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. Section 4 of Partnership Act defines partnership. In other words, a partnership is a formal arrangement by two or more parties to manage and operate a business and share its profits.
The person who entered into partnership with another person to carry on its business is called a partner.
Essentials of Partnership:
- – A partnership is an arrangement between two or more people to oversee business operations and share its profits and liabilities.
- – In a general partnership company, all members share both profits and liabilities.
- – In other partnership structures, some partners may share a smaller percentage of the profits but not assume any liability for the business.
- – Professionals like doctors and lawyers often form a limited liability partnership.
- – There may be tax benefits to forming a partnership instead of a corporation.
Rights of Partners:-
- To take part in the conduct & management of the business
- Free access of all records, books of accounts of the business
- Partner who has contributed by way of loan are entitled to interest upon otherwise @ 6% p.a. But he can’t claim interest on capital unless agreed upon 7%.
- To share profits equally unless profit sharing ratio mentioned
- Partner is entitled to be indemnified by the firm for all
– expenses incurred by him in the course of business
– payments made by him in respect of partnership debts
– funds provided in emergency for protecting the firm - Power to protect the firm in an emergency from loss
- To stop the admission of new without his consent
- To retire by giving notice
- Outgoing partner has a right to carry on competitive business under certain conditions
- To continue in the partnership & not to be repelled from it.
Duties of Partners:-
- Bound to carry on the business of the firm to the greatest common advantage
- Bound to keep & render true, proper & correct accounts of partnership firm.
- Bound to just & faithful to other partners
- Partner shall compete with the firm, without the consent of other partners. Any profits made by such unauthorised competition can be claimed by the firm.
- Must not make “secret profit”
- Bound to act within the scope of his actual authority. If he exceeds his authority, he shall be liable to compensate other partners for loss caused unless they ratify his act.
SECTION 17. Rights and duties of partners.—
Subject to contract between the partners,
(a)after a change in the firm.—
where a change occurs in the constitution of a firm, the mutual rights and duties of the partners in the reconstituted firm remain the same as they were immediately before the change, as far as may be;
(b)after the expiry of the term of the firm, and.—
where a firm constituted for a fixed term continues to carry on business after the expiry of that term, the mutual rights and duties of the partners remain the same as they were before the expiry, so far as they may be consistent with the incidents of partnership at will; and
(c)where additional undertakings are carried out.—
where a firm constituted to carry out one or more adventures or undertakings carries out other adventures or undertakings, the mutual rights and duties of the partners in respect of the other adventures or undertakings are the same as those in respect of the original adventures or undertakings.
SECTION 12. THE CONDUCT OF THE BUSINESS.
Subject to contract between the partners –
(a) every partner has a right to take part in the conduct of the business;
(b) every partner is bound to attend diligently to his duties in the conduct of the business;
(c) any difference arising as to ordinary matters connected with the business may be decided by a majority of the partners, and every partner shall have the right to express his opinion before the matter is decided, but no change may be made in the nature of the business without the consent of all the partners;
(d) every partner has a right to have access to and to inspect and copy any of the books of the firm;
(e) in the event of the death of a partner, his heirs or legal representatives or their duly authorised agents shall have a right of access to and to inspect and copy any of the books of the firm.
SECTION 13. MUTUAL RIGHT AND LIABILITIES
Subject to contract between the partners –
(a) a partner is not entitled to receive remuneration for taking part in the conduct of the business;
(b) the partners are entitled to share equally in the profits earned, and shall contribute equally to the losses sustained by the firm;
(c) where a partner is entitled to interest on the capital subscribed by him, such interest shall be payable only out of profits;
(d) a partner making, for the purposes of the business, any payment or advance beyond the amount of capital he has agreed to subscribe, is entitled to interest thereon at the rate of six per cent. per annum;
(e) the firm shall indemnify a partner in respect of payments made and liabilities incurred by him
(i) in the ordinary and proper conduct of the business; and
(ii) in doing such act, in an emergency, for the purpose of protecting the firm from loss, as would be done by a person of ordinary prudence, in his own case, under similar circumstances; and
(f) a partner shall indemnify the firm for any loss caused to it by his willful neglect in the conduct of the business of the firm.
SECTION 9. GENERAL DUTIES OF PARTNERS.
Partners are bound to carry on the business of the firm to greatest common advantage, to be just and faithful to each other, and to render true accounts and full information of all things affecting the firm to any partner, his heir or legal representative.
SECTION 10. DUTY TO INDEMNIFY FOR LOSS CAUSED BY FRAUD.
Every partner shall indemnify the firm for any loss caused to it by his fraud in the conduct of the business of the firm.
