Unit III - Companies Act and Indian Partnership Act

Faculty of Management Studies and Commerce

UM22BB242B - BUSINESS LAW (4-0-0-4-4)

UNIT-III

Introduction to Companies Act

• Company legislation in India owes its origin to the English law

• The companies act passes from time in India have been following the English
companies act with certain modifications
• The first legislative enactment for registration of joint stock companies was passed in
the year 1850.
• The principle of limited liability was first introduced in England by the limited
liability act of 1885 under which a company was entitled to obtain certificate of
registration with limited liability.
• The English companies act 1856 replaces both the acts of 1554 and 1855.
• Under this English companies Act 1856 any 7 or more persons could form themselves
into an incorporated company, with or without limited liability by signing a
memorandum of association and complying with the requirements of the act.
• This English company’s act passed to India, then came the companies act of 1866 for
consolidating and amending the law relating to the incorporation, regulation and
winding up of trading companies and other associations
• The companies act of 1866 in India was recast in 1882 to bring the Indian company’s
law in conformity with the various amendments made to the English companies act of
1862. this act stood the test of time till 1913
• At the end of World War II, the need for further revision of the company’s law was
felt
• In 1950, 25th October a committee of 12 members representing various interest under
the chairmanship of Mr. H.C. Bhabha

• The Bhabha committee submitted a comprehensive report on all aspects of company

law in April 1952.
• The recommendations of the committee culminated in the most comprehensive and
voluminous law on the subject in the companies act of 1956.
• The act has been amended several times since it was codified. The major amendments
are Constitution of the national company law tribunal in place of company law bard
• Revival, rehabilitation and winding up of sick industrial companies
• Introduction of an innovative model of a private company called the producer
company

• The act extends to the whole of India except that-

As regards state of Nagaland, it applies, subject to such modification, if any, as the
central government may, by notification in the official gazette, specify. Sec1(3)
As regards goa, daman and du such of the provisions of the act shall not apply or shall
apply only with such exceptions and modifications or adaptations to any existing
company registered under the act

• A company in common parlance, means a group of persons associated together for the
attainment of a common end, social or economic.
• The term registered company means a company incorporated under the companies act
1956
• Companies incorporated under the companies act 1956 are mostly business companies
but they may also be formed for promoting art, charity, research, religion, commerce
or any other useful purpose.
• A voluntary association of person: In broad sense may mean an association of
individual formed for some common purpose. But it is a voluntary association of
persons. It has capital divisible into parts known as shares.it is an artificial person
created by a process of law
• An artificial person: a company has no body, no soul and no conscience nor is it
subject to imbecilities of the body.
• Separate legal entity: it is an independent corporate existence. Any of its members can
enter into contract with it in the same manner as any other individual can and he
cannot be held liable for the acts of the company even if he holds virtually the entire
share capital.
 • Limited liability: a company may be a company limited by shares or a company
limited by guarantee - In a company limited by shares, the liability of members is
limited to the unpaid valve of the shares.
• Perpetual succession: it never dies nor does its life depend on the life of its members.
It is not any manner affected by insolvency, mental disorder or retirement of any of its
members.
• Common seal: since a company has no physical existence, it must act through its
agents and all such contracts entered into by its agent must be under the seal of the
company. The common seal acts as the official signature of the company
• Transferability of shares: the capital of a company is divisible into parts, called shares.
These shares are subject to certain conditions, freely transferable, so that no
shareholder is permanently or necessarily wedded to company.
• Separate property: As a company is a legal person distinct from its members, it is
capable of owning, enjoying and disposing of property in its own name
• Capacity to sue: A company can sue and be sued in its corporate name

Formation of a company

• Section 3 of the Companies Act, 2013, details the basic requirements of forming a
company as follows:
• Formation of a public company involves 7 or more people who subscribe their names
to the memorandum and register the company for any lawful purpose.
• Similarly, 2 or more people can form a private company.
• One person can form a One-person company.

Registration or Incorporation of a Company

Section 7 of the Companies Act, 2013, details the procedure for incorporation of a company.
The procedure is as follows:

• Filing of company registration papers with the registrar

• To incorporate a company, the subscriber has to file the following company
registration papers with the registrar within whose jurisdiction the location of the
registered office of the proposed company falls.
 • The Memorandum and Articles of the company. All subscribers have to sign on the
memorandum.
• The person who is engaged in the formation of the company has to give a declaration
regarding compliance of all the requirements and rules of the Act. A person named in
the Articles also has to sign the declaration.
• Each subscriber to the Memorandum and individuals named as first directors in the
Articles should submit an affidavit with the following details:
• Declaration regarding non-conviction of any offence with respect to the formation,
promotion, or management of any company.
• He has not been found guilty of fraud or any breach of duty to any company in the last
five years.
• The documents filed with the registrar are complete and true to the best of his
knowledge.
• Address for correspondence until the registered office is set-up.
• If the subscriber to the Memorandum is an individual, then he needs to provide his full
name, residential address, and nationality along with a proof of identity. If the
subscriber is a body corporate, then prescribed documents need to be provided.
• Individuals mentioned as subscribers to the Memorandum in the Articles need to
provide the details specified in the point above along with the Director Identification
Number.
• The individuals mentioned as first directors of the company in the Articles must
provide particulars of interests in other firms or bodies corporate along with their
consent to act as directors of the company as per the prescribed form and manner.

Issuing the Certificate of Incorporation

Once the Registrar receives the information and company registration papers, he registers all
information and documents and issues a Certificate of Incorporation in the prescribed form.

Corporate Identity Number (CIN)

The Registrar also allocates a Corporate Identity Number (CIN) to the company which is a
distinct identity for the company. The allotment of CIN is on and from the company’s
incorporation date. The certificate carries this date.

Maintaining copies of Company registration papers

The company must maintain copies of all information and documents until dissolution.

Furnishing false information at the time of incorporation

During the formation of a company, an individual can:

Furnish incorrect or false information

Suppress any material information in the documents provided to the Registrar for the
incorporation, on purpose

In such cases, the individual is liable for action for fraud under section 447.

The company is already incorporated based on false information

If a company is already incorporated but it is found at a later date that the information or
documents submitted were false or incorrect, then the promoters, first directors, and persons
making a declaration is liable for action for fraud under section 447.

Order of the National Company Law Tribunal (NCLT)

• If a company is incorporated by furnishing false or incorrect information or

representation or suppressing material facts or information in the documents
furnished, the Tribunal can pass the following orders (if an application is made and
the Tribunal is satisfied with it):
• Pass an order to regulate the management of the company. It can include changes in
its Memorandum and Articles if required. This order is either in public interest or in
the interest of the company and its members and creditors.
• Make the liability of its members unlimited
• Order removal of the name of the company from the Registrar of Companies
• Order the company to wind-up
• Pass any other order as it deems fit
• Before passing an order, the Tribunal has to give the company a reasonable
opportunity to state its case. Also, the Tribunal should consider the transactions of the
company including obligations contracted or payment of any liability.

Effect of Registration of a Company

According to Section 9 of the Companies Act, 2013, these are the effects of registration of a
company:

From the date of incorporation, the subscribers to the Memorandum and all subsequent
members of the company are a body corporate.

A registered company can exercise all functions of a company incorporated under the Act.
Also, the company has perpetual succession with power to acquire, hold, and dispose of
property of all forms. Also, it can contract, sue and be sued by the said name.

Further, the company becomes a legal person separate from the incorporators from the date of
incorporation. Also, a binding contract comes into existence between the company and its
members as mentioned in the Memorandum and Articles of Association. Until the company
dissolves or the Registrar removes it from the register, it has perpetual existence.

