The Partnership Act contains various provisions regulating the relationship between the partners. The partners are bound to carry on the business of the firm to the greatest common advantage, to be just and faithful to each other and to render true account and true information of all things affecting the firm to any partner or his legal representative. Definition of partnership as contained in section 4 of the Partnership Act, 1932 and section 5 of the same Act makes it clear that partnership is created by contract. Therefore, the fundamental principle relating to relation of partners with each other is that everything depends upon the consent of the partners.
CHAPTER 3 of the Act contains well established rules setting out the mutual rights, duties, liabilities of partners inter se. There are two fundamental principles that govern relations of partners to one another. The first principle gives the partners the freedom to settle their mutual rights and duties by their own voluntary agreement. The statement of duties and rights should be prefaced with the contents of section 11 which gives freedom to partners, subjects of course to the provisions of the Act, to determine their mutual rights and duties by their own agreement.
England v. Curling, (1844) 8 Beav 129: 133 RR 68 – Lord Langdale M.R. observed “with respect to a partnership agreement, it is to be observed that all parties being competent to act, as they please, they may put an end to or vary at any moment. A partnership agreement is therefore open to variation from
day-to-day, and terms of such variation may not only be evidenced by writing but also by the conduct of the parties in relation to the agreement and to their mode of conducting their business when, therefore, there is a variation and alteration of the terms of a partnership, it does not follow that there was not a binding agreement at first.
Partners are bound to carry on the business of the firm to the greatest common advantage, to be just and faithful to each other and to render true account and full information of all things affecting the firm to any partner or his legal representative.
This section deals with the general duties of the partners and lays down that partners should carry on—
(i) Business of the firm to the greatest common advantage,
(ii) to be just and faithful to each other.
(iii) to render true accounts and full information of all things affecting the firm to any partner or his/her legal representative.
(i) Greatest common advantage:
It is admitted that the relations of partners are based on mutual trust and confidence and thus it becomes the duty of each and every partner to run the business to the greatest common advantage.
Venttey v. Creanen, (1853) 1 Wiven Reports 75. The task of purchasing sugar was entrusted to one partner. He sold his own sugar which he had purchased on cheap rates to the firm at a high rate and earned a profit. This was held that he must return the said benefit to the firm because the said work was done in disregard of the general duties of the partners.
(ii) Just and faithful:
For carrying on the business it is of utmost importance that each one must be just and faithful to the other. In the absence of it partnership can’t exist.
(iii) Render true accounts:
It is the duty of every partner that he must give true account of the transactions of the firm. Partners are not bound only to give true account of the income and expenditure but of all such money that comes to them during the course of business.
1. Prem Bullabh v. Mathura Dutt, MANU/SC/0035/1966 : AIR 1967 SC 1342: A partner must observe utmost good faith in dealing with the other partners. But in the absence of special circumstances he cannot be regarded as a kind of trustee for the other partner or liable to render accounts to them in a fiduciary capacity.
2. Gattulal v. Gulabsingh, MANU/SC/0006/1985 : AIR 1985 SC 547: A court will not aid those who can be shown to have remained quiet in the hope of evading responsibility in case of loss, but to claim a share of gain in case of ultimate success.
3. Irimble v. Goldberg, (1906) AC 494 PC: In a transaction between partners for the sale and purchase of a share in the business, if one of them is better acquainted with the accounts than the other, it is his duty to disclose all material facts, but the party entitled to such disclosure may elect, at any stage to waive his right to further information even if he knows that there has been some concealment of facts which he has since discovered, and believes that others are still concealed.
“Every partner shall indemnify the firm for any loss caused to it by his fraud in the conduct of the business of the firm.”
This section lays down that every partner shall indemnify the firm for any loss caused to it by his fraud in the transaction of the firm. Following are the conditions for holding a partner liable for paying damages for loss caused by his deceitful conduct.
Barbarilal v. Seikh Shukrulla, MANU/BH/0095/1939 : AIR 1940 Pat 1.
(a) Partner is guilty of deceitful conduct.
(b) Partner has done such deceitful work in the conduct of the business of the firm.
(c) By the fraud of the partner, firm or other partners
have suffered
loss.
The liability of partner to pay damages is based on the principle that if any partner knowingly does an illegal act, he should pay damages to other partners for the loss suffered by them; Campell v. Campell, (1840) 7 Ch S Fin 160; see also Nabinchandra v. Moolchandra, MANU/MH/0059/1966 : AIR 1966 Bom 111.
The word ‘fraud’ has the same meaning which is given in section 17 of the Indian Contract Act, 1872. In the case of Dairy v. Peek, (1899) 14 AC 337: Lord Hershell has held the following elements of fraud—
(i) False promise which makers of promise know it to be false.
(ii) Promise in reality is false and maker of promise does not believe on its truthfulness, or
(iii) Promise is false in reality and maker of promise has said it without considering its truthfulness or otherwise. It is also necessary to prove that by the deceitful promise plaintiff has been actually deceived, suffered loss and plaintiff had no means to find out the truth. Promise was made with the intention that other party should act on believing it. Plaintiff acted on believing such promise and suffered loss.
It has been held that the partner who commits fraud in the conduct of the business of the firm should make good the loss sustained.
(1) “Subject to the provisions of this Act, the mutual rights and duties of the partners of a firm may be determined by contract between the partners, and such contract may be express or may be implied by a course of dealing.”
Such a contract may be varied by consent of all the partners and such consent may be express or may be implied in the course of dealing.
(2) Agreement in restraint of trade: Notwithstanding anything contained in section 27 of the Indian Contract Act, 1872, such contracts may provide that a partner should not carry on any business other than that of the firm while he is partner.
This section incorporates the general principle that the mutual rights and duties of the partners may be determined by a contract between themselves. They may themselves decide how much investment or labour is to be put by whom. Or whether a partner will be entitled to any remuneration, apart from sharing the profits or what will be the profit sharing ratio etc. Such contract may be expressed or may be implied by a course of dealing. The mutual rights and duties which may have been agreed upon between the partners may be subsequently varied with the consent of all the partners. Such variance or change in the mutual rights and duties may also be made either expressly or by an implied consent through a course of dealing between the partners.
1. Pabitra Construction Co. v. UCO Bank, AIR 2008 Cal 103. Three partners opened a joint account with the respondent-Bank with special instructions that any of the two partners would be entitled to operate the Bank account. In the course of business transactions disputes arose between them and one of them gave written instruction to the respondent-Bank, not to clear any cheque unless all the three partners jointly operate the account, in deviation from the earlier instruction. The Bank, in view of such instruction, refused to clear two cheques issued by two of the partners. The action taken by the Bank was held as quite justified by the Calcutta High Court.