RELEVANT CASE LAWS
Trimble v. Goldberg(1906) AC 494 (PC)
Facts: A Partnership firm was carried on by Goldberg, Trimble and Bennet. Goldberg was a land speculator, Trimble was an auctioneer. They all deal in purchase and resale of properties belonging to one person, Hollard. There was nothing special in agreement and profits also shared equally. All business involving the partnership’s assets was to be conducted through and through Trimble, to who the remaining partners had to grant powers of attorney. Hollard, a wealthy man and a director of Sigma Syndicate, was about to leave South Africa and anxious to dispose of everything he had there before quitting the country. One day Trimble went to Johannesburg to met Hollard and settled the terms of the purchase offhand. Trimble questioned Hollard about whether the syndicate would be selling the stands in Government Square as a group when they arrived there. Yes, Hollard replied, adding that he anticipated the board would be sold for around £120,000. When Trimble inquired about the terms, Hollard directed him to the secretary, Davis, who would, according to him, bring the issue before the board. It appears that the syndicate made some unsuccessful attempts to sell its stands. Trimble immediately connected with Bennett and informed him that he believed the sale would generate revenue based on some top-secret information he had learned, which it appears would not hold up under scrutiny. He invited Bennett to participate in the speculation and made it clear that he was willing to offer an even higher sum. Bennett agreed to support the business financially and to join. Trimble was able to obtain the stands on Government Square to himself and Bennett because the leadership of the syndicate were more than happy to accept his offer. At the time, Goldberg was not made aware of this acquisition. It wasn’t until towards the end of 1902 or early in 1903 that he learned about it. Meeting Trimble one day in the street, he said, according to Trimble’s uncontracted evidence, corroborated by an accountant called Winship, who was present. But he had a loftier conception of his privileges, and in June 1904, he filed this lawsuit, initially claimed which the company had given Trimble the go-ahead to purchase the stands on a joint account—a claim that both Courts found to be unproven. He further argued that he possessed the right to split the profits from their purchase with his partners based on basic principles that applied to all partnerships.
Issue: Whether the purchase of ‘Stands’ made by Trimble & Bennett was within the scope of the Partnership?
Whether the purchase was injurious to the common interest?
Judgement: The decision by the Court of Appeal was criticised. Such a purchase was not expressly prohibited under the agreement but was held by the Court of appeal as a violation of trust, the basic foundation of a partnership. It was analysed by the House of Lords that even if it was expressly prohibited, then also the remedies available would have been an immediate dissolution of the partnership or claim for damages. Nonetheless, a share in the profits made from such a purchase would still have been held out of scope.
Court refer the case Cassels vs Stewart, in which it was held that the agreement made on May 19, 1863, did not bind the company and that James Reid remained a partner until his death, impacting the validity of the partnership agreement. The court found that the defendant’s claim was not supported by evidence presented and that the partnership account should be settled accordingly.
But in the present case, there was no legal duty on Trimble or Bennet to disclose the purchase to Goldberg unless he had a right to take part in speculation.Also, the partnership eventually gained from such a purchase as the company got to sell at a higher price than what it would have gotten from the Government and the partnership as a shareholder of the company was proportionately the gainer.
The Privy Council ruled that the Court of Appeal’s ruling could not be upheld since it could not be justified by either precedent or any accepted equity doctrine. The purchase was deemed to be “not within the scope of the partnership” notwithstanding the fact that the appellant learned about it while conducting the partnership’s business or which was an identical transaction to that of the partnership.
Hence, the Appeal was allowed and the Respondent was directed to pay the cost of the Appeal.
Miles v. Clarke[1953] 1 All ER 779
Facts: The defendant started a photography business. For this reason, he signed a 7-year lease for £400 per year on a property in Shepherd’s Market, which served as the location for carrying on business. The defendant also owned the furniture and studio equipment. He hired others to work for him because he lacked the necessary skills. The defendant asked the plaintiff to join him in business in January 1950. At the time, the plaintiff was a well-known commercial photographer who worked as a freelancer. He initially worked part-time in the defendant’s studio before beginning to do so regularly in April 1950. He significantly improved the company’s reputation and connections. Both introduced various drawbacks. There were just two stipulations of the partnership that had been agreed upon:
*Profits were to be distributed equitably to all.
*The plaintiff will receive £125 each month as his profit-sharing payment.
The plaintiff and the defendants were partners in a partnership at will and conducted the business of fashion and commercial photographers.There was no additional agreement between the parties, but they discussed operating the business as a limited corporation.
Issue: Whether there was a partnership?
If there was a partnership, what were the assets of the partnership?