Memorandum of association

• The memorandum of association is a document of great importance in relation to the

proposed company

• The purpose of memorandum:

1. The prospective shareholders shall know the field in, or the purpose for, which their
money going to be used by the company and what risk they are undertaking in making
investment

2. The outsiders dealing with the company shall know with certainty as to what the
objects of the company are and as to whether the contractual relation into which they
contemplate to enter with the company is within the objects of the company

Contents of memorandum

• The name of the company

• The state in which the registered office of the company is to be situate

• The objects of the company to be pursued by the company on its incorporation and
objects incidental or ancillary to the attainment of the main objects

• Limited liability
 • Share capital

• Association clause

Alteration of MOA

• Alteration of conditions

1. Change of name –

- by special resolution

- By ordinary resolution-

- Fresh certificate of incorporate

- on

2. Change of registered office

- Change of registered office from the jurisdiction of one ROC to the jurisdiction of
another ROC within a state

- Change of registered office from one state to another

Article of association

• The articles of association or just articles are the rules, regulations and bye law for the
internal management of the affairs of a company

• Content of articles

- Articles should contain provisions relating to the following matters:

- Share capital, rights of shareholder, variation of these rights, payment of commission

share certificates

- Lien on shares

- Calls on shares

- Transfer of shares

- Transmission of shares
 - Forfeiture of shares

- Conversion of shares into stocks

- Share warrants

- Alteration of capital

- General meetings and proceedings

- Voting rights of members, voting and poll, proxies

- Directors – appointment and remuneration

- Manager

- Secretary

- Dividends and reserves

- Account, audit and borrowing power

- Capitalization of profits

- Winding up

Legal effect of Memorandum and Articles

• Member to the company

• Company to the members

• Members interest

• Company to the outsiders

Company management

Director
• Director includes any person occupying the position of director by whatever name
called.
• No body corporate, association or firm can be appointed director of a company. Only
an individuals can be so appointed
• Every public company shall have at least three directors and every other company and
a private company at least two directors
• The number so fixed may be increased or reduced within the limits prescribed by the
article by an ordinary resolution of the company in general meeting.
• Any increase in number of directors beyond the maximum permitted by the article
shall be approved by the central government. But where the increase in number does
not make the total number of directors more than 12 than there is no need of approval
of the central government.
Appointment of directors:

• The article of a company usually names the first directors by their respective names or
prescribe the method of appointing them.
• In the case of a public company or a private company which is subsidiary of a public
company, at least 2/3 of the total number of directors shall be liable to retire by
rotation. Such directors are called rotational directors and shall be appointed by the
shareholders in general meeting
• An additional director
• In a casual vacancy- board of directors can fill the vacancy in board meeting
• An alternate director
• Appointment of directors by third parties: Debenture holders or other creditors e.g
bankers or banking company or financial incorporation can appoint the director.
• The article of a company may provide forth appointment of not less than 2/3 of the
total number of directors of a public company or of a private company which is
subsidiary of a public company according to the principle of proportional
representation.
• Empowers the central government to appoint such number of directors on the board of
a company as the company law board may, by order in writing, specify as necessary to
effectively safeguard the interest of the company or its shareholders or the public
interest.
• The appointment will be for a period not exceeding 3 years on any occasion
• A person shall not hold office at the same time as director in more than 15 companies
• Where a person already holding the office of director in 15 companies is appointed as
a director of any other company, the appointment shall not take effect unless such
 person has within 15 days of his appointment effectively vacated his office as director
in any of the companies in which he was already a director
• The shareholders may remove a director before the expiry of his period of office by
passing an ordinary resolution
• The central government may in certain circumstances, remove managerial personnel
from office on the recommendation of the tribunal
• Where on an application to the company law board for prevention of oppression or
mismanagement the company law board finds that that the relief ought to be granted,
it may terminate set aside or modify any agreement between the company
• In the case of every company meeting of its board of directors shall be held at least
once in every quarter and at least 4 such meeting shall be held in every year.
• Notice of every meeting of the board of directors of a company shall be given in
writing to every director for the time being in India, and at his usual address in India
• The quorum for a meeting of the board shall be 1/3rd of its total strength, or 2
directors whichever is higher

Company meetings

The meeting of a company may be classified as follows:

Statutory meetings
Annual general meeting
Extraordinary meeting

These meetings are general meeting of a company as these are meetings of all the members of
the company

Statutory meeting
• Every company limited by shared and every company limited by guarantee and
having a share capital shall within a period not less than one month nor more than six
months from the date at which company is entitled to commence business, hold a
general meeting of the members of the company.
• This meeting is called the statutory meeting.
• This is the first meeting of the shareholders of a public company and is held once in
the lifetime of a company
Statutory report:
• The board of directors shall at least 21 days before the day on which the meeting is to
be held forward a report called statutory report to every member of the company.

Content of the statutory report:

• Total shares allotted

• Cash received
• Abstract of receipts and payment
• Directors and auditors
• Contracts
• Underwriting contract
• Commission and brokerage

Procedure at the meeting:

• List of members
• Discussion of matters relating to formational aspect
• Adjournment
• Consequences of default

Annual General Meeting:

• The first annual general meeting must be held within 18 months from the date of the
incorporation of the company
• The subsequent annual general meeting should be held each year and note more than
15 months must elapse between the date of one annual general meeting and the next.
It must be within six months after the closing of the financial year of the company.
• The notice for the meeting must clearly specify that the meeting in the annual general
meeting.
• It should also state the date, time and place of the meeting and it must be sent to event
member at least 21 days before the date of the meeting.
• The notice for the meeting must be accompanied by a copy of the audited balance
sheet and profit and loss account for the previous year and also the annual report of
directors.

Content of Annual report of directors:

 • A brief statement on the trading results of the company in the past year
• The amount proposed to be carried to the reserve fund
• The amount proposed to be paid as dividend
• Material changes and commitments if any affecting the financial position
• The conservation of energy, technology absorption, foreign exchange earnings and
outgo in such manner as may be prescribed
• A statement indicating the name of every employee of the company who-
• If employed throughout the financial year, was in receipt of remuneration for that year
which, in the aggregate was not less than such sum as may be prescribed
• If employed for a apart of the financial year, was in receipt of remuneration for any
part of that year, at a rate which, in the aggregate, was not less than sum as may be
prescribed

Extraordinary General Meeting:

• Every general meeting other than the statutory meeting and the annual general
meeting is an extraordinary general meeting.
• Such a meeting is generally convened for transacting some special or urgent business
which has to be done before the next annual general meeting.

Resolutions

The term motion refers to a definite proposal put before a meeting for consideration and
decision. Once the motion is passed it is a resolution.
Under the companies act, there are three kinds of resolutions. They are
• Ordinary resolution
• Special resolution
• Resolution requiring special notice.

Ordinary resolution
A resolution which is passed by simple majority of votes cast by members personally or by
proxy is called ordinary resolution.
When is an ordinary resolution required?
• Rectification of name or adoption of new name where it resembles the name of an
existing company with the previous approval of the central government.
 • Issues of shares at a discount.
• Alteration of share capital.
• Re-issue of redeemed debentures.
• Adoption of statutory report.
• Passing of annual accounts and balance sheet, along with reports of board of directors
and auditors.
• Appointment of auditors and fixation of their remuneration.
• Appointment of first directors who are liable to retire by rotation.
• Increase or reduction in the number of directors within the limit fixed by the articles.
• Appointment of managing/whole-time director.
• Removal of a director and appointment of a director in his place.
• Approval of appointment of sole selling agents.
• Winding up a company voluntarily in certain events.
• Appointment and fixation of remuneration of liquidators in a members voluntary
winding up.
• Nomination of a liquidator in a creditors voluntary winding up.

