LCI Learning
LCI Learning

Share on Facebook

Share on Twitter

Share on LinkedIn

Share on Email

Share More


INTRODUCTION

 

A partnership is the relationship between persons who have agreed to share the profits of a business carried on by all or any of them acting or all. In India it is governed by the Indian Partnership Act, 1932, which extends to the whole of India except the State of Jammu and Kashmir. It came into force on 1st October 1932. A partnership agreement can be entered into between persons who are competent to contract. Every person who is of the age of majority according to the law to which he is subject and who is of sound mind and is not disqualified from contracting by any law to which he is subject can enter into a partnership.                            

The subject of partnership is included in item 7 of the Concurrent List in the Seventh Schedule to the Constitution of India and therefore, the parliament and the Legislature of any state have the power to make laws with respect to this matter as provided in art 246 of the constitution. The task of consolidating the many common law rules largely formulated in the 18th and 19th centuries was performed by Sir Frederick Pollock who first drafted the Partnership bill in 1879 and having amended it several times, saw it enacted as the Partnership Act 1890 which has proved to be one of the most successful pieces of the legislation in English law.[1] The Indian Partnership Act has drawn its luminosity from the English Act by enacting several similar substantive provisions. The Act defines and amends the law relating to partnership but does not purport to completely codify it and the unrepealed provisions of the Indian Contract Act, in so far as they are not inconsistent with the Act, continue to apply to firms. The Act provides only a voluntary framework for businessmen planning to use the medium of partnership and contains contracting out provisions in s 11(1) and 13, which make mutual rights and liabilities of the partners, subject to a contract between them. The definition of the expression ‘business’ under s 45 of the English Act is retained in s 2(b). The definition is not exhaustive. ‘Business’ would include a single commercial adventure.[2] Road building activity under a government contract even in a single venture is a business activity. Thus virtually any commercial activity or adventure amounts to a business for the purpose of the Act, but it is not every occupation, which results in monetary gain that constitutes a business. A landowner does not carry on a business although the management of his estate and collection of his rents may be his only serious occupation. The term business is restricted to what is regarded by businessmen as commercial or professional business.ie, calling in which men holds themselves out as willing to sell goods or to provide skilled assistance or other service. Partnership is one of the oldest forms of business relationships. Though limited liability companies have replaced partnership firms in complex businesses, partnerships are still preferred by professionals and small trading and business enterprises in India and abroad. The Indian partnership act of 1932 provides for a general form of partnership which is the most prevalent form in India, but, over time the general form of partnership has lost its charm because of the inherent disadvantages in it, the most important is the unlimited liability of all partners for business debts and legal consequences, regardless of their holding, as the firm is not a legal entity. It has been suggested to us that the fundamental principle on which the Indian Partnership Act is based, that a “firm” is not a legal entity, should be replaced by the contrary principle which recognizes the firm as a legal person or legal entity, on the ground that such a change would be useful to the business and commercial community as well as to those who deal with a firm and that it would also simplify proceedings by and against a firm. Thus questions for a long time engaged the attention of jurists, lawyers and textbook writers in India, England and the United States of America. In England, it has been suggested that the English law of Partnership should in this respect be assimilated to that of Scotland which recognizes a firm as a legal or juristic person.

 

Definition of ‘partnership’, ‘partner’, ‘firm’, and ‘firm name’

The entire above are defined in sec 4 of The Indian Partnership Act 1932 as below:

‘Partnership’ is a relation between persons who have agreed to share the profits of a business carried on by all or any of 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’.

