Law of Partnership: How much is Practical?

 

Introduction

The Law of Partnership regulates by the “Partnership Act, 1932”. According to section 4 of the Act “Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.” The members of a partnership are jointly known as the partnership firm and individually known as partners. For running a partnership there are so many limitations, obligations, rights and duties but it is easier to create.

Essential Elements of a Partnership

ü  Agreement & Membership: For beginning a partnership minimum of two persons are required but not exceed ten persons and an agreement is the basic instrument which must be made between the parties. It is said that no agreement, no partnership.

ü  Sharing of Profits and Loss: The major purpose of a partnership is to share profits as well as losses as it was said in the agreement.

ü  Mutual Agency & Consent: The “Mutual Agency” is a must. A partnership is directed by all the partners. So, individually every partner is a principal as well as an agent and the act of any partner affects others also the firm. “Mutual Consent” is mandatory for transferring the interest of the firm to any third party. Again, it is needed for making any decisions and for regular activities.

Requirements of Becoming a Partner

As the partnership arises from a contract, it can be said that any person who has the capacity to make a contract, can be a partner also. Such as:

ü  Adult: The person should be an adult; in Bangladesh, it determines 18 years.

ü  Sound mind: A person, who has the capacity to understand the nature and content of the contract.

ü  Woman: An adult woman can be a partner.

ü  Not Disqualified by Law: A person, who is not disqualified by law of making any contract.

 

The following persons cannot be a partner –

ü  Minor: A person, who is under 18 years old 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. Such a minor gets all the benefits of the partnership.

ü  Person of Unsound Mind: A person, who has not the capacity to understand the nature and content of the contract.

ü  An Alien Enemy: An alien enemy cannot enter into a contract of partnership with a citizen of Bangladesh. Such as a Pakistani cannot enter into a contract with me as Pakistan is the permanent enemy country of Bangladesh.

 

Classification of Partnership:

v  Based on duration, the partnership is classified in two ways:

ü  Partnership at will: It exists as per the will of the partners.

ü  Particular Partnership: It is created for a specified time to carry on a certain project.

 

v  Based on liability, the partnership is classified in two ways:

ü  General Partnership: In this partnership, partners have unlimited and joint liabilities. All the parties can take part in the management and they are bound by the acts of one another as well as of the firm.

ü  Limited Partnership: In which all the parties have limited liability except one partner. It is easy to set up because it does not require any fees or processes.

Types of Partners: Partners can be divided into 3 classes based on their liabilities and participation- 

•   Active Partner: An active partner contributes to all the work, gives much effort and works more than others.
• Nominal Partner: He is neither active at any work nor entitled to profit or loss. But only invest there and his liabilities are the same as those of Active Partners.
• Sub-Partner: The person who accepts a share of a partner’s interest from a regular partner is called a Sub-Partner. His rights and privileges are limited.

 

Registration of Partnership Firm

The registration of a partnership firm is not mandatory and an unregistered firm is not an illegal association. But it affects getting certain rights. The firm can be registered at any time even after the partners have agreed to dissolve the firm. It can be registered by sending by post or delivering a statement in the prescribed form and accompanied by the prescribed fee to the Registrar of Firms of the area in which it is situated, stating the following particulars;

(i) The firm name;

(ii) The place or principal place of business of the firm;

(iii) the names of any other places where the firm carries on business;

(iv) the date when each partner joined the firm;

(v) the names in full and permanent addresses of the partners and

(vi) the duration of the firm.

The statement shall be signed by all the partners. On receipt of the statement and fees, the Registrar records an entry of the statement in a register called the Register of Firms and files the statement after that it is considered registered.

Consequences of Non-registration of Partnership Firm

Registration gives some privileges related to rights & non-registration refrains from those such as Any non-registered firm cannot file a suit against a third party for breach of contract. Without registration, a firm cannot claim a set-off against any action brought to the firm by a third party having a value of more than tk. 100. An aggrieved partner of the non-registered firm can not take any legal action against any partner or against the firm.

Rights of Partners

Generally, the rights and duties of partners are contained in the agreement but in case of the non-existence of the provision, the rights as provided by the Partnership Act, 1932 should apply and the major rights are below:

ü  Rights Relating to Individual

Each partner has the right to take part in the business proceeding and also has the right to be consulted. The majority of the decision should be final. A partner has access to check the papers of the firm. Every partner has the right to act on behalf of another partner or the firm. Making a fresh agreement after the end of any partner’s interest is a right of an individual. An individual can use the property of a firm for the purpose of business.

ü  Rights Relating to Firm

A right of getting the equal or proportionate profit of earnings and interest on capital as it was said in the agreement. Getting a Maximum of 6 per cent interest annually from the advance money is a right and has a right to dissolve the firm with the consent of others.

