Write short note on Property of the firm.

The Statutory Definition

Section 14 provides that, subject to contract between the partners, the property of the firm includes all property and rights and interests in property originally brought into the stock of the firm, or acquired by purchase or otherwise, by or for the firm, or for the purposes and in the course of the business of the firm, and includes also the goodwill of the business. The section further provides a valuable evidentiary presumption: unless a 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. The opening words "subject to contract between the partners" are significant, since they make clear that the partners are free to agree, expressly or impliedly, that a particular asset shall or shall not form part of the firm's property, and such an agreement will override the general rule the section otherwise lays down.

Distinguishing Partnership Property from Individual Property

Not all property that partners happen to use jointly, or that is merely employed in the course of the firm's business, automatically becomes partnership property; property belonging to one partner does not become firm property merely by being used for the purposes of the business. The English case Davis v. Davis illustrates this well: two brothers inherited business premises as tenants-in-common and ran the family business there for three years, borrowing money on mortgage of those very premises for use in the business; it was held that although the brothers had become partners in the business itself, the premises on which the business was carried on remained their individual property as co-owners, and did not become partnership property. The commentary draws the same distinction from a colliery example: brothers who inherit a coal mine and jointly work it as a partnership business are partners in the profits of the colliery business, but the mine itself does not thereby become part of the partnership assets.

Rights of a Partner Over Firm Property

Because a firm has no separate legal personality, the property of the firm technically vests in all the partners collectively, and in that sense every partner has an interest in it; but during the subsistence of the partnership, no partner can deal with any specific item of that property as exclusively his own, nor assign his interest in any particular item to a stranger — his right is only to a share of profits, and, on dissolution, to a share of the surplus assets remaining after satisfying the firm's liabilities under Section 48. The Supreme Court affirmed this in A. Narayanappa v. Bhaskar, observing that once property or money is brought into the partnership as capital, it ceases to be the exclusive property of the partner who brought it in and becomes trading assets of the firm in which every partner has an interest proportionate to his share in the venture. This is why ordinary principles of co-ownership do not apply to firm property: a co-owner may freely transfer his interest to a stranger, whereas a partner cannot; and one co-owner is not the agent of another, whereas every partner is agent of the firm and his co-partners under Section 18.

Illustrations from the Act

The Act itself supplies a set of illustrations clarifying the operation of Section 14. Where A, a partner, without B's authority, buys railway shares in his own name using the firm's money, the shares become partnership property, since they were acquired with firm money for the purposes of the business. Where A buys land with partnership money but for his own sole benefit, and thereafter debits himself in the firm's books and becomes a debtor to the firm for the purchase price, the land is not partnership property, because the surrounding facts clearly show a contrary intention overriding the presumption in Section 14. But where A simply buys land in his own name out of the profits of the partnership business, with no facts showing any contrary intention, the land is partnership property, since the presumption operates undisturbed. Similarly, where A and B, formerly members of a joint Hindu family, convert their family business into a partnership after partition but expressly stipulate that their shares in certain immovable properties are not to be varied even though their shares in the business are varied, this raises a strong presumption that the partners never intended those immovable properties to form part of the partnership assets.

Goodwill as Partnership Property

Section 14 expressly includes the goodwill of the business within the property of the firm. Goodwill has been judicially explained as encompassing the whole advantage of the reputation and business connection built up over years of honest work, entitling its holder to represent that he carries on the business of the firm, to solicit its former customers, and to prevent others from claiming to carry on that same business. Because goodwill is treated as an asset like any other, the representatives of a deceased partner are entitled to share in its value, and surviving partners who attempt improperly to appropriate the goodwill for themselves can be restrained by injunction if action is taken in time. However, the Supreme Court's decision in Shadi Lal v. Nagin Chand shows the limits of this principle: where a partner, having purchased the goodwill of a dissolved firm, continued the business under the same firm name and thereby obtained a government quota for woollen yarn in that name, the quota was held to be his own separate property and not an after-acquired asset of the dissolved partnership, since the business name itself belonged to him following the purchase of goodwill.

Individual Property Retained Despite Partnership

Finally, the mere fact of becoming a partner does not automatically convert a partner's pre-existing individual property into a firm asset. In Shashi Kapila v. R.P. Ashwin, the Supreme Court held that a partner's tenancy right in premises, acquired before the firm's formation and never thrown into the partnership as an asset, remained his separate individual property, notwithstanding that the firm used those premises for its business. This underscores the guiding principle running through Section 14: what matters is not mere use of an asset by the firm, but clear evidence that the asset was actually brought into, or acquired for, the stock of the partnership, whether by the express terms of the partnership agreement or by the conduct and intention of the partners as disclosed by the surrounding facts.