MODE OF DETERMINING EXISTENCE OF PARTNERSHIP

Submission of project for bachelors degree of law 2nd semester

Submitted by Tanvi Garg Enrollment No. A3221509039 Batch: 2009 14 Amity Law School (AUUP)

Neha Shrivastava Lecturer (ALS)

Amity University U.P.

CERTIFICATE
This is to certify that Tanvi Garg student of Bachelors of Law 2nd semester, Amity University, ALS (U.P.) has satisfactorily prepared this project as Mode of Determining Existence of Partnership under supervision and guidance. The present work incorporates the result of his independent study and research. Supervisor

Neha Srivastava Lecturer ALS (AUUP) Amity University (U.P.)

ACKNOWLDGEMENT
Every individual in professional life is keenly aware of his sense of indebtness to many people who have stimulated and influenced his intellectual development ordinarily. This feeling is formally expressed in customary gesture of acknowledgement. I acknowledge my deep indebtness and gratitude to my project guide Ms Neha Srivastava (Faculty of Amity Law School). Her regular review and feedback has made this report possible. Her valuable suggestions and motivation has enabled me to take up this project and complete it. I am beholden to my family and friends for their blessings and encouragement. With warm regards Tanvi Garg

PREFACE
Partnership continues to be the most convenient vehicle for carrying on business activities. It is also the most suitable organization where business partners enjoy mutual trust and confidence. Its simplicity is the top recommending factor. All the partners can take part in the business and they are jointly and severally liable. There is no compulsory registration and there are no filling requirements. It is an informal business medium which enjoys full business recognition. The basic feature of trust and confidence enables partnership firms to go on operating without generating much litigation. That is why very few matters reach the courts. The Act also does not undergo many changes or amendments. Partnership is a form of business organization, where two or more persons join together for jointly carrying on some business. It is an improvement over the Sole Trade business, where one single individual with his own resources, skill and effort carries on his own business. Due to the limitation of the resources of only a single person being involved in the sole trade business, a larger business requiring more investment and resources than available to a sole trader cannot be thought of in such a form of business organization. In a Partnership on the other hand, a number of persons could pool their resources and efforts and could start a much larger business, than could be afforded by any of these partners individually. In this project definition and essentials of partnership have been described in short and various Mode of Determining existence of partnership has been described.

CONTENTS
1. Table of Cases 2. Introduction 3. Object of Study 4. Chapter I Definition & Essentials of Partnership: Definition Essentials 5. Chapter II Mode Of Determining Existence of Partnership: Sharing of Profits 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 the profits (iv ) Seller of goodwill sharing the profits 6. Conclusion 7. Bibliography 6 78 9 10 11 10 11 12 16 12 12 14 15 16 16 17 18

TABLE OF CASES
1. Grace v. Smith, 1775, 2, Wm. Blacks. 998 2. Waugh v. Carver, 1793, 2 H. Blacks 235: 14 R.R. 845 3. Cox v. Hickman, 1860, 8 H.L.C. 268: 125 R.R. 148 4. Mollow March & Co. v. Court Of Wards, 1872, L.R. 4 P.C. 419 5. McLaren v. Verschoyle, 1901, 6 C.W.N. 429 6. Munshi Abdul Latif v. Gopeswar A.I.R. 1933 Cal. 204: 1932, 56 Cal, L.J. 172 7.Walker v. Hirsch, 1884 27 Ch. D. 460 8. Holme v. Hammond, L.R. 7 Ex. 218 9. Pratt v. Strick, 1932, 7, Tax, Cas. 459 10. Commissioner of Income Tax v. M/s Kedarmall Keshardeo, A.I.R. Assam & Nagaland 68

