Partnership Property: A Case Law Derivative

PARTNERSHIP PROPERTY:

      A CASE LAW DERIVATIVE

Introduction

‘Partnership’ is the relation between the persons who have agreed to share the profits of a business carried on by all or any of them acting for all. As per the Indian Partnership Act, 1932; the term partnership defined under section 4 is like this: “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.” This assignment is focusing on the topic of partnership property.

The term partnership property has been defined in section14 of the Indian Partnership Act, 1932. Generally property of a firm includes-

(i)                  All property and rights and interests in property originally brought into the stock of the firm.  

(ii)                All property and rights and interests in property acquired by purchase or otherwise by or for the firm in the course of business of the firm.

(iii)               The goodwill of the business.[1]

Section 15 of the said Act also throws light upon the concept of application of the property of the firm. It lays down that the property of the firm may be held and used by the partners of the firm exclusively for the business of the firm.

Now, as the contents of the assignment has been already made clear out here, what we discuss further in the coming pages are the various discussions arising out of the concept of partnership property and its applications.  

Partnership Property

What is Partnership?

Partnership is the result of agreement. In partnership, there is a mixture of profits and losses. A partner is the agent of other partners. A partner is not entitled to transfer his interest to a third person so as to substitute him in his place. A partner has no right to get a partition of the partnership property in special, but only after the dissolution of the partnership he can have it sold. Also a partner has more extensive remedies against his co-partners. It is defined in section 4, Indian Partnership Act 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”.

 It is a creation of contract between the parties; and the rights and liabilities of the parties to a partnership are enforceable by and against them individually. In a partnership of banking business there cannot be more than 10 partners while in any other kind of business there cannot be more than twenty. The liability of partners is unlimited and is not limited only to the extent of their share in partnership property. The individual partners of a firm have a right to take part in the management of the business of the firm. A partner can sue his fellow partner if he is excluded from the business. In partnership, subject to a contract between the partners, a partner cannot transfer his share and impose an undesirable person as the head of other partners. Each partner is the agent of the firm and binds the firm by all his acts done on behalf of and within the scope of the business of the firm. The death of a partner on the assignment of his interest dissolves the partnership. In the case of partnership the members can be sued individually and also in the name of the partnership firm.

The expression ‘partnership’ as also the expressions ‘firm’ and ‘partner’ have the same meaning under the income-tax law as is assigned to them under the Partnership Act, except to this extent that ‘partner’ shall also include any person who, being a minor, has been admitted to the benefits of partnership.

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Capital of partnership

Capital of a partnership refers to the aggregate of the sums contributed by its members for the purpose of commencing or carrying on the partnership business, and intended to be risked by them in that business.[2] The capital of a partnership is  a sum fixed by the agreement of the partners; as the actual assets of the firm vary from day to day, and includes everything belonging to the firm and having any money value. The capital of each partner is not necessarily the only item to be considered in ascertaining the amount due to him from the firm. Not only may he owe the firm money so that less than his capital is due to him; but the firm may owe him money in addition to his capital e.g. for money advanced by him to the firm by way of loan, and not intended to be wholly risked in the business. The distinction between a partner’s capital and what is due to him for advances by way of loan to the firm is frequently very material.  The amount of each partner’s capital is always ought to be accurately stated, in order to avoid disputes on a final adjustment of account. This is more important where the capitals of the partners are unequal, for if there is no evidence as to the amounts contributed by them, the shares of the whole assets will be treated as equal.[3] It is also to be noted that unless any 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.

Whether property used by partnership is partnership property?

It is not necessary that every partnership for the purpose of its business should own and utilise its own partnership property only. It can also utilise the property owned by others for the purpose of its business. Such a property would become partnership property only if there is an agreement, express or implied that the property under the agreement of partnership to be treated as the partnership property. Therefore, for a property to become the property of a firm it must have been brought into the 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.[4]

 A property becoming partnership property in the absence of a contract to the contrary.

In the absence of any agreement between the partners the property shall be deemed to be partnership property in the following cases:

(1) Whether it is originally brought into the common stock of the firm; or

(2) Whether it is acquired by purchase or otherwise, or for the firm; or

(3) Whether it is acquired for the purpose and in the course of the business of the firm.

