Partnership Business Based on Fiduciary Relationship
Subject: Law, Organizational Behavior | Topics:

Introduction:

          There are different type of business available in the country. Partnership business is one of them. It is consist of the some partners (more than one) and they must have the good relationship and faith before starting the business. It any partners have the wrong mentality business can continue. So, the base of partnership business is fiduciary relationship.

Here we are discussing about the partnership business with some information regarding these ideology. The Indian Partnership Act of 1932 (Act IX of 1932) applies to partnerships created by agreement between parties.

Definition & Characteristics:

Section 4 of the Partnership Act defines a partnership as follows: “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.” A partnership, as defined in the Act, must have three essential elements:

  1. There must be an agreement entered into by two or more persons
  2. The agreement must be to share the profits of a business.
  3. The business must be carried on by all or any one of them acting for all.

1. Voluntary Agreement

  A partnership can only arise as a result of an agreement, express or implied, between two or more persons. Where there is no agreement there is no partnership. But a partnership cannot be formed with more than ten persons in banking and twenty persons in other types of business.

2. Sharing of Profits of a Business:

 The second element states the motive underlying the formation of a partnership. It also lays down that the existence of a business is essential to a partnership. Business includes any trade, occupation or profession. If two or more persons join together to form a music club it is not a partnership because there is no business in this case.

3. Mutual Agency:

The third elements is the most important feature or partnership. It states that persons carrying on business in partnership are agents as well as principals. The business of a firm is carried on by all or by any one or more of them on behalf of all. Every partner has the authority to act on behalf of all and can, by his actions, bind all the partners of the firm. Each partner is the agents of the others in all matters connected with the business of the partnership.

Who can be a Partner:

A person:

 Under the Indian partnership Act, a person may be partner if he has the capacity to enter into a contract (“Capacity of parties”)

Minor:

A minor cannot be a partner. But in an existing partnership, a minor can be admitted into a firm if all the partners of the firm agree.

Persons of unsound mind:

A person who is of unsound mind cannot become a partner.

Woman:

A woman can be a partner, married or unmarried. Of course a woman cannot be a partner if she is a minor or she is of unsound mind.

Company:

In a company the capacity to enter into contract is determined by the Memorandum and Articles of the Association of the company. The liability of the members of a firm under the Partnership. Act, for the debts of the firm, is unlimited. But a company cannot incur unlimited liability. Therefore a company cannot become a partner of a firm.

An alien enemy:

An alien enemy cannot enter into a contract of partnership with a citizen of any Country.

Classes of Partners:

Partners can be classified as below:

Active partner:

An active partner is one who actually participates in the business of the firm. A person becomes a partner only by agreement.

Dormant, Sleeping or Nominal Partner:

 These partners join the firm by agreement but do not take any active part in the business. Their liabilities are same as of Active Parnters.

Sub-Partner:

The transferee of a share of a partner’s interest in a firm is called a Sub-partner. Suppose P, the owner of ½ of firm, transfers 1/2 of his share to Q. Q will be called a sub-partner. His rights and liabilities are limited.

Classes of Partnerships:

Partnerships can be classified as below:

Partnership-will:

 A partnership is called a partnership at-will (i) when the partnership is not for a fixed period of time and (ii) when no provision is made as to when and how the partnership will come to an end.

Particular Partnership. Joint Venture:

A particular partnership is one-which is formed for a particular adventure or a particular undertaking. Such a partnership is usually dissolved on the completion of the adventure or undertaking.

Limited Partnership:

In Great Britain, according to the provisions of the partnership Act of 1907, a partnership may be formed in which the liability of all partners (except one) is limited. There must be at least one partner with unlimited liability.

Partnership Agreement:

The agreement to carry on business in partnership may be oral or in writing. If it is in writing, the document in which the terms are incorporated is called the Deed of Partnership or the Articles of Partnership.-

  1. Relationship between partners regarding the business.
  2. Name, Address, age etc. of the partners
  3. Firm name
  4. Nature of business
  5. Location of business
  6. Business address
  7. Duration of the partnership
  8. Mode of dissolution of partnership
  9. Amount of capital contribution of each partner.
  10. Share profit to be taken by each member
  11. Mode of management
  12. Power of the partners
  13. Term of retirements (Under what condition a partner retired)
  14. Expulsion of member
  15. Interest of Advance
  16. Indemnity fault or personal fault

Registration:

It is not compulsory for partnership. If any partnership firm is not registered it is not illegal association.

