Indian Partnership Act
Mode of Determining the Existence of Partnership: Section 6
Parties rarely announce that they are partners. They sign an agreement calling themselves financiers, or managers, or joint venturers, and years later a creditor asks a court to hold them all liable. Section 6 tells the court how to decide: look at the real relation between the parties, as shown by all relevant facts taken together. It then adds two safeguards: sharing gross returns creates no partnership, and a share of profits is evidence but not conclusive, with five receipts expressly protected. This note explains the test and how it is applied.
Weighing the facts for and against, the five protected receipts, the two tests, and how a court approaches the question
1. The Provision
§ Section 6, in substance The main rule. In determining whether a group of persons is or is not a firm, or whether a person is or is not a partner in a firm, regard shall be had to the real relation between the parties, as shown by all relevant facts taken together. Explanation 1. The sharing of profits or of gross returns arising from property by persons holding a joint or common interest in that property does not of itself make such persons partners. Explanation 2. The receipt by a person of a share of the profits of a business, or of a payment contingent upon the earning of profits or varying with the profits earned by a business, does not of itself make him a partner with the persons carrying on the business; and in particular, the receipt of such share or payment by a lender, a servant or agent remunerated by a share of profits, a widow or child of a deceased partner by way of annuity, and a previous owner or part owner of the business receiving the price of goodwill by instalments or otherwise, does not of itself make the receiver a partner. |
2. The Real Relation Test
§ What the court looks at • Substance over form. The description the parties give themselves does not decide the matter; a document calling a person a financier may still disclose a partnership, and one calling him a partner may not. • The whole document. The agreement is read as a whole, not clause by clause. • Conduct. How the parties actually behaved: who ordered goods, signed cheques, dealt with customers, and bore the risk. • Appearance to outsiders. Whether third parties were led to treat them as partners, which may also raise holding out under Section 28. • Intention. The real intention of the parties, gathered from the agreement and the surrounding circumstances, not from labels. • No single fact decides. All relevant facts are weighed together; agency is decisive where it is clearly present or clearly absent. |
3. Indicators For and Against
Pointing towards partnership | Pointing away |
|---|---|
The parties act for one another in the business | The person has no power to bind the others |
Each can bind the firm in dealings with outsiders | He receives a fixed return, or a share dressed up as interest |
Joint control, joint bank account, joint books | He has no access to books and no say in management |
Contribution of capital and sharing of losses | He bears no losses and faces no creditors |
Registration of the firm and a deed describing them as partners | The arrangement is one of loan, employment or sale |
4. Gross Returns and Joint Property
i. The rule. Sharing gross returns is not partnership, because profits, not receipts, are what partners share.
ii. Joint property. Persons holding property jointly and sharing its produce or rent are co-owners, not partners, unless they carry on a business with mutual agency.
iii. Illustration. Two owners of a cinema hall who share the ticket collections, leaving each to meet his own costs, share gross returns; two persons running the cinema as a joint business and dividing what is left after expenses share profits.
5. The Five Protected Receipts
Recipient | Why he is not a partner |
|---|---|
A lender of money to a person engaged in business | He is a creditor; a share of profits is only the measure of his return. Cox v Hickman (1860) |
A servant or agent remunerated by a share of profits | The relation is one of employment or agency; he does not carry on the business on his own behalf |
A widow or child of a deceased partner receiving an annuity | The annuity is a benefit, not a share in a business carried on by her |
A previous owner or part owner receiving the price of goodwill | He is a seller receiving the consideration, measured by profits |
Persons sharing gross returns from joint property | There is no business and no agency |
📖 Mollwo, March & Co. v Court of Wards, (1872) LR 4 PC 419 A financier advanced money to a trading firm and took a share of its profits, with wide powers of control over the business. The Privy Council held that he was not a partner: the control was taken to protect the advance, and the business was not carried on on his behalf. Real relation, not the extent of supervision, decides. |
6. Profit-Sharing Test and Mutual Agency Test
Basis | Profit-sharing test | Mutual agency test |
|---|---|---|
The question | Does he share the profits? | Is the business carried on by or on behalf of him? |
Status | Evidence only, under s. 6 | The true and decisive test |
History | Once treated as conclusive | Established by Cox v Hickman (1860) and adopted by the Act |
Failure | A lender or employee may share profits without being a partner | A person who binds and is bound is a partner, even if his share is small |
7. Frequently Asked Questions
How is the existence of a partnership determined?
By the real relation between the parties, shown by all relevant facts taken together, under Section 6; labels and single facts are not conclusive.
Does a lender who shares profits become a partner?
No. Explanation 2 to Section 6 protects a lender whose return is measured by profits, as Cox v Hickman held.
Does sharing gross returns create a partnership?
No. Explanation 1 to Section 6 says the sharing of profits or gross returns from jointly held property does not by itself make the sharers partners.
Can a person be a partner although the agreement says he is not?
Yes. Section 6 looks at the real relation; a label cannot displace facts showing mutual agency.