The definition of partnership now substituted for the condensed version of Kent’s, which stood in the Contract Act, reproduces, with slight verbal alteration, a suggestion made long ago by Sir F Pollock. His purpose then was to meet an objection of Sir G Jessel’s, which seemed to him rather captious[3] to the effect that persons who do not in fact bring any property, labour or skill to the common undertaking, such as a deceased partner’s widow admitted under a provision in the partnership articles may be partners. The answer in that case appears to be that the share acquired by her is nonetheless hers, by virtue of being given to her. It will be observed that the present section is confined, as a definition ought to be, to stating the attributes, which are necessary and sufficient to identify any particular example as a member of the class defined. Cautions, qualifications and exceptions, which have to be attended to in applying the general conception, are properly left to come afterwards. The fault of including too much is easy to commit, and has been committed by several of the authors whose definitions are collected in the first chapter of Lindley.[4] One typical mistake is to add words about the object being lawful. It is not correct to say or imply that partnership entered into for an unlawful purpose, or purposes, some of which are unlawful, is not a partnership at all. One might as well say (contrary to the definition of larceny in English law) that a thief does not have possession of the thing stolen. Under common law legal systems, the basic form of partnership is a general partnership, in which all partners manage the business and are personally liable for its debts. Two other forms which have developed in most countries are the limited partnership , in which certain "limited partners" relinquish their ability to manage the business in exchange for limited liability for the partnership's debts, and the limited liability partnership , in which all partners have some degree of limited liability.

There are two types of partners. General partners and silent partner general partner have an obligation of strict liability to third parties injured by the Partnership. General partners may have joint liability or joint and several liability depending upon circumstances. The liability of limited partners is limited to their investment in the partnership. Whereas a silent partner is one who still shares in the profits and losses of the business, but who is uninvolved in its management, and/or whose association with the business is not publicly known.

According to Civil Law: In civil law system, a partnership is a nominate contract between individual who, in the spirit of corporation, agree to carry on an enterprise, contributing it by combining property, knowledge and sharing the profit. Partner may have partnership agreement or declaration of partnership and in some jurisdiction such agreement may be registered and available for public inspection. In many civil law countries partnership is considered to be a legal entity, although different legal system reach different conclusion.

In India: The definition of partnership was first given in section 239 of Indian contract act 1872 as “Partnership is the relation which subsists between persons who have agreed to combine their property, labour, skill in some business and to share the profits thereof between them”. Later partnership was separated from Bear act and older definition was superseded, given as follows

According to the Section 4 of Indian Partnership Act of 1932, partnership is “the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all”. Thus the present definition of Partnership act according to Indian contract Act is much wider than previous definition because the 1932 definition adds the concept of mutual agency.

In England: Partnership is the relation which subsists between persons carrying on a business in common with a view of profit. The definition of partnership is given by different personalities some of the definitions given by them are as fellow Prof. Haney, “partnership is the relation existing between persons, competent to make contracts, who have agreed to carry on a lawful business in common with a view to private gain”. According to Dr. William R.Spriegel, “partnership has two or more members, each of whom is responsible for obligation of the partnership. Each of the partners may bind the others and the assets of partners may be taken for the debts of the partnership”. In the words of Kimball and Kimball, “A partnership or firm as it is often called, is thus a group of men who have joined capital or services for the prosecuting of some business”. Therefore, by going through all the definition we can conclude that partnership is “that form of business organization in which, partners agree to share the profits of a lawful business, managed and carried on either by all or by any one of them acting for all”.

The definition of ‘partnership’ contains three elements:

(1)   There must be an agreement entered into by all the persons concerned;

(2)   the agreement must be to share the profits of a business; and

(3)   the business must be carried on by all or any of the persons concerned, acting for all.

All these elements must be present before a group of associates can be held to be partners. These three elements may appear to overlap, but they are nevertheless distinct. The first element relates to the voluntary contractual nature of partnership; the second gives the motive which leads to the formation of firms, i.e., the acquisition of gain; and the third shows that the persons of the group who conduct the business do so as agents for all the persons in the group, and are therefore liable to account for all.

The definition which stands in English Act, ‘the relation which subsists between persons carrying on a business in common with a view of profit’, appears to be founded on the following dictum of the Privy Council in an Indian case decided on the analogy of English Law: ‘To constitute a partnership the parties must have agreed to carry on business and to share profits in some way in common’. It will be observed that this definition does not mention sharing as distinguished from making profits; and it has been suggested that in England persons may be partners in an undertaking carried on by them in concert without aiming at personal gain, or even on the express terms that none of them shall derive any individual profits from it, and that the object of dividing profits, though almost always important in fact, ‘points to the conclusion that it is rather an accident than of the essence of the partnership relation’.

