Business Laws
1
PROJECT REPORT ON
INCOMING & OUTGOING PARTNERS
MODES OF DISSOLUTION
EFFECTS OF NON-REGISTERATION
LLP vis-à-vis TRADITIONAL PARTNERSHIP
SUBMITTED TO: Dr. Nancy Sharma
SUBIMTTED BY: Harkiran Singh Brar 87/10 th VII Semester
Business Laws
2
ACKNOWLEDGEMENT I owe a great many thanks to a great many people who helped and supported me during the writing of this project. My deepest thanks to my Business Law Lecturer, Dr. Nancy Sharma, the Guide of the project for guiding me and correcting various documents of mine with attention and care. She has taken pain to go through the project and make necessary corrections as and when needed. I would also thank my Institution and my faculty members without whom this project would have been a distant reality. I also extend my heartfelt thanks to my family famil y and well-wishers.
Business Laws
2
ACKNOWLEDGEMENT I owe a great many thanks to a great many people who helped and supported me during the writing of this project. My deepest thanks to my Business Law Lecturer, Dr. Nancy Sharma, the Guide of the project for guiding me and correcting various documents of mine with attention and care. She has taken pain to go through the project and make necessary corrections as and when needed. I would also thank my Institution and my faculty members without whom this project would have been a distant reality. I also extend my heartfelt thanks to my family famil y and well-wishers.
Business Laws
3
Table of Contents ............................................................................................................ .................................................. 4 Incoming and Outgoing Partners .......................................................... Incoming Partner .................................................................... ................................................................................................................................ ............................................................ 4 ........................................................................................................................ 4 Mode of Admission. ........................................................................................................................ .................................................................................................. ...................................... 4 Liability of new partner [S. 31(2)] ............................................................ Outgoing Partner .................................................................... ................................................................................................................................ ............................................................ 5 ...................................................................................................................... 6 Modes of Retirement. ...................................................................................................................... .............................................................................................................. 9 Liability of retired partner ............................................................................................................... ............................................................................................................ ................................................ 10 Rights of outgoing partner ............................................................ Revocation of Continuing Guarantee [S. 38] .................................................................................... 13 .............................................................................................................................. ................................................................................. .............. 14 Dissolution ........................................................... Modes of Dissolution ........................................................................................................................ ........................................................................................................................ 14 ....................................................................................................................... 14 By Consent [S. 40] ........................................................................................................................ ................................................................................................................... ............................................... 14 By Agreement [S. 40] .................................................................... ................................................................................................... 15 Compulsory Dissolution [S. 41]. ................................................................................................... ..................................................................................................... 17 Contingent Dissolution [S. 42]. ..................................................................................................... .......................................................................................................................... ........................................................... 18 By Notice [S. 43] ............................................................... ......................................................................................................... ................................................ 20 Dissolution by Court [S. 44] ......................................................... ....................................................................................................... .................................... 24 Effects of Non-Registration [S.69] ................................................................... Suits between partners and firm [sub-s(1)] ............................................................. ...................................................................................... ......................... 25 Suits between Firm and Third Parties [S. 69(2)] ............................................................................... 26 .................................................................................................. 31 LLP vis-à-vis Traditional Partnership ................................................................................................... ......................................................................................................................................... ...................................................................... 34 Bibliography ...................................................................
Business Laws
4
Incoming and Outgoing Partners Incoming Partner Mode of Admission A new partner can be