Section 14 of the Indian Partnership Act, 1932, details the law surrounding the property of the firm or partnership property. Further, section 15 explains the various applications of such property. In this article, we will endeavor to understand partnership property and its applications.
Partnership Property (Section 14)
The property of a firm is also known as partnership property, partnership assets, joint stock, common stock, or joint estate. A partnership property includes all property and rights, and interest in property that the partnership firm purchases.
These purchases can also be made for the purpose and in course of the business of the firm, including the goodwill of the firm. All partners collectively own such properties.
Hence, a partnership property comprises of the following items if there is no agreement between the partners showing any contrary intention:
- All property and rights and interest in property that the partners purchase in the common stock as their contribution to the common business.
- All property and rights and interest in property that the firm purchases either for the firm or for the purpose and in course of the business of the firm.
- Goodwill of the business.
Determining whether a particular property is partnership property depends on the true intention or agreement between the partners.
Hence, if a firm uses the property of a partner for its purposes, it does not make it a partnership property unless that was the real intention. At any time, the partners may agree to convert the property of a partner or partners into partnership property.
If such a conversion is made in good faith, then it would be effectual between the partners and against the creditors of the firm. The partners may also agree to convert the separate property of any partners into the property of the firm.
Goodwill
Section 14 specifies that the goodwill of a business is the property of the firm and is subject to a contract between the partners. However, it does not define the term goodwill.
Goodwill is the value of the reputation of a business in respect of the expected future profits OVER AND ABOVE the profits that a firm earns in the same class of business. It is a part of partnership property. The firm can sell the goodwill separately or along with other properties.
When a partnership firm dissolves, all partners have a right to have the goodwill sold for the benefit of all the partners unless there is an agreement contrary to the same. After the firm sells the goodwill, any partner may make an agreement with the buyer to not carry on any business similar to that of the firm within a certain time-period or local limits. Such an agreement is notwithstanding anything contained in Section 27 of the Indian Contract Act, 1872 and is valid if the restrictions are reasonable.
Application of Partnership Property (Section 15)
According to section 15, the partnership property should be held and used exclusively for the purpose of the firm. While all partners have a community of interest in the property, during the subsistence of the partnership no partner has a proprietary interest in the assets of the firm.
Each partner has a right to his share in the profits of the firm until the firm subsists. He also has a right to see that the application and use of the assets of the firm are for the purpose of the business of the partnership.
Solved Example onPartnership Property
Q1. Peter, John, and Oliver are partners in a catering business running in the name of PJO Caterers. In September 2017, Peter resigns and the John and Oliver reconstitute the partnership, without changing the business name. Peter also assigns all his rights, title, interest in goodwill and other assets in favor of the reconstituted partnership.
In January 2018, Peter starts his own catering business in the name of PJO Caterers. His firm’s office is near John and Oliver’s firm and he even keeps the same logo as the original company. Can John and Oliver sue Peter?
Answer: Yes. Peter has assigned all his rights including interest in goodwill to the reconstituted partnership. Hence, when he opens a business in the same name, he breaches the agreement. The court can order him to close down the business or change the name of the firm. Further, he may have agreed to not open a business similar to PJO Caterers, within certain location limits. In such a case, the court may also order him to shift the location of his firm.