 

REGISTRATION OF PARTNERSHIP FIRMS

Registration of a firm is not compulsory, though usually done as registration brings many advantages to the firm. Since Partnership Act is a concurrent subject as per the constitution of India, the registration firms and the related works are handled by the 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 forms of various statements and intimations are to be made to registrar and regulating procedures in the office of the registrar.

 

TYPES OF PARTNERSHIP FIRM

Different kinds of partnership may be explained as follows.

                        

1.      General or Unlimited Partnership

2.      Limited Partnership

1. General or Unlimited Partnership

A partnership in which the liability of all the partners is unlimited is known as unlimited partnership. All the partners can take part in the working of the business. In India, only this kind of partnership exists. General partnership can be classified into three types such as partnership-at-will, particular partnership and joint venture. They are discussed below.

 

a. Partnership–at–will

Partnership-at-will is a partnership which is formed to carry on business without specifying any period of time. The life of such a partnership continues as long as the partners are willing to continue it as such. The partnership can be terminated, if any partner notifies his desire to quit.

b. Particular Partnership

It is a partnership established for a stipulated period of time or for the completion of a specified venture. It automatically comes to an end with the expiry of the stipulated period or on the completion of the specified venture, as the case may be. For example, a partnership may be created for one year only. When the time lapses, the partnership comes to an end.

c. Joint Venture

A joint venture is a temporary partnership which is formed to complete a specific venture or job during a specified period of time. Every partner does not have the right of implied agency. No

partner can withdraw his interest in the firm before the completion of the venture. For example, a partnership is formed for the construction of a building. The partnership comes to an end if the

construction is over.

 

2. Limited Partnership

A partnership in which the liability of the partner is limited is called limited partnership. The Law does not permit the formation of a limited partnership in India. But in Europe and U.S.A.  and U.K limited partnership is allowed. A limited partnership firm must have at least one partner whose liability is unlimited. The liability of remaining partners is limited. Thus limited partnership consists of two types of partners, general partner and limited partner.

 

 

 

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 Partner in the fir} unless the firm is registered and the person suing! is or has been shown in the Register of Firms as a partner in the firm. [Section 69(1)]. - Thus, a partner cannot sue the firm or any other” 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.

GENERAL DUTIES OF A PARTNER

Subject to a contract to the contrary between the partners the following are the duties of a partner according to section 9 of The Indian Partnership Act, 1932-

1-      To carry on the business of the firm to the greatest common advantage. Good faith requires that a partner shall not obtain a private advantage at the expense of the firm. Where a partner carries on a rival business in competition with the partnership, the other partners are entitled to restrain him.

2-      To be just and faithful. Partnership as a rule is presumed to be based on mutual trust and confidence of each partner, not only in the skill and knowledge, but also in the integrity, of each other partner

3-      To render true accounts and full information of all things done by them to their co-partners.

4-      According to sec. 10 of the said act every partner shall indemnify for loss caused by fraud. Every partner shall indemnify the firm for loss caused to it by his fraud in the conduct of the business of the firm.

5-      Not to carry on business competing with the firm. If a partner carries on any business of the same nature as and competing with that of the firm, he shall account for and pay to the firm all profits made by him in that business.

6-      To carry out the duties created by the contract. The partners are bound to perform all the duties created by the agreement between the partners.

 

RIGHTS AND DUTIES OF THE PARTNERS

Determination of rights and duties of partners by contract between the partners:

Subject to the provisions of the Indian Partnership 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.

According to section 17 of the said act, rights and duties of partners is subject to a contract between the partners:

1-      After a change in a firm- where a change occurs in the constitution of a firm, the mutual rights and duties of the partners in the reconstituted firm remain the same as they were immediately before the change.

2-      After the expiry of the term of the firm- where a firm constituted for a fixed term continues to carry on business after the expiry of that term, the mutual rights and duties of the partners remain the same as they were before the expiry, so far as they may be consistent with the incidents of partnership at will.

3-      Where additional undertakings are carried out- where a firm constituted to carry out one or more adventures or undertakings carries out other adventures or undertakings are the same as those in respect of the original adventures or undertakings.

Subject to a contract to the contrary a partner has the following rights.