The matter came up for consideration in Addanki Narayanappa v. Bhaskara Krishnappa,[5] before the Supreme Court and the nature of the interest of a partner in the partnership property during the subsistence of partnership. After its dissolution was fully discussed, it was laid down from the provisions of sections 14, 15, 29, 32, 37, 38 and 48 making it clear that whatever may be the character of the 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 partnership it becomes the property of the firm. 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. During the subsistence of the partnership, no partner can deal with any portion of the property as his own. Nor can he assign his interest in a specific item of the partnership property to any one. His right is to obtain such profits, if any, as fall to his share from time to time, if any, upon the dissolution of the firm to a share in the assets of the firm which remain after satisfying the liabilities set out in clause (a) and sub- clauses (i), (ii), and (iii) of clause (b) of section 48. 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 in, would cease to be the exclusive property of the person who brought it in. It would be the trading assets of the partnership in which all the partners would have interest in proportion to their share in the joint venture of the business of partnership. The person, who brought it in, would, therefore, not be able to claim or exercise any exclusive right over any property which he has brought in. He would not be able to exercise his right even to the extent of his share in the business of the partnership. It is true that even during the subsistence of the partnership a partner may assign his share to another. In that case what the assignee would get would be only that which is permitted by section 29 (1), that is to say, the right to receive the share of profits of the assignor and accept the account of profits agreed to by the partners.[6]

 Essentials of property of the firm.

The property belonging to a person in the absence of an agreement to the contrary 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 S. 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.[7]

Presumption about partnership property

To constitute partnership property it is not necessary that the property should be purchased for the purposes of the partnership business.[8]

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.[9]

Property of a partner, does not become partnership property merely on his permitting it to be used in partnership business.[10]

Rules in coming for the conclusion whether property is partnership property.

The following rules may be taken as guiding factors in determining whether a particular property is partnership property or not:

(i) All property, rights and interests which the partners have thrown into the common stock at the beginning of the business or subsequently contributed by them or acquired by means of common funds are to be regarded as property of the firm.

(ii) Property purchased with money belonging to the firm, is deemed to be the property of the firm.

(iii) The mere fact that a particular property is used for the purposes of the firm does not necessarily make it a partnership property.

Persons may be partners in a business but may not be so in the property with the help of which the business is carried on and may only be co-owners in such property. Davis v. Davis,[11] is an illustration of the above proposition. In this case a testator devised his residuary estate, comprising his business, the freehold premises uses on which it was carried on, and some adjoining freehold premises to his sons as tenants in common. The sons continued the business and raised funds on various occasions on the security of these premises for the business and used the money in the business, mainly in the purchase of new plant and machinery. It was held that the sons were partners in the business but that the premises belonged to them as co-owners. In another case Phillips v. Phillips[12] public houses were devised to persons who carried on a brewery in partnership and it was held that such houses did not become partnership property though used for the purposes of partnership.

The partners can by agreement amongst themselves convert that which was partnership property into the separate property of an individual partner or vice versa. Such an agreement may be express or implied or may be oral or in writing.

In case the separate property of a partner has been consistently used in the business it will be presumed that such property has been thrown in the common stock and has become property of the firm. Similarly if co-owners of land form a partnership and the land is merely necessary to their trade, and is treated as part of the common stock of the firm, the land will be partnership property.[13]

It was thus held in the under mentioned case that a contract of agency between a firm of managing agents of a limited company and the company itself could not be regarded as asset of the firm, as the contract being determinable at any time by the company.[14]

  Tests to prove Partnership Property.

The following tests may be applied in coming to the conclusion whether a particular property is partnership property or not:

A partnership agreement provides that the land or building shall remain the property of one partner but it is used by the firm which pays all outgoing, as the presumption is that the firm has the tenancy for the duration of partnership. The main test whether a property is partnership property is by knowing the intention of the parties as gathered by the partnership agreement and all the circumstances in which the property was purchased.[15]

The following factors may be taken into account while determining whether particular property is a partnership property:

(a) Whether the property was acquired for partnership purpose in the course of the business of the firm;

(b) Whether it was purchased with the assets of the firm;

(c) Whether it was acquired by or for the firm;

(d) Whether it was put to the use of the firm and treated as the property of the firm;

(e) Whether it was entered and carried on in the books of the firm as the property of   the firm;

(f) Whether it had been thrown into the partnership stock.

