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Discussion > Civil Law > Legal Words & Maxims > PRTNER'S DEATH IS A DEATH OF FIRM   Unanswered Threads Post New Topic

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raj kumar makkad


Advocate
[ Scorecard : 131934]
Posted On 10 February 2010 at 11:22 Report Abuse

When there are two partners, and one of them dies, the firm is automatically dissolved even if there is clause in the partnership deed that the firm will continue in existence. In the case, Mohd Laiquiddin vs Kamala Devi one party claimed that the partnership continued though one partner had died. The court rejected this contention explaining that the firm is deemed to have been dissolved despite the existence of the clause. Upholding the view of the Andhra Pradesh high court, the SC saidpartnership is not a matter of heritable status; it is purely one of contract under Section 4 of the Contract Act.



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Manish Singh


Advocate
[ Scorecard : 12697]
Posted On 10 February 2010 at 11:34 Report Abuse

 Yse Mr. Makkad, absolutely true but its the case when there is only two partners. had there been two partners and the firm was not at will, the said firm would have continued even after the death of a partner.

Also, when a firm is at will then in spite of the fact that there are more than two partners in any firm, the firm gets dissolved even when a partner exits the firm or dies.

 



Total thanks : 1 times


Manish Singh


Advocate
[ Scorecard : 12697]
Posted On 10 February 2010 at 11:35 Report Abuse

Correction to the earlier statement :

  Yes Mr. Makkad, absolutely true but its the case when there is only two partners. had there been  MORE THAN two partners and the firm was not at will, the said firm would have continued even after the death of a partner.

Also, when a firm is at will then in spite of the fact that there are more than two partners in any firm, the firm gets dissolved even when a partner exits the firm or dies.

 



Daksh


Student
[ Scorecard : 4521]
Posted On 10 February 2010 at 11:43 Report Abuse

  Dear All,

The Indian Partnership Act was passed in 1932 to define and amend the law relating to partnership. Indian Partnership Act is one of very old mercantile law. Partnership is one of the special types of Contract. Initially, this was part of Indian Contract Act itself (Chapter IX - sections 239 to 266), but later converted into separate Act in 1932.

