There can be different kind of partners. State briefly about any five kinds of partners.
Explain the concept of Partnership by holding out
Partner by estoppel or holding out:
The circumstances under which a person may be held liable for the acts of a firm, without being its partners
Doctrine of ‘holding out’
Holding out means “to represent”. Strangers, who hold themselves out or represent themselves to be partners in a firm, whereby they induce others to give credit to the partnership are called “partners by holding out” or partnership by estoppel. The object of the above stated rule, obviously, is to prevent frauds to which creditors would otherwise be exposed.
The principle of ‘holding out’ has been recognised by Sec. 28 of the Indian Partnership Act.
“Anyone who by words spoken or written or by conduct represents himself, or knowing permits himself to be represented, to be a partner a firm, is liable as partner in that firm to anyone who has on the faith of any such representation given credit to the firm, whether the person representing himself or represented to be a partner does or does not know that the representation has reached the person so giving credit”.
In order to hold a person liable as a partner-though in fact he may not be one on the basis of holding out, it must be established:
(a) That by words or conduct he represented himself to be a partner or knowingly permitted himself to be represented as a partner to anyone and,
(b) That the other person acting on the faith of the representation gave credit to the firm.
Effects of holding out: The partner by estoppel or holding out becomes personally liable for the acts of the firm. But he does not become a partner in the firm and is not entitled to any rights or claim upon the firm. An outsider, who has given credit to the firm thinking him to be a partner can hold him liable as if he is a partner in that firm.
Example: A retired businessman of some repute assumed the honorary presidentship of the business of certain persons who requested him for the same. Held, he was liable for the debts of the firm to those who gave credit to the firm in the bona fide belief that he was a partner. [Lake v. Duke of Argyll, (1844) 6 Q.B. 477].
State the points of difference between A company and A partnership firm.
Distinction between A Company & A Partnership Firm
A company is a legal entity distinct from its shareholders. While a firm is a compendious name for all the partners. Both are forms of business organization:
| Company | Partnership Firm |
Formation | A company comes into existence only after registration under the Companies Act. | A partnership is formed by mutual agreement of all the partners. Registration is not compulsory. |
Legal Status | A company has a separate legal entity distinct from its members. | A partnership is collection of individuals. It does not have a separate legal entity. |
Number of Members | (i) The minimum number of persons required to form a company is 2 for private company (other than One Person Company) and 7 for public co. | (i) The minimum number of persons required to form a partnership is 2. |
| (ii) There is no maximum limit to the number of members in the case of public company. A private company cannot have more than 200 members. | (ii) As per Companies Act, 2013 the number of partners in a partnership firm carrying on any business should not exceed 50 persons. |
Liability of Members | The liability of the members is limited. | The liability of partners is unlimited. |
Agency of Members | A shareholder is not an agent of the company nor he is agent of other shareholders | Every partner is the agent of the firm and his partners for the purposes of the business of the firm. |
Transfer of shares | Shares can be transferred without the consent of other members. In a private company there are restrictions on transfer of shares. | No partner can transfer his share or interest in the firm without the consent of his co-partners. |
Stability | A company has perpetual succession. The death or insolvency of a member does not affects its existence. | A partnership comes to an end on the death and insolvency of its partners. |
Management | There is separation of ownership from management. The shareholders do not actually take part in the management of the company. The Board of Directors manage the company. | A partnership firm is managed by partners themselves. |
Powers | The general powers of the company are regulated by Memorandum of Association. It is difficult to change the objects. | The partnership agreement (deed) regulates the mutual rights and duties of partners only. |
Statutory Obligations | A company is required to comply with various statutory obligation. Such as compulsory audit, the holding of the meetings, the keeping of proper account books and registers, filing of annual returns etc. | A partnership 1 inn is not required to comply with any such statutory obligation. |
Interest | A member has no interest in the assets of the company. | A partner has an interest in assets of the partnership. |
PARTNERSHIP PROPERTY (SECS. 14 & 15)
What constitutes a partnership property depends upon the agreement between the partners? It is open to the partners to agree among themselves as to what is to be treated as the property of the firm and what is to be separate property of one or more partners. They can convert by mutual agreement, partnership property into separate property of an individual partner and vice versa. In the absence of any such agreement, the property of the firm according section 14, means—
(i) property originally brought into the common stock of the firm by the partners,
(ii) property acquired in the course of the business with money belonging to the firm;
(iii) the goodwill of the firm.
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.
Application of the property of the firm (sec. 15)
Subject to contract between partners, the property of the firm shall be held and used by the partners exclusively for the purposes of the business.
Goodwill:
1. Goodwill is not defined in the Partnership Act. Goodwill may be described as the advantage which is acquired by a firm from the connection it has built up with its customers and the reputation it has gained.