The ultimate test determining whether the property is the partnership property the intention of the parties or the agreement between the partners. In the absence of such an agreement, the property would be deemed to be he property of the firm, that is, partnership property, in the following cases:

(a) If it is originally brought into the stock of the firm; or

(b) If it is acquired, by purchase or otherwise by or for the firm; or

(c) If it is acquired by purchase or otherwise, for the purpose and in the course of the business of the firm; or

(d) In the absence of a contrary intention, if it is acquired with money belonging to the firm.

It follows that, for the proper determination of the question whether a particular property is or is not the property of the firm, the court, in the first instance, has to see: Whether the partners have by their agreement, determined among them whether it shall not be the property of the firm? If there is such an agreement, the same governs the matter. But, if there is no agreement, attention has to be paid to:

(a) The source whence the property was obtained

(b) The purpose for which it was acquired ; and

(c) The mode in which it has been dealt with.

Sections 20 to 28 of the English Partnership Act 1890 deal with what is partnership property.

Underhill[16] explains the law with regard to partnership property as follows;

“Difficult questions frequently arise whether property is the property of the firm, or of individual partners; for property may be used for purposes of the partnership and yet may not be part of the partnership property.

For instance, the building in which a business is carried on frequently belongs to one partner only, and the firm pays him a rent for the use of it. And where the building is declared by the partnership deed to be the property of one of the partners, and the deed, though providing generally for payment of all rent of profits contains no reference to the tenancy of the particular building, the Court will infer a tenancy by the partnership, not a tenancy at will or a yearly tenancy which would give the partner owning the property power to turn the other partners out before the end of the partnership”.[17]

Moreover, persons may be mere co-owners of property and may yet be partners in the profits made from its use.

On this matter section 20(3) of the Partnership Act states:

“Where the owners of an estate or interest in any land or in Scotland of any heritable estate, not being itself partnership property, are partners as to profits made by the use of that land or estate, and purchase other land or estate out of the profits to be used in like manner, the land or estate so purchased belongs to them, in the absence of an agreement to the contrary, not as partners, but as co-owners for the same respective estates and interests as are held by them in the land or estate first mentioned at the date of the purchase”.

A further rule as to partnership property is contained in section 21 of the Partnership Act, 1890, which states

“Unless the contrary intention appears, property bought with money belonging to the firm is deemed to have been bought on account of the firm.”

Thus, in Wray v. Wray,[18] the facts of the case were : William Wray carried on business under his own name. He took into partnership his sons Henry Wray and William James Wray, and also Joseph Turnbull. The business was still carried on in the name of “William Wray”. William Wray died in 1885, and his widow, Eliza Wray, became a partner. In 1890 the partners bought North Hill House, Highgate, and the purchase price was paid out of the partnership assets. The property was conveyed to “William Wray”, this name being signed by Henry Wray with the concurrence of the other partners. Henry Wray retired and received the full value of his share of the partnership assets. He died in 1902. The three continuing partners sought a declaration that the conveyance of North Hill House to “William Wray” passed to the persons carrying on business under the style of “William Wray” i.e. the continuing partners and the late Henry Wray as part of the partnership property, because it had been purchased out of the partnership assets.

It was held by the Chancery Division that the declaration would be granted.

The point as to whether property is partnership property is often of great importance;

(1) As between the partners themselves; because an increase in the value of partnership property belongs to the firm, whereas if the property is the property of an individual partner the increased value belongs to him only,

(2) As between the creditors of the firm and the creditors of the individual partners in the event of the firm becoming insolvent, as will be shown in a subsequent Chapter; and

(3) As between the persons who take a deceased partner’s real estate and those who take personal estate; because his interest in partnership land is personally and not reality.

In short, the question whether property has become partnership property or not, is always a question of fact, and generally one of a very difficult nature, in which one must endeavour to ascertain whether it has been treated by the partners as part of the common stock, or merely used, either at a rent or by gratuitous licence, as ancillary to the carrying on of the business.

Clarke[19] carried on business as a photographer at premises of which he owned the lease for seven years from 1948. In 1950 he and Miles, who was a freelance photographer entered into partnership by which all the profits were to be shared equally. Miles brought with him his personal connection. The partners quarrelled, and a dispute arose as to whether the following items constituted partnership property;

(i) the consumable stock-in-trade

(ii) the personal connection brought in by each partner

(iii) the lease of the premises

(iv) the furniture, fittings and equipment of the studios.