The court explained that in a partnership business all the partners were equally interested in case of profit and loss arising out of business and if all the three partners jointly opened an account, one of them could subsequently decide not to continue with the said account and even give instruction to stop further transaction unless the dispute among them was resolved.
The court held that if one of the joint account holders decided to change the mode of operating the account, which was initially agreed to by the parties the Bank should not continue with the account based on the instruction initially given to it so long the dispute was not settled by the parties.
2. Helmare v. Smith, (1886) 35 Ch D 436: Bacon V.C. observed. “If fiduciary relationship means anything I can’t conceive a stronger case of fiduciary relation than that which exists between partners. Their mutual confidence is the life-blood of the concern. It is because they trust one another that they are partners in the first place, it is because they continue to trust one another that the business goes on”.
3. Suresh Kumar v. Amrit Kumar, AIR 1982 Del 131: The Delhi High Court, approved the observation of the Bacon V.C. In this case the plaintiff and defendants were carrying on the business of motors cars, jeeps and their spare parts under the name of Sanghi Motors. The plaintiff was the managing partners of the Business and his appointment had been made with the consent of all the partners and that he was acting in this capacity from the very beginning. Majority of partners removed him and appointed Ashok Kumar Sanghi as the Managing Partner. The Delhi High Court held that above majority decision can’t be enforced.
The first sub-
section states, in a more direct and positive form the elementary principle already implied in sections 252 and 253 of the Contract Act. Partnership as a relation eminently depends on the consent of the parties, not only for its existence, but for the terms of the agreement in all things consistent with its essential nature and purpose and an agreement to become partner in the first instance, or to vary the terms at any time, need not be manifested in any particular form.
4. It is really needless to cite authorities but reference may be made to Const v. Harris, (1823-24) TSR 496: where Lord Eldon laid down that a majority of partners can regulate patterns of details but substantial terms of their agreement can be amended only by the consent of all. A judicial statement made 20 years later showed that the law was by that time well-settled and expresses it in a clear and positive manner too often wanting in Lord Eldon’s judgment:
With respect to a partnership agreement, it is to be observed that all the parties being competent to act as they please, they may put an end to or vary it at any moment, a partnership agreement is therefore open to variation from day-to-day and the terms of such variation may not only be evidenced by writing but also by the conduct of the parties in relation to the agreement and to their mode of conducting their business. When, therefore, there is a variation and alteration of the terms of a partnership, it does not follow that there was not a binding agreement at first. Partners, if they please, may, in the course of the agreement daily come to a new arrangement for the purpose of having some addition or alteration in the terms on which they carry on business, provided those additions or alterations be made with an unanimous concurrence of all the partners.
A practice of the firm, though not part of the original agreement may become binding by usage and alterable only by consent e.g., made of valuing assets, adjustment of profit and loss account.
5. Coventry v. Barclay, (1863) 3 De GJ & S 320.
6. Exp. Barber, 1870.
7. Gurprasad Dayal v. L. Raghunath Prasad, MANU/UP/0032/1976 : AIR 1976 All 141. Where the power of general management as contemplated in the deed of partnership was with the manager who was also one of the partners but by a resolution passed by the partners the duty of purchasing certain machines was cast on another partner who failed to purchase the same in time despite reminders by the manager, it was held that the manager was not responsible for the default of that partner.
Sub-section (2) re-enacts with some verbal amendments the substance of exception 3 to section 27 of the Indian Contract Act which is one of the enactments repealed by the present Act. As to the treatment of agreements in restraint of trade by Contract Act, Pollock and Mulla can be referred.
“Agreements of the kind protected by this sub-section are in fact extremely common, and it would be an intolerable hindrance to business if they were not allowed.”
“Subject to contract between the partners, every partner is bound to attend diligently to his duties in the conduct of the business.”
Section 12(c)—
Subject to contract between the partners, any differences arising as to ordinary business may be decided by the 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.
Thus section 12(c) makes it clear that in ordinary matters decision shall be taken by the majority of the partners but before taking the decision, it is necessary to give every partner opportunity to express his views. Moreover, the majority should decide the matter in good faith. In respect of the conduct of the important matters, consent of all the partners is necessary.
According to Lindley:
“utmost good faith is due from every member of partnership towards every other member and if any dispute arises between partners touching any transaction by which one seeks to benefit himself at the expense of the firm, he will be required to show, not only that he had the law on his side, but that his conduct will bear the highest standard of honour. Thus if one partner knows more about the state of partnership account than another, and, concealing what he knows, enters into a agreement with that other, relating to some matter as to which a knowledge of the state of the account is material, such agreement will not be allowed to stand.
1. Suresh Kumar v. Amrit Kumar, AIR 1982 Del 131.
2. Economic Transport Service v. Economic Transport Carriers (North), AIR 2003 Del 201 (202):The decision of the majority of partners can’t be binding on the other partners particularly when the suit is for passing off the name of a firm or infringement of the trade name as commercial activity of every kind is prosecuted through a partnership firm. In no circumstances, the majority of the partners can be allowed to permit a stranger to use their name or trade name as it would amount to offence of passing off. Every partner has a vital interest in the activities of partnership firm. Majority cannot trample or impede the interest of minority partners. Thus the suit against passing off name of firm can be continued or withdrawn by the plaintiff firm. It is not permissible for the majority of partners to withdraw such a suit.
3. Y. Venkanna Chowdhry (died) v. G. Lakshmidevamma, MANU/TN/0023/1994 : AIR 1994 Mad 140. If the accounting partner has not maintained accounts properly and has mixed up his private affairs with those of the partnership and when accounts submitted by him do not reflect truly the income and expenditure of the partnership, the court must order to reopen and/or reject the accounts submitted by such accounting partner.
“Subject to the contract between partners, a partner shall indemnify the firm for any loss caused to it by his wilful neglect in the conduct of the business of the firm.”
A partner’s general duty to attend diligently to the firm’s business is of course broken by wilful neglect in conducting it and there is authority, if it were needed to show that in taking accounts under the direction of the court, one partner may have compensation awarded to him for damages incurred through the neglect of another.
1. Krishnamachariar v. Shankar Sah, (1920) 22 Bom LR.Suppose the case of an act of fraud or culpable negligence or wilful neglect or default by a partner during the partnership to the damage of its property or interest, in breach of his duty to the partnership, whether in law compellable or not compellable, he is certainly in equity compellable to competence or indemnify the partnership in this respect. The partner on whom the whole management of the business is thrown by another’s wilful neglect of it is entitled to compensation.
2. Gurprasad Dayal v. L. Raghunath, MANU/UP/0032/1976 : AIR 1976 All 141. It is held that the section does not contemplate a suit by one partner for damages against another. The liability of partners is to the firm and not to one particular partner. But the liability of one partner to another for his acts is not as wide as that of an agent to a principal.