As far discussion made above we see that though an unregistered firm is not illegal association, it rights as per contract or partnership act. That is though registration of a partnership is optional, its registration is necessary for its own interest.

Relations of Partners to one another:

The Partnership Act lays down two general rules regarding the conduct of the partners to one another.

General duties of partners:

“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 lays down that the relationship between partners is one of utmost good faith. Though partners are not trustees for one another, it has been held in some cases that the relationship between them is of a fiduciary character.

Indemnity:

“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 rule follows logically from the rule laid down in the previous section. Since partnership implies utmost good faith, a partner must not act fraudulently against the firm. If he does, he must make up the loss.

Rules regarding the conduct of the business:

Subject to any agreement to the contrary, the following rules apply as regards the management of a firm:

  • Every partner has a right to take part in the conduct of the business.
  • Every partner is bound to attend diligently to his duties in the conduct of the business.
  • and 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 rights 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; and
  • Every partner has a right to have access to and to inspect and copy any of the books of the firm.

Mutual rights and duties:

          Subject to any contract to the contrary, the mutual rights and duties of partners are as follows:-

  • A partner is not entitled to receive remuneration for taking part in the conduct of business.
  • The partners are entitled to share equally in the profits earned and shall contribute equally to the losses sustained by the firm.
  •  Where a partner is entitled to interest on the capital subscribed by him such interest shall be payable only out of profits.
  • A partner making, for the purposes of the business, any payment or advance beyond the amount of capital he has agreed to subscribe, is entitled to interest thereon at the rate of six percent per annum.
  •  A partner shall indemnify the firm for any loss caused to it by his willful neglect in the conduct of the business of the firm.

Personal Profits Earned by Partners:

Subject to contract between the partners,

  • If a partner derives any profit 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.
  • If a partner carries on any business of the same nature as and competing with that of the firm, he shall account for and pay to the firm all profits made by him in that business.

Liability of a Partner:

The partner’s liabilities can be discussed in three categories.

d Liability of a partner for Acts of the Firm:

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.

This section lays down the rule that every partner is liable, to an unlimited extent, for all debts due to third parties from the firm incurred where he was a partner.

As between the partners, the liability is adjustable according to the terms of the partnership agreement. Thus if a partner is entitled to receive £th share of profits he is liable to pay the share of the losses. The accounts between the partners will be adjusted on this basis. But a third party, who is a creditor of the firm, is entitled to realize the whole of his claim from any one of the partners.

There is no difference between working partners and dormant partners as regards liability to third parties. A dormant partner also is liable to an unlimited extent for all debts of the firm.

d Liability of   the   firm    for    wrongful acts of a   partner:

Where, by the wrongful act or omission of a partner acting in the ordinary course of the business of a firm, or with the authority of his partners, loss or injury is caused to any third party, or any penalty is incurred, the firm is liable therefore to the same extent as the partner.

d Liability of firm for misapplication by partners:

Where a partner acting within his apparent authority   receives money or property from a third party and misapplies it, or a firm in the course of its business receives money or property from a third party, and the money or property is misapplied by any of the partners while it is in the custody of the firm, the firm is liable to make good the loss.

Example :

X, a member of a firm of solicitors, obtained a loan for A/, from some other clients of the firm. A” said to M that the mortgagee required collateral security for the loan and M deposited certain share warrant payable to bearer. The security was actually not necessary. The other partners of the firm and the mortgagee had no knowledge of this deposit. X then misappropriated the share and absconded. Held, the transaction was within the apparent authority of the other partners, and was an act of firm. Therefore the act was binding on the firm. The firm had to pay the loss. M. Rhodes v. Moules.