It was held by the Chancery Division that no more agreement between the parties should be supposed that was absolutely necessary to give business efficacy to the relationship between the parties. Accordingly, since the only agreement was as to the share of the profits only the consumable stock-in-trade should be regarded as partnership property.

Again, in Davis v. Davis,[20] partners in a business borrowed money on the security of some property of which they were tenants-in-common. They expended the money partly in erecting on a small part of the mortgaged property workshops as an addition to works in which they carried on the partnership business, and which also belonged to them as co-owners.

It was held by the Chancery Division that the workshops did not become partnership property, for there was no evidence that the parties had such an intention.

Further, in Waterer v. Waterer,[21] a nursery man carried on business on a piece of freehold land belonging to him in fee simple. On his death he devised all his property to his three sons as tenants-in-common. They continued the nursery business in partnership, and out of money belonging to the father’s estate completed the purchase of adjacent land which he had agreed to buy. The land was also used in the business. Two of the sons then purchased the share of the third son in the land and the business and continued the business. One of the two sons died and the question arose as to whether the land was partnership property.

Held, that it was partnership property.

Role of partners in Partnership Property

 All the partners are joint owners or co-owners of the entire partnership property and each partner is co-owner of the entire property. Therefore, it cannot be said that a partner who receives partnership property is entrusted with property or with dominion over property belonging to another person. Nor can it be said that a partner receiving partnership property is entrusted with his co-partner’s share of that property. What share his co-partner has, will be known only on dissolution and accounts. It follows that during the subsistence of the partnership there cannot, except by special agreement be any entrustment of a partnership property with a partner.

Interest of partners

 Whether partners are co-owners in building owned by partnership:

It has been seen under various circumstances that the partners, inter se among themselves cannot be equated to that of co-owners for the purpose of holding that as a house belongs to a partnership as its asset, a partner can be regarded as a co-owner of that property and in that sense he should be held to be a full owner the thereof within the meaning of the Rent Control legislation. The only right that the partners have is a share in the profits as long as the partnership runs and a share in the surplus assets in the winding up of the partnership business.

Even assuming that the property in question was in the hands of the firm which was illegal for some time before it is converted into a limited company, the rights cannot be adjudged on the basis of the past even which is no longer in existence for deciding the rights of the parties at present. It is enough if the Courts have ruled that the members of partnership or a company hit by this section can, however, have beneficial interest in the property. If the partnership agreement is illegal, the Court cannot adjudicate in respect of such contract which the law declares to be illegal.

Interest of partners in partnership property after dissolution:

The property, whatever may be the character of it, 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 a partner for what he is entitled to, is his share of profits, if any, accruing to the partnership from the realisation of this property, is entitled and to a share upon dissolution of the partnership, 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 as his own. Nor can he assign his interest in a specific item of the partnership property to any one. His right is to obtain such profits, if any, as fall to his share from time to time, and upon the dissolution of the firm to a share in the assets of the firm which remains after satisfying the liability set out in clause (a) and sub clauses (i), (ii) and (iii) of clause (b) of section 48. It has been stated ‘what is meant by the share of a partner in his proportion of the partnership assets after they have been all realised and converted into money, and all partnership debts and liabilities have been paid and discharged. Thus it is, on this only which on the death of a partner passes to his representatives, or to a legatee of his share.. . . and which on his bankruptcy passes at his trustee.[22]

Whether relinquishment of a partner’s interest in the partnership requires a registration.

The share of a partner in partnership property is held as moveable property and as such relinquishment of such share does not require registration. A full bench of the Lahore High Court in the case of Ajudhya Parshad v Sham Sundar, AIR 1947 Lah 13 (F.B.) ruled that the interest a partner in partnership assets comprising of moveable and immoveable property is moveable property.

Whether registered deed is necessary to transfer property to partnership.

 On a reading of S. 14 of the Indian Partnership Act, 1932, it would be clear that all property and rights and interests which the partners, may have brought into the common stock as their contribution to the common business are parts of the partnership property. Even if the property contributed by a partner be immovable property no document, registered or otherwise, is required for transferring the property to the partnership.