3. Mahadev v. Gannu, (1925) 27 BLR 500. Under section 212 of the Indian Contract Act, an agent is responsible to his principal for the direct consequences of his neglect, want of skill or misconduct. A partner is not liable to the same extent as an agent. Where a partner acts bona fide in order to benefit the firm and without culpable negligence and wilful neglect he will alone be not liable and loss if any, must be borne by all.
4. T.B. Mody v. Ghanshyam, MANU/KA/0070/1987 : AIR 1987 Kant 268. Loss should be actual and substantial and not only notional and on the balance-sheet only.
5. Sasthi Kenkar v. Man Gobinda, MANU/BH/0077/1919 : AIR 1919 Pat 386: In a suit for dissolution of a partnership and accounts, the defendants who were managing partners were charged with negligence and contribution was claimed for the losses. The alleged negligence was that they failed to sue certain firms for the price of coal supplied and consequently one of the claims became time-barred and another was lost due to the debtor’s insolvency.
“They were held liable for the claim which had become time-barred. For the other claim the court held that the firm was an old consumer and the defendants themselves learnt it too late that it had become insolvent.
6. Gurprasad Dayal v. L. Raghunath, MANU/UP/0032/1976 : AIR 1976 All 141. The Allahabad High Court observed that section 13 does not contemplate a suit by one partner for damages against another partner. The liability of a partner is to the firm and not to one particular partner.
“If a partner derives any profits for himself from any transaction of the firm or from the use of the property or business connection of the firm or the firm name, he shall account for that profit and pay it to the firm.”
The principle underlying this section is that a partner is an agent of the firm and as such must not act on his own account, or make any secret gain for himself in conducting the business of the partnership. The principle under section 16 is based on good faith. No partner is allowed to benefit himself at the expense of the firm. According to Lindley, “Good faith requires that a partner shall not obtain a private advantage at the expense of the firm. He is bound in all transactions affecting partnership, to do his best for the common body and to share with his co-partners any benefit which he may have been able to obtain from other people and in which the firm is in honour and conscience entitled to participate: Semper enim non id quod privatum interest unius ex socis servari solet, sed quod societate expedit (the invariable practice being not to have regard to the private interest of one of the partners but to the advantage of the firm.)
Problem:
A, B and C carry on business of partnership as merchants, D to whom they make consignments for sale on commission, secretly allows C, a share in the commission, which he receives in consideration of C using his influence to send consignment to him. A and B come to know of secret share of ‘C’. What are ‘A’s and ‘B’s rights against ‘C’ in respect of the secret share received by him?
This is the case falling under section 16(a) ‘A’/’B’ can compel ‘C’ to account to the firm for the money so received by him.
1. Gardner v. Mccutcheon, 1842 Beav 534, a ship belonged to two partners, one of whom was also the captain of ship. While the ship was operating under charter parties the captain made considerable profits by making certain contracts. The court held that he was liable to account for such profits.
2. Aas v. Beham, (1891). It is clear law that every partner must account to the firm for every benefit derived by him without the consent of his co-partners from any transaction concerning the partnership or from any use by him of the partnership property name or business connection.
3. Bentley v. Craven, (1853) 18 Beav 75: 104 RR 373: One of the partners in a firm of sugar refiners who was considered expert in the job was entrusted with the duty of purchasing sugar for the firm for being refined. He himself was a whole-sale dealer in sugar. He supplied his own sugar, which he had purchased at a lower price, to the firm at the prevailing market rates and thereby made considerable profits. He did not let his co-partners know that he was selling his own sugar to the firm and thereby making profit out of this transaction of the firm. It was held that he was bound to account to the firm for the profit thus made by him.
According to section 215 of Indian Contract Act, a partner is the agent of the firm for the purpose of the business of the firm. According to the rule of agency, no agent can deal on his account in the business of agency without the consent of his principal.
Section 216–
“if an agent without the consent of his principal, deals in the business of agency on his own account instead of on account of his principal, the principal is entitled to claim from the agent any benefit which may have resulted to him from the transaction.
In one case, a partner without consent and notice of other partners is entitled either to prevent such sale or to challenge the sale price and compel the partner to purchase it on proper and fair price.
“Subject to the contract between the partners, if a partner carries on any business of the same nature and competing with that of the firm he shall account for and pay to the firm all profits made by him in that business”.
One or more persons may with knowledge and consent of all parties be members of two distinct firms carrying on a similar if not a directly competing business, as where the two undertaking are a morning and evening newspaper.
1. Dean v. McDowell, (1878) 8 Ch D 345: There may be express agreement not to engage in any business whatever other than the firm’s irrespective of competition. Breach of such an agreement, however does not make the partner breaking it, liable for an account of profits.
Therefore section 16(b) lays down that a partner can’t derive any exclusive advantage by engaging in transactions in competition with the firm. In one case, a partnership was entered into for the business of importing salt into India and for re-selling the same in Chittagong. One of the partners in the course of the operations, bought some quantity of salt for himself and re-sold the same on his own account. The Calcutta High Court held that the partner was liable to account for his profit to his co-partners as the opportunity to make such a profit came his way while he was on the business of the firm.
2. Pulin v. Mahendra, (1921) 34 Cal LJ 405: This duty is however subject to any variation made by the partnership deed. Thus, the agreement between the partners may allow them to carry on any business whatsoever, whether competing or not. Conversely, the agreement may restrain the partners from carrying on any other business whatsoever (i.e., whether competing or not). Section 11 of the Act clearly provides that the agreement between the partners may provide that a partner shall not carry on any business other than that of the firm, whilst he is a partner. The section further provides that this will not amount to restraint of trade under section 27 of the Indian Contract Act.
3. Gordon v. Holland, (1913) 108 LT Rep 385: A partner sold the land belonging to the firm to a bona fide purchaser and then re-purchased that land himself. It was held that all the benefits made by this partner on re-purchase of the land had to be given to the firm.
“Subject to the contract between partners, the property of the firm shall be held and used by the partners exclusively for the purpose of the business.” If a partner uses firm’s property for private benefits, he shall account for and pay such profits to the firm.”
Illustration. X and Y are partners in a trading firm. X borrow Rs. 9000 from P and execute a pronote in the name of the firm. X spends the money in purchasing a plot of land in his own name for his personal purpose. P can hold Y liable and realize the said money because a partner is an agent of all other partners and can bind them by his acts. But X shall have to account for and pay Rs. 9000 to the firm because according to section 15, the property of the firm shall be held and used by the partners exclusively for the purposes of the business. Besides this, under section 16(a), if a partner derives any profit for himself from any transaction of the firm or from the use of the property or business or business connection of the firm or firm name, he shall account for that profit and pay it to the firm.
