Wednesday, May 21, 2014

Partnership under Indian Partnership Act, 1932

A partnership arises from a contract. It is a form of business organization, where two or more persons join together for jointly carrying on some business.

Section 4 of the Indian Partnership Act, 1932 defines partnership as follows: - ‘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.
Person who have entered into partnership with one another are called individually ‘partner’ and collectively ‘a firm’ and the name under which their business is carried on is called the ‘firm name’.

Essentials of Partnership

(i) there must be an agreement entered into by all the persons concerned; 
(ii) the agreement must be to share the profits of a business; and 
(iii) the business must be carried on by all or any of the persons concerned acting for all i.e. each partner carries on business for himself as principle and also as an agent for the other partners.

Who can be a partner in a firm?
In terms of Section 11 of the Indian Contract Act, only such persons as are competent to contract, are of sound mind, major and are not disqualified from contracting by any law in force would be entitled to become partner. This would mean that a lunatic, a minor, a firm or a trust who are not persons competent to contract in the eye of law as such would not be entitled to become partners.
The law however, recognizes partnership firm as a distinct personality only for the purpose of income tax by varieties of specific provision under the Income Tax Act. It is also a separate legal entity under Sales-tax law. Further the agreement by a minor is void but he is capable of accepting benefits. In consonance with this position of law, Section 30(1) of the Indian Partnership Act provides that a minor 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.

Since the partnership is ‘agreement’ there must be minimum two partners. The Partnership Act does not put any restrictions on maximum number of partners. However, Section 11 of Companies Act prohibits partnership consisting of more than ten members for banking business and twenty members in other businesses, unless it is registered as company under Companies Act, 1956. In the case of a private company the minimum number is two and the maximum is fifty whereas in the case of a public company the minimum number of members should be seven but there is no limit to the maximum number.

Registration of partnership firm.

The Indian Partnership Act does not make registration of a firm compulsory nor does it impose any penalty for non registration of a firm yet Section 69 of the Partnership Act cut short the capacity of unregistered firm and its partner to sue. This disability is too great compelling force to bring the firm to registration.

The application for registration has to be made in the prescribed form and the same has to be accompanied by the prescribed fee. The application must state the following: -

(i) the firm name;

(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; and

(vi) the duration of the firm. However, if no period is fixed in the deed of partnership and no provision is made for its determination the partnership shall be deemed to be a partnership at will.

The statement shall be signed by all the partners, or by their agents specially authorized in this regard. Each person signing the statement shall also verify it in the manner prescribed by Section 58(2) of the Partnership Act.

A firm may be got registered at any time after the creation of partnership. It is not necessary that it should be registered at the time of its formation. Once the registration is made it would continue to be valid in the eyes of law until the same was cancelled. There is no need of fresh registration on the death of a partner or when there is otherwise any change in the constitution of the firm. In such cases, it is sufficient to notify the Registrar about the changes so that he could note the same in the relevant register (Girdharmal vs. Dev Rai, AIR 1963 SC 1587).

The Supreme Court in the judgment in Yasin Khan vs. Shreeram Finance Corporation, AIR 1989 SC 1769, considered a case where there was a change in the partners of the firm and since the corresponding change was not notified to the Registrar and therefore, on the date of suit, the current partners were not shown in the Register of Firms, the Apex Court held that the suit was not maintainable. The relevant test would be whether on the date of the suit, the firm was registered and the names of the partners were shown in the Register of Firms. But in Raptakos Brett & Co. Ltd vs. Ganesh Property, (1998) 7 SCC 184, the Supreme Court has observed that even if the suit is filed by an unregistered partnership firm against a third party and is treated to be incompetent as per Section 69 subsection (2) of the Indian Partnership Act, if pending the suit before a decree is obtained, the plaintiff puts its house in order and gets itself registered, the defect in the earlier filing which even though may result in treating the original suit as still born, would no longer survive if the suit is treated to be deemed to be instituted on the date on which registration is obtained. If such an approach is adopted, no real harm would be caused to either side.  

When a suit has been dismissed on grounds of non-registration, a fresh suit after the registration of the firm is maintainable. The same is not barred as res-judicata as the dismissal of a suit because of non-registration is not a decision of the case on its merits (Malhotra & Co. vs. Ramesh Mistri, AIR 1971 P&H 212).

If a firm is unregistered, a suit by a partner for the rendition of accounts without a prayer for the dissolution of the firm is not maintainable. In Basantlal vs. Chiranjilal, AIR 1968 Pat 96, one partner of an unregistered firm sued the other partner after the dissolution for recovery of money in respect of accounts between them, it was held that such an action was maintainable after the dissolution of the firm.

In Ramesh Kumar Bhalotta vs. Lalit Kumar Bhalotta, AIR 2001 Pat 174, a partner of an unregistered firm filed a suit against the firm claiming declaration of share, proper administration of firm and rendition of the accounts of the firm. The suit was dismissed as barred under Section 69(1) of the Indian Partnership Act.
The same partner subsequently filed another suit praying for the dissolution of the firm, and the accounts of the dissolved firm. It was held that the subsequent suit was maintainable as it was permissible under Section 69(3)(a) and dismissal of the earlier suit was no bar to the present suit. Moreover, the suit was not barred under Order 2, Rule 2 of the CPC; as the cause of action under the two suits was different.

A suit by unregistered firm is not barred by Section 69(2) of the Partnership Act if a Statutory right is being enforced. In M/s Haldiram Bhujiawala vs. M/s Anand Kumar Deepak Kumar, AIR 2000 SC 1287, the Apex Court has observed that a suit for perpetual injunction to restrain the defendant from infringing plaintiff’s trade mark and passing defendant’s goods as those of the plaintiff, and a claim of damages in that regard, is not barred by Section 69(2) of the Act. Such right does not arise out of contract. In such a case there is enforcement of a statutory right arising under the Trade Mark Act.

If the action against a third party is not based on contract but on tort, fraud or any other wrongful act, the same is not hit by Section 69(2) of the Partnership Act and the action for the same is maintainable. Thus when the action relates to wrongful detention of property, the action being founded on tort rather than contract, the same is maintainable. Similarly, a suit for the recovery of the price of goods obtained by fraud is also maintainable as the action in such a case does not arise out of contract.

Disclaimer: - All the contents are for general use and information. Consult your Lawyer before acting upon these information.