by Asok Nadhani
Partnership Firm Formation
2.1 Formation of Partnership Firm
A partnership is
based on an agreement which can be made orally or in writing or may be implied
from the course of dealing among partners. However, the agreement must contain
all the essential elements of a valid contract. There must be free and genuine
consent of the parties who must be competent to contract. The object of the
partnership should be lawful and other legal formalities should be complied
with the following restrictions:
1.
Minor Partner: A minor may be
admitted to the benefits of partnership with the consent of all the other
partners.
2.
Consideration: As per sec.185
of Indian Contract Act, 1872, hence no consideration is required to create an
agency, no consideration is required to create partnership also (which is an
extension of the law of agency).
2.2 Essential elements of a valid Contract of
Partnership
1.
Agreement: Partnership is
formed by an agreement between persons willing to form a partnership. There
must be at last two persons to form a partnership but the Partnership Act
remains silent about the maximum number of partners. According to sec.11 of the
Companies Act, 1956, the maximum number of partners is 10 for a partnership
carrying on banking business and 20 for a partnership carrying out any other
business.
2.
Competency of Partnership:
As
per sec. 5(1), partnership arises
from contract. So, the partnership may be formed only by persons competent to
enter into contract. The following persons are eligible to form partnership:
i.
A Major,
ii.
A person of sound mind,
iii.
A person not disqualified by any law to which he is
subject to enter into an agreement.
3.
Consideration: No consideration
is required to create an agency. Hence, consideration is also not required for
formation of partnership (as partnership is an extended agency and partners are
mutual agents).
4.
Consent: There should be
free consent of partners for formation of partnership.
5.
Object: Partnership
should be formed for a lawful object. If partnership is formed for some
unlawful object, it shall be invalid.
6.
Legal Formalities: The agreement
of partnership may be oral or written, expressed or implied. According to the
Partnership Act, no legal formalities are required for the formation of
partnership. However, the partner can make a partnership deed and go in for
registration of their partnership firm, to avoid future disputes.
2.3 Partnership Deed
A partnership
deed is a document containing the terms and conditions of the partnership in
writing to avoid future disputes. The agreement by which partnership is created
may be either oral or in writing.
According to the
Partnership Act, there is no specific format of a partnership deed. It can be
written in any form. But, it should be signed by each partner personally or
through their agent and should also be properly stamped, as per the Stamp Act,
1889. If the firm is registered, the deed must be registered with the Registrar
of Firms. The deed can be modified or altered from time to time with the
consent of all the partners.
2.3.1 Contents of Partnership Deed
The contents of
partnership deed differ in different businesses depending upon their nature.
However, the basic contents of partnership deed are as follows:
1.
Name and address of the firm.
2.
Name and address of the partners.
3.
Scope and business of the partnership business.
4.
Share of each partner in the capital contribution
in the firm.
5.
Duration of partnership.
6.
Ratio of profits and losses sharing among the
partners.
7.
Lending to the firms by the partners and rate of
interest, thereon along with other terms and conditions.
8.
Amount borrowed by the partners from the firm and
relevant terms and conditions along with the rate of interest.
9.
Drawing rights and interest thereon.
10.
Salary to the partners, if admissible.
11.
Interest on capital, if admissible.
12.
Accounts and their audit.
13.
Rights of partners to access the accounts and take
copies therefrom.
14.
Duties of partners in the conduct of the business
of the firm.
15.
Rules regarding retirement of partners and
valuation of goodwill thereon.
16.
Admission of a new partner.
17.
Death of a partner and the rights of his legal
representative.
18.
Relinquishment of a partner from the firm.
19.
Agreement for the payment of the share of property
and profits to a retiring partner.
20.
Arbitration clause.
21.
Dissolution of the firm.
2.3.2 Need for Partnership Deed
Partnership deed
is prepared only with the object of resolving the mutual differences among the
partners in future.
During
registration of firm, a copy of the partnership deed is also to be sent with
the other information to the Registrar of Firms to make registration more
authentic and valid in the court. The court accepts the terms and conditions as
contained in the deed while setting the matters/disputes between the partners.
2.4 Registration of Partnership Firm
The registration
of a firm refers to the recording of firm’s name, alongwith prescribed
particulars, in the Register of firms kept in the office of the Registrar of
Firms.
But, the
registration of firms is neither compulsory nor punishable. A firm can
optionally get itself registered. But an unregistered firm suffers from
numerous disabilities as provided in sec.69. So for practical purpose,
registration of firms is almost compulsory. Registration does not create
partnership but protects the interest of third parties in making transaction
with the firm.