Rights Op Partners:

The rights of partners, and the relations of partners to one another, are determined by the agreement of the partners. Where there is no express or implied terms in the agreement, the rules stated in the Partnership Act will be applied. Subject to any con­tract to the contrary, the important rights of partners are summarised below :

  •     Conduct of business. Every partner has a right to take part in the conduct of the business.
  •     Can express opinion. Every partner shall have the right to express his opinion.
  •     Access, inspection, copy. Every partner has a right to have access to and to inspect and copy any of the books of the firm—Sec.
  •      Equality of profits he   partners are entitled to share equally in the profits earned.
  •     Interest on capital A partner is entitled to get interest  on the capital out of profits only.
  •      Interest on advance. A partner, paid or advanced to the firnvbeyond the amount of capital, is entitled to interest thereon at the rate of six per cent per annum.
  •     To get indemnity. The firm shall indemnify a partner in respect of payment’s made and liabilities incurred by him, in the ordinary and proper conduct of the business and in doing such act, in any emergency.
  •      Application of property of firm. The property of the firm shall be held and used by the partners exclusively for the purposes of the business.
  •     Partner’s authority. Every partner has right to act on be­half of the firm. He has express and implied authority and
  •      Powers in an emergency. He has certain powers in an emergency.
  •      Reconstitution the constitution of a firm may be changed by the introduction of a new partner, death, retirement, insolvency, expulsion or by the transfer of a partner’s share to an outsider. The rights and liabilities of the incoming and outgoing partners have been stated in the sections 29 & 31 to 38. (See under “Reconstitution”
  •     Dissolution. A partner has the right to get the firm dissol­ved inider appropriate circumstances. Upon dissolution, the partners have the right to get accounts of the firm and surplus assets according to their shares.

Right to carrying on a competing business : By a special agreement, an outgoing partner can be prevented from carrying on a similar business within a specified period or local limits. But if there is no restraining agreement, an outgoing partner can carry on a com­peting business and may advertise such business. But, subject to contract to the contrary, he cannot use the firm-name, represent himself as carrying on the firm business or solicit the custom of the former buyers of the firm.

Right to share profits after retirement:    If after retirement (or death) and the continuing partners carry on the business of the firm with the property of the firm (without any final settlement of accounts) the outgoing, partner (or the legal representative of the deceased partner) is entitled to get share of profits or d% per annum of his share of the property of the firm, at their option.

Duties of Partners:

The important duties of partners are summarized below:

  •     Justice, Faithfulness, True Accounts, Full Information. Partners are bound to carry on the business of the firm to the greatest common advantages, to be just and faithful to each other, and to render true accounts and full information of all things affecting the firm to any partner or his legal representative.
  •     To pay indemnity. Every partner shall indemnify the firm for any loss caused to it by his fraud in the conduct of the business of the firm.
  •     To attend diligently. Every partner is bound to attend diligently to his duties.
  •     No remuneration. Subject to any contract to the contrary, a partner is not entitled to receive remuneration for taking part in the contract of the business.
  •     Equality of losses. Subject to any contract to the contrary, partners are bound to pay the losses of the firm equally.
  •     To pay indemnity for willful neglect. A partner shall indemni­fy the firm for any loss caused to it by his willful neglect in the conduct of the business of the firm.
  •     No private benefit.   A partner cannot use the partnership “properties, directly or indirectly, for his own benefit.
  •      To account for secret profit. 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.
  •     No secret profit. If a partner carries on any competing business of the firm, he shall account for and pay to the firm all profits made by him in that business.
  •     Unlimited liability. Every partner is liable for the acts of the firm done while he is a partner. The liability is joint and several.

Dissolution of Firms:

A firm may be dissolved on any of the following grounds:

  • By agreement. A firm gray be dissolved any of with the consent of all the partners of the firm Partnership is created by contract, it can also be terminated by contract.
  • Compulsory Dissolution.
  • A firm   is dissolved
  1. by the adjudication of all the partners or of all the part­ners but one as insolvent, or
  2. by the happening of any event which makes the business of the firm unlawful.

But if a firm has more than one undertaking, some of which be­come unlawful and some remain lawful, the firm may continue to carry on the lawful undertakings.

 On the   happening of   Certain   Contingencies

Subject to contract between the partners firm is dissolved

  1. if constituted for a fixed^ term, by the expiry of that term
  2. if constituted to carry out one or more adventures  or undertakings, by the completion thereof:
  3. by the death of a partner
  4. by the adjudication of a partner as an insolvent.