1.      To take part in the conduct and management of the business

2.      To express opinion in matters connected with the business. He has a right to be consulted and heard in all matters affecting the business of the firm

3.      To have free access to all the records, books of account of the firm and take copy from them.

4.      To share in the profits of the business. Every partner is entitled to share in the profits in proportion agreed to between the parties.

5.      To get interest on the payment of advance. Where a partner makes for the purpose of the business, any payment or advance beyond the amount of capital he has agreed to subscribe, he is entitled to interest thereon at the rate of 6% per annum.

6.      To be indemnified by the firm against losses or expenses incurred by him for the benefit of the firm.

SPECIAL RIGHTS AND DUTIES OF THE PARTNERS

After the change of the firm-Where the change occurs in the constitution of a firm, the mutual rights and duties of the partners in the reconstituted firm remain the same.

 

                                                                                                       

RELATIONS OF PARTNERS TO THIRD PARTIES

According to sec 18 of the Indian Partnership Act, a partner is the agent of the firm for the purpose of the business of the firm.

This and the two following sections supersede sec 251 of the contract act by a much more explicit statement , which closely resembles sec 5 of the English Act in form. For obvious reasons, the summary statement of principle in sec 18 called for the expansion which is supplied in sec 19 , and these two closely connected sections are here dealt with together for the reader’s convenience. In Cox v. Hickman[5], Lord Wensleydale said:

So far if two or more agree that they should carry on a trade, and share the profits of it, each is a principal, and each is an agent for the other, and each is bound by the others contract in carrying on the trade, as much as a single principal would be by the act of an agent who was to give the whole of the profits to his employer. The settled position of law is that the act of the partner of the firm can well be constructed as an act on behalf of all the partners if the circumstances warrant such a conclusion. A firm is not presumed conversely to be an agent of the individual partners. Payment to one partner is in general a good payment to the firm , but the payment to the firm of a private debt due to one partner is not a discharge unless it is shown that the firm had in fact authority to receive it.

RESTRICTIONS ON AUTHORITY OF A PARTNER

Restrictions are governed by Contract and by the Partnership Act

The partners may by contract extend or restrict the implied authority of any partner.

Under the Partnership Act in the absence of any usage of trade to the contrary, the implied authority of a partner does not empower him to do the following acts:

1-Submit a dispute relating to the business of a firm to arbitration.

2-Open a bank account in his own name.

3-Compromise or relinquish any claim of the firm.

3-Withdraw a suit or proceeding on behalf of the firm.

4-Admit any liability in a suit or proceeding against the firm.

5-Acquire immovable property on behalf of the firm.

6-Transfer immovable property belonging to the firm, or

7-Enter into partnership on behalf of the firm.

 

IMPLIED AUTHORITY OF PARTNER

The contract act provided that a partner has such authority as he would have if he were an expressly appointed agent of the firm. Section 18 has adopted the more direct method of the English Act and lays down that he is an agent. This is a clear improvement. The generality of a partner’s authority as agent is not affected by the fact, where it is so, that two Hindu partners are brothers or otherwise members of a joint Hindu family, they are on an equal footing for the purposes of partnership law. Implied authority in Indian situation arose for consideration by the Supreme Court and by the High court of Madras and Andhra Pradesh. One of the partners entered into a contract for supply of dal, a purpose not specifically enumerated as business of the firm. The Supreme Court noted ‘It was not the case of partners that the firm was not carrying on the business of supply of dal. Another fact found by the court was that the partner was authorized to do business on behalf of the firm.’ In that factual setting the apex court held that the contract for the supply of dal, though entered in only by one of the partners, would be binding on other partners of the firm. In addition to the facts already found, the court held that the subsequent conduct of the partners also constituted ratification of the contract.[6] The Andhra Pradesh High Court in Kalingala Sesha Giri Rao v. Kanneganti Dasiahi and anor,[7] distinguished the decision, in that case, the firm had as its objects, trade in rice, paddy and groundnut with the usual processing of those articles. There was an express provision in the partnership deed authorising them to deal in any other commodity as may be agreed upon by the partners. The court held that the dealing in turmeric was beyond the implied authority under s 19(2), particularly in view of the agreement by partners visualized under the deed, and when the express agreement pleaded was found as not established.

