding the above limits must be registered under a Companies
Act.

Partnership is not created by status: Section 5 states that, “The relation of partnership arises
from contract and not from status.” In particular the members of a Hindu undivided family
carrying on a family business, as such, are not partners in such business.

Example:

The sole proprietor of a business dies leaving a number of heirs. The heirs inherit the stock in
trade of the business including the goodwill of the business but do not become partners until
there in an agreement, express or implied, to carry on the business as partners.

2. Sharing of Profits of a Business

The second element states the motive underlying the information of a partnership. It also lays
down that the existence of a business is essential to a partnership. Business includes any trade,
occupation or profession. If two or more persons join together to form a music club it is not a
partnership because there is not business in this case. But if two or more persons join together to
give musical performances to the public with a view to earning profit, there is a business and a
partnership is formed.

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3. Mutual Agency

The third element is most important features of partnership. It states that persons carrying on
business in partnership are agents as well as principals. The business of a firm is carried on by all
or by any one or more of them on behalf of all. Every partner has the authority to act on behalf of
all and can, by his actions, bind all the partner of the firm, each partner is the agent of the others
in all matters connected with the business of the partnership. The law of partnership has therefore
been called a branch of the law of agency.

4. Maximum number of partners in a partnership are 20

Since partnership is a contract so there must be at least two partners to constitute partnership. A
partnership consisting of more than 10 partners in a banking business and more than 20 persons
for any other business would be considered as illegal. Only persons competent to contract can
enter into a contract of partnership. Persons may be natural or artificial. A company may, being
an artificial legal person, enter into a contract of partnership, if authorized by its Memorandum
of Association to do so.

5. Carrying on of business:

The third essential element of a partnership is that the parties must have agreed to carry on a
business. The term ‘business’ is used in its widest sense and includes every trade, occupation or
profession [Sec. 2(b)].

If the purpose is to carry on some charitable work, it will not be a partnership. Similarly, if a
number of persons agree to share the income of a certain property or to divide the goods
purchased in bulk amongst them, there is no partnership and such persons cannot be called
partners because in neither case they are carrying on a business.

Thus, where A and B jointly purchased a tea shop and incurred additional expenses for
purchasing pottery and utensils for the job, contributing necessary money half and half and then
leased out the shop on rent which was shared equally by them, it was held that they are only co-
owners and not partners as they never carried on any business.

Rights of Partners in a Firm

(a) Every partner has a right to take part in the conduct and management of business.

(b) Every partner has a right to be consulted and heard in all matters affecting the business of
the partnership.

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(c) Every partner has a right of free access to all records, books and accounts of the business,
and also to examine and copy them.

(d) Every partner is entitled to share the profits equally.

(e) A partner who has contributed more than the agreed share of capital is entitled to interest at
the rate of 6 per cent per annum. But no interest can be claimed on capital.

(f) A partner is entitled to be indemnified by the firm for all acts done by him in the course of
the partnership business, for all payments made by him in respect of partnership debts or
liabilities and for expenses and disbursements made in an emergency for protecting the firm from
loss provided he acted as a person of ordinary prudence would have acted in similar
circumstances for his own personal business.

(g) Every partner is, as a rule, joint owner of the partnership property. He is entitled to have the
partnership property used exclusively for the purposes of the partnership.

(h) A partner has power to act in an emergency for protecting the firm from loss, but he must act
reasonably.

(I) Every partner is entitled to prevent the introduction of a new partner into the firm without his
consent.

(J) Every partner has a right to retire according to the Deed or with the consent of the other
partners. If the partnership is at will, he can retire by giving notice to other partners.

(k) Every partner has a right to continue in the partnership.

(l) A retiring partner or the heirs of a deceased partner are entitled to have a share in the profits
earned with the aid of the proportion of assets belonging to such outgoing partner or interest at
six per cent per annum at the option of the outgoing partner (or his representative) until the
accounts are finally settled.

CASE LAWS

State Bank of India Vs M/s.Simko Engineering Works

Sections 20, 22
A partnership firm has no independent entity of its own and all the liabilities against the firm or
all acts done by any one of its partners for and on behalf of the firm shall bind all the other
partners as well - Section 20 is an exception to the implied authority - Partners by contract
between themselves extend or restrict the implied authority of any partner - However,
notwithstanding any such restriction, any act done by a partner on behalf of the firm, which falls

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within his implied authority, binds the firm, unless the person with whom he is dealing knows of
the restriction or does not know or believe that partner to be a partner - Onus to prove that such
authority of partner is restricted is upon the person who claims such a restriction.

P.N.Shanmugam & Anr. Vs P.D.Vadivelu

Section: 42

Dissolution and reconstitution are two different legal concepts. Dissolution puts an end to the
partnership, but reconstitution keeps it subsisting, though in another form. Dissolution followed
by some of the erstwhile partners taking over the assets and liabilities of the dissolved
partnership and forming themselves into a partnership is not reconstitution of the original
partnership - Partnership formed after dissolution is a new partnership and not a reconstitution of
the old partnership - A reconstitution of a firm denotes a structural alteration of the membership
of the firm, by addition or reduction of members and an incidental redistribution of the shares of
the partners.

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Bibliography
https://www.charteredclub.com/partnership-firm/

http://www.publishyourarticles.net/eng/articles2/partnership-definition

http://www.lawyersclubindia.com/forum/Some-important-judgments

https://search.yahoo.com/yhs

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