Velji Raghavji v. State of Maharastra, MANU/SC/0091/1964 : AIR 1965 SC 1433: The appellant was the working partner of a firm. It was agreed among the partners that he should carry on the work of realising the dues of the partnership. On the allegation that he misappropriated certain sums and also failed to deposit in the bank some collections, he was convicted for the offence of criminal breach of trust under section 409, IPC. The Supreme Court acquitted him. Even if there was a mandate to the appellant with respect to some dues to the collection and deposit them in bank, failure to do so would not constitute the offence, as the appellant was also authorised by the other partners to spend the money for the business of the partnership. The appellant would not also be guilty of dishonest misappropriation of property under section 403 of the Code, because he had undefined ownership along with the other partners over all the assets of the partnership and as such owner, in whatever way and with whatever intention he used the property, he would not be liable for misappropriation.
Provides that the partners shall contribute equally to the losses sustained by the firm.
Normally, of course, the partnership deed provides the ratios in which profits and losses are to be shared. It is even open to the partners to agree that one or more of them shall not be liable at all for the losses suffered by the firm.
Section 14 of the Partnership Act, 1932 expressly declares that property exclusively belonging to a person, on his entering into partnership with others, does not become a property of the partnership merely because it is used for the business of the partnership, in the absence of an agreement to the contrary.
Arjun Kanji Thankar v. S.K. Thankar, (1969) 3 SCC 555: Thus such property will become property of the partnership only if there is an agreement express or implied, that the property was under the partnership agreement, to be treated as the property of the partnership.
Mere use by firm does not make property, the property of the firm. Where there was partnership entered into for constructing and running of cinema theatre, one partner had contributed and other had put up construction. There was no clause in deed showing intention to treat land structure equipment as firm’s property.
Section 15. Application of the property of the firm–
“subject to contract between the partners, the property of the firm shall be held and used by the partners exclusively for the purposes of the business.”
This section makes it a duty of the partners that the property of the firm shall be held and used by them exclusively for the purposes of the business of the firm. Even, if the section had not so provided, a joint property, being the nature of a trust has always to be used for the purposes of the trust. No partner should, therefore, use the assets of the firm for any of his personal purposes.
Addanki Narayanappa v. Bhaskara Krishnappa, MANU/SC/0281/1966 : AIR 1966 SC 1300: The Supreme Court explained the nature of the right of the partners in the following words:
“Whatever may be character of a property which is brought in by the partners when the partnership is formed or which may be acquired in the course of the business of the partnership, it becomes the property of the firm and what a partner is entitled to is his share of profits, if any, accruing to the partnership from the realisation of his property and upon dissolution of the partnership to a share in the money representing the value of the property. No doubt, since a firm has no legal existence the partnership property will vest in all the partners and in that sense every partner has an interest in the property of the partnership.”
The property of the firm has got to be used exclusively for the purpose of the business of the firm. If any partner derives any profit or personal advantage by the use of the property of the firm, he has to account for that profit and pay the same to the firm. This rule is subject to contract between the partners.
It has been noted above that various rights and duties of partners contained in sections 12-17 are subject to contrary agreement between the partners. Therefore, unless it has been agreed otherwise, the following rights as contained in the above mentioned provision are—
“Every partner has a right to take part in the conduct of the business of the firm.” ‘A partnership being the business of all the partners, the powers of management of the partners are co-extensive. A partner, is as such, as of right entitled to take part and be consulted in the management of the partnership business. If, however, a partner is wrongly prevented from taking part in the firm’s business, he can obtain an injunction from the court against the erring partners. However, this right is subject to a contract between the partners. Thus, it is quite usual to provide in the partnership deed for an exclusion of this right as regards some of the partners.
1. Suresh Kumar v. Amrit Kumar, AIR 1982 Del 131: The privilege of participation in business must be used for promoting the interest of the firm and not for damaging it. The Delhi High Court issued an injunction against a partner who, in order only to undermine the position of the managing director, wrote to the principals of the firm not to supply motor vehicles and to the bankers not to honour the firm’s cheques. Partnership agreements usually provides for the exclusion of this right in the case of some partners.
The partners are free to provide in their agreement that only some of them will take part in the conduct of the business and certain other partners will not. If such a right is wrongfully denied to a partner, he can seek the enforcement of the right through a court of law. If the right to manage the business has been conferred on only some of the partners, they alone will be entitled to this right.
“Any differences 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.”
When the difference of opinion pertains to an ordinary or routine matter connected with the business, the same may be resolved by a decision of the majority of the partners. But before the matter is decided every partner must be provided with an opportunity to express his opinion. In this connection Lord Eldon observed-
“I call that the act of all, which is act of the majority, provided all are consulted and the majority are acting bona fide. Meeting not for the purpose of negativing, what, when they met together they may after due consideration, think proper to be a negative.
1. Const v. Harris, (1824) 525: As in all other cases of the exercise of power by a majority acting in a quasi-judicial capacity, the decision must be made in good faith with a view to the common advantage of the whole body, and when so made is conclusive. A majority cannot bind a minority without notice to them and without giving them the opportunity to express their opinion. If this were not so, it would practically put the entire management in the hands of a high handed majority, and would set the rule at naught that every partner has a right to take part in the conduct of the business.
The decision of the majority of the partners cannot be binding on the other partners particularly when the suit is for passing off the name of a firm or infringement of the trade name as commercial activity of every kind is proceeded through a partnership firm. Every partner has a vital interest in the activities of a partnership firm. Majority cannot trample or impede the interest of minority partners; Economic Transport Carrier v. Economic Transport Carrier (North), AIR 2003 Del 201.
What are ordinary matters connected with the partnership business would appear to be a question of fact upon which evidence would be required as to requirements and usual practices of the particular business.
“Every partner has a right to have access to and to inspect and copy any of the books of the firm.”
This right is available to both active and dormant partners. This right is not only in respect of books of accounts but in respect of any books of the firm. A partner could exercise this right either personally or by engaging an agent for the purpose. The partner himself, no less than his agent might be restrained if necessary from using copies or extracts made in the exercise of his right for purpose hostile or injurious to the interest of the firm. If books of account are not maintained or are deliberately vague or withheld wrongfully as destroyed, a presumption may be drawn by the court against those to whose negligence or misconduct the non-production of proper account is due.
In one English case, a sleeping partner wished to sell her interest to other partners. He therefore authorised a valuer to inspect the accounts and to ascertain the value of his interest. The other partners objected and the court held that they could not have any objection-unless of course, there was reasonable ground for objecting, as for instance the protection of trade secrets; Bevan v. Webbs., 1903 All ER.