INTRODUCTION
The Indian Partnership Act was enacted in 1932 and it came into force on 1st day of October, 1932 (Sec.1). The present Act superseded the earlier law relating to Partnership, which was contained in chapter XI of the Indian Contract Act, 1872. The Act is not exhaustive. It purports to define and amend the law relating to Partnership. A Partnership arises from a contract, and therefore, such a contract is governed not only by the provisions of the Partnership Act in that regard, but also by the general law of contract in such matters, where the Partnership Act does not specifically make any provision. It has been expressly provided in the Partnership Act that the unrepealed provisions of the Indian Contract Act, 1872, save in so far as they are inconsistent with the express provisions of this Act, shall continue to apply (Sec.3). Thus the rule relating to offer, acceptance, consideration, free consent, legality of object etc as contained in the Indian Contract Act are applicable to a contract of Partnership also. On the other hand, regarding the position of a minor, since there is a specific provision contained in Sec.30 of the Indian Partnership Act, the minors position is governed by the provisions of the Partnership Act. Partnership is a form of business organization, where two or more persons join together for jointly carrying on some business. It is an improvement over the Sole Trade business, where one single individual with his own resources, skill and effort carries on his own business. Due to the limitation of the resources of only a single person being involved in the sole trade business, a larger business requiring more investment and resources than available to a sole trader cannot be thought of in such a form of business organization. In a Partnership on the other hand, a number of persons could pool their resources and efforts and could start a much larger business, than could be afforded by any of these partners individually. Any two or more persons can join for creating Partnership. Sec.11 of the Companies Act, 1956 imposes a limit as to maximum number of persons in a Partnership. In a Partnership for the purpose of carrying banking business, there can be a maximum of ten partners, whereas if the Partnership is for carrying on any other business, there can be a maximum of 20 partners. If the number of members in any association exceeds the above stated limits, that must be registered as a company under the Companies Act, otherwise that will be considered to be an illegal association. As against Partnership,

where the maximum number of partners can be 10 or 20, depending on the nature of partnership business, there could be possibly much larger number of members in a Company. In certain respects, a partnership is a more suitable form of business organization than a Company. For the creation of partnership just an agreement between various persons is all what is required, whereas in the case of a Company, there are a lot of procedural formalities which have to be gone through before a Company is created. For the day to day running of the business, maintenance of accounts, holding of the meetings, distribution of profits and numerous other things a Company is subject to a lot of statutory control, whereas the partners are their own masters for regulating their affairs. Even for the dissolution of partnership a mere agreement between the partners is enough, but that is not so in the case of a Company, which can be wound up only after a certain set of procedures are followed. Since all the profits are to be pocketed by the partners in a partnership firm, there is a great incentive for partners to make the business successful, but that is not so in the case of a Company. Because of distinct advantages of a partnership over a sole trade business, and certain advantages even over a company, it is a very popular form of business organization.

OBJECT OF STUDY
The main objective of this project is to have a deep an indebt knowledge of the topic Mode of Determining the Existence of Partnership and to understand the basis of the provisions of Sec.6 of the Indian Partnership Act.

CHAPTER I DEFINITION AND ESSENTIALS OF PARTNERSHIP

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 The present definition replaces Sec.239, Indian Contract Act, which defined Partnership as under: Partnership is the relation which subsists between persons who have agreed to combine their property, labour or skill in some business, and to share the profits thereof between them. The present definition is wider than one contained in the Indian Contract Act in so far as it includes the important element of mutual agency, which was absent in the old definition. The present Act adopts Pollocks definition with slight modification. According to Pollock: Partnership is the relation which subsists between persons who have agreed to share the profits of a business carried on by all or any of them on behalf of all of them. The Partnership Act omits the words which subsists out of Pollocks definition, those words being considered as unnecessary. Moreover, instead of the words all or any of them on behalf of all of them the words all or any of them acting for all have been used in the Partnership Act. These words convey the idea of mutual agency, which is essential for every contract of Partnership.

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 ESSENTIALS OF PARTNERSHIP:According to Sec.4, the following essentials are necessary to constitute a partnership. 1. There should be an agreement between the persons who want to be partners. 2. The purpose of creating partnership should be carrying on of business. 3. The motive for the creation of the partnership should be earning and sharing profits. 4. The business of the firm should be carried on by all of them or any of them acting for all, i.e., in mutual agency. When all the above elements are present in a certain relationship that is known as Partnership. Persons who have entered into partnership with one another are called individually partners and collectively a firm and the name under which their business is carried on is called the firm name.

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CHAPTER II MODE OF DETERMINING EXISTENCE OF PARTNERSHIP

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. The term profits has not been defined in the Act. It means net gain, i.e., the excess of returns over outlay. 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 example I may pay a share of profits to the manager of my business instead of paying him fixed salary so that he takes more interest in the progress of the business; such person sharing the profit is simply my servant or agent but not my partner. Similarly a share of profits may be paid by a business man to a money lender by way of payment towards the return of his loan and interest thereon, such a money lender does not thereby become a partner. At one time it was thought that the person who shared the profits must incur the liability also as he was deemed to be a partner. This rule was laid down in Grace v. Smith, in 1775 and it was stated by Grey C.J. that every man who has the share of profits of a trade ought also to bear his share of the losses. This principal was confirmed in 1793 in Waugh v. Carver. In 1860 this question came from consideration before the House of Lords in Cox v. Hickman. In that case it was laid down that the persons sharing the profits of the business do not always incur the liability of partners unless the real relation between them is that of partners. The principle laid down in Cox v. Hickman 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 the 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 the relevant facts into account. The provision contained in Sec.6 as follows: MODE OF DETERMINING EXISTENCE OF PARTNERSHIP: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.