Special resolution

• A special resolution is one which is required to be passed by a three-fourth majority

• This type of resolution is required for transacting special business
• The special resolution is one which satisfies the following conditions:
• The intention to propose the resolution as a special resolution has been duly specified
in the notice calling the general meeting
• The votes cast in favour of the resolution by members entitled to vote are not less
than 3 times the number of votes cast against the resolution by members so entitled
and voting. The members may vote in person, or where proxies are allowed, by
proxies.
• An explanatory statement setting out all material facts concerning the subject matter
of the special resolution
• A copy of every special resolution together with the copy of the explanatory statement
shall within 30 days of the passing of the resolution, be filed with the registrar
Winding-up of a company

Winding up or liquidation of a company represent the last stage in its life. It means a
proceeding by which a company is dissolved.
There are three modes of winding up of a company
• Winding up by the court
• Voluntary winding up
• Winding up subject to supervision of court

Winding up by the court

• Winding up of a company under the order of a court is also known as compulsory
winding up
• Grounds for compulsory winding up.
• Special resolution of the company.
• Default in delivering the statutory report to the registrar or in holding statutory
meeting.
• Failure to commence, or suspension of business.
• Reduction in membership.
• Inability to pay its debts.
• The court may order winding up under the just and equitable clause in the following
cases:
When the substratum of a company is gone
When the company is carrying on its business at a loss and there is no reasonable hope
that the object of trading of a profit can be attained
When the existing and probable assets of the company are insufficient to meet its
existing liabilities
When the management is carried on in such a way that the minority is disregarded or
oppressed
Where there is a deadlock in the management of the company

Voluntary winding up

• Voluntary winding up means winding up by the members or creditors of a company

without interferences by the court
• The object of a voluntary winding up is that the company i.e the members as well as
the creditors are left free to settle their affairs without going to the court.
• The company may be wound up voluntarily by
• By passing an ordinary resolution
• By passing a special resolution
• A voluntary winding up shall be deemed to commence at the time when the resolution
for the winding up is passed.
• Within 14 days of the passing of the resolution for voluntary winding up of the
company the company shall give notice of the resolution by advertisement in the
official gazette and in some newspapers
• A voluntary winding up may be a
• Members voluntary winding up
• Creditors voluntary winding up
• Members voluntary winding up:
In a voluntary winding up of a company if a declaration of its solvency is made
accordance with the provision of sec 488, it is a members voluntary winding up
• The declaration shall be made by a majority of the directors at a meeting of the board
of directors that the company has no debts or that it will be able to pay its debt in the
full within 3 years from the commencement of the winding up and the declaration
shall be verified by an affidavit
• The declaration shall have effect only when it is –
• Made within five weeks immediately before the date of the resolution and delivered to
the registrar for the registration before that date
• Accompanied by a copy of the report of the auditors of the company on the profit and
loss account of the company from the date of the last profit and loss account to the
latest practicable date immediately before the declaration of solvency
• The balance sheet of the company
• Statement of the company assets and liabilities as on the last-mentioned date.
• Within 14 days of the passing of the resolution for voluntary winding up of the
company the company shall give notice of the resolution by advertisement in the
official gazette and in some newspapers
• A voluntary winding up may be a
• Members voluntary winding up
 • Creditors voluntary winding up

Members voluntary winding up:

• In a voluntary winding up of a company if a declaration of its solvency is made

accordance with the provision of sec 488, it is a members voluntary winding up
• The declaration shall be made by a majority of the directors at a meeting of the board
of directors that the company has no debts or that it will be able to pay its debt in the
full within 3 years from the commencement of the winding up and the declaration
shall be verified by an affidavit
• The declaration shall have effect only when it is –
• Made within five weeks immediately before the date of the resolution and delivered to
the registrar for the registration before that date
• Accompanied by a copy of the report of the auditors of the company on
• The profit and loss account of the company from the date of the last profit and loss
account to the latest practicable date immediately before the declaration of solvency
• The balance sheet of the company
• Statement of the company assets and liabilities as on the last-mentioned date.
• Provisions applicable to a member voluntary winding up.
• Appointment and remuneration of liquidators.
• Board powers to cease on appointment of a liquidator.
• Power to fill vacancy in office of liquidator.
• Notice of appointment of liquidator to be given to registrar.
• Power of liquidator to accept shares.
• Duty of liquidator to call creditors meeting in case of insolvency.
• Duty to call general meeting at the end of each year.
• Final meeting and dissolution.
• Provisions as to annual and final meeting in case of insolvency.
• Creditors voluntary winding up:
• A voluntary winding up of a company in which a declaration of its insolvency is not
made is referred to as creditors voluntary winding up.
• Provisions applicable to creditors voluntary winding up:
• Sec. 500 to 509 shall apply in relation to a creditors voluntary winding up.
• Meeting of creditors.
 • Notice of resolution to be given to registrar.
• Appointment of liquidator.
• Appointment of committee of inspection.
• Liquidator remuneration.
• Board powers to cease on appointment of liquidator.
• Power to fill vacancy in office of liquidator.
• Power of liquidator to accept shares etc., as consideration for sale of property.
• Duty of liquidator to call meeting at the end of each year.
• Final meeting and dissolution.

Indian Partnership Act, 1932

DEFINITION & NATURE OF PARTNERSHIP

INTRODUCTION

The law of partnership is contained in the Indian Partnership Act, 1932, which came into
force on 1st October 1932, except Section 69 (dealing with the effect of non-registration of
firms), which came into force on 1st October 1933.

Since partnership comes into existence only by a contract between the parties for the purpose,
the provisions of the Indian Contract Act, except when they are inconsistent with the express
provisions of the Partnership Act, continue to apply to partnership firms (Sec. 3).

DEFINITION OF PARTNERSHIP

Section 4 of the Indian Partnership Act, 1932, defines 'partnership' in the following terms:

"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."

ESSENTIAL ELEMENTS: This definition contains five elements which constitute a

partnership, namely: (1) There must be an agreement; (2) between two or more persons; (3)
who agree to carry on a business; (4) with the object of sharing profits; and (5) the business
must be carried on by all or any of them acting for all (i.e., there must be mutual agency)
Agreement

There must be an agreement to form a partnership disagreement may be expressed or implied

this essential element is further clarified under Section 5 provides that the relation of
partnership arises from contract and not from status that is why I am Hindu undivided family
carry on a family business is not considered as a partnership the reason is that coparceners of
a Hindu undivided family acquire interest in the business because of their status that is birth
in the family and not because of an agreement between them thus partnership is voluntary and
contractual in nature.

Two or more Persons

There must be at least 2 persons to form a partnership and all such persons must be competent
to contract according to section 11 of the Indian contract act 1872 every person except in the
following is competent to contract minor person of unsound mind and person disqualified by
any law to which they are subject.

Business

There must exist a business. Section 2 (b) the term business includes every trade occupation
and profession for example when 2 or more persons agreed to share the income of a joint
property example rent from building it does not amount to a partnership because there does
not exist any business similarly an association created for charitable religious or social
purpose cannot be regarded as partnership because there does not exist in a business it me
also be noted that an agreement to carry on business at a future time does not result in
partnership unless the time arrives and the business is started.

Sharing of Profits

There must be sharing of profit sharing of profit does not necessarily imply sharing of losses
as well that is why there are minor partner and partner in profits only it me also be noted that
sharing of profit is a prima facie evidence and not a conclusive evidence of partnership that is
why everyone who shares the profits of a business need not necessarily be a partner for
example a manager who receives a particular share in the profits of a business as a part of his
remuneration is simply an employee and not a partner.