“Subject to contract between the partners, “the partners are entitled to share equally in the profits earned, and shall contribute equally to the losses sustained by the firm.”
K. Pitchiah Chettiar v. G. Subramaniam Chettiar, ILR 58 Mad 25. The scope of section 253(2) of the Indian Contract Act, 1872 has been explained which has received the approval of the Supreme Court in the context of section 13(b) as well. Section 253(2) of the Indian Contract Act lays down that all partners are entitled to share equally in the profits of the partnership business and must contribute equally towards the losses sustained by the partnership.
This rule is, however, a rule of presumption which, in practice is constantly superseded by express agreement or even a continued usage of the firm. Thus, several partnership deeds provide that, as between the partners anyone or more of them will not be liable to bear the losses of the firm. Since every partner is entitled to share the profits, no other remuneration as a general rule is to be paid to a partner for the management of the firm’s business. The rule contained in this regard in section 13(a) is that a partner is not entitled to receive remuneration for taking part in the conduct of the business unless otherwise agreed. Thus, it is only if the partners so agree a partner may be entitled to additional salary commission, etc., for the efforts made by him in running the business of the firm.
1. Mansha Ram v. Tej Bhan, AIR 1958 Punj 5: Whether partners have contributed money equally or unequally, whether they are or are not on a parity as regards skill etc., whether they have or have not laboured equally for the benefit of the firm, their share will be considered as equal, unless some agreement to the contrary can be shown to have been entered into.
2. Robinson v. Anderson, (1855) 20 Beau: Two solicitors were jointly retained to defend certain actions and there was no satisfactory evidence to show in what proportion they were to divide their remuneration. It was held that they were entitled to share it equally although they had been paid separately and had done unequal amount of work.
In T.O. Alias v. T.O. Abraham & Co., MANU/KE/0157/2004 : AIR 2004 Ker 344:
While partners were litigating different matters before different courts in one of the suits, the Civil Court ordered the funds of the firm could be utilised only after getting majority decisions of partners. But without making other partners as partners two partners filed writ petition for releasing amount from bank. Thus, amount was got released by order of High Court and was utilised without obtaining approval of majority of partners.
South Eastern Coal Fields Ltd. v. State of Madhya Pradesh, MANU/SC/0807/2003 : AIR 2003 SC 4482; Karnataka Rare Earth v. Senior Geologist Department of Mines and Geology, AIR 2004 SC 2915:
The Supreme Court observed that the doctrine of actus curiae nominem grovabit is not confined in its application only to such acts of the court which are erroneous. The doctrine is applicable to all such acts had it been correctly appraised of the facts and the law. It is the principle of restitution which is attracted.
Section 13(c):
“Subject to the contract between the partners where a partner is entitled to interest on the capital subscribed by him such interest shall be payable only out of profits.”
Section 13(d):
“A partner making for the purpose 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.
If the partner has advanced for the purposes of the business of the firm a sum of money over and above the capital which he has agreed to subscribe, he is entitled to interest on such amount (at the rate of six per cent. per annum).
1. Somasundaram v. S. Chettiar, MANU/PR/0055/1938 : AIR 1938 PC 277: So far as interest on capital contribution is concerned, it ceases to be given from the date of dissolution.
2. Keshavji Raviji & Co. v. Commissioner of Income-Tax, (1990) 2 SCC 231: Even where a partner is given the right to receive interest on his subscribed capital, such interest shall be payable only out of profits.
Capital of a partnership can be withdrawn or added to by all the partners. The fact of withdrawal of amount of several partners does not mean that there was no obligation to contribute; Commissioner of Income-Tax v. Badrilal Bholaram, MANU/MP/0004/1969 : AIR 1969 MP 9.
“Subject to contract between the partners. 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 acts, 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.”
Paragraph (e) consist of two branches which are founded on distinct principles and must not be confused on any account. By clause (i) the general rule of an agent’s right to indemnity in respect of lawful acts done by him in the exercise of his authority, as can be seen in Contract Act section 222, is applied to the case of partner acting in the firm’s business, if the partner refused to disclose the nature of expenditure incurred he will not be entitled to be indemnified by the firm. A partner is entitled to be reimbursed for expenditure properly incurred even if the things in respect of which it is incurred ultimately turns out to be worthless.
Sub-clause (ii) declares a partner’s right to indemnity for expenses in or about anything necessarily done for the preservation of the business or property of the firm.
Thomas v. Atherton, (1877) 10 Ch D 185. ‘T’ a managing partner of a colliery received notice from L, an adjoining owner that the working was being carried on beyond the boundry. ‘T’ insisted that he was entitled to the disputed ground and carried on her working. The matter, having been referred to arbitration, he was held liable to pay £ 6000 as damages for the trespass. His claim for contribution from his co-partners failed as the loss was not suffered in the ordinary and proper conduct of the business.
He worked beyond the limits of the partnership colliery without proper inquiry as to limits and had acted with gross negligence and recklessness in continuing his working after notice and without consulting his partner, when it was evident that his right to work in the disputed area was extremely doubtful.
Sadhu Narayan Aiyangar v. Ramaswami, ILR 32 Mad 203:
The right to indemnity is not lost by the dissolution of the firm and also it does not matter that there is or has been no settlement of accounts.
The general rule is that a partner is not entitled to receive remuneration for taking part in the conduct of the business. But this rule is subject to contract between the partners..... Section 13(a).
It may be presumed that the work done by him for the firm is gratuitous in nature. It is of course possible to have a clause in the Partnership Deed, providing for remuneration to the working partners. However, in the absence of such a provision, no partner is entitled to any salary or other remuneration.
The courts have sometimes carved out exceptions to this rule. Thus, for instance when one partner is guilty of wilful neglect and so the entire burden of the work is shouldered by the other partner, the latter may make a valid claim to be compensated for the extra work done by him.
1. Airey v. Barham, (1861) 54 ER 768. There was a quarrel between two partners, only one of them attended to the business of the firm and the Court held that he was entitled to an extra allowance for having managed the business without any assistance from the other partner.
2. C.V. Mulk v. Commissioner of Agriculture Income-Tax, 1980 Ker LT 933. The partnership agreement, however, provides for the payment of remuneration to working partners. A contract of service stipulates two different persons whereas a firm and its partners are one and the same thing. The so-called remuneration paid to the partners is in reality a distribution of profits.
“Subject to the contract between the partners-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 partners.”
When the difference of opinion pertains to an ordinary or routine matter connected with the business, the same may be resolved by a decision of the majority of the partners. But before the matter is decided every partner must be provided with an opportunity to express his/her opinion. Lord Eldon observed. “I call that the act of all which is the act of the majority: provided all are consulted and the majority are acting bona fide, meeting not for the purpose of negativing. What any one have to offer, but for the purpose of negativing. What, when they met together, they may, after due consideration, think proper to negative.
