Partnership Law: Determination Of Partnership Status And Liability Towards Third Party

Definition of Partnership as per Partnership Act 1963

Question:

Discuss about the Whether Status of Both Violet and Sonny.

Whether status of both Violet and Sonny is determined as partner of the Busy Bee, and whether any liability arises towards the Friendly Bank on part of Violet and Sonny in context of loan taken by Busy Bee Florist Shop?

Meaning of partnership is defined by Partnership Act 1963, and this section states that partnership is considered as relationship between two or more people who agreed to carry common business for the purpose of earning profit. This definition also includes incorporated limited partnership and external partnership. However, any relationship which exists between the company members cannot be considered as partnership, does not matter whether such relationship form as per the Act or not.

This is understood in other form also, as partnership is the relationship under which contract is signed by two or more parties for carrying on the common business to earn profit. Partners must intent to bind each other while entering into agreement which means relationship must be contractual in nature. It can also be considered in some other way also that partnership is the mutual participation by partners and partners must not create legal entity while creating the partnership. In case law Smith v Anderson (1880) 15 Ch D 247 at 273, James LJ held that ordinary partnership include those individuals who were enter into an contract for the purpose of bound themselves for joint object either for limited period of time or for indefinite period. Usually, partnership is for those who want to enter into a binding contract with each other.

Partnership law imposed restriction on maximum number of partners which can be entered into single partnership. However, firm name must be registered under the partnership Act (Partnership Act, 1963).

Law which governs the partnership is based on both statue law and case law. Partnership is also known as special type of agency because partners of the firm while carrying on the business of the partnership are acting as the agent of each other.

After considering above facts it is clear that agreement is the essential element for partnership, and such agreement must be legally enforceable.

Whether partnership exist or not is the most difficult issue which is determined by Court in number of cases and for this purpose section 7 of the Partnership Act 1963 defines rules through which Court can determine whether partnership exists or not. Details of section are stated below:

1. This section defines that rules for determining the existence of partnership are stated under clause 2 to clause 4 of section 7.
2. This clause defines the rule related to joint tenancy and common interest, which means any joint tenancy, common interest, joint property, and ownership in part does not result in partnership itself just on the ground that person held and owned something. Court considers the factor whether any profit shared by tenants or owners is earned through using these things held and owned by tenant or owner. This means that relationship of partnership does not exist on the basis that co-owners jointly held the property. In case law Davis v Davis [1894] 1 Ch 393, Court determine the issue related to relationship of partnership between two brothers who hold real estate property as joint tenants. In this business and three houses were left by father of brother’s after his death. Brothers decided to let one house and other two houses were used by brothers in their business. For the purpose of carrying on the business, two houses were used as security by brothers for getting loan and brothers also used the amount earned by the business was taken by brothers for their weekly expenses. In this case, court decided that there was relationship of partners between the brothers for the purpose of carrying on the business, and Court further stated that both the houses which were given as security will be considered as property of the partnership (Egert, 2007).
3. This clause defines the sharing of profits and gross returns, and as per this clause any sharing of profits and gross returns of partnership business does not considered as existence of partnership unless such return and profit is derived from the property in which person has common rights and interest. In case law Cribb v Korn (1911) 12 CLR 205, High court stated that there was no relationship of partnership, and it was just a tenancy. Court took this decision on the ground that owner of the land has exclusive right in the land and there was no common interest, and no right was available to Cribb to direct the actions of owner of land.
4. This clause defines the payments which were not considered while determining existence of partnership. As per this clause, in case any profit or return is received by the person from the activities of partnership business then such receipt can be considered as primary evidence for the purpose of determining the status of partnership. However, it must be noted that any receipt of such profit or return or any change occurred in the profit of the business shall not be itself considered as existence of partnership. Following are some payments which cannot be considered as primary evidence of sharing of profit.

Elements of Partnership Agreement

 

1. If any amount related to debt or any other amount in the form of installments as liquidated debt is received by the person or any other form of accruing profits then such person is not determined as partner of the firm and such person is also not liable for any debt of the firm towards the third party.
2. Any contract which is related to the remuneration of employee or agent of that person who is engaged in the day to day activities of the business by sharing business profits, then such employee and agent is not considered as partner of the firm and such employee or agent is also not liable for any debt of the firm towards the third party.
3. Any amount received by domestic partner and child of deceased partner in lieu of profit sharing of the business in way of periodic payments then such domestic partner and child of deceased partner is not determined as partner of the firm and such person is also not liable for any debt of the firm towards the third party (Sydney, n.d.).
4. If any person lends money to the person who is engaged in day to day activities of the business under contract which is made in writing and if such contract is signed by all relevant parties, and for this lending lender received share in profit then such lender is not determined as partner of the firm and such person is also not liable for any debt of the firm towards the third party.
5. If any portion of profit is received by any person in lieu of goodwill by way of periodic payments then such person is not determined as partner of the firm and such person is also not liable for any debt of the firm towards the third party.
6. This clause states the non-applicability of provisions of section 7 and as per these clause provisions of this clause is not applied on incorporated limited partnership (partnership Act, 1963).

