Page 152 - DMGT407Corporate and Business Laws

Unit 6: Partnership Act and Limited Liability Act

Held, the arrangement did not make creditors partners with A in business [Cox v. Hickman, Notes
(1860) 8 H.L.C., 268].
Similarly, a servant or agent who receives a share of profits as his remuneration or the
seller of goodwill of a business who is given a share of profits as consideration for the sale
of goodwill are not by reason of such facts alone, partners.

5. Business must be carried on by all or any of them acting for all. Partnership is based upon
the idea of mutual agency. Every partner assumes a dual role – that of a principal and of an
agent. The foundation of the law of partnership is agency and it is therefore said that “the
law of partnership is a branch of the law of principal and agent”. Each partner is an agent
binding the other partners who are his principals and each partner is again a principal,
who in turn, is bound by the acts of the other partners. Thus the question whether a person
is or is not a partner depends on whether he can bind others by his acts or be bound by the
acts of others. It is not necessary that partner must actively participate in the conduct of the
business. Thus, it is possible to have a partnership, in which one or more of the partners
have management and control and some other partner is a sleeping a or dormant partner.

6.1.1 Other Legal Characteristics of Partnership Form of Organisation

Certain other important legal characteristics of partnership organisation are:
1. Unlimited liability. The liability of each partner of the firm is unlimited in respect of the
firm’s debts. The liability of partners is joint and several and therefore even one of the
partners can be called upon to pay the debts of the firm in case the firm’s assets are
insufficient.
2. No separate legal entity. The partnership firm has no independent legal existence apart
from the persons who constitute it.
3. Utmost good faith. A partnership agreement is based on mutual confidence and trust of
the partners. The partners must therefore be just and honest towards the other partners.
They must disclose all facts and render true accounts relating to the business of the firm
and not make any secret profits.
4. Restriction on transfer of interest. No partner can transfer his share to an outsider without
the consent of all other partners.

5. Unanimity of consent. No change may be made in the nature of the business without the
consent of all partners.

6.1.2 Formation of Partnerships

All the essential elements of a valid contract must be present in a partnership as it is based on an
agreement. Therefore, while constituting a partnership. The following points must be kept in
mind:
(i) The Act provides that a minor may be admitted to be benefits of partnership.

(ii) No consideration is required to create partnership. A partnership is an extension of agency
for which no consideration is necessary.
(iii) The partnership agreement may be express (i.e., oral or writing) or implied and the latter
may be inferred from the conduct or the course of dealings of the parties or from the
circumstances of the case. However, it is always advisable to have the partnership agreement
in writing.
(iv) An alien friend can enter into partnership, an alien enemy cannot.

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