 

Duties of Partners

Being honest about any activities of the firm is the first and foremost duty of a partner. To Perform one’s duty with sincerity. Taking advantage as well as taking losses is absolutely a compulsory duty. Not using the property of a firm for one’s own benefit is also a duty and one should not take any secret profit from the firm. Confidentially he cannot transfer his interest to a third party. Lastly, Performing all the liabilities with a devotion which is dedicated to him is an obligatory duty of a partner.

 

Deed of Partnership

A partnership deed is a document that outlines in detail the rights and responsibilities of all parties to a business operation. It has the force of law and it is helpful in preventing disputes.

Contents of Partnership Deed

I. Name of the Partnership;

 II. Contributions to the Partnership;

 III. Allocation of Profits, Losses and Draws;

 IV. Partner’s Authority;

V. Partnership Decision Making;

VI. Management Duties;

VII. Admitting New Partners;

VIII. Withdrawal or Death of a Partner;

 IX. Resolving of Disputes;

 X. Signature and Authorization.

 

Dissolution of Firms

Dissolution of a firm is the process by which the existence of a partnership firm comes to an end and the complete breakdown of relations among all the partners and the business is closed down.

There are some grounds by which a firm can be dissolved and these are below;

ü  By Agreement: A firm can be dissolved at any time with the mutual consent of all the partners of the firm.

ü  Compulsory Dissolution: A firm can be dissolved by the insolvency of all the partners or except one or by the business becoming unlawful happening of any event.

ü  On the happening of Certain Contingencies: A firm can be dissolved on the happening of some certain events

(i) by the death of a partner;

(ii) by one’s insolvency;

(iii) by the expiry of a fixed term as it was constituted;

(iv) by the completion of the carry-out.

    ü  By Notice: Partnership constitutes basically with the will of partners. So, when a partner wants to dissolve the partnership firm, he has to give the notice to others.

ü       ü Dissolution by the Court: Dissolution of firm is necessary when there arises a difference of opinion between the partners regarding the matter of dissolution. Then the court can decide with its discretionary power and the grounds are these; insanity, permanent incapacity, guilty conduct, persistent breach of agreement, transfer of whole interest, continues loss or just and equitable clause. 

The Consequences of Dissolution

After dissolving a firm there are some liabilities left to be performed by the partners of the firm and these are mentioned below:

(i) Acts should be done after Dissolution: When a firm is decided to be dissolved but the public notice is not given yet, during that time the partners are liable to do all the activities they were involved in.

(ii) Winding up: It means full closing of all the objects. After the dissolution of the firm, their assets and properties should be assembled together then all the debts and liabilities should be divided and the surplus should be distributed among them.

(iii) Share Personal Profit: As long as the winding up is in process, any partner should not make any personal profit which arises related to the firm rather it must be shared with others and is based on his honesty.

(iv) Rescinded for fraud or misrepresentation: When a contract creating partnership is rescinded on the ground of fraud or misrepresentation of any of the parties thereto, the party is entitled to rescind is, without prejudice to any other right is entitled to lien, subrogation and indemnification.

(v) Restraint from use of Firm-name or Firm-property and restraint of trade: After dissolution, no partner can use the firm-name or firm-property for a similar business for his own benefit until wound up is completely done. But a partner can use the name only by purchasing the goodwill of the firm. Similarly, they can make an agreement not to do a similar business or within the locality for a specified period.

Practical Usages of the Law of Partnership

The Partnership Act, of 1932 defines partnership more than what is needed to execute a partnership firm. Basically, it is easy to make a partnership with the free consent of two or more parties make an agreement (which is also known as the deed) with the existence of a witness signing on the deed thereupon it is considered a Partnership Firm. But there are some shortcomings in the practical application of this law and those are mentioned below-

• Shortage of proper execution of the Partnership Act: The authorized authority is not concerned enough to enforce the law properly.
• Lack of modification of Partnership Act: Since it was made many years ago, it needs to be up to date with the present perspective.
• Reluctance of practising of law: Although the law is sufficient but the parties do not follow it properly as a result dispute arises and the firm is not able to make the expected progress and the law is losing its applicability day by day.

 

Conclusion

The Law of partnership is needed for the betterment of a developing country like Bangladesh. If we people follow the law in its proper way then it is possible to develop our country by inspiring from one business to become an entrepreneur and increasing business sectors. And it would be easier to reduce unemployment at a massive rate. Finally, it should be supervised by the authorized authority and their work should be done with sincerity to which they are entitled.

This Article is written by Farzana Suvra, Student of the Department of Land Management and Law, Jagannath University, Dhaka