Mode of Defining Existence of Partnership

MODE OF DETERMINING EXISTENCE OF PARTNERSHIP
11/24/2013
DEFINITION
Sec.4 of the Indian Partnership Act, 1932 defines Partnership as under: 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
11/24/2013
SHARING OF PROFITS
The object of every partnership must be to carry on business for the sake of profits and to share the same. Therefore clubs or societies which do not aim at making profits are not partnerships. Although sharing of profits is one of the essential elements of every partnership but every person who shares the profits need not always be a partner. For determining the existence of partnership regard must be had to the real relation between the parties, after taking all the relevant facts into account.
11/24/2013
MODE OF DETERMINING EXISTENCE OF PARTNERSHIP

This provision is contained in S.6 of the Indian Partnership Act 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 persons partners. Explanation 2 The receipt by a person of a share of the profits of the 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 business and, in particular, the receipt of such share or payment
11/24/2013 4
Explanation 1 makes the position further clear by standing that sharing of profits between certain persons does not of itself make such persons partners. Explanation 2 mentions four particular instances where a person may be sharing the profits with another, or may be getting some payment contingent upon or varying with the profits and still the real relations between the persons thus sharing the profits may not be that of partners. The instances given in the Explanation are of: (i) The money lender (ii) The servant or the agent (iii) The widow or child of a deceased partner (iv) The seller of goodwill, who may be sharing the profits and yet may not be the partners.
11/24/2013
(i) Money lender sharing the profits

The decision of the House Of Lords in the case of Cox v. Hickman (1860) is an illustration of money lender sharing the profits of a business of which he is not a partner. The facts of the case are as under: Smith and Son carried on business as iron merchants. They got into financial difficulties as a consequence of which they executed a deed of arrangement with the creditors. According to the arrangement five representatives of the creditors were appointed as five trustees. They included Cox and Wheatcroft. The business of Smith and Son was to be managed by the five trustees. The net income of the business was to be distributed by these trustees amongst the general creditors of Smith and 6 11/24/2013 Son
After all the creditors had been paid off the business was to be returned to Smith and Son. While the business was being managed by the trustees, the plaintiff, Hickman, supplied goods to the firm. One of the trustees accepted bills of exchange drawn by Hickman undertaking to pay the price of those goods. Hickman sued Cox and Wheatcroft to recover the price of the goods supplied by him. It was held that although the creditors where sharing the profits and the business was being managed by the trustees, still the relationship between Smith and Son on the one hand and the creditors (including trustees) on the other was that of debtor and creditor and not that of partners and, therefore, Cox and Wheatcroft could not be made liable.
11/24/2013 7
(ii) Servant or Agent sharing the profits

Sometimes a share in the profits may be given to a servant or agent in the business so that he can take more interest in the business. Such a person sharing the profits in the capacity does not thereby become a partner. In McLaren v. Verschoyle (1901) an assistant in a firm of brokers was paid a share in the profits over and above his salary. At times he signed some letters and documents on behalf of the firm. It was held that such a servant only acted as an agent for the firm and the mere fact that he shared the profits did not make him a partner in the firm.
11/24/2013 8
(iii) Widow or child of a deceased partner sharing profits

Sometimes on the death of a partner the widow or the child of the deceased partner may be given a share of profits in accordance with an agreement which may have been entered into between the partners. Such widow or child does not become the partner merely because he or she is sharing the profits in the business. There is no bar to the widow or the son of a deceased partner to enter into partnership after the death of the deceased, but a clear agreement to that effect has to be proved. Holmes v. Hammond
11/24/2013
(iv) Seller of goodwill sharing the profits

A person selling the goodwill of his business may be entitled to share the profits of a business in consideration for the sale of goodwill, such a person will not become a partner merely because he is sharing the profits with the person carrying on such business. In Pratt v. Strick (1932), a doctor sold the goodwill of medical practice and entered into an agreement with the buyer of the goodwill that he would help such buyer to introduce patients for three months and he would be entitled to half the share of profits and incur half the expenses. It was held that the doctor had not become a partner with the person to whom the goodwill was sold.
11/24/2013 10
CONCLUSION
The principle laid down in Cox v. Hickman (1860) forms the basis of the provisions of Sec.6 of the Indian Partnership Act, which gives a caution that the presence of only some of essentials of partnership does not necessarily result in partnership. For determining the existence of partnership regard must be had to the real relation between the parties, after taking all relevant facts into account.
11/24/2013
11
Thank You
11/24/2013
12

Mode of Defining Existence of Partnership

Uploaded by

Copyright:

Available Formats

Mode of Defining Existence of Partnership

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Mode of Defining Existence of Partnership

Uploaded by

Copyright:

Available Formats

MODE OF DETERMINING EXISTENCE OF PARTNERSHIP

MODE OF DETERMINING EXISTENCE OF PARTNERSHIP

(i) Money lender sharing the profits

(ii) Servant or Agent sharing the profits

(iii) Widow or child of a deceased partner sharing profits

(iv) Seller of goodwill sharing the profits

You might also like