Mutual Agency
There must exist a mutual agency relationship among the partners mutual agency relationship
means that each partner is both an agent and principal each partner is an agent in the sense
that he has a capacity to bind other partners by his acts done. Each partner is a principal in the
sense that is bound by the acts of other partners Because of the existence of mutual agency
relationship among the partners the law of partnership is also regarded as an extension of
general law of agency it may be noted that mutual agency relationship distinguishes a
partnership from Co ownership and simple agreement for sharing profits.

PARTNERS, FIRM AND FIRM NAME

• 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' (Sec. 4).

• A 'firm' is not a separate legal entity distinct from its members. It is merely a collective
name of the individuals composing it.

• Hence, unlike a company which is a separate legal entity distinct from its members, a firm
cannot possess property or employ servants, neither it can be a debtor nor a creditor.

• It cannot sue or be sued by others. It is only for the sake of convenience that in commercial
usage terms like 'firm's property,' 'employee of the firm,' 'suit against the firm' and so on are
used, but in the eye of law that simply means 'property of the partners,' 'employee of the
partners ' and 'a suit against the partners' of that firm. It is relevant to state that for the
purposes of the Income Tax Act, a partnership firm is an entity quite distinct from the
partners composing it and is assessable separately.

Nature of partnership firm

A partnership firm is not a person in the eyes of law it has no separate legal entity apart from
the partners constituting it Thus firm themselves cannot enter into a contract for partnership
though their partners can for example 2 firms namely M/s A and B and M/s X&Y themselves
cannot form a new partnership to the partners of individual firms can form a partnership.

PARTNERSHIP VS. JOINT STOCK COMPANY

Basis Partnership Joint Stock Company
Legal status A firm is not legal entity i.e., it has no A company is a separate legal entity
legal personality distinct from the distinct from its members (Salomon v.
personalities of its constituent Salomon).
members.
Agency In a firm, every partner is an agent of In a company, a member is not an
the other partners, as well as of the agent of the other members or of the
firm. company, his actions do not bind
either.
Distribution The profits of the firm must be There is no such compulsion to
Of profits distributed among the partners distribute its profits among its
according to the terms of the members. Some portion of the profits,
partnership deed. but generally not the entire profit,
become distributable among the
shareholders only when
dividends are declared.
Extent of liability In a partnership, the liability of the In a company limited by shares, the
partners is unlimited. This means that liability of a shareholder is limited to
each partner is liable for debts of a firm the amount, if any, unpaid on his
incurred in the course of the business shares, but in the case of a guarantee
of the firm and these debts can be company, the liability is limited to the
recovered from his private property, if amount for which he has agreed to be
the joint estate is insufficient to meet liable. However, there may be
them wholly. companies where the liability of
members is
unlimited.
Property The firm’s property is that which is the In a company, its property is separate
“joint estate” of all the partners as from that of its members who can
distinguished from the ‘separate’ estate receive it back only in the form of
of any of them and it does not belong dividends or refund of capital.
to a body distinct in law from its
members.
Transfer shares oA share in a partnership cannot be In a company a shareholder may
f transferred without the consent of all transfer his shares, subject to the
the partners. provisions contained in its articles. In
the case of public limited companies
whose shares are quoted on the stock
exchange, the transfer is usually
unrestricted.

Management In the absence of an express Members of a company are not

agreement to the contrary, all the entitled to take part in the
partners are entitled to participate management unless they are
in the management. appointed as directors, in which case
they may participate. Members,
however, enjoy the right of attending
general meeting and voting where
they can decide certain questions such
as election of directors, appointment
of auditors, etc.
Registration Registration is not compulsory in A company cannot come into
the case of partnership. existence unless it is registered under
the Companies Act, 2013.
Winding up A partnership firm can be A company, being a legal person is
dissolved at any time if all the either wind up by the National
partners agree. Company Law Tribunal or its
name is struck of by the Registrar of
Companies.
Number of According to section 464 of the A private company may have as many
memberships Companies Act, 2013, the number of as 200 members but not less than two
partners in any association shall not and a public company may have any
exceed 100. number of members but not less than

However, the Rule given under the seven. A private Company can also be

Companies (Miscellaneous) formed by one person known as one

 Rules, 2014 restrict the present limit to person company
50.

Duration of Unless there is a contract to the A company enjoy a per

existence contrary, death, retirement or succession.
insolvency of a partner results in
the dissolution of the
firm.

PARTNERSHIP VS. CLUB

Basis of Difference Partnership Club

Definition It is an association of persons formed A club is an association of persons
for earning profits from a business formed with the object not of earning
carried on by all or any one of them profit, but of promoting some
acting for all. beneficial purposes such as
improvement of health or providing
recreation for the
members,
Relationship Persons forming a partnership are called Persons forming a club are called
partners and a partner is an agent for members. A member of a club is not the
other partners. agent of other members.
Interest in the Partner has interest in the property of A member of a club has no interest in
property the firm. the property of the club.
Dissolution A change in the partners of the firm A change in the membership of a club
affect its existence. does not affect its existence.

PARTNERSHIP VS. HINDU UNDIVIDED FAMILY

Basis of difference Partnership Joint Hindu family
Mode of creation Partnership is created necessarily by an The right in the joint family is
agreement. created by status means its
creation by birth in the family.
Death of a member Death of a partner ordinarily leads to The death of a member in the
the dissolution of partnership. Hindu undivided family does not
give rise to
dissolution of the family
business.
Management All the partners are equally entitled The right of management of
to take part in the partnership joint family business generally
business. vests in the Karta, the
governing male member or
female member of the family.
Authority to bind Every partner can, by his act, bind The Karta or the manager, has
the firm. the authority to contract for the
family business and the other
members in the family.
Liability In a partnership, the liability of a In a Hindu undivided family,
partner is unlimited. only the liability of the Karta is
unlimited, and the other
coparcener are liable only to
the extent of their share in the
profits of the family business.
Calling for accounts on A partner can bring a suit against the On the separation of the joint
closure firm for accounts, provided he also family, a member is not
seeks the dissolution of the firm. entitled to ask for account of
the family business.
Governing Law A partnership is governed by the A Joint Hindu Family
Indian Partnership Act, 1932. business is governed by the
Hindu Law.
Minor’s capacity In a partnership, a minor cannot In Hindu undivided family
become a partner, though he can be business, a minor becomes a
admitted to the benefits of member of the ancestral
partnership, only with the consent of business by the incidence of
all the partners. birth. He does not have to wait
for attaining majority.
Continuity A firm subject to a contract between A Joint Hindu family has the
the partners gets dissolved by death continuity till it is divided. The
or insolvency of a partner. status of Joint Hindu family is
not thereby affected by the
Death of a member.
Number of In case of Partnership number of Members of HUF who carry on
Members members should not exceed 50. a business may be unlimited in
number.
Share in the business In a partnership each partner has a In a HUF, no coparceners have
defined share by virtue of an a definite share. His interest is
agreement between the partners. a fluctuating one. It is capable
of being enlarged by deaths in
the family diminished by births
in the family.

PARTNERSHIP VS. CO-OWNERSHIP OR JOINT OWNERSHIP (i.e. the relation

which subsists between persons who own property jointly or in common.)

Basis of difference Partnership Co-ownership

Formation Partnership always arises out of a Co-ownership may arise either from
contract, express or implied. agreement or by the operation of law,
such as by
inheritance.
Implied agency A partner is the agent of the other A co-owner is not the agent of other co-
partners. owners.
Nature of interest There is community of interest which Co-ownership does not necessarily
means that profits and losses must involve sharing of profits and losses.
have to be shared.
Transfer of A share in the partnership is A co - owner may transfer his interest or
interest transferred rights in the property without the consent
only by the consent of other partners. of other co-owners.