In this case, busy bee florist shop is the partnership firm which is carried by two partners that is Mary and Rose. Business of firm is declined in last few months because of drought and unfavorable weather conditions. Because of this decline bank account of firm is overdrawn and friendly bank refuses to honor the cheques of this bank. Both Rose and Mary decided to take loan from their friends. Rose request Violet to give loan of $20000 to the busy bee and Violet agreed to give loan to busy bee in exchange of share in business profit or loss. Agreement related to loan of $20000 state following conditions:

• Violet has right to get 20% share in the profit and loss of the business.
• Books of the partnership business are checked by the Violet.
• Violet also has right to get statements related to partnership business on quarterly basis.
• Money given by violet is given in the form of loan and violet is not the partner of the firm.

Later, Mary request Sonny who is also the employee of the busy bee to give loan of $ 10000 and Sonny in lieu of this loan demand amount of 1/8^th share in the profit. Sony lend money to the business and after that Sonny receives both his salary and one eight share of net profit and losses.

After, considering above facts it is clear section 6 and 7 of Partnership Act 1963 is applied in this case, and through rules stated in section 7, status of both Violet and Sonny in busy bee is determined.

Clause 3 of section 7 defines the sharing of profits and gross returns, and as per this clause any sharing of profits and gross returns of partnership business does not considered as existence of partnership unless such return and profit is derived from the property in which person has common rights and interest. In other words, court stated that sharing of profit can be considered as proper evidence for determining the status of person in partnership, but it is not possible to determine partnership on the basis of this element only.

Clause 4 of section states any receipt of such profit or return or any change occurred in the profit of the business shall not be itself considered as existence of partnership.

Clause further states if any person lends money to the person who is engaged in day to day activities of the business under contract which is made in writing and if such contract is signed by all relevant parties, and for this lending lender received share in profit then such lender is not determined as partner of the firm and such person is also not liable for any debt of the firm towards the third party.

Restrictions on Number of Partners and Registration Requirements under the Partnership Act

In case Cox v Hickman [1860] 8 HL Cas 268, Court held if circumstances of any case clearly reveal that there is relationship of partnership between the parties then such lender is considered as partner of the firm and such lender is also known as partner of the firm and he is also liable towards the third party for its debt.

In this case, both violet and Sonny is the lender of the firm and both agreed to share profit and loss of the business but circumstances in both the case are completely different. In this, Sonny is not considered as partner of the business because if any person lends money to the person who is engaged in partnership business and receives share of profit in lieu of damage then such person is not considered as partner of the firm.

In case of violet all the circumstances of the case is considered because if circumstances of any case clearly reveal that there is relationship of partnership between the parties then such lender is considered as partner of the firm and such lender is also known as partner of the firm and he is also liable towards the third party for its debt. In this circumstance of Violet states that he is the partner of the firm such as he has right to inspect books, share profit and loss, and get quarterly statements.

Conclusion:

Sonny is not considered as partner of the business because if any person lends money to the person who is engaged in partnership business and receives share of profit in lieu of damage then such person is not considered as partner of the firm.

After considering the circumstances of the case, Violet is the partner of the firm such as he has right to inspect books, share profit and loss, and get quarterly statements.

References:

Cox v Hickman [1860] 8 HL Cas 268.

Cribb v Korn (1911) 12 CLR 205.

Davis v Davis [1894] 1 Ch 393.

Eggert, A. (2007). Defining a Partnership: The Traditional Approach Versus An Innovative Departure – Do Queensland Appeal Court Decisions Point to the Need for a Review of the Traditional Approach to Interpretation Adopted by Australian Courts. Viewed at: https://epublications.bond.edu.au/cgi/viewcontent.cgi?article=1332&context=blr. Accessed on 4^th October 2017.

Partnership Act 1963, Section 6.

Partnership Act 1963, Section 7.

Smith v Anderson (1880) 15 Ch D 247 at 273.

Sydney.edu. Partnership. Viewed at:https://www.google.co.in/url?sa=t&rct=j&q=&edata-src=s&source=web&cd=2&cad=rja&uact=8 ved=0ahUKEwic5ZPS5NbWAhUVSY8KHSAiAOEQFgguMAE&url=http%3A%2F%2Fsydney.edu.au%2Flec%2Fsubjects%2Fassociations%2Fnotes%2FSummer%25202010-11%2FTopic%25203%2520-%2520Partnership.doc&usg=AOvVaw1xHdiqSR8TyFCeX90YUPBO. Accessed on 4^th October 2017.