Non-registration
of a firm does not affect the main and ancillary activities of a firm,
described as follows-
1.
Registration is not
compulsory
The registration of a firm
is optional. Hence, a firm may decide not to get itself registered.
2.
Non-registration
is not punishable
The Act has not prescribed
any penalty or punishment for non-registration of a firm.
3.
Transactions
remain unaffected
Transactions of an
unregistered firm cannot be void, unlawful or illegal merely because of
non-registration which also does not affect the validity of any act, dealing,
transaction or contract entered into by the firm.
4.
Business remains
same
A non-registered firm can
carry on the business in the same way as a registered firm carries on its
business. Even the non-registration does not make the business of the firm
illegal, if such business is otherwise legal. But, a non-registered firm cannot
maintain an action arising from a breach of contract.
5.
Disabilities of
a non-registered firm
A non-registered firm
cannot maintain any suit, claim any set off, make any counter claim or
institute any legal proceeding in respect of any act, dealing, transaction or
contract, until it has been registered.
2.4.1 Time of Registration
There is no
definite provision in the Partnership Act regarding time of the registration of
a firm. As per sec.69(2), no suit can be instituted in any Court by or on
behalf of a firm against any third party unless the firm is registered and the
persons suing are or have been shown in the Register of Firms as partners in
the firm and the only course open to the Court is to dismiss it. The point of
time refers to the time of the institution of the suit. Hence, the firm must be
a registered firm by the date of the institution of the suit which implies that
before any suit is filed in a Law
Court
2.4.2 Procedure of Registration (Sec.58, 59)
1.
Presentment of
Application for Registration
The firm is to make an
application to the Registrar of firms of such area in which any place of
business of the firm is situated or is proposed to be situated. The State
Government has been empowered by sec.57 to appoint Registrars of Firms and
define the areas within which they shall exercise their powers and perform
their duties.
2.
Time of making
Application
No time limit has been
prescribed for registration of a firm as the registration of firms is not
compulsory. An existing firm can make an application for registration anytime
after its formation. Simultaneously, a proposed firm may obtain registration
even before its formation.
3.
Legal
requirements as to Application
The various requirements of
a valid application are as follows:
§ The application
shall be made in writing in the prescribed form.
§ The application
shall be accompanied with prescribed fees.
§ The application
shall be signed by all the partners, or by their agents specially authorized in
this behalf [sec.58(1)].
§ The application
shall be accompanied with the agreement between the partners, i.e., the
partnership deed, if any.
§ It shall be
verified by all the partners in the prescribed manner. [sec.58(2)]
§ The application
may be sent to the Registrar by hand or by registered post.
4.
Contents of
Application
(a)
The application shall contain the following
particulars about the partnership firm:
§ Name of the
firm.
§ The principal
place of business of the firm.
§ The names of
other places where the firm carries on business.
§ Duration of the
firm.
(b)
The application must specify the following
particulars regarding the partners
§ Name and
permanent address of each partner.
§ Date of joining
the firm in respect of each partner.
(c)
Except with the approval of the State Government, a
firm name shall not contain the words, like, ‘Crown’, ‘Emperor’, ‘Empress’, ‘Empire’, ‘Imperial’, ‘King’,
‘Queen’, ‘Royal’, or words expressing or implying the sanction, approval or
patronage of the Government [sec.58(3)].
5.
Issue of
Certificate of Registration
According to sec.59, the
registrar on being satisfied that all the requirements of sec.58 have been duly
complied with, shall record an entry of the statement in the Register of Firms
and file the statement and shall enter the name of the firm and the names of
all the partners of the firm in the register of firms. Then he shall issue a
certificate of registration.
The registration
of the firm shall be effective only from the date when the Registrar enters the
particulars in the Register of Firms, and not from the date when application
for registration is made to the Registrar.
2.4.3 Alteration of particulars after Registration
(Secs. 60 to 63)
In case of any
alteration to any matters regarding constitution of a registered firm, a
statement or intimation is to be sent to the Registrar of Firms for
incorporating the necessary changes in the Register of Firm as stated below:
1.
Change in the name of the firm or in location of
the principal place of business of the Registered Firm (Sec. 60): The firm
shall make a fresh application containing the changed particulars to the
Registrar, regarding the change in its name and principal place of business.
The application shall also comply with all the legal requirements required to
be fulfilled at the time of filing of application.
2.
Closing and opening of branches (Sec. 61).
3.
Change in names and addresses of partners (Sec.
62).
4.
Change in the constitution of the firm and its
dissolution or election of a minor partner on attaining majority to continue as
partner or severe his connection (Sec. 63).