2. “The goodwill of business is the whole advantage of the reputation and connection formed with customers together with the circumstances whether of habit or otherwise, which tend to make such connection permanent. It represents in connection with any business of business product the value of attraction to customers which the name & reputation possesses.”
3. Goodwill is part of the property of the firm (Sec. 14).
Sale of goodwill after dissolution (sec. 55)
The rules relating to sale of goodwill upon dissolution of a firm are as follows:
1. In settling the accounts of a firm after dissolution, the goodwill shall, subject to contract between the partners be included in the assets, and it may be sold either separate or along with other property of the firm. [Sec. 55(1)]
2. The rights of the buyer and seller of the goodwill are as follows:
(a) Seller’s rights: After the sale of goodwill, the seller i.e., the partner of the dissolved firm,
(a) may carry on a business competing with that of the buyer of goodwill, and
(b) may advertise such business. [Sec. 55(2)].
But subject to agreement between him and the buyer, the seller of goodwill that is, partners of the dissolved firm may not:
(i) use the firm name,
(ii) represent themselves as carrying on the business of the old firm, and
(iii) solicit the customers of the old firm. [Sec. 55(2)]
(b) Buyer’s rights: On the purchase of goodwill the buyer gets the (I) right to carry on the same business under the old name and (II) to represent himself in continuing the business and solicit former customers of the business and restrain the sellers of the goodwill from doing so.
3. But any partner of the dissolved firm may make an agreement with the buyer that such partner will not carry on a business similar to that of the firm within a specified period or within specified local limits, provided the restrictions imposed are reasonable. Sec. 55(3)
Rohit is not a partner in a particular firm. But, he represents himself or knowingly permits himself to be represented as a partner of that particular firm to Sanjay, who on the faith of such representation gives credit to the firm. Is Rohit liable as a partner in the firm?
Partner by estoppel or holding out:
The circumstances under which a person may be held liable for the acts of a firm, without being its partners
Doctrine of ‘holding out’
Holding out means “to represent”. Strangers, who hold themselves out or represent themselves to be partners in a firm, whereby they induce others to give credit to the partnership are called “partners by holding out” or partnership by estoppel. The object of the above stated rule, obviously, is to prevent frauds to which creditors would otherwise be exposed.
The principle of ‘holding out’ has been recognised by Sec. 28 of the Indian Partnership Act.
“Anyone who by words spoken or written or by conduct represents himself, or knowing permits himself to be represented, to be a partner a firm, is liable as partner in that firm to anyone who has on the faith of any such representation given credit to the firm, whether the person representing himself or represented to be a partner does or does not know that the representation has reached the person so giving credit”.
In order to hold a person liable as a partner-though in fact he may not be one on the basis of holding out, it must be established:
(a) That by words or conduct he represented himself to be a partner or knowingly permitted himself to be represented as a partner to anyone and,
(b) That the other person acting on the faith of the representation gave credit to the firm.
Effects of holding out: The partner by estoppel or holding out becomes personally liable for the acts of the firm. But he does not become a partner in the firm and is not entitled to any rights or claim upon the firm. An outsider, who has given credit to the firm thinking him to be a partner can hold him liable as if he is a partner in that firm.
Example: A retired businessman of some repute assumed the honorary presidentship of the business of certain persons who requested him for the same. Held, he was liable for the debts of the firm to those who gave credit to the firm in the bona fide belief that he was a partner. [Lake v. Duke of Argyll, (1844) 6 Q.B. 477].
Briefly explain the difference between Partnership and Co-ownership
| Basis of Distinction | Partnership | Co-ownership |
1. | Agreement | It arises from an agreement. | It may or may not arise from an agreement. |
2. | Business | It is formed to carry on a business. | It may or may not involve carrying on a business. |
3. | Profit or Loss | It involves profit or loss. | It may or may not involve profit or loss. |
4. | Mutual agency | Partners have a mutual agency relationship. | Co-owners do not have a mutual agency relationship. |
5. | Name of persons involved | The persons who form partnership are called partners | The persons who own some property jointly are called owners. |
6. | Maximum limit | The Maximum limit of partners is 10 for a banking business and 20 for any other business. | There is no maximum limit of owners. |
7. | Transfer of interest | A partner cannot transfer his share to a stranger without the consent of other partners. | A co-owner can transfer his share to a stranger without the consent of other co-owners. |
8. | Right to claim partition | A partner has no right to claim partition of property but he can sue the other partners for the dissolution of the firm and accounts. | A co-owner has the right to claim partition of property. |
9. | Lien on property | A partner has a lien on the partnership property for expenses incurred by him on behalf of the firm. | A co-owner has no such lien. |
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