PARTNERSHIP VS. ASSOCIATION

Basis of difference Partnership Association

Meaning Partnership means and involves Association evolves out of social cause
setting up relation of agency where there is no necessarily motive to
between two or more persons who earn and share profits. The intention is
have entered into a business for not to enter in a business for gains.
gains, with the intention to share the
profits of such a business.
Examples Partnership to run a business and Members of charitable society or
earn profit thereon. religious association or an improvement
scheme or building corporation or a
mutual insurance society or a trade
protection association.
 KINDS OF PARTNERSHIPS
The following chart illustrates the various kinds of partnership

Kinds of
Partnership

with regardto Withregardto

duration theextentofthe
business

Partnership at Partnership for a Particular General

will fixed period partnership partnership

The various kinds of partnership are discussed below:

Partnership at will

According to Section 7 of the Act, partnership at will is a partnership when:

i. no fixed period has been agreed upon for the duration of the partnership; and
ii. there is no provision made as to the determination of the partnership.

These two conditions must be satisfied before a partnership can be regarded as a partnership
at will.
But, where there is an agreement between the partners either for the duration of the
partnership or for the determination of the partnership, the partnership is not partnership at
will. Where a partnership entered into for a fixed term is continued after the expiry of
such term, it is to be treated as having become a partnership at will.

A partnership at will may be dissolved by any partner by giving notice in writing to all the
other partners of his intention to dissolve the same.
It may be noted that if this freedom to dissolve the firm at will is curtailed by agreement, say, if
the agreement provides that the partnership can be dissolved by mutual consent of all the
partners only, it will not constitute a 'partnership at will.'

Partnership for a fixed period:

Where a provision is made by a contract for the duration of the partnership, the partnership
is called ‘partnership for a fixed period’. It is a partnership created for a particular period of
time. Such a partnership comes to an end on the expiry of the fixed period

Particular partnership:

When a partnership is formed for a particular or specific venture or undertaking, e.g., for
working a coal mine or producing a film, it is called a ‘particular partnership’ (Sec. 8).
In such a case the partnership is automatically dissolved on the completion of the adventure
(Sec. 42).
Before such time the partnership would not be dissolved unless all the partners agree to it
(Sec. 40).

If the partners decide to continue such a partnership even after the completion of the
specific ad venture or undertaking then it becomes a ‘partnership at will.’

General partnership:

Where a partnership is constituted with respect to the business in general, it is called a general
partnership. A general partnership is different from a particular partnership. In the case of a
particular partnership the liability of the partners extends only to that particular adventure or
undertaking, but it is not so in the case of general partnership.

PARTNERSHIP DEED

Partnership is the result of an agreement. No particular formalities are required for an

agreement of partnership. It may be in writing or formed verbally. But it is desirable to have
the partnership agreement in writing to avoid future disputes.

The document in writing containing the various terms and conditions as to the
relationship of the partners to each other is called the ‘partnership deed’. It is a
document in which the respective rights and obligations of the members of a
partnership are set forth.
It should be drafted with care and be stamped according to the provisions of the Stamp
Act, 1899.

Where the partnership comprises immovable property, the instrument of partnership must be
in writing, stamped and registered under the Registration Act.

Partnership deed may contain the following information:-

1. Name of the partnership form.

2. Names of all the partners.

3. Nature and place of the business of the firm.

4. Date of commencement of partnership.

5. Duration of the partnership firm.

6. Capital contribution of each partner

7. Profit Sharing ratio of the partners.

8. Admission and Retirement of a partner.

9. Rates of interest on Capital, Drawings and loans.

10. Provisions for settlement of accounts in the case of dissolution of the firm.

11. Provisions for Salaries or commissions, payable to the partners, if any.

12. Provisions for expulsion of a partner in case of gross breach of duty or fraud.

The terms laid down in the Deed may be varied by consent of all the partners, and such
consent may be expressed or may be implied by a course of dealing [Sec. 11(1)].

T YPES OF PARTNERS
Based on the extent of liability, the different classes of partners are:

Active or Sleepingor Partnerin Incoming Partnerby

Nominal Sub-partner Partner Dormant Profitsonly Partner
Active or actual or Ostensible partners:

It is a person who has become partner by agreement and who actively participates in the
conduct of the partnership business

He acts as an agent of other partners for all acts done in the ordinary course of business.

In the event of his retirement, he must give a public notice in order to free himself of
liabilities for acts of other partners done after his retirement.

Sleeping or Dormant partners:

It is a person who has become partner by agreement and who does not actively participate
in the conduct of the partnership business

They share profits and losses and are liable to the third parties for all acts of the firm.

They are, however not required to give public notice of their retirement from the firm.

Nominal partners

A person who lends his name to the firm, without having any real interest in it, is called a
nominal partner.

He is not entitled to share the profits of the firm.

Neither he invests in the firm nor takes part in the conduct of the business.

He is, however liable to third parties for all acts of the firm

Partners in profit only:

A partner who is entitled to share the profits only without being liable for the losses is known
as the partner for profits only.

As a rule such a partner has no voice in the management of the business.

However, his liability vis-a-vis third parties will be unlimited.

Incoming partners:
A person who is admitted as a partners into an already existing firm with the consent of all the
existing partners is called as “incoming partner”.

Such a partner is not liable for any act of the firm done before his admission as a partner.

Outgoing partner:

A partner who leaves a firm in which the rest of the partners continue to carry on business is
called a retiring or outgoing partner.

Such a partner remains liable to third parties for all acts of the firm until public notice is given
of his retirement.

Partner by holding out (Section 28):

If a person represents to the outside world by words spoken or written or by his conduct, that
he is a partner in a certain partnership firm, he is then estopped from denying his being a
partner, and is liable as a partner in that firm to any one who has on the faith of such
representation granted credit to the firm.

Actually, such a person is not a partner in that firm-no agreement, no sharing in profits and
losses, no say in the management, may not be knowing exact place of business, but as he
holds himself out to be a partner, he becomes responsible to outsiders as a partner on the
principle of estoppel or holding out. It is for this reason that such a person is called as
'partner by estoppel' or 'partner by holding out.'

It is only the person to whom the representation has been made and who has acted thereon
that has right to enforce liability arising out of ‘holding out’.

For the purpose of fixing liability on a person who has, by representation, led another to act, it
is not necessary to show that he was actuated by a fraudulent intention.

The rule given in Section 28 is also applicable to a former partner who has retired from
the firm without giving proper public notice of his retirement. In such cases a person who,
even subsequent to the retirement, give credit to the firm on the belief that he was a partner,
will be entitled to hold him liable.

Rights, Duties & Liabilities of Partners

MUTUAL RIGHTS AND DUTIES

 "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 maybe 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"

[Sec. 11(1)]

Thus, except in cases where the Partnership Act makes a mandatory provision, the partners
are entitled to agree to any terms and provide for their mutual rights and duties.

DUTIES OF PARTNERS

GENERAL DUTIES OF PARTNERS (SECTION 9): Partners are bound to carry on the
business of the firm to the greatest common advantage, to be just and faithful to each other,
and to render true accounts and full information of all things affecting the firm to any partner
or his legal representative.