LIABILITIES OF PARTNER

1. Every partner is liable for the debts of the firm to an unlimited extent, jointly and severally.

2. A retiring partner is liable for all the debts incurred before his retirement

3. An incoming partner is liable only for the debts incurred by the firm after his admission into the partnership.

4. In case of deceased partner, his legal representatives are liable only for the debts incurred by the firm before his death.

5. In the case of minor partner, he is not personally liable for the debts of the firm. Only his share in the profits and assets of the partnership is liable for the debts of the firm.

6. Every partner is liable to make good the loss that the firm or other partners suffer as a result of his negligence.

RIGHTS OF A MINOR

  1. 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.
  1. Such minor 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 of the accounts of the firm.
  2. Such minors share is liable for the acts of the firm, but the minor is not personally liable for any such act.
  3. Such minor may not sue the partners for an account or payment of his share of the property or profits of the firm
  4. At any time within six months of his attaining majority, or of his obtaining knowledge that he had been admitted to the benefits of partnership, whichever date is later, such person may give public notice that he has elected to become or that he has elected not to become a partner in the firm, and such notice shall determine his position as regards the firm, provided that, if he fails to give such notice, he shall become a partner in the firm on the expiry of the said six months.
  5. Where any person has been admitted as a minor to the benefits of partnership in a firm, the burden of proving the fact that such person had no knowledge of such admission until a particular date after the expiry of six months of his attaining majority shall lie on the person asserting that fact.
  6. Where such person becomes a partner-
    1. His rights and liabilities as a minor continue upto the date on which he becomes a partner, but he also becomes personally liable to third parties for all acts of the firm done since he was admitted to the benefits of the partnership, and
    2. His share in the property and profits of the firm shall be the share to which he was entitled as a minor.
  7. Where such person elects not to become a partner-
    1. His rights and liabilities shall continue to be those of a minor up to the date on which he gives public notice,

b.      His share shall not be liable for any acts of the firm done after the date of the notice, and he shall be entitled to sue the partners for his share of the property and profit.

 

 

 

DISSOLUTION OF FIRMS

Dissolution comes under sec 39 of Indian Partnership Act. This signifies the dissolution of a partnership between the partners of a firm is called the “Dissolution of the Firm”. 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. Dissolution of partnership, firm might be dissolved by any partner giving notice in writing to all the partners of his intentions to dissolve the firm.[8]

DISSOLUTION OF AN AGREEMENT- This comes under sec 40 of Indian Partnership Act. A firm may be dissolved with the consent of all the partners or in accordance with a contract between the partners.

COMPULSARY DISSOLUTION- This comes under sec 41 of Indian Partnership Act. A firm is dissolved under the following circumstances-:

(1)By the adjudication of all partners or of all the partners but one is insolvent.

(2)By the happening of any event which makes it unlawful for the business of the firm to be carried on or for the partners to carry it on in the partnership.

Provided that, where more than one separate adventure or under taking is carried on by the firm, the illegality of one or more shall not of itself cause the dissolution of the firm in respect of its lawful adventures and undertakings.

 Referred case – Esposito vs Bowden – In this case, A and B are partners. They charter a ship to go to a foreign country and receive a cargo on their joint venture. War breaks out between England and the country where the port is situated before the ship arrives at the port and continues until after time appointed for loading. The partnership between A and B is dissolved.

 

DISSOLUTION ON THE HAPPENING OF CERTAIN CONTINGENCIES

Subject to contract between the partners a firm is dissolved , which is mentioned in sec.42 of The Indian Partnership Act,1932.

(a) If constituted for a fixed term, by the expiry of that term.

(b) If constituted to carry out one or more adventures or undertakings, by the completion thereof.

(c) If the death of a partner.

(d)By the adjudication of a partner as an insolvent.

Referred Case- Mann vs D’Arcy – The managing partner of a firm of produce merchants have entered into a single venture co-partnership with the plaintiff for the purchase and resale of a particular quantity of potatoes on the terms of quall share in the profits and the validity of the co-partnership for the said venture was upheld.