2.4.4 Penalty for false information (Sec. 70)
If any person
supplies false or incomplete information to the Registrar, or signs any
statement containing false or incomplete information to be supplied to the
Registrar, he is punishable with imprisonment which may extend to three months,
or with fine, or with both.
2.4.5 Inspection of Register of Firms and Documents
(Secs. 66, 67)
Any person can
inspect the Register of Firms on payment of a prescribed fee [Sec. 66(1)]. Further
all statements, notices and informations filed with the Registrar shall be open
to inspection subject to prescribed conditions and payment of prescribed fees
[Sec. 66(2)]. The Registrar shall also, on application, furnish to any person
on payment of the prescribed fee a certified copy of any entry in the Register
of Firms (Sec. 67).
2.4.6 Conclusive Evidence (Sec. 68)
Any statement,
notice or intimation recorded with the Registrar by any person shall be a
conclusive proof against him of any fact therein stated. However, it can be
challenged by third parties to prove that it is false and is based on
misrepresentation or fraud.
2.4.7 Effects of Non-registration of a Firm
(Sec.69)
According to
sec.69 of Partnership Act, a non-registered firm suffers from the following
disabilities:
1.
Filling a suit
against the Firm or other Partners
No partner of an
unregistered firm can sue the firm or any other partner of the firm for the
enforcement of any right conferred by the Indian Partnership Act, 1932. He can
exercise this right if the firm is registered and the person suing is or has
been shown in the Register of Firms as a partner in the firm [sec.69(1)].
Example:
P, Q and R are the three
partners of the firm PQR & co which is an unregistered firm. Q uses the firm’s
property for his personal use. But, P and R cannot claim the profits made by Q,
since, the right to claim the profits made by Q is conferred by the Indian
Partnership Act, 1932.
2.
Filling a suit
against Third Parties
If the firm is not
registered, no suit can be filed in any Court by or on behalf of a firm against
any third party to enforce a right arising from a contract [Sec. 69(2)]. Thus,
an unregistered firm, or any of the partners of an unregistered firm cannot
file a suit against a third party for the enforcement of any right arising
under a contract.
3.
Claim a Set-off
No partner of an
unregistered firm and the firm thereof can claim set off in any suit or
proceeding filed by a third party to enforce a right arising from a contract,
until the registration of the firm is effected [sec.69(3)]. The right of
set-off is not affected if the claim of set-off does not exceed Rs.100 in value
[Sec.69(4)(b)].
Hence, in a suit filed by a
third party against an unregistered firm or a party thereof, the unregistered
firm and the partner cannot claim that some money is due to the firm from the
third party.
If the suit is filed by
partner against any other partner of the unregistered firm, the defendant
partner cannot claim that some money is due to him under the Partnership.
4.
Enforce other
proceeding
A partner of an
unregistered firm or an unregistered firm cannot enforce any proceedings for
the enforcement of any right arising under a contract (i.e., partnership deed).
Hence, any right arising under a contract be enforced by-
(a)
a partner of
an unregistered firm against the firm or any other partner of the firm;
(b)
an unregistered firm against a third party.
Example:
T enters into a contract
with XYZ & company (an unregistered firm) providing that any dispute shall
be referred to arbitration. When a dispute came up, T instantly files a suit
against XYZ & company in the Court of law. XYZ & company has no right
to enforce the arbitration clause since the arbitration clause is contained in
a contract, which cannot be enforced by an unregistered firm.
2.4.8 Rights not affected by Non-registration of a
Firm (Sec. 69)
Non-registration
of a firm does not affect the following rights of the partners:
1.
Suit by a Partner
Even in case of an
unregistered firm, a partner may file a suit in the Court for seeking
dissolution of the firm. During dissolution, he can file a suit that the
accounts of the firm be rendered to him and he shall be paid his due share of
property in the dissolved firm. The disability of a partner disappears with the
dissolution of the firm.
2.
Non-contractual
Rights
If a right accrues to a
firm otherwise than under a contract, the firm can file a suit for enforcement
of such a right [sec.69(3) and (4)]. Hence, the firm or any of its partners can
initiate criminal proceedings against any partner or a third party.
3.
Suit of a value
upto Rs.100
If the amount due to an
unregistered firm does not exceed Rs.100, the unregistered firm or any of its
partners shall have the right to file a suit for recovery of amount due or
right to enforce set off, where suit is filed by the party who is liable to pay
the firm an amount not exceeding Rs.100.
4.
Recovery of partnership
property of an Insolvent Partner
Where a partner of an
unregistered firm is adjudicated an insolvent, the Court or the official
assignee or the official receiver shall have a right to realize the property of
the insolvent partner.