The partnership agreement may provide that the firm will not be dissolved in any of the aforementioned cases. Such a provision is valid

a By notice:

Where the partnership is at will, the firm may be dissolved by any partner giving notice in writing to all other partners of his intention to dissolve the firm. The firm is dissol­ved as from the date mentioned in the notice as the date of dissolu­tion, or, if no date is mentioned, as from the date of communication, of the notice.

a Dissolution by the Court:

At the suit of a partner, the court may dissolve a firm on any one of the following grounds:

a. Insanity:

If a partner has become of unsound mind. The suit for dissolution in this case can be field by the next friend of the insane partner or by any other partner.

b. Permanent incapacity:

If a partner becomes permanently incapable of performing his duties as a partner. Permanent incapacity may arise from an incurable illness like paralysis. In Whitwell v. Arthur a partner was attacked with paralysis which on medical evidence was found to be curable. Dissolution was not granted.

The suit for dissolution in this case must be brought by a partner other than the person who has become incapable.

c. Guilty Conduct:

If a partner is guilty of conduct-which is likely to affect prejudicially the carrying on of the business, regard being had to the nature of the business. To justify dissolution under this clause the misconduct must be of such a nature as to affect adversely the particular business concerned. Misconduct which affects one business may not affect another business. Therefore the court must take into account the nature of business that1 the partnership carries on. The test generally applied is whether the act complained of is likely to affect the credit and custom of the particular business.

The suit for dissolution on the ground mentioned in this clause must be brought by a partner other than the partner who is guilty of misconduct.

Examples:

  •     The partner of a firm of solicitors was convicted of traveling on the railway without a ticket and with intent to defraud. It was held that since the conviction was for dishonesty, it was likely to be detrimental to the partnership business and dissolution was granted. Carmichael v. Evans.
  •     In English cases dissolution has been granted for the following acts conviction for an offence involving moral turpitude ; misapplica­tion of the monies of a client by a solicitor ; adultery by a doctor ; speculation in shares by the partner of a regular mercantile business.
  •     Persistent Breach of Agreement. If a partner willfully and persistently commits breach of the partnership agreement regarding management, or otherwise conducts himself in such a way that it is not reasonably practicable for the other partners to carry on business in partnership with him.

The suit for dissolution in cases coming under this clause is to be brought by a partner other than the partner guilty of the acts complained of.

Example:

In English cases the following acts have been held to be suffices ground for directing dissolution: refusing to account for monies received taking away the books of account; the application of monies belonging to the firm in payment of his private debts; continued quarrelling, and such a state of animosity as precludes reasonable hopes of reconciliation and friendly co-operation Transfer of whole interest. It a partner has transferred the whole of his interest in the firm to an outsider  or has allowed his interest to be sold in execution of a decree.

Transfer of a partner’s interest does not by itself dissolve the firm. But the other partners may ask the court to dissolve the firm if such a transfer occurs. Only the transfer of the entire interest of the partner gives ground for action. The transfer of a part of the partner’s interest does not provide any ground for dissolution. The formation of a sub-partnership is, therefore, not a ground for dissolution.

The suit for dissolution on the ground mentioned in this clause must be brought by a partner other than the partner whose interest has been transferred or sold.

Loss:

If thy business of the firm cannot be carried on except at a loss. Since the motive, with which partnerships are formed, is acquisition of gain, the courts have been given discretion to dissolve a firm in cases where it is impossible to make profits.

Just and Equitable clause:

If the court considers it just and equitable to dissolve the firm. This clause gives a discretionary power to the court to dissolve a firm in cases which do not come within any of the foregoing clauses but which are considered to be fit and proper cases for dissolution.

Dissolution has been granted under the clause in the following cases deadlock in the management; partners not on speaking terms; disappearance of the substratum of the business.

Conclusion:

Under the above discussion, we can say that partnership business is a legal business and its partners are also legal. Because they have to perform some formalities. But except these the most important thing of this business is belief. Without belief everything is baseless. As the partnership business is consist of some partners. So, the partners must be honest and faithful to each other. If there is lack of perfect relationship among the partners the business must be dissolve. So, we can say that “Partnership Business is a Business Based on Fiduciary Relationship.”

Partnership Business

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