 

DISSOLUTION BY NOTICE OF PARTNERSHIP AT WILL

Section 43 of the said act says that:

(1) Where the partnership is at will, the firm may be dissolved by any partner giving notice in writing to all the other partners of his intention to dissolve the firm.

(2) The firm is dissolved as from the date mentioned in the notice as the date of dissolution or, if no date is so mentioned, as from the date of the communication of the notice.

DISSOLUTION BY THE COURT

Section 44 of the said act says that:

At the suit of a partner, the Court may dissolve a firm on any of the following grounds, namely:

(a) That a partner has become of unsound mind, in which case the suit may be brought as well by    the next friend of the partner who has become of unsound mind as by any other partner

(b) That a partner, other than the partner suing, has become in any way permanently incapable of performing his duties as partner

(c) That a partner, other than the partner suing, is guilty of conduct which is likely to affect prejudicially the carrying on of the business regard being had to the nature of the business

(d) That a partner, other than the partner suing, willfully or persistently commits breach of agreements relating to the management of the affairs of the firm of the conduct of its business; or otherwise so conducts himself in matters relating to the business that it is not reasonably practicable for the other partners to carry on the business.

LIABILITY FOR ACTS OF PARTNERS DONE AFTER DISSOLUTION

 

 (1) Notwithstanding the dissolution of a firm, the partners continue to be liable as such to third parties for any act done by any of them which would have been an act of the firm, if done before the dissolution, until public notice is given of the dissolution : Provided that the estate of a partner who dies, or who is adjudicated an insolvent, or of a partner who, not having been known to the person dealing with the firm to be a partner, retires from the firm, is not liable under this section for acts done after the date on which he ceases to be a partner.

(1)     Notices under sub-section (1) may be given by any partner.

The first sub section of sec. 45 of the Indian Partnership Act is really equivalent to s.36, sub s.(1). Of the English Act, but is more explicitly stated. That enactment speaks of dealings with a firm after a change in its constitution, but older authority makes it clear that the meanings of these words cannot be narrowed to a change short of dissolution. it will be observed that in India public notice as per sec, 72 is now sufficient in all cases, without any distinction between old and new customers. The question arises whether as a literal readings of the term would suggest, public notice is necessary as well as sufficient; in other words, that it would be no answer to a party suing on an act such as here described that, although public notice of dissolution has not been given, the plaintiff was in fact aware that the firm was dissolved. Compare the English Act, s.36 sub s. (2), where there is no express savings of private notice. The best opinion is that notice in fact, of any kind, is good if proved. It will not, of course, be established by matter of mere surmise or conjecture. Section 45(1) has a twofold objective. On the one hand it seeks to protect third parties dealing with the firm who had no notice of its prior dissolution and on the other hand, it also seeks to protect partners of a dissolved firm from liability to third parties for acts of other partners done subsequent to the dissolution.

 

RIGHT OF PARTNERS TO HAVE BUSINESS WOUND UP AFTER DISSOLUTION

Section 46 of The Indian Partnership Act says that: On the dissolution of a firm every partner or his representative is entitled, as against all the other partners or their representatives, to have the property of the firm applied in payment of the debts and liabilities of the firm, and to have the surplus distributed among the partners or which representatives according to their rights.

RECENT DEVELOPMENT ON PARTNERSHIP FIRM IN INDIA

Limited liability partnership is the recent development on partnership in India.

A limited liability partnership protects each partner from personal liability for certain obligations of the partnership. The limited liability partnership differs in one important way from general partnerships. Each partners is not liable to the other partner's debts or obligations as they would be in a general partnership. It is a partnership in which all partners are limited partners. In an LLP one partner is not responsible or liable for another partner's misconduct or negligence. This is an important difference from that of a limited partnership. In an LLP, all partners have a form of limited liability for each individual's protection within the partnership, similar to that of the shareholders of a corporation. Limited liability partnerships are distinct from limited partnerships, in that limited liability is granted to all partners, not to a subset of non-managing "limited partners." As a result the LLP is more suited for businesses where all investors wish to take an active role in management.

—  The Parliament of India has passed the Limited Liability Partnership (LLP) Bill 2008.