The assessed-firm had five partners, M and his four sons. The four sons brought into the partnership a building and some cash. M contributed furniture and some cash. The E.T.O. refused the claim for depreciation on the building under S. 10(2) (vi) of the Indian I.T. Act, 1922 on the ground that no transfer of immoveable property consisting of the building and the land was made in accordance with the Transfer of Property Act, 1882, and that in the absence of registration of the transfer in favour of the firm, no title to the building passed to the turn. On appeals the A.A.C. and the Tribunal held that the building was Partnership property and the assessee was entitled to depreciation on the same. On a reference:

Held, that the deed of partnership of which four of the five partners contributed immoveable property as their contribution towards the assets of the partnership did not require registration and the firm was entitled to depreciation under S. 10(2)(vi) of the Act in respect of the building.[23]

Tenancy rights of the shop whether partnership property.

The nature of tenancy rights will depend on the terms of the partnership deed. The renewal of the lease by one of the partners does not affect the position, as long as the partnership is not dissolved, the tenancy rights remain the property of the firm. The tenancy right in a shop will be deemed to be partnership property and will be dealt with as other property the partnership at the time of the passing of the final decree.[24]

Property purchased by a partner with money advanced by the firm as loan not partnership property.[25]

Nor is property jointly owned by the partners, and used for the purposes the partnership business partnership property, unless the partners agree to make partnership property.[26]

Nor is property meant exclusively for the benefit of an individual partner, without any intention of its forming part of the partnership property.[27]

Where land is purchased out of the profits of land held in co-ownership, the profits being the subject-matter of partnership, such land does not become partnership property unless the co-owner expressly intend, it to be so.[28]

Where, however a property is acquired after dissolution, but before the affairs of the partnership are wound up, it will not be presumed to be partnership property, even though the partner acquiring it has continued to carry on the business of the dissolved

firm without the consent of his late partners.[29]

Goodwill

Lord Lindley defines “goodwill” as “the benefit arising from connexion and reputation”. This section includes goodwill in the ‘property of the firm’. The goodwill of a firm is a part of the property of the firm and can be sold either separately or along with the other property of the firm.

Section 14 of the Indian Partnership Act which defines the expression “property of the firm” makes it clear that the expression “property of the firm” includes the “goodwill” of the business. The term is nowhere defined but it is described as the advantage which is acquired by a business beyond the value of a capital stock, fund as acquired there in consequence of the general public patronage and encouragement which it receives from consent or habitual customers. What goodwill means must depend on the character and nature of the business to which it is attached. Generally speaking it means much more than the mere probability that the old customers will resort to the old place. Often goodwill is the very sap and life of a business without which the business will yield little or no fruit. It is whole advantage whatever it may be, of the reputation and connection of the firm, which may have been built up by years of honest work.

Lord Hersehell described the term “Goodwill” as follows

“It is the advantage which a person goes by continuing to carry on and being entitled to represent to the outside world that he is carrying on a business which has been carried on for some time previously.”

Dissolution of firm

It is necessary to consider the type of business and the type of customer which such a business is inherently likely to attract as well as all the surrounding circumstances. Thus, goodwill is composed of a variety of elements. It is a composite thing referable in part to its locality, in part to the way in which it is conducted and the personality of those who conduct it, and in part to the likelihood of competition etc.

It was necessary to take into consideration the totality of the surrounding circumstances, the nature of business, the possible advantages of the good name of the firm etc. As pointed out by the Supreme Court in R.C. Cooper v. Union of India[30] goodwill is a composite thing composed of a variety of elements including the conduct and personality of the partners, likelihood of competition, a good reputation, established connections, etc. Therefore, it depends upon a computation of the various circumstances like the location, service standing of the business and many other factors.

Conclusion

Partnership Property coming under the Indian Partnership Act is of greater relevance in the present monitory scenario as the nation is witnessing the emergence of various business ventures and corporate domains since the economic boom of trade activities. The legal provisions regarding partnership and its application skills help in a resolving a variety of issues arising in various fields of business as well contracts.

Bibliography

• S.D. Singh & J.P.Gupta, Law of Partnerships in India, Orient Law House, Third Revised Edition,(1988), at p.8.
• Justice K. Sukumaran, Mulla The Indian Partnership Act, Pollock & Mulla, Lexis Nexis Butterworths, Sixth Edition.
• H.R. Gokhale & Y.S. Chithale, The Sale of Goods & Partnership Act,  Pollock & Mulla, Tripathi, Fourth Edition.