Civil Procedure Code (CPC)

Property brought in as capital in partnership firm

This query is : Resolved 

Querist : Anonymous (Querist)
15 June 2021

Two individuals A & B entered into a partnership firm. A brought in a property as a capital contribution into the firm. This partnership firm never did any business until both partners died. It was only a paper partnership. A died first and then B died a few years later. None of the legal heirs of A joined the partnership firm after the death of A.

Now the legal heirs of both partners want to settle this issue. How can this matter be settled now?

kavksatyanarayanaOnline (Expert)
15 June 2021

When there are only two partners, and if one partner has died, then it is deemed to be dissolved. If the deceased partner had put a capital, then his capital shall be given to the legal heirs of the deceased. The firm is not yet commenced, the question of profit does not arise. And you stated that the deceased partner had not invested any property/cash, the question of giving does not arise. However, as they are asking, please settle the issue amicably. If you go to court, it will take more time.

Querist : Anonymous (Querist)
15 June 2021

Thank you Sir.

I have a further query regarding appreciation in the property value. Say for example when the property was contributed by A to the partnership firm, its valuation was 10 lakhs and as of today the valuation is 15 lakhs.

So as per your above reply Rs.10 lakhs goes to "A".

But what about Rs.5 lakhs?

Dr J C VashistaOnline (Expert)
16 June 2021

I agree and appreciate the analyses, opinion and advise of expert Mr. Kavksatyanarayana.
The partnership never existed hence the capital and land invested pertain to the individual contributor to non-existent firm.
Appreciation of the land (Rs. 5 lakh) belong to A.
Prima facie a hypothetical and fabricated topic has been posted by an anonymous person for time pass.

Sankaranarayanan Online (Expert)
16 June 2021

I do agree with expert Mr.Satyanaraya reply

Querist : Anonymous (Querist)
16 June 2021

Thank you to all experts

Asgher MahdiOnline (Expert)
16 June 2021

Death of partners leads to death of partnership. As there are no partners, the claims over the property will be mutas mutandi

T. Kalaiselvan, Advocate Online (Expert)
17 June 2021

The Supreme Court observed that when there are only two partners in a firm, on the death of one the firm is deemed to be dissolved despite the existence of any clause which says otherwise. Therefore, if in a firm comprised of only two persons as partners one dies, the contract comes to an end.
When property is distributed to a partner, then the partnership must treat it as a sale at fair market value ( FMV ). The partner's capital account is decreased by the FMV of the property distributed. The book gain or loss on the constructive sale is apportioned to each of the partners' accounts .
Subject to any agreement to the contrary, partnership debts must be paid in the following order:

to creditors other than partners—that is, all the outside creditors
to partners for debts other than for their capital contributions to the partnership (that is, their investment in the partnership) and their share of any partnership profits that remain unpaid
to partners for their capital contributions to the partnership, and
to partners for their share of any unpaid partnership profits.

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