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Definition of Partnership and the Relationship Between Partners Under the Indian Partnership Act, 1932

Definition of Partnership and the Relationship Between Partners Under the Indian Partnership Act, 1932

Introduction

The Indian economy depends heavily on businesses of all sizes. Among the most common forms of business organizations is the Partnership Firm.

The Indian Partnership Act, 1932, governs the formation, operation, and dissolution of partnerships in India. It provides detailed rules about how partners should relate to each other and run the business.

In this assignment, we will discuss:

  • Meaning and definition of partnership

  • Essential elements of a partnership

  • Relationship between partners (Inter Se relationships)

Part 1: Definition of Partnership

Meaning of Partnership

A partnership is an arrangement between two or more persons who agree to share the profits of a business carried on by all or any of them acting for all.

The partnership firm is not a separate legal entity like a company. It is just a collective name for the individuals (partners) who have agreed to run a business together.

Definition under Section 4 of the Indian Partnership Act, 1932

"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."

Thus, partnership is a combination of three important things:

  1. Agreement between persons

  2. Sharing of profits

  3. Business carried on by all or any acting for all

Part 2: Essential Elements of a Partnership

For a valid partnership, the following essential elements must be present:

1. Agreement

  • Partnership arises from a contract and not by status (like a family business).

  • The agreement can be oral or written.

  • It must fulfill all essentials of a valid contract (like free consent, lawful object).

2. Business

  • The purpose of forming the partnership must be to conduct a lawful business.

  • Business includes trade, occupation, or profession.

3. Sharing of Profits

  • There must be an agreement to share the profits.

  • Sharing of losses is not necessary but usually happens.

4. Mutual Agency

  • Every partner is an agent as well as a principal.

  • Any partner can bind the firm by his acts, and every partner is responsible for others' acts.

5. Number of Partners

  • Minimum: 2 persons.

  • Maximum:

    • 50 partners (as per the Companies Act, 2013, Section 464).

6. Competence of Partners

  • Partners must be legally capable of entering into a contract (must be major and of sound mind).

Part 3: Relationship Between Partners (Inter Se)

The Indian Partnership Act describes several mutual rights, duties, and obligations of partners toward each other.
These are called the relation between partners inter se (among themselves).

The relations can be divided into:

  • Rights of partners

  • Duties of partners

  • Liabilities of partners

Let’s explain them in detail.

A. Rights of Partners

Under the Act, unless agreed otherwise, every partner has the following rights:

1. Right to Take Part in Business (Section 12(a))

  • Every partner has the right to participate in the conduct of the business.

2. Right to Be Consulted (Section 12(c))

  • In matters concerning the business, all partners have a right to express their opinions.

  • Decisions should be by majority, but changes in the nature of the business require unanimous consent.

3. Right to Access Books and Accounts (Section 12(d))

  • Every partner can inspect and copy the firm's books and accounts.

4. Right to Share Profits (Section 13(b))

  • Unless agreed otherwise, partners share profits equally.

5. Right to Interest on Capital and Advances

  • A partner is entitled to interest at 6% per annum on advances (not on capital) unless agreed otherwise.

6. Right to Be Indemnified (Section 13(e))

  • A partner is entitled to be reimbursed for expenses made in the course of the firm’s business.

7. Right to Retire

  • A partner can retire with the consent of other partners or according to the agreement.

8. Right to Carry on Competing Business after Retirement

  • Subject to restrictions in the partnership agreement, a retired partner can carry on a competing business but must not misuse the firm’s goodwill.

B. Duties of Partners

The Act imposes certain duties on every partner:

1. Duty of Good Faith

  • Every partner must act honestly and loyally towards the firm and other partners.

2. Duty to Work for Common Advantage (Section 9)

  • Partners must work to promote the interests of the firm.

3. Duty to Provide True Accounts (Section 9)

  • Partners must maintain and disclose accurate accounts.

4. Duty to Indemnify for Loss by Fraud (Section 10)

  • A partner must compensate the firm for any loss caused by his fraud.

5. Duty Not to Compete (Section 16)

  • A partner must not engage in a competing business during the partnership.

  • If he does, he must account for the profits made.

C. Liabilities of Partners

1. Joint and Several Liability

  • Every partner is jointly and severally liable for all the acts of the firm.

2. Unlimited Liability

  • Partners’ liability is unlimited. Personal property may be used to settle the firm’s debts.

Part 4: Important Points in Relation Between Partners

1. Partnership Deed

  • To avoid disputes, partners often enter into a partnership deed.

  • It specifies the rights, duties, and obligations of each partner.

2. Changes in Relation

  • Any changes (admission, retirement, expulsion) must be according to the agreement or with mutual consent.

3. Expulsion of a Partner (Section 33)

  • A partner can be expelled if:

    • It is done in good faith.

    • It follows the partnership agreement.

Part 5: Important Case Laws

1. Cox v. Hickman (1860)

  • It was held that mutual agency (ability to bind each other) is the real test of partnership.

2. Garner v. Murray (1904)

  • It was decided that if a partner becomes insolvent, the loss should be borne by solvent partners in proportion to their last agreed capital.

Conclusion

Partnership is based on mutual trust, cooperation, and confidence among partners.
The Indian Partnership Act clearly defines how partners must act towards each other.

  • Partners must act honestly, work for common benefit, and maintain true accounts.

  • They have rights like sharing profits, participating in business, and inspecting accounts.

  • They have duties like loyalty, diligence, and indemnity.

Thus, the relation between partners plays a vital role in ensuring the smooth functioning and success of a partnership business.

Understanding these principles helps in building strong partnerships and avoiding conflicts.


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