The Indian Partnership Act is complimentary to Contract Act. Basic provisions of Contract Act apply to contract of partnership also. Basic requirements of contract i.e. legally enforceable agreement, mutual consent, parties competent to contract, free consent, lawful object, consideration etc. apply to partnership contract also.
Partnership Contract is a ‘concurrent subject’ - ‘Contract, including partnership contract’ is a ‘concurrent subject, covered in Entry 7 of List III (Seventh Schedule to Constitution). Indian Partnership Act is a Central Act, but State Government can also pass legislation on this issue. Though Partnership Act is a Central Act, it is administered by State Governments, i.e. work of registration of firms and related matters is looked after by each State Government. The Act is not applicable to Jammu and Kashmir.
Unlimited liability is major disadvantage - The major disadvantage of partnership is the unlimited liability of partners for the debts and liabilities of the firm. Any partner can bind the firm and the firm is liable for all liabilities incurred by any firm on behalf of the firm. If property of partnership firm is insufficient to meet liabilities, personal property of any partner can be attached to pay the debts of the firm.
Partnership Firm is not a legal entity -  It may be surprising but true that a Partnership Firm is not a legal entity. It has limited identity for purpose of tax law. As per section 4 of Indian Partnership Act, 1932, 'partnership' is the relation between persons who have agreed to share the profits of a business carried on by all or any one of them acting for all. - - Under partnership law, a partnership firm is not a legal entity, but only consists of individual partners for the time being. It is not a distinct legal entity apart from the partners constituting it - Malabar Fisheries Co. v. CIT (1979) 120 ITR 49 = 2 Taxman 409 (SC).
Firm legal entity for purpose of taxation - For tax law, income-tax as well as sales tax, partnership firm is a legal entity - State of Punjab v. Jullender Vegetables Syndicate - 1966 (17) STC 326 (SC) * CIT v. A W Figgies - AIR 1953 SC 455 * CIT v. G Parthasarthy Naidu (1999) 236 ITR 350 = 104 Taxman 197 (SC). Though a partnership firm is not a juristic person, Civil Procedure Code enables the partners of a partnership firm to sue or to be sued in the name of the firm. - Ashok Transport Agency v. Awadhesh Kumar 1998(5) SCALE 730 (SC). [A partnership firm can sue only if it is registered].
Partnership, partner, firm and firm name -  “Partnership” is the relation between persons who have agreed to share the profits of business carried on by all or any to them acting for all. - - Persons who have entered into partnership with one another are called individually “partners” and collectively “a firm”, and the name under which their business is carried on is called the “firm name”. [section 4].
“Business” includes every trade, occupation and profes­sion. [section 2(b)]. Thus, a ‘partnership’ can be formed only with intention to share profits of business. People coming together for some social or philanthropic or religious purposes do not constitute ‘partnership’.
Partners are Mutual agents - The business of firm can be carried on by all or any of them for all. Any partner has authority to bind the firm. Act of any one partner is binding on all the partners. Thus, each partner is ‘agent’ of all the remaining partners. Hence, partners are ‘mutual agents’.
Oral or written agreement - As per normal provision of contract, a ‘partnership’ agreement can be either oral or written. - - Agreement in writing is necessary to get the firm registered. Similarly, written agreement is required, if the firm wants to be assessed as ‘partnership firm’ under Income Tax Act.  A written agreement is advisable to establish existence of partnership and to prove rights and liabilities of each partner, as it is difficult to prove an oral agreement. - - However, written agreement is not essential under Indian Partnership Act.
Sharing of profit necessary - The partners must come together to share profits. Thus, if one member gets only fixed remuneration (irrespective of profits) or one who gets only interest and no profit share at all, is not a ‘partner’. - - Similarly, sharing of receipts or collections (without any relation to profits earned) is not ‘sharing of profit’ and the association is not ‘partnership’. For example, agreement to share rents collected or percentage of tickets sold is not ‘partnership’, as sharing of profits is not involved. - - The share need not be in proportion to funds contributed by each partner. - - Interestingly, though sharing of profit is essential, sharing of losses is not an essential condition for partnership . - - Similarly, contribution of capital is not essential to become partner of a firm.
Number of partners - Since partnership is ‘agreement’ there must be minimum two partners. The Partnership Act does not put any restrictions on maximum number of partners. However, section 11 of Companies Act prohibits partnership consisting of more than 20 members, unless it is registered as a company or formed in pursuance of some other law.
Mode of determining existence of partnership - 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. [section 6].
Mutual agency is the real test - The real test of ‘partnership firm’ is ‘mutual agency’, i.e. whether a partner can bind the firm by his act, i.e. whether he can act as agent of all other partners.