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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 (a) By a lender of money to persons engaged or about to engage in any business. (b) By a servant or agent as remuneration. (c) By the widow or child of a deceased partner as annuity. (d) By a previous owner or a part owner of the business as consideration of the sale of the goodwill or share thereof, does not of itself make the receiver a partner with the persons carrying on the business. As it has been noted above that Sec.6 gives a caution that for determining whether there is partnership between certain persons or not, the real relation between the parties and all the relevant facts have to be taken into consideration. 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.

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(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 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. Discussing the position of a person sharing the profits Lord Cranworth observed: It is not strictly correct to say that his right to share in the profits makes him liable to the debts of the trade. The correct mode of stating the proposition is to say that the same thing which entitles him to the one makes him liable to the other, namely, the fact that the trade has been carried on, on his behalf, i.e., that he stood in the relation of principle towards the persons acting ostensibly as the traders, by whom liabilities have been incurred, and under whose management the profits have been made. Taking this to be the ground of liability as a partner, it seems to me to follow that the mere concurrence of creditors in an arrangement under which they permit their debtor, or trustees for their debtor, to continue his trade, applying the profits in discharge of their demands does not make them partners with their debtors, or the trustees. The debtor is still the person solely interested in the profits, save only that he

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has mortgaged them to his creditors. He receives the benefits of the profits as they accrue, though he has precluded himself from applying them to any other purpose than the discharge of his debts. The trade is not carried on by or on account of the creditors, though their consent is necessary in such a case, of without it all the property might be seized by them in execution. But the trade still remains the trade of the debtor. The position may also be may also be explained by the decision of the privacy council in Mallow March & Co. v. Court Of Wards (1872). In that case a Hindu raja advanced large sums of money to a firm. The raja was given extensive powers of control over the business and he was to get commission on profits until the repayment of his loan with 12 percent interest thereon. It was held that the raja could not be made liable of the debts contracted by the firm while the said agreement was in force, because the intention in the agreement was not to create partnership but simply to provide security to raja, who had lent money to the firm. (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. Similarly, in Munshi Abdul Latif v. Gopeswar (1933), A, who had undertaken to load and unload railway wagons for a limited company, appointed B to do the job, B was to be paid 75 percent of the profits and was also liable for the losses, if any. It was held that the relationship between A and B was that of principal and agent and not partners. In Walker v.Hirsch (1884), the plaintiff, who was a clerk in the defendants firm, was to be paid fixed salary and also 1/8th of the profits. He agreed to advance Rs.1500 to the firms business. By an agreement this relationship could be terminated by four months notice from either side. He performed the duties of a clerk only and had no say in the conduct of business. He was given a notice by the defendants terminating his services. He contended that he was a partner and claimed dissolution of the firm and accounts.

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It was held that though he shared the profits, he was having a capacity of a servant only. He was not a partner and could not seek dissolution of the firm. (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. In Holmes v. Hammond, five persons entered into partnership for seven years and agreed to share the profits and losses equally. They further agreed that if any one of them dies before the expiry of the said period of others would seven years, the others would continue the business and pay the share of the profits of the deceased to the executors. On the death of the partners the survivors continued the business. The executors of the deceased, who did not actually take any part in the management of the business, were paid 1/5th share of profits made since the death of the deceased. The plaintiff sued the executors of the deceased to them liable in respect of a contract entered into by the surviving partners after the death of the deceased partner. It was held that the executors, though sharing the profits, had not become partners and, therefore, they could not be made liable. 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. (Commission of Income Tax v. M/s Kedarmall, A.I.R. Assam and Nagaland) (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.

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CONCLUSION
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. 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. Hence I conclude that for determining the existence of partnership regard must be had to the real relation between the parties, after taking all relevant facts into account.

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BIBLIOGRAPHY
Indian Partnership Act DR. R.K. BANGIA Introduction to Law of Partnership AVATAR SINGH

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