MODE OF DETERMINING THE EXISTENCE OF PARTNERSHIP
INTRODUCTION
A partnership is a relationship between two or more persons who have agreed to share the profits of a business by all or any of them acting for all. So, to determine the existence of a partnership, the agreement between them should be looked into. But if there is no agreement constituting a partnership among the partners, section 6 of the Indian Partnership Act sets out some rules to determine the existence of the partnership.
DEFINITION OF PARTNERSHIP
- Section 4 of the Indian Partnership Act, 1932, defines partnership as follows:
A partnership is a relation between two or more persons who have agreed to share the profits of a business carried on by all or any one of them acting for all.
- The English Partnership Act defines partnership as “the relation which subsists between persons carrying on business in common with a view of profit”.
- Sir Fredrick pollock defines ‘Partnership’ as – ‘the relation which subsists between a person who has agreed to share the profits of a business carried on by all or any of them on behalf of all them’.
EXPLANATION
- The persons who have entered into a partnership with one another are called individually ‘partners’ and collectively a ‘firm’ and the name under which their business is carried the ‘firm’s name’.
- Law does not confer legal personality to the firm and hence has no independent personality apart from its partners. Only for assessment of income tax, the firm is separately dealt with from the partners constituting it.
- A firm cannot become a member of another partnership firm though, its partners can join any other firm as partners.
- There are four essential features of a partnership, namely –
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- That it is the result of an agreement
- That it is organized to carry on a business
- That the persons concerned agree to share the profits of the business
- That the business is to be carried on by all or any of them acting of all.[1]
RULES TO DETERMINE THE EXISTENCE OF PARTNERSHIP
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Agreement: (Section 4 and 5)
Section 4 of the Partnership Act defines partnership as 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.
To constitute a partnership, there must be an agreement between persons. Without an agreement, there cannot be a partnership. Thus, an agreement is the basis of a partnership.
Section 5 of the Partnership Act states, ‘the relation of partnership arises from contract and not from status.’
The partnership is only a contract. In other words, it springs from an agreement to create a partnership that may be either expressed or in writing. A partnership does not arise from status. It is a special type of contract.
In Haji Isa Vs. Sarnbai
It was observed that ‘an agreement is a sine qua non (most fundamental) of every partnership which may be oral or in writing. It may be expressed or implied.
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Sharing of profits
Though the following persons share the profits of a partnership business, they do not become partners:
- Joint owners sharing gross returns:
The joint owners of property who share the profits or gross returns arising out of the property do not become partners.
- Lender of money receiving profits:
A person who has lent money to a person or firm engaged in business and has agreed to take in addition to his interest, a portion of the profits of the business does not become a partner in the business.
- Servant or agent receiving profits:
Sometimes a servant or agent of a business is allowed in addition to his regular remuneration a portion of the profits of the business, but by this, he does not become a partner in the business.
- Widow or child of deceased partner:
On the death of a partner, the surviving partners sometimes agree to give a share in the profits to the widow or the child of the deceased partner. Such a widow or child does not become a partner in the firm.
- Seller of goodwill:
A person who sells his business along with the goodwill is sometimes given a share in the profits of the business. But such a person does not become a partner in the business.
- Cox Vs. Hickman:
A partner assigned his share to another person. He shared the profits of the business. The firm incurred a loss. The Court held that the assignee was not liable because he was not a partner. This case was a death blow to the sharing of profits test, which was vague for nearly sixty years. [2]
- Waugh Vs. Carver:
Some people shared the profits of a business. The question arises whether these persons were partners or not because they shared profits. The Court held that sharing of profits is prima facie evidence of a partnership.[3]
According to this case, three principles are essential to find out the existence of a partnership. They are:
- By whom the business was carried on.
- By whom the liability was incurred.
- Under whose management, profits were made.
- Mullow, March and Co Vs. Court of Madras:
A creditor advanced a loan to a partnership business. He also shared the profits of the business. The court held that the creditor was not a partner even though he shared the profits. This is another death blow to the ‘sharing of profits test’.
In this case, the following principle was laid down to find out the existence of a partnership. The real intention and conduct of the business must be considered to decide whether they are partners or not. This is known as the intention and conduct test.
The following persons are not partners:
- The members of a Hindu Undivided Family, carry on the family business.
- A Burmese Buddhist husband and wife carrying on a business.
Thus, section 6 of the Indian Partnership Act lays down the rule in Mullow, March, and co. So, the real relationship, conduct, and intention of the parties are important to deciding the existence of a partnership.
MUTUAL AGENCY
Section 4 of the Partnership Act says that the business may be carried on ‘by all or any of them acting for all.
This establishes the principle of implied agency as a test to find out the existence of a partnership. The partner who is conducting the affairs of the business is considered the agent of the remaining partners. The relationship between partners is governed by the law of agency.
This concept of mutual agency is the true test of the existence of a partnership. This relationship of principal and agent distinguishes a partnership business from co-ownership, a joint Hindu family business as well as an agreement to share profits of the business.[4]
Stocker Vs. Brocklebank,1851
The defendant agreed to pay 40% of the profits of his business to the manager. The Court held that the manager was only a servant and not a partner, as there was no mutual agency among them.
CONCLUSION
A partnership is very much significant and the role of section 6 i.e., determining the existence of a partnership is a fundamental part of it. We get into partnership agreements often and there might be situations that come to light that may seem to be a partnership agreement but in real life, it isn’t. With the aid of the numerous case laws and the circumstances that appear at the same time, it is for that reason concluded that mutual agency is the conclusive part of establishing the existence of a partnership.
BIBLIOGRAPHY:
- Section 4 in The Indian Partnership Act, 1932 Indiankanoon.org, https://indiankanoon.org/doc/1459716/ (last visited Jun 16, 2022)
- Nature and Essentials of Partnership under Indian Partnership Act, 1932 iPleaders, https://blog.ipleaders.in/nature-essentials-partnership-act/#:~:text=The%20interests%20of%20partners%20in%20the%20firm%20are,under%20the%20provisions%20of%20the%20Indian%20Partnership%20Act. (Last visited Jun 16, 2022)
- Modes of determining the existence of a partnership: a comprehensive study – iPleaders, https://blog.ipleaders.in/modes-determining-existence-partnership-comprehensive-study/ (last visited Jun 16, 2022)
- Elements of Partnership toppr.com, https://www.toppr.com/guides/business-laws/the-indian-partnership-act/elements-of-a-partnership/ (last visited Jun 16, 2022)
[1] Section 4 in The Indian Partnership Act, 1932 Indiankanoon.org, https://indiankanoon.org/doc/1459716/ (last visited Jun 16, 2022)
[2] Nature and Essentials of Partnership under Indian Partnership Act, 1932 iPleaders, https://blog.ipleaders.in/nature-essentials-partnership-act/#:~:text=The%20interests%20of%20partners%20in%20the%20firm%20are,under%20the%20provisions%20of%20the%20Indian%20Partnership%20Act. (Last visited Jun 16, 2022)
[3] Modes of determining the existence of partnership: a comprehensive study – iPleaders, https://blog.ipleaders.in/modes-determining-existence-partnership-comprehensive-study/ (last visited Jun 16, 2022)
[4] Elements of Partnership toppr.com, https://www.toppr.com/guides/business-laws/the-indian-partnership-act/elements-of-a-partnership/ (last visited Jun 16, 2022)
AUTHOR: Adithya Narayanan,
5 Yr BBA-LLB, SDM Law College,
Mangalore, Karnataka.