Where a partnership is created for a fixed period or for a particular business, it should naturally come to an end on the expiry of such period or on the completion of such business. Section 17 is enacted to meet such cases. Its essence is that the firm shall continue as far as applicable, on the same terms and condition as if no change has come in them.
(a) Rights and duties of partners 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—
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.
(c) And 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 adventure or undertaking.”
Section 17 gives general rule for the determination of the rights and duties of the partners after the happening of the events which would otherwise leave those rights and duties undermined.
(1) X and Y are partners for seven years, X taking no active part in the business. After the expiry of seven years, Y continues the business in the same name and with the property of the firm, without giving any account to X. Is X entitled to a share in the profits of the business?
Ans. In the above circumstances, the partnership is not dissolved and X is entitled to participate in the profits on the same terms as those of the original agreement; Parson v. Hayword, (1862) 4 DFJ 474.
(2) An agreement of partnership between P & R for one year contains an arbitration clause. The partnership is continued beyond one year. Is the arbitration clause binding on the partners after one year has expired?
Ans. An arbitration clause is not inconsistent with a partnership at Will and, therefore, the arbitration clause continues to bind the partners even after the expiry of one year Gillett v. Thoronton, 1875 LR 19.
1. Change in Constitution 17(a): Where a change occurs in the Constitution of the firm mutual rights and duties remain the same as they were immediately before the change. For example A and B were partners in a firm and their share in profits of the firm was 10 annas and 6 annas respectively. After the death of A, his son became the partner and without any express agreement the business continued. It was held that ‘A’s son is entitled to receive share of 10 annas; Dawood Sahib v. Sheikh Mahideen, MANU/TN/0218/1937 : AIR 1938 Mad 5.
2. After expiry of term 17(b): Clause (b) contains the substance of
section 27 of the English Act and section 256 of Indian Contract Act. This provides that after the expiry of the term of the firm, mutual rights and duties of the partners remain the same. But after the expiry of the term, partnership becomes partnership at Will. It is, therefore, necessary that the said rights and duties of partners must be consistent with the incidents of partnership at Will.
3. Where additional undertakings are carried out Section 17(c): Where a firm is constituted for a fixed term, but continues to carry one or more adventures or undertakings, the mutual rights and duties will remain the same. The same rule applies where the business is continued after the death of a partner. The main reason behind this rule is that in the absence of express agreement, either the original contract is deemed to have continued or its novation having taken place.
Neilson v. Massend Iron Co., 1886:
Lord Watson further said that this rule applies to other contracts. The legal effect of this is that all the formalities, terms and conditions of the original contract continues to the extent they are not inconsistent with the implied terms of the new contract.
The same rule has been substantially acted upon in the case of a business being continued by the surviving partners after the death of a member of the original firm, the court inferred as a fact from their conduct that the business was continued on the old terms, but probably, if there were nothing more than a want of evidence to the contrary, a continuance on the old terms would be presumed.
Daw v. Herring, (1892) 1 Ch 284: It was held that a clause giving one partner an option of buying the other’s share within three months after the expiration of determination of the partnership by effluxion of time applies to the partnership as continued after the expiration of the original term.
The expression ‘property of the firm’ refers to partnership property, partnership assets, joint stock, common stock or joint estate denoting all property rights and interest to which the firm i.e., all the partners, may be said to be entitled and in this context the assets of a firm may include benefit of a contract, benefit of lease or renewal of a lease. Benefit of licence or quota, buildings, land etc. The assets of a firm have a tangible and different meaning than that of the goodwill of the firm and unless a contrary intention appears even if the goodwill is included in the term as property of the firm, the exclusion of goodwill specifically in the term of contract would not necessarily take within its fold the other properties or the assets of the firm.
A partnership not being a legal person, is not capable of owning any property and the so-called property of the firm is nothing but the joint estate of all the partners yet, for all practical purposes, the joint estate is regarded as so much separate from the partners that none of them can claim any personal ownership over any item of it.
1. Narayanappa v. Bhaskara Krishnappa, MANU/SC/0281/1966 : AIR 1966 SC 1300: The Supreme Court Judge Mudholkar observed that the whole concept of partnership is to embark upon a joint venture and for that purpose to bring in as capital money or even property including immovable property. Once that is done whatever is brought it would cease to be the exclusive property of the person who brought it in. It would be the trading asset of the partnership in which all the partners would have interest in proportion to their share. The person who brought it in world, therefore, not be able to claim or exercise any exclusive right over any property which he has brought in, much less over any other partnership property.
2. Syndicate Bank v. R.S.R. Engg. Works, MANU/SC/0404/2003 : (2003) 6 SCC 265: It is recognised principle that partnership is not the species of joint tenancy and that, in absence of some contrary agreement there is no survivorship as between partners at least so far as it concerns their beneficial interest in the partnership assets.
“Subject to contract between the partners, the property of the firm includes all property and rights and interest in property originally brought into the stock of the firm, or acquired, by purchase or otherwise by or for the firm or for the purposes and in the course of business of the firm, and includes also the goodwill of the business.
Unless the contrary intention appears, property and rights and interests in property acquired with money belonging to the firm are deemed to have been acquired for the firm”.
3. Boda Narayan Murthy & Sons v. Valluri Venkata Saguna: (1977) 2 Andh WR 480: It was held that in the absence of an agreement to the contrary, the property belonging to a person does not become the property of the partnership merely because it is used for the business of the partnership. It would become property of the partnership only if there is an agreement, express or implied that the property under the agreement of partnership to be treated as the property of the partnership.
According to the provisions of section 14 for a property to become the property of a firm, it must have been brought into the common stock of the firm by the partners originally when the firm was formed or subsequently acquired by purchase or otherwise in the course of the business of the firm. In the instant case, there is no evidence adduced to show what are the properties that were brought into the stock of the firm when it was originally formed or what are the properties that were subsequently purchased or acquired by the firm in the course of its business.
4. Arm Group Enterprises Ltd. v. Waldrof Restaurant, 2003 (1) RCR (Rent) 594 (SC): Property exclusively belonging to a person does not become a property of the partnership merely because it is used for the business of the partnership. Such property will become property of the partnership if there is an agreement.
5. Noor Mohd Mir v. Qadir Mir, AIR 1983 (NOC) 181: Property of a partner does not become partnership property merely on his permitting it to be used in partnership business.
6. Ganpat Rai v. Abnash Chander, AIR 1973 J&K 74: According to section 14 all the property and assets of the firm belong to the firm and include all the property brought into the firm assets by any partner or acquired with the partnership funds and the goodwill of the firm is included in the property of the firm. All these assets are to be valued and then distributed at the time of final decree.