—  Lok Sabha granted its assent to the Bill on December 12, 2008 which was earlier passed by the Rajya Sabha.

—  The Limited Liability Parternship Act 2008 has been notified in the official Gazette of India on Januay 9, 2009.

—  The Minister of Corporate Affairs is striving hard to get the first LLP in India be incorporated on 1st April 2009.

FEATURES OF LLP IN UK

Name of LLP: The name of LLP must end with the expression ‘limited liability partnership’ or the abbreviation ‘llp’ or ‘LLP’.

Registered Office: An LLP shall at all times have a registered office situated in England and Wales or in Scotland. The LLP may change its registered office by delivering notice of the change to the RoC.

Formation: A limited liability partnership (LLP) is created by registration of an Incorporation Document with the Registrar of Companies. Section 2(1) of the UK LLP Act provides that two or more person associated for carrying on a lawful business with a view to profit must have subscribed their names to an Incorporation Document. The ROC issues a certificate of registration that is conclusive evidence that the requirements have been complied with and that the LLP is incorporated by the name specified in the Incorporation Document.

Becoming Member:  Any person may become a member of LLP by and in accordance with an agreement with the existing members. Mutual rights and duties of the members as per section 5 are governed by the agreement between the members or between the LLP and its members.

Upper Limit on Membership: There is no upper limit on number of members in an LLP. In that sense it is like a public limited company in India.

Business: An LLP can be set up for any type of trade and business.

Liability of Members: The liability of members of an LLP is limited. However, like a company, the LLP and its assets are primarily liable for the debts and obligations. Under the LLP legislation of UK, a negligent member e.g. an accountant causing loss by negligently preparing accounts, may have unlimited liability. But the non-negligent members would not be at any risk of this type. But in most cases the LLP will be liable.

Members as Agents: Each member as per section 6 of the Act is an agent of the LLP and therefore can act on its behalf in all its business. However, the LLP will not be bound by the actions of a member where that member does not have authority to act and the person dealing with the member is aware of this or does not know or believe the member to be a member of the LLP.

Management: The regulations made under the Limited Liability Partnership Act, 2000 permit every member to take part in the management of the LLP.

Powers of LLP: An LLP has unlimited powers to act and does not face any problems of Doctrine of Ultra-vires which applies to normal companies.

Dissolution: An LLP can be dissolved by agreement of the members. When LLP becomes insolvent, creditors can initiate winding up proceedings. In the winding up of LLP, past and present members are liable to contribute to the extent they have agreed to do in the LLP agreement.

Advantages and Disadvantages: An LLP has the advantage of perpetual succession, limited liability of members; ownership of the property vested in LLP, and may obtain finance by creating floating charge. The disadvantages of this form of organization are public inspection of accounts, costly administration e.g. Filing fees for documents, cost of compulsory audit, etc.

 

INDIAN LLP IS MODELLED ON U.K LLP

The LLP proposed in the MCA Concept Paper and the one proposed by the 2nd Naresh Chandra Committee, are nothing copy- book of the LLP Act, 2000 of UK, with minor changes here and there. The proposed LLP contains identical conditions and resembles with the LLP of UK in the following ways:

1- It is a body corporate with distinct legal entity and perpetual succession.

2-It is created by registration of an incorporation document with the Registrar of Companies.

3-It can be set up for any type of trade and business.

4- It shall have a registered office, the address of which may be changed by lodging with the ROC notice of change in a prescribed manner.

5-Minimum two partners/members are required for its formation and there is no limit on maximum number of partners.

6- Any person may become partner/member of LLP either by subscribing to the Incorporation Document or by agreement with the existing partners. Mutual rights and duties of the members are governed by the agreement between the members or between the LLP and its members.

7- The contents of LLP agreement, as may be prescribed, are to be filed with the ROC.

8-Each partner of LLP is an agent of the LLP and therefore can act on its behalf in all its business.

9-Liability of partners/members shall be limited except in the case of fraud and negligence.

10- The ordinary Partnership Act is not applicable to it.