Judgement: The studio name, or the goodwill that has been attached to it (although I should have thought it was probably small), and the images insofar as they collected throughout the two years the partnership was in existence are the only partnership assets that are still in existence, in my opinion. The plaintiff will undoubtedly lose his own connection and his own clientele now that the parties have broken up, while the defendant is likely to keep his. It could be advantageous for him to be allowed to keep the leasehold property, but since he already owned them and did not agree to assign them or sublet them, that is the unavoidable outcome of the parties’ inability to reach a more suitable agreement. The judge observed that nothing except the negatives brought by both parties had gone into the partnership as assets and if they wish to, both the parties can take away their own negatives. The judge on the topic of the negatives stated that the negatives of photographs that had been used up in the course of the partnership are an asset belonging to the partnership. It is claimed that no further agreement between the parties is required; all that is required is to assert that everything that belonged to one of them at the start of the partnership remained his or her property at the end, and that the law will not create any fictitious agreement between the parties since it has been established as a fact that there was none.
The court held that the lease, equipment and furniture were brought in by the defendant, and was thus his personal property. The judge noted that only the negatives provided by both parties had been added to the partnership’s assets, and either party may remove their own negatives if they so choose.
Holme v. Hammond(1872) L.R. 7 Ex. 218; 41 L.J. Ex. 157
Facts: Thomas, William and Smith carried on business in co-partnership as auctioneers, under a deed. It was decided that on the death of Thomas, his executors will get share. Thomas died in August, 1869. The two surviving partners carried on business until the death of Smith, when William continued to carry it on alone. William and Smith having sold a mill and machinery on account of plaintiff received the proceeds of sale in the following month.
The plaintiff brought an action against William, regarding the performance of a contract entered by the other partners post the death of the deceased partner.
The deceased’s executors were paid 1/5th of the profits of the company, despite the fact that they never took part in the management of the business.
Issue: whether the deceased’s executors will be considered to the partners of the company?
Judgement: The court said that though the defendants took the profit of the company, they did not involve in the process of the business and so they could be considered to be partners of the business. But when the court looked into the judicial precedents of this case, they said a testator cannot be a partner in a form, in which the deceased was a partner, unless there is an agreement or contract between the surviving partners and the testator, either expressly or impliedly.
There was no evidence whatsoever to establish a contract of partnership between the executors and the surviving partners; there was no mutual agency between them. Thus, the executors could not be made liable.
The court said that though the defendants took the profit of the company, they did not involve in the process of the business and so they could be considered to be partners of the business. But when the court looked into the judicial precedents of this case, they said a testator cannot be a partner in a form, in which the deceased was a partner, unless there is an agreement or contract between the surviving partners and the testator, either expressly or impliedly.
Hamlyn v. Houston & Co.(1903) 1 K.B. 81
Facts: The defendant company is a partnership company with two partners, Mr Houston and Mr Strong, who represented the company. They both were grain merchants. Strong was a sleeping partner and Houston looked after the conduct of the business.
Mr Houston, acting within the scope of his authority, bribed the clerk of the plaintiff’s company and induced him to commit a breach of contract with the plaintiff as a result of which the clerk divulged some of the secret, important information of the plaintiff’s company. This act of Mr Houston was done without Mr Strong’s knowledge.
The information was used by Mr Houston in a way to make the plaintiff company, his competitor, suffer the loss. Plaintiff sued both the partners of the defendant company for breach of contract under vicarious liability. The trial court said that both the partners are liable for breach of the contract. The case went to the Court of Appeal.
Issue: Whether the defendant’s firm is liable to the plaintiff for the wrongful act of Houston as he induced the plaintiff’s clerk to breach his contract of employment by disclosing confidential information which has caused damages to the plaintiff?
Judgement: The Court held that Houston was authorized to obtain information as to the contracts and tenders made by competing firms by legitimate means.
It is within the scope of Houston’s authority to procure information, it is immaterial for the present purpose whether the act which was committed in order to procure it was fraudulent or not.
That is the law as expressed in the Partnership Act, 1890, and as laid down by decisions previous to that Act, in which it has been held that a principal is liable for the fraud or other wrongful act of his agent if committed within the scope of his employment. This doctrine does not appear to rest upon the notion of the principal’s holding out the agent as having authority.
The Court of Appeal upheld the order of the trial court and said that both the partners of the defendant company, Mr Houston and Mr Strong, are guilty of inducing breach of contract, even though it was committed by only one of them.
PRESENT CASE
Q. 1/2020. The creditor can proceed against the personal property of B1, C1, D, and E. A is a sleeping partner so he is liable only upto to the extent of the capital invested by him in the business.
Q. 1/2019. Since there is no connection between the partnership and the partner’s purchase, Sanayaima and Sanatombi cannot be made accountable to Bissesori on the basis of any authority or on any recognised doctrine of equity. Hence, Sanayaima and Sanatombi are not liable for the business transaction entered into by them.