7. S.V. Chandra Pandian v. S.V. Sivalinga Nadar, MANU/SC/0450/1993 : (1993) 1 SCC 589: The Apex Court indicated that entire property whether brought in by the partners on constitution of the partnership or acquired in the course of business of the firm, would constitute property of the firm. The Court further said that during the subsistence of the partnership, partners are entitled to an undefined share in such property but after dissolution and settlement of accounts, partners are entitled to proportionate share in residue of the property.
8. Kallepally Krishna Raju v. Commr & Inspector-General of Registration and Stamp, AIR 2007 (NOC) 2254 (AP): The Andhra Pradesh High Court held that any properly could be thrown into the partnership stock without any formal document. Such property would, thus become the property of the firm; when the very partnership firm formally came into existence under the document and there were no words whatever of dispositive character, which expressly or by implication amounted to a transfer of interest as between the partner who threw his property in the partnership and the rest of the partners, it could not be presumed the court said, that the partner sold his property to the firm. Even if the document was executed and the same was registered as a partnership deed, it could not be construed either as a sale deed or as a gift deed for the purpose of collecting the deficit stamp duty.
9. Jai Narayan Mishra v. Hashmathunnissa Begum, MANU/AP/0403/2002 : AIR 2002 AP 389. It was held that the property belonging to a person in the absense of an agreement to the contrary did not become the property of the partnership merely because it was used for the business of the partnership. It would become property of the partnership only if there is an agreement, express or implied that the property under the agreement of partnership to be treated as the property of the partnership. According to section 14 partnership property may be of following three types:
(1) Property originally brought into the stock of the firm: The property originally brought into the stock of the firm undoubtlly constitutes partnership property. But this is subject to contract between the partners. Thus property originally brought into the stock of the firm at the commencement of the business is partnership property.
10. Commissioner of Income-Tax v. Janab N. Hyath Batcha Sahib, (1969) MANU/TN/0261/1968 : 72 ITR 528. The Madras High Court held that when a partner brings his property in the partnership firm as his contribution to its capital, it is not regarded as sale.
11. Commissioner of Income-Tax v. C.M. Kunammed, (1974) MANU/KE/0096/1972 : 94 ITR 179 (Ker).
12. Commissioner of Income-Tax v. Abdul Khader Motor & Lorry Service, (1978) MANU/TN/0434/1976 : 112 ITR 360 (Mad).
13. Commissioner of Income-Tax v. Hind Construction Ltd., (1972) MANU/SC/0327/1971 : 83 ITR 211.
The Court observed and have given the same view in all the above cases that a property was claimed to be the property of the firm on the basis of registered partnership deed. The defendant pleaded that the document was a sham because it originally was tempered with by interpolations and that at no point of time the partnership was acted upon.
14. Jag Mohan Chawla v. Dera Radha Swami Satsang, MANU/SC/0565/1996 : AIR 1996 SC 2222: The Supreme Court said that so long as the partnership deed remains unchallenged and it is not cancelled, the document must be held to be valid and lawful and that this will be so despite the interpolation.
15. Prem Raj v. Bhani Ram, ILR (1946) 1 Cal 191.
16. Ram Sahai Mal v. Biseshwar Nath Pal, MANU/BH/0066/1963 : AIR 1963 Pat 221: The court referred that no written or registered document is necessary to enable an individual to contribute to the firm by way of his capital any land or immovable property. The absence of mutation would also hardly matter.
17. Sunil Siddharthbhai v. CIT, Ahmedabad, Gujarat, MANU/SC/0164/1985 : (1985) 4 SCC 519: The Supreme Court has observed that there is no difficulty in accepting to the extent to which the exclusive interest is reduced to a shared interest it would seem that there is a transfer of interest. Therefore; when a partner brings in his personal asset into the capital of the partnership firm as his contribution to its capital he reduces his exclusive interest in the asset to shared rights in it with the other partners of the firm.
18. Addanki Narayanappa v. Bhakara Krishtappa, (1966) 3 SCR 400: MANU/SC/0281/1966 : AIR 1966 SC 1300: In this, Supreme Court had observed that the property brought in by the partners irrespective of its nature or property earned during the course of business becomes the property of the firm and every partner is entitled to receive his share of property and on dissolution he gets his share in the property. But during the existence of the partnership no partner can use the firm’s property as his own property nor can he sell any specific goods in lieu of his interest in the property.
All the partners have interest in trading asset or properties of partnership in the same proportion in which they carry on the partnership business of the joint undertaking.
19. Shashi Kapila v. R.P. Ashwin, MANU/SC/0722/2001 : AIR 2002 SC 101: The Supreme Court observed that a partnership firm is an association of persons. But inspite of that unity between themselves, every partner can have his own separate existence from the firm. Any right which a partner has over any property would remain as his individual asset.
20. Sujan Suresh Sawant v. Dr. Kamlakant Shantaram Desa, MANU/MH/0472/2004 : AIR 2004 Bom 446: Bombay High Court observed that when a partner brings in his personal asset into partnership firm as his contribution to the capital an asset which originally was subject to the entire ownership of the partner, becomes now subject to the rights of other partners in it. In other words, the partner who bring in the asset reduces the exclusive right in the asset to the shared rights in it with other partners in the firm.
21. Sunil Siddhart v. Commissioner of Income-Tax, Ahmedabad, Gujarat, MANU/SC/0164/1985 : AIR 1986 SC 368: The Supreme Court observed that in its general sense, the expression ‘Transfer of Property’ connotes the passing of rights in the property from one person to another. In one case, there may be passing of the entire bundle of rights from the transferor to the transferee. In another case the transfer may consist of one of the estates only out of all the estates comprising the totality of rights in the property.
22. Arjun Kanaji Tankar v. Shantaram, (1969) 3 SCC 555: There may be a reduction of the exclusive interest in the totality of rights of the original owner into a joint or shared interest than a share in that property. Therefore, when a partner brings in his personal assets into the capital of the partnership firm as his contribution to its capital he reduces his exclusive rights in the assets to shared rights in it with the other partners of the firm.
(2) Property Acquired by purchase or otherwise by or for the firm: According to the provisions of section 14 for a property to become the property of a firm it must have been brought into the common stock of the firm by the partners originally when the firm was formed or subsequently acquired by purchase or otherwise in the course of business of the firm. In the instant case, there is no evidence adduced to show what are the properties that were brought into the stock of the firm when it was originally formed or what are the properties that were subsequently purchased or acquired by the firm in the course of its business.
Gumanmal v. Papurbai, (1914) 30 IC 24: It was held that it cannot be laid down as a universal rule that when lands are bought by partners in trade and are paid for out of the partnership assets, they of necessity, become part of the joint estates of the partners there are different purposes for which the lands may have been bought and if they are not used for the purpose of the partnership business, the question is an open one and it is to be decided on the general evidence.