The major point of difference between LLP proposed in India and the one in UK among others  include the appointment of a manager who is accountable for regulatory and legal compliance. The manager who must be an individual and resident of India shall be personally liable to all penalties imposed on the LLP unless he satisfies the National Company Law Tribunal that he should not be liable. The Manager is required to file with the ROC an annual “Declaration of Solvency” also. Section 2(1) of LLP Act, 2000 of UK3 relating to incorporation provides :

(i)Two or more persons must subscribe their names to an incorporation document.

(ii) They must carry some lawful business for profits. The word “business” under section 18 of the LLP Act of U.K includes Every trade, profession and occupation.

(iii) They must deliver to the Registrar of Companies under Companies Act, 1985 an incorporation document. Even though the original intention of UK Legislation was to restrict the use of LLPs to professionals only like it was recommended by the 2nd Naresh Chandra Committee in India, but the LLP Act, 2000 of UK, as per section 1(3) makes them available to every trade or business. LLP of UK may carry out whatever trade or business it wishes, while USA limits it to professional services only. Section 6(1) of LLP Act of UK provides that every member of an LLP is the agent of LLP. The UK Act binds the LLP for the wrongful acts of its member unless the act is unauthorized and the member knew that he had no authority. Section 10 of the UK LLP Act lays down that a trade, profession or business carried on by an LLP, with the view to profit, shall be treated as carried on in partnership by its members and not by the LLP itself. Thus, any asset held by an LLP, or any tax chargeable on gains made shall be treated as held by the partners, or gains made by the partners, and not by the LLP itself. In other words, an LLP enjoys a pass-through status and is not taxable as such; the taxation liability falls on the partners in their individual capacity.

 

 

 

CONCLUSION

After my research I found that the Partnership law is very important in 21st century due to its several advantages for example; easy formation, registration not compulsory, larger financial resources, greater managerial talent, more credit standing, quicker and better business decisions, sharing of risks, flexibility, easy dissolution etc. After comparing English and Indian situations in partnership law we found that the Indian Partnership Act is very similar to English Partnership Act, 1890 except few differences, for example, in English law registration of partnership firm is compulsory but in India registration of partnership firm is not compulsory. In English law minor may be a partner to the firm by the consent of all the partners of the firm but in India law a minor cannot be a partner, can only be a beneficiary. In English partnership law LLP already exists but in India it is in process to come. Partnership firm is important in this a partnership is not created by status; no partner can dominate on other partner in a partnership firm. All are equally liable in partnership firm. In Indian Partnership act 1932, a partner retiring is liable for debts of the firm before he retires but in English partnership law a retiring partner is not liable for the debts while he or she retires.  Since business transaction plays a important role in the development of every country so this partnership type of business is started for the encouragement of business because a single person can’t bear high capital business, so law has given provisions of partnership type of business with suitable law. So in this globalization era its duty of every country to develop its laws regarding partnership according to the changes in the business world then only it can lead the country to development through law.

BIBILOGRAPHY

·         LAW OF PARTNERSHIP III edition by Dr. Avatar Singh, published by Eastern Book Company.

·         Pollock and Mulla The sale of Goods Act VII edition, by Dr. Justice GC Bharuka, published by LexisNexis Butterworths .

·         Goyle’s The Law of Partnership, II edition, by M.R. Mallick, published by Eastern Law House .

 

 

 

 

 

 

 

 


[1] POLLOCK & MULLA, The Indian Partnership Act, p.2, 6th edition

[2] Re Abenheim  (1913) 109 LT 219

[3] Pollock, Digest  of the Law of Partnership,12th edn,p.5

[4] Supra note1 p.10

[5]( 1860) 8 HLC 268, 312.

[6] Sangener Dal and Flour Mills v. FC and ors AIR 1992 SC 481.

[7] 2000(2) Andh LT 234.

[8] P.Venkateswarlu  vs. Lakshmi Narshima Rao, AIR 2002 AP 62


"Loved reading this piece by Adv. Ankur Mishra?
Join LAWyersClubIndia's network for daily News Updates, Judgment Summaries, Articles, Forum Threads, Online Law Courses, and MUCH MORE!!"






Tags :


Category Others, Other Articles by - Adv. Ankur Mishra 



Comments


update