5.
Rights of a Third
Party
A third party is entitled
to sue the firm, whether or not the firm is registered.
6.
Firm having no
place of business in India
Non-registration does not
affect to the right of a firm or partners of a firm having no place of business
in any area of India
7.
Rights on
Registration of the Firm
A suit, which is not maintainable
because of the reason of non-registration of firm, shall become maintainable
immediately on registration of firm. Hence, the disabilities cease to apply
when a firm is registered before filling the suit.
2.4.9 Late
Registration on Payment of Penalty (Sec. 59A-1)
If the statement
in respect of any firm is not sent or delivered to the Registrar within the
time specified, then the firm may be registered on payment of a penalty of one
hundred rupees per year of delay or a part thereof.
2.4.10 Rectification of Mistakes in Register of Firms
(Sec. 64)
The Registrar may rectify any mistake to bring the
entry in the Register of Firms into conformity with documents relating to the firm
filed under this Chapter.
2.4.11 Amendment
of Register by Order of Court (Sec. 65)
The Court may
direct the Registrar to make any amendment in the entry in the Register of
Firms consequential upon its decision; and the Registrar shall amend the entry
accordingly.
2.4.12 Penalty for Contravention of Provisions (Sec.
69A)
If any statement, intimation or notice under sections
60, 61, 62 or 63 in respect of any registered firm is not sent or given to the
Registrar, within specified period, the Registrar may, after giving notice to
the partners of the firm and after giving them a reasonable opportunity of
being heard, refuse to make the suitable amendments in the records relating to
the firm, until the partners of the firm pay such penalty, not exceeding ten
rupees per day, as the Registrar may determine of the period between the date
of expiry of the period specified in sections 60, 61, 62, 63, or as the case
may be, and the date of making the amendments in the entries relating to the
firm.
2.5 Partnership Property
Partners can
determine the partnership property by the agreement made between the partners
and can differentiate partnership property from that of personal property of a
partner. However, in the absence of such an agreement, the provision of sec. 14
shall apply, according to which the following property shall be deemed to be
partnership property:
1.
Property
originally brought in the Firm
At the commencement of
partnership, the partners may bring capital in the form of some property for
use in the business of the firm. Such property becomes the property of the
firm. Similarly, during admission of a partner, the incoming partner may bring
in capital in the form of some property for use in the business of the firm.
2.
Property
acquired by the Firm
All property acquired by or
for the firm, whether by purchase or otherwise, is partnership property.
3.
Property
acquired for the purpose of business of the Firm
All property acquired for
the purposes and in the course of the business of the firm is partnership
property. Similarly, any property which is acquired during the conduct of business
of the firm is partnership property.
4.
Property
acquired with firm’s money
All property which is
purchased with the firm’s money, either in the name of the firm or in the name
of any partner of the firm, is considered as Partnership Property.
However, property is being
purchased for the sole benefit of the partner shall not become partnership
property, but shall be treated as personal property and the concerned partner
shall become a debtor of the purchase price paid by the firm.
5.
Goodwill of Firm
The goodwill of the
business amounts to Partnership Property.
6.
Other Intangible
Assets
Copyrights, trade marks,
patents etc. acquired by reason of joint efforts of the partners during the
conduct of the business of the firm amount to Partnership Property.
Following
factors should be considered to determine whether a particular property is
partnership property or not:
(a)
Purchased for conduct of business of the firm.
(b)
Purchased during the conduct of business of the
firm.
(c)
Purchased in the name of the firm.
(d)
Purchased with the firm’s money.
(e)
Acquired by the firm in the form of introduction of
capital at the commencement of business or at the time of admission of a
partner.
2.5.1 Significance of Partnership Property
(a)
Partnership property is to be exclusively used for
the business activities of the firm. However, the agreement between the
partners may provide otherwise (Sec. 15).
(b)
On dissolution of firm, the debts of the firm are
paid first out of partnership property. Still, if debts of the firm are not
paid in full, the surplus property of each partner shall be utilised in payment
of debts of the firm (Secs. 48and 49).
2.5.2 Use of Partnership Property
Under sec.15, in absence to any contract, the property of the
partnership firm is held for the purpose of the business of the firm and is
used for such purpose only. No partner can use the property of the firm for his
own benefit.
Any profit earned by a partner by using the property of the firm are
deemed to be the profits earned by the firm and he is bound to account for such
profits and deposit them with the firm.
For more details, refer to Mercantile law, by Asok Nadhani,
BPB Publications,www.bpbonline.com, bpbpublications@gmail.com