Partnership at will - Where no provision is made by contract between the partners for the duration of their partnership, or for the determination of their partnership, the partnership is “partnership at will”. [section 7]. - - Partnership ‘at will’ means any partner can dissolve a firm by giving notice to other partners (or he may express his intention to retire from partnership) - - Partnership deed may provide about duration of partnership (say 10 years) or how partnership will be brought to end. In absence of any such term, the partnership is ‘at will’. - - In case of ‘particular partnership’, the partnership comes to end when the venture for which it was formed comes to end.
Determination of rights and duties of partners by contract be­tween the partners - Subject to the provisions of this Act, the mutual rights and duties of the partners of a firm may be determined by con­tract between the partners, and such contract may be express or may be implied by a course of dealing. - - Such contract may be varied by consent of all the partners, and such consent may be express or may be implied by a course of dealing. [section 11(1)]. - - Thus, partners are free to determine the mutual rights and duties by contract. Such contract may be in writing or it may be implied by their actions.
Dutiesand mutual rights  of partners - Subject to contract to contrary, partners have duties and mutual rights as specified in Partnership Act-
Every partner has right to take part in business - Subject to contract between partners (to the contrary), every partner has right to take part in the conduct of the business. [section 12(a)]. - - Thus, every partner has equal right to take active part in business, unless there is specific contract to the contrary. Even if authority of a partner is restricted by contract, outside party is not likely to be aware of such restriction. In such case, if such partner acts within the apparent authority, the firm will be liable for his acts.
The property of the firm - 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. - - Unless the 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 [section 14].
Partner to be agent of the firm - Subject to the provisions of this Act, a partner is the agent of the firm for the purposes of the business of the firm. [section 18].
Implied authority of partner as agent of the firm - Subject to the provisions of section 22, the act of a partner which is done to carry on, in the usual way, business of the kind carried on by the firm, binds the firm. The authority of a partner to bind the firm conferred by this section is called his “implied authority”. [section 19(1)]. -
Partners jointly and severally liable acts of the firm - Every partner is liable, jointly with all the other partners and also severally, for all acts of the firm done while he is a part­ner. [section 25]. ‘An act of a firm’ means any act or omission by all the partners, or by any partner or agent of the firm which gives rise to a right enforceable by or against the firm [section 2(a)]. ‘Joint and several’ means each partner is liable for all acts. Thus, if amount due cannot be recovered from other partners, any one partner will be liable for payment of entire dues of the firm.
Partner by Holding out - ‘Holding out’ means giving impression that a person is partner though he is not. This is principle of ‘estoppel’. If a person gives an impression to outsiders that he is partner of firm though he is not partner, he will he held liable as partner, if third party deals with the firm on the impression that he is a partner. Similarly, if a person retires from the firm but does not give notice of retirement, he will be liable as a partner, if some third party deals with the firm on the assumption that he is still partner.
Minors admitted to the benefits of partnership - A person who is a minor according to the law to which he is subject may not be a partner in a firm, but, with the consent of all the partners for the time being, he may be admitted to the benefits of partnership. [section 30(1)].
Rights of minor - Minor (who is admitted to benefit of partnership) has a right to such share of the property and of the profits of the firm as may be agreed upon and he may have access to and inspect and copy any of the accounts of the firm. [section 30(2)]. [Since the word used is ‘may’, it seems that right of minor to inspect accounts can be restricted by agreement among partners].
Minor’s share liable but not minor himself - Such minor’s share is liable for the acts of the firm, but the minor is not personally liable for any such act. [section 30(3)].
Reconstitution of a Partnership Firm - A partnership firm is not a legal entity. It has no perpetual existence as in case of a company incorporated under Companies Act. However, the Act gives the partnership limited rights of continuity of business despite change of partners. In absence of specific provision in partnership deed, death or insolvency of a partner means dissolution of the firm. However, partnership can provide that the firm will not dissolve in such case.
Change in partners may occur due to various reasons like death, retirement, admission of new member, expulsion, insolvency, transfer of interest by partner etc. After such change, the rights and liabilities of each partner are determined afresh. This is termed as reconstitution of a firm.
Dissolution of a Firm - A partnership firm is an ‘organisation’ and like every ‘organ’ it has to either grow or perish. Thus, dissolution of a firm is inevitable part in the life of partnership firm some time or the other.
Dissolution of a firm without intervention of Court can be (a) By agreement (section 40) (b) Compulsory dissolution in case of insolvency (section 41) (c) Dissolution on happening of certain contingency (section 42) (d) By notice if partnership is at will (section 43).
A firm can also be dissolved by Court u/s 44.