Analysis:

i. Duty to carry on the business to the greatest common advantage (Sec. 9): Every
partner is bound to carry on the business of the firm to the greatest common advantage. It
implies that every partner must use his knowledge and skill for the benefit of the firm and
not for his personal gain. He must conduct the business with the best of his ability and
secure maximum benefits for the firm.

ii. Duty to be just and faithful inter-se (Sec. 9): An ideal partnership is one where there is
mutual trust and confidence, and spirit of helpfulness and goodwill among the partners. As
such every partner must be just and faithful to his co-partners. He must observe utmost
good faith and fairness towards other partners of the firm.

iii. Duty to render true accounts (Sec. 9). Every partner must render true and proper
accounts to his co-partners. It implies that each partner must be ready to explain the
accounts of the firm and produce vouchers in support of the entries. No partner should
think of making a secret profit at the expense of the firm.

iv. Duty to provide full information (Sec. 9). Every partner must give full information of all
things affecting the firm to his co-partners. A partner, being an agent of other partners,
 must not conceal any information concerning the firm from the other partners by reason of
the law of agency as well. Law of agency provides that knowledge to the agent is deemed
to be knowledge to the principal.

DUTY TO INDEMNIFY FOR LOSS CAUSED BY FRAUD (SEC. 10):

- A partner can cause loss to the firm by his neglect or want of skill or omission or fraud
while acting in the ordinary course of business.

- The general practice is that where a partner acts bonafide the loss caused by his neglect or
want of skill or omission is borne by the firm.

- But when the loss is caused by fraud committed against a third party by a partner, the same
must be recovered from the guilty partner and cannot be shared among all the partners.

- Section 10 gives statutory recognition to this rule and provides that "every partner must
indemnify the firm for any loss caused to it by his fraud in the conduct of the business of
the firm."

- The object of this provision is to discourage partners to deal fraudulently in the conduct of
the business.

DUTY TO ATTEND DILIGENTLY TO HIS DUTIES [SEC 12(b)].

Every partner is bound to attend diligently to his duties in the conduct of the business.

RIGHTS OF PARTNERS:

THE CONDUCT OF THE BUSINESS (SECTION 12): Subject to contract between the
partners-

every partner has a right to take part in the conduct of the business;

every partner is bound to attend diligently to his duties in the conduct of the business;

any difference arising as to ordinary matters connected with the business may be decided
by majority of the partners, and every partner shall have the right to express his opinion
before the matter is decided, but no change may be made in the nature of the business
without the consent of all partners; and

every partner has a right to have access to and to inspect and copy any of the books of the
firm.

Analysis:

Right to take part in the conduct of the Business [Section 12(a)]:

Every partner has the right to take part in the business of the firm. This is because
partnership business is a business of the partners and their management powers are
generally coextensive.

Example: Now suppose this management power of the particular partner is interfered with
and he has been wrongfully precluded from participating therein. Can the Court interfere in
these circumstances? The answer is in the affirmative. The Court can, and will, by
injunction, restrain other partners from doing so. It may be noted in this connection that a
partner who has been wrongfully deprived of the right of participation in the management
has also other remedies, e.g., a suit for dissolution, a suit for accounts without seeking
dissolution, etc.

The above-mentioned provisions of law will be applicable only if there is no contract

to the contrary between the partners. It is quite common to find a term in partnership
agreements, which gives only limited power of management to a partner or a term that the
management of the partnership will remain with one or more of the partners to the
exclusion of others. In such a case, the Court will normally be unwilling to interpose with
the management with such partner or partners, unless it is clearly made out that something
was done illegally or in of the trust reposed in such partners.

Right to be consulted [section 12(c)]:

Where any difference arises between the partners with regard to the business of the firm, it
shall be determined by the views of the majority of them, and every partner shall have
the right to express his opinion before the matter is decided.

But no change in the nature of the business of the firm can be made without the
consent of all the partners.
 This means that in routine matters, the opinion of the majority of the partners will prevail.
Of course, the majority must act in good faith and every partner must be consulted as
far as practicable.

It may be mentioned that the aforesaid majority rule will not apply where there is a change
in the nature of the firm itself. In such a case, the unanimous consent of the partners is
needed.

Right of access to books [Section 12 (d)]:

Every partner whether active or sleeping is entitled to have access to any of the books of
the firm and to inspect and take out of copy thereof. The right must, however, be
exercised bonafide.

MUTUAL RIGHTS AND LIABILITIES (SECTION 13): Subject to contract between the
partners-

(a) a partner is not entitled to receive remuneration for taking part in the conduct of the
business;

(b) the partners are entitled to share equally in the profits earned, and shall contribute
equally to the losses sustained by the firm;

(c) where a partner is entitled to interest on the capital subscribed by him such interest shall
be payable only out of profits;

(d) a partner making, for the purposes of the business, any payment or advance beyond the
amount of capital he has agreed to subscribe, is entitled to interest thereon at the rate of
six percent per annum;

(e) the firm shall indemnify a partner in respect of payments made and liabilities incurred
by him-

(i) in the ordinary and proper conduct of the business, and

(ii) in doing such act, in an emergency, for the purposes of protecting the firm from loss, as
would be done by a person of ordinary prudence, in his own case, under similar
circumstances; and
 (f) a partner shall indemnify the firm for any loss caused to it by his willful neglect in the
conduct of business of the firm.

ANALYSIS:

(i) Right to remuneration [Section 13(a)]:

No partner is entitled to receive any remuneration in addition to his share in the profits of
the firm for taking part in the business of the firm.

But this rule can always be varied by an express agreement, or by a course of dealings,
in which event the partner will be entitled to remuneration.

Thus, a partner can claim remuneration even in the absence of a contract, when such
remuneration is payable under the continued usage of the firm. In other words, where it is
customary to pay remuneration to a partner for conducting the business of the firm he can
claim it even in the absence of a contract for the payment of the same.

Right to share Profits [Section 13 (b)]:

Partners are entitled to share equally in the profits earned and so contribute equally to
the losses sustained by the firm.

The amount of a partner’s share must be ascertained by enquiring whether there is any
agreement in that behalf between the partners.

If there is no agreement then one should make a presumption of equality and the burden of
proving that the shares are unequal, will lie on the party alleging the same.

There is no connection between the proportion in which the partners shall share the profits
and the proportion in which they have contributed towards the capital of the firm.

Interest on Capital [Section 13 (c)]:

The following elements must be there before a partner can be entitled to interest on moneys
brought by him in the partnership business:

(i) an express agreement to that effect, or practice of the particular partnership or

(ii) any trade custom to that effect; or a statutory provision which entitles him to such
interest.
 Where a partner is entitled to interest on capital subscribed by him, such interest shall be
payable only out of profits.

Interest on advances [Section 13 (d)]:

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 cent per annum.

While interest on capital account ceases to run on dissolution, the interest on advances
keep running even after dissolution and up to the date of payment.

Right to be indemnified [Section 13 (e)]:

Every partner has a right to claim indemnity from the firm in respect of payments made or
liabilities incurred by him:

a) in the ordinary and proper conduct of the business, and

b) in doing such act, in an emergency, for the purpose of protecting the firm from loss, as
would be done by a person of ordinary prudence, in his own case, under similar
circumstances.

RELATION OF PARTNERS TO THIRD PARTIES

1. PARTNER TO BE AGENT OF THE FIRM (SECTION 18): Subject to the provisions of

this Act, a partner is the agent of the firm for the purposes of the business of the firm.

Analysis of section 18:

Section 4 lays down that partnership is the relationship between the partners who have
agreed to share the profits of the business carried on by all or any of them acting for all
(Section 4).

Thus, as per this definition mutual agency between the partners is one of the essential
elements of a partnership. And, therefore, each partner is both a principal and an agent for
the other and each is bound by the others' contract in carrying on the trade.
Section 18 declares that from the point of view of the third parties a partner is an agent of
the firm for the purposes of the business of the firm. As such even if only one partner acts
on behalf of the firm, the third party can make all the partners of the firm liable.

However, one partner can make other partners liable towards the third parties only if
he acts within the scope of his express or implied authority

EXPRESS AUTHORITY OF A PARTNER

When a partner is expressly authorized by an agreement of all the partners to do certain

acts on behalf of the firm, it is called express authority of a partner.