Re Adarji Mancherji Deshi, AIR 1931 Bom 428: It was held that to constitute partnership property it is not necessary that the property should be purchased for the purpose of the partnership business. It may be noted that a partner is a trustee of the partnership property standing in his name and no partner can be said to have any beneficial interest in any particular estate or property, until the partnership is dissolved.
Debi Prasad v. Jairam, AIR 1952 Punj 284: Where one partner purchases share in his own name, but with the money of the firm, the shares were held to be partnership property.
—Where the partners effected assurance of their lives for which premiums were paid out of the money of the firm, the policies were held to be the property of the firm.
—Where a partner renews a lease of the firm in his own name, the renewed lease is the property of the firm.
Mohanlal Bahri (deceased) by LRs. v. K.L. Bahri, MANU/UP/0499/1997 : AIR 1998 All 247 (250-51): Where a partner purchases a property without taking the consent of other partners which is required under the deed of partnership, out of the amount withdrawn from account of the firm and the partner in question looks after the business and also supervises in filing of Income-Tax returns and maintenance of account book and does not include the property in question in assessment register of firm, it cannot per se be inferred that the property was not purchased for interest and benefit of firm but it was purchased for benefit of the partner in question.
Broadway Centre v. Gopaldas Bagri, MANU/WB/0099/2002 : AIR 2002 Cal 78 (84), Where one partner purchased a certain property in court auction as he had an interest by virtue of courts sale and thus became the owner of the property and subsequently he brought the property in partnership in terms of registered partnership deed. The said partner and other partners supplying necessary amount for purchasing the said property at the time of the court sale by way of their share capital, such a property would be the property of the firm.
When something of valuable nature is acquired by the partner in breach of his duty of good faith, is taken to be acquired for the benefit of all the partners and has to be accounted for to the firm.
Khushal Khemgar Shah v. Khurshed Banu Dadipa Boatwala, MANU/SC/0014/1970 : AIR 1970 SC 1147. The goodwill of the business of the firm is included in the property of the firm and exclusion of goodwill necessarily does not include the assets which also form the property of the firm.
Shri Chemical Corporation, Ahmedabad v. Miraben Profulbhai Contractor, MANU/GJ/0139/2000 : AIR 2001 Guj 171: Where the goodwill is expressly excluded by a clause in the deed to a retiring partner, it cannot mean the exclusion of all rights in the asset as part of the property of the firm other than the goodwill. Thus, it is discernible as a principle of law that by way of agreement between the parties, such exclusion would not automatically include the exclusion of assets.
(3) Partner’s property in firm’s use: Where the personal property of a partner is being used in the business of the firm, it is a question of fact to be determined by reference to the parties’ intention whether it has become the property of the firm. The Supreme Court observed whether property belonging to a person on entering into partnership with others, can become the property of the firm, depends upon the terms of the partnership agreement.
Arm Group Enterprises Ltd. v. Waldrorf Restaurant, MANU/SC/0267/2003 : (2003) 6 SCC 423: The conduct of the partners in respect of the property may give rise to an implied agreement. Retiring partner had sold his share to others. The date of valuation should be date of retirement.
Robinson v. Ashton, (1875) 20 E.g. 25: A licence issued to a partner in his individual capacity has been held by the Supreme Court not to become partnership property; Ved Gupta v. Apsara Theatres, MANU/SC/0043/1983 : (1983) 4 SCC 323.
The personal licence of a partner to run a cinema hall does not become the property of the firm even if the cinema hall is being operated in partnership. At the most the other partners can acquire share in the exploits of the licence.
Miles v. Clarke, (1953) 1 WLR 537: 1983 All ER 779: A person who carried on the business of photography and the premises of business was on lease, included another person as a partner in his business. The agreement expressly provided that the profit would be divided equally. The Court held that lease, furniture goods of the studio etc., did not become partnership property.
Arjun Kanaji Thanker v. Santa Ram Kanaji Thankar, 1969 UJ SC 405: The Supreme Court has also held that when a person commences partnership with other person then subject to a contrary contract, the personal property of that partner does not become firm’s property simply because it is used in the business of the firm.
Boda Narayan Murthy and Sons v. Valluri Venkata Suguna: MANU/AP/0105/1978 : AIR 1978 AP 257. A property can become firm’s property when it was brought originally into the stock of the firm by the partners when the partnership was constituted or it has been acquired by purchase or otherwise in the course of business. For example A, B and C are partners of a firm. A’s scooter is purchased in the name of A and the money is paid from firm’s account and A becomes indebted to the partnership firm for the said money. The property in scooter shall be deemed to be the separate property of ‘A’.
The main test to determine whether a property is separate property of a partner or partnership property is the agreement between the partners and if no agreement has been made between the partners, property such as could be purchased for the purposes of firm, the prima facie presumption is, if the money has proceeded from the partnership firm, then the property is the joint property of the firm. But if these conditions do not exist the property is separate property.
Burnell v. Hunt, (1841) 5 Jur 650: In this case in pursuance of an agreement between A and B, ‘A’ took the premises in his own name and purchased silk material on his account to carry on the business of a silk lace maker and provided all the machinery and implements of trade and ‘B’ was employed to superintend and manufacture of goods. The agreement also stipulated that all the silk and materials, all the manufactured goods, and all the machinery and implements should be the sole property of ‘A’ and that ‘B’ should receive for his remuneration half the profits as soon as any accrued. It was held that the agreement did not make the property employed in the business the property of the firm. It is evident that the premises, the utensils of trade, or of the office furniture may be the separate property of one partner, unless he throws them into the partnership stock as his share of the partnership capital.
The main test for determining whether the property belongs to partnership is to ascertain as to what agreement was arrived at between the partners regarding it, Arjun Kanaji Thankar v. Santaram Kanaji Thankar, AIR 1969 NOC 77. Thus, intention of the parties as gathered from the partnership agreement is the main test to determine whether the property is partnership property; Lachmandas v. Gulab Devi, MANU/UP/0227/1935 : AIR 1936 All 270.
Ganpat Rai v. Abnash Chander, AIR 1973 J&K 74: The tenancy right will be treated to be a part of the goodwill and belonged to the firm. The same will have to be valued along with the goodwill and taken into account at the final settlement of the accounts while passing a final decree.
“Every partner is liable, jointly with all the other partners and also severally, for all acts of the firm done while he is a partner”.
Sahu Rajeshwar Nath v. I.T.O., Meerut, MANU/SC/0233/1968 : AIR 1969 SC 667: As the liability of the partners is joint and several, it is open to a creditor of the firm to recover the debt from any one or more of the partners.
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