Dissolution of partnership and dissolution of firm - The dissolution of partnership between all the partners of a firm is called the dissolution of the firm. [section 39]. - - . As per section 4, Partnership is the relation between persons who have agreed to share profits of business carried on by all or any of them acting for all. - - Thus, if some partner is changed/added/ goes out, the ‘relation’ between them changes and hence ‘partnership’ is dissolved, but the ‘firm’ continues. Hence, the change is termed as ‘reconstitution of firm’. However, complete breakage between relations of all partners is termed as ‘dissolution of firm’. After such dissolution, the firm no more exists. Thus, ‘Dissolution of partnership’ is different from ‘dissolution of firm’. ‘Dissolution of partnership’ is only reconstruction of firm, while ‘dissolution of firm’ means the firm no more exists after dissolution.
Mode of dissolution of firm - Following are various modes of dissolution of firm. * Dissolution by agreement - [section 40]. * Compulsory dissolution in case of insolvency - [section 41] * Dissolution on the happening on certain contingencies [section 42] * Dissolution by notice of partnership at will  [section 43(2)] * Dissolution by the court
Consequences of dissolution of firm - After firm is dissolved, business is wound up and proceeds are distributed among partners. The Act specifies what are the consequences of dissolution of a firm.
Sale of goodwill of firm after dissolution - Business is attracted due to reputation of a firm. It creates a ‘brand image’ which is valuable though not tangible. ‘Goodwill’ is the value of reputation of the business of the firm. Goodwill of a firm is sold after dissolution either separately or along with property of firm. - - As per section 14, property of partnership firm includes goodwill of the firm. - - Goodwill is the reputation and connections which the firm establishes over time, together with circumstances which make the connections durable. This reputation enable to earn profits more than normal profits which a similar business would have earned. Goodwill is an intangible asset of the firm.  - -
In settling the accounts of a firm after dissolution, the goodwill shall, subject to contract between the partners, be included in the assets, and it may be sold either separately or along with other property of the firm. [section 55(1)].
Settlement of accounts after dissolution - Accounts are settled after a firm is dissolved as provided in the Act. A firm is said to be ‘wound up’ only after accounts are fully settled.
Registration of Firms - Registration of firm is not compulsory,  though usually done as registration brings many advantages to the firm. Since ‘partnership contract’  is a ‘Concurrent Subject’ as per Constitution of India, registration of firms and related work is handled by State Government in each State. Section 71 authorises State Government to make rules for * prescribing fees for filing documents with registrar * prescribing forms of various statements and intimations are to be made to registrar and * regulating procedures in the office of Registrar.
Partner cannot sue if firm is unregistered - No suit to enforce a right arising from a contract or conferred by this Act shall be instituted in any court by or on behalf of any person suing as a partner in a firm against the firm or an{ person alleged to be or to`have been a Ápartner in the fir} unless the firm is registered and the person suing!is or has been shown iø the Register of Firms as a partner in the firm.$ [section 69(1)]. - - Thus, a partner cannot sue the firm or any otheÄ ” partner if firm is unregistered. - - If third party files suit against a partner, he cannot claim of set off or institute other proceeding to enforce a right arising from a contract. - - Suit or claim or set off upto Rs 100 can be made as per section 69(4)(b), but it is negligible in today’s standards. - - Criminal proceedings can be filed, but civil suit is not permissible.
Unregistered Firm cannot sue third party - No suit to enforce a right arising from a contract shall be instituted in any Court by or on behalf of a firm against any third party unless the firm is registered and the persons suing are or have been shown in the Register of Firms as partners in the firm. [section 69(2)].  - - If third party files suit against the unregistered firm, the firm cannot claim set off or institute other proceeding to enforce a right arising from a contract. - - Suit or claim or set off upto Rs 100 can be made as per section 69(4)(b), but it is negligible in today’s standards. - - Criminal proceedings can be filed, but civil suit is not permissible.
 
To summarize the subjectively what probably Mr.Raj Kumar Makkad Advocate might be trying to convey is that although after the death of the partner in legal parlance the contractual relationship amongst the parties to the Partnership Deed comes to an end then after inducting  a new partner the business can go on and on and on and on and on......
 
To add value addition to this stale discussion let us explore comparative difference in between the death of partnership firm and legal death of a corporate entity the difference must be enlightening for other members.
 
Best Regards
 
Daksh
 
 
 


Raghavendran Subramanian


MD/CEO
[ Scorecard : 22]
Posted On 16 June 2014 at 17:15 Report Abuse

Hi, I am not a lawyer. I just want to know something from lawyers. My brother and his friend started a company by registering it as a partnership firm. Now both are dead in an accident. I am taking up the company. Can any one tell me, whether the parent's of the friend of my brother can make any problems legally?




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