The firm is bound by all acts of a partner done within the scope of his express authority
even if the acts are not within the scope of the partnership business.

LIABILITY OF PARTNERS TO THIRD PARTIES

The liability of partners to third parties may be divided into three categories:

1. Liability of a partner for acts of the firm [Section 25]

2. Liability of the firm for wrongful acts of a partner [Section 26]

3. Liability of the firm for misapplication by partners [Section 27]

Liability of a partner for acts of the firm (Sec. 25).

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.

Further, the liability of all the partners is unlimited. By virtue of joint and several liability,
a creditor of the firm has several causes of action. He can sue all partners together, or can
sue them separately (in successive actions if necessary).

As between the partners themselves, the partner paying for more than his share of the
liability may claim contribution from the others according to the terms of the partnership
agreement.
 In order to bring a case under Section 25, it is necessary that the act of the firm, in
respect of which liability is brought to be enforced against a party, must have been
done while he was a partner.

Example:

Certain persons were found to have been partners in a firm when the acts constituting an
infringement of a trademark by the firm took place, it was held that they were liable for
damages arising out of the alleged infringement, it being immaterial that the damages arose
after the dissolution of the firm.

LIABILITY OF THE FIRM FOR WRONGFUL ACTS OF A PARTNER (SECTION

26):

Where, by the wrongful act or omission of a partner in the ordinary course of the business of
a firm, or with the authority of his partners, loss or injury is caused to any third party, or any
penalty is incurred, the firm is liable therefor to the same extent as the partner.

Analysis of section 26:

The firm is liable to the same extent as the partner for any loss or injury caused to a third
party by the wrongful acts of a partner, if they are done by the partner while acting.

(a) in the ordinary course of the business of the firm

(b) with the authority of the partners.

Thus, all the partners in a firm are liable to a third party for loss or injury caused to him by
the negligent act of a partner acting in the ordinary course of the business.

Example: One of the two partners in coal mine acted as a manager was guilty of personal
negligence in omitting to have the shaft of the mine properly fenced. As a result thereof, an
injury was caused to a workman. The other partner was also held responsible for the same.

LIABILITY OF FIRM FOR MISAPPLICATION BY PARTNERS (SECTION 27):

Where-

a) a partner acting within his apparent authority receives money or property from a third
party and misapplies it, or
 b) a firm in the course of its business receives money or property from a third party, and
the money or property is misapplied by any of the partners while it is in the custody of
the firm, the firm is liable to make good the loss.

Analysis of section 27:

It may be observed that the workings of the two clauses of Section 27 is designed to bring out
clearly an important point of distinction between the two categories of cases of
misapplication of money by partners.

Clause (a) covers the case where

a partner acts within his authority and due to his authority as partner, he receives money or
property belonging to a third party and misapplies that money or property.

For this provision to the attracted, it is not necessary that the money should have actually
come into the custody of the firm.

On the other hand, the provision of clause (b) would be attracted

when such money or property has come into the custody of the firm and it is misapplied by
any of the partners.

The firm would be liable in both the cases.

- But if receipt of money by one partner is not within the scope of his apparent authority, his
receipt cannot be regarded as a receipt by the firm and the other partners will not be liable,
unless the money received comes into their possession or under their control.

Example: A, B, and C are partners of a place for car parking. P stands his car in the parking
place but A sold out the car to a stranger. For this liability, the firm is liable for the acts of A.

RETIREMENT OF A PARTNER (SEC. 32)

A partner is said to retire when he ceases to be a member of the firm without bringing to an
end the subsisting relations between the other members, or between the firm and third parties.

The term ‘does not cover the case where a partner withdraws from a firm by dissolving it,
which should properly be referred as a dissolution and not as a retirement. Retirement of a
partner from a firm does not dissolve it.
SECTION 32 lays down ‘A partner may retire:

(a) with the consent of all the other partners;

(b) in accordance with an express agreement by the partners; or where the partnership is at
will, by giving notice in writing to all the other partners of his intention to retire.

Liability of a Retiring Partner:

(c) For acts done prior to retirement: (Section 32(2)) A retiring partner continues to be
liable for the acts of the firm done before his retirement. He may, however, free himself
from his liability towards third parties for the debts of the firm incurred before his
retirement by an agreement with such third parties and the partners of the reconstituted
firm discharging the outgoing partner from all liabilities. The remaining partners alone
cannot give this freedom to the retiring partner. He may be discharged only if the
creditors agree.

(d) Liability of are tiring partner for acts of firm post retirement (Sec 32(3)): A retiring
partner also continues to be liable for the acts of the firm, even after retirement, until
public notice is given of the fact of retirement. Similarly, the partners of the
reconstituted firm continue to be liable for the acts of the retired partner though done
after retirement, until public notice is given of the retirement.

(e) Such a public notice may be given either by the retiring partner or by any partner
of the reconstituted firm. [Sec 32(4)]

(f) A dormant or sleeping partner, however, need not give any such notice.

(g) If the partnership is at will, the partner by giving notice in writing to all the other
partners of his intention to retire will be deemed to be relieved as a partner without
giving a public notice to this effect.

Registration and Dissolution of a Firm

Registration of Firms-Optional

Under the Partnership Act it is not compulsory for every partnership firm to get itself
registered, but an unregistered firm suffers from a number of disabilities. In practice,
therefore, few partnerships would deem it advisable to remain unregistered.
Procedure of Registration (Sec. 58).

An application in the prescribed form along with the prescribed fee has to be submitted to the
Registrar of Firms of the State in which any place of business of the firm is situated or
proposed to be situated.

The application or statement must be signed by all the partners, or by their agents specially
authorized in this behalf, and must contain the following particulars:

i. The name of the firm.

ii. The place or principal place of business of the firm.
iii. The names of any other places where the firm carries on business.
iv. The date when each partner joined the firm.
v. The names in full and permanent addresses of the partners.
vi. The duration of the firm.

A firm name shall not contain any of the following words, namely:-

‘Crown’, Emperor’, ‘Empress’, ‘Empire’, ‘Imperial’, ‘King’, ‘Queen’, ‘Royal’, or words

expressing or implying the sanction, approval or patronage of Government except when
the State Government signifies its consent to the use of such words as part of the firm-
name by order in writing.

When the Registrar is satisfied that the provisions of Section 58 have been duly
complied with, he shall record an entry of the statement in a Register called the
Register of Firms and shall file the statement. Then he shall issue a certificate of
Registration. (Section 59).

However, registration is deemed to be completed as soon as an application in the

prescribed form with the prescribed fee and necessary details concerning the particulars of
partnership is delivered to the Registrar. The recording of an entry in the register of firms is a
routine duty of Registrar.

Change of particulars
With a view to keep the Registrar of Firms posted with up-to-date information regarding
the firm, if any change takes place in any of the particulars given above, it should be
notified to the Registrar, who shall thereupon incorporate the necessary change in the
 Register of Firms.

Further, the Registrar should also be informed when any partner ceases to be a partner by
retirement, expulsion, insolvency or death, or when a new partner is admitted or a minor,
having been admitted, elects to become or not to become a partner, or when the firm is
dissolved. (Secs. 60-63).

Time of registration.

Registration may take place at any time during the continuance of the partnership firm.
Where the firm intends to institute a suit in a court of law to enforce rights arising from
any contract, registration must be affected before the suit is instituted otherwise the court
shall not entertain the suit.

Registration may also be affected even after a suit has been filed by the firm but in that
case it is necessary to withdraw the suit, get the firm registered and then file a fresh
suit. Registration of the firm subsequent to the institution of the suit cannot by itself cure
the defect.

DISSOLUTION OF FIRM

The Indian Partnership Act distinguishes between:

(a) Dissolution of firm, and

(b) Dissolution of partnership.

Section 39 provides that the dissolution of partnership between all the partners of a firm is
called the 'dissolution of the firm.'

Thus, the dissolution of firm means the discontinuation of the jural relation existing between
all the partners of the firm.

But when only one or more partners retires or becomes incapacitated from acting as a partner
due to death, insolvency or insanity, the partnership, i.e. the relationship between such a
partner and other is dissolved, but the rest may decide to continue. In such cases, there is in
 practice, no dissolution of the firm. The particular partner goes out, but the remaining partners
carry on the business of the firm, it is called ‘dissolution of partnership.’

In the case of dissolution of the firm, on the other hand, the whole firm is dissolved. The
partnership terminates as between each and every partner of the firm.

DISSOLUTION OF FIRM VS. DISSOLUTION OF PARTNERSHIP

S. Basis of Difference Dissolution of Firm Dissolution of Partnership

1. Continuation of It involves discontinuation of It does not affect continuation of
business business in partnership. business. It involves only
reconstitution of the firm.
2. Winding up It involves winding up of the firm It involves only reconstitution and
and requires realization of assets requires only revaluation of assets
and settlement of liabilities. and liabilities of the firm.
3. Order of court A firm may be dissolved by the Dissolution of partnership is not
order of the court. ordered by the court.

4. Scope It necessarily involves dissolution It may or may not involve

of dissolution of firm.
partnership.
5. Final closure of books It involves final closure of books It does not involve final closure of
of the firm. the books.

MODES OF DISSOLUTION OF A FIRM (SECTIONS 40-44)

The dissolution of partnership firm may be in any of the following ways:

1. DISSOLUTION WITHOUT THE ORDER OF THE COURT OR VOLUNTARY

DISSOLUTION:

It consists of following four types:

Dissolution by agreement (Section 40):

A firm may be dissolved with the consent of all the partners or in accordance with a contract
between the partners. Partnership is created by contract, it can also be terminated by contract.
‘Contract between the partners’ means a contract already made.

Compulsory dissolution (Section 41):

A firm is compulsorily dissolved under any of the following circumstances:

a) When all the partners, or all the partners but one, are adjudged insolvent; or

b) Whensomeeventhashappenedwhichmakesitunlawfulforthebusinessofthefirmtobecarried
on or for the partners to carry it on in partnership (e.g., when any partner, who is a
citizen of a foreign country, becomes an alien enemy because of the declaration of war
between his country and India).

Where, however, a firm is carrying on more than one adventures or undertakings, the
illegality of one or more shall not of itself cause the dissolution of the firm in respect of its
lawful adventures or undertakings.

Example: A firm is carrying on the business of trading a particular chemical and a law is
passed which bans on the trading of such a particular chemical. The business of the firm
becomes unlawful and so the firm will have to be compulsorily dissolved.

Dissolution on the happening of certain contingencies (Section 42):

Subject to contract between the partners, a firm can be dissolved on the happening of any of
the following contingencies-

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) by the death of a partner; and

d) by the adjudication of a partner as an insolvent

The partnership agreement may provide that the firm will not be dissolved in any of the
aforementioned circumstances. Such a provision is valid.
 Dissolution by notice of partnership at will (Section 43): 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.

If the date is mentioned, 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):

Dissolution of a firm by the Court is necessitated when there is a difference of opinion

between the partners regarding the matter of dissolution. For example, where one of the
partners has become insane, some of the partners may be willing to continue the firm and
share profits with the insane partner, while the other partner(s) may be insisting on the
dissolution of the firm. Obviously in these circumstances intervention by the Court becomes
necessary. On receiving the petition for the dissolution of the firm the Court is not bound to
decree/order dissolution and it enjoys complete discretion in the matter. It may or may not
order for the dissolution of the firm depending upon the merits of each case.

Section 44 enumerates the various grounds on which a petition may be made to the court for
the dissolution of the firm. The Section lays down that at the suit of a partner, the Court may
dissolve a firm on any of the following grounds:

(a) Insanity/unsound mind: Where a partner (not a sleeping partner) has become of unsound
mind, the court may dissolve the firm on a suit of the other partners or by then friend of the
insane partner. Temporary sickness is no ground for dissolution of firm.

(b) Permanent incapacity: When a partner, other than the partner suing, has become in any
way permanently incapable of performing his duties as partner, then the court may dissolve
the firm. Such permanent incapacity may result from physical disability or illness etc.

(c) Misconduct: Where a partner, other than the partner suing, is guilty of conduct which is
likely to affect prejudicially the carrying on of business, the court may order for dissolution
of the firm, by giving regard to the nature of business. It is not necessary that misconduct
must relate to the conduct of the business. The important point is the adverse effect of
 misconduct on the business. In each case nature of business will decide whether an act is
misconduct or not.

(d) Persistent breach of agreement: Where a partner other than the partner suing, willfully
or persistently commits breach of agreements relating to the management of the affairs of
the firm or the conduct of its business, or otherwise so conduct himself in matters relating
to the business that it is not reasonably practicable for other partners to carry on the
business in partnership with him, then the court may dissolve the firm at the instance of any
of the partners.

(e) Transfer of interest: Where a partner other than the partner suing, has transferred the
whole of his interest in the firm to a third party or has allowed his share to be charged or
sold by the court, in the recovery of arrears of land revenue, the court may dissolve the firm
at the instance of any other partner. Thus, Transfer or assignment of partner's interest does
not by itself dissolve the firm. But the other partners may apply to the Court to dissolve the
firm if such a transfer occurs.

(f) Continuous/Perpetual losses: Where the business of the firm cannot be carried on except
at a loss in future also, the court may order for its dissolution.

(g) Just and equitable grounds: Where the court considers any other ground to be just and
equitable for the dissolution of the firm, it may dissolve a firm. The following are the cases
for the just and equitable grounds-

(h) Deadlock in the management.

(i) Where the partners are not in talking terms between them.

(j) Loss of substratum.

(k) Gambling by a partner on a stock exchange.

The Rights of a Partner On Dissolution

The various rights of a partner on dissolution as follows:

Partners Generally Lien Section 46

Every partner or is representative is entitled

 • to have the firms property applied in payment of the firm’s debts and

• to have a surplus distributed among the partners are the representatives according to
their respective rights.

Right To Claim the Return of Premium On Premature Winding Up Sec 51

If a partner joined a firm for a fixed term and had a premium and the firm is dissolved
before the fixed term he is entitled to return of the premium. The amount of premium will
depend upon terms upon

The terms upon which he became a partner and

The length of the time. However such a partner cannot claim any return of the premium in
the following 3 circumstances:

• when the dissolution is due to the death of a partner

• when the dissolution is mainly due to misconduct of the partner who paid the
premium or

• the dissolution according to an agreement which had no provision for the return of
premium or any part there of

Rights Of a Partner In Case Of Dissolution On Account Of Fraud Or Misrepresentation

Section 52

Where the partnership is rescinded on grounds of fraud or misrepresentation the aggrieved

partner, besides other rights under other provision has the following rights:

• He has a right of lien on the surplus assets after the payment of firms debt for any
some paid by him for purchase of share in the firm for any capital contributed by
him

• He’s entitled to rank as a creditor of the firm in respect of any payment made by
him towards firms debts

• He’s entitled to be indemnified by the partner guilty of fraud or misrepresentation

against all debts of the firm

Right To Restrain from Use of Firm Name or Firm Property Section 53

Unless otherwise agreed by the partners every partner or is representative may restrain any
other partner or his representative from carrying on similar business in the firm name or
from using the property of the firm for his own benefit till the affairs of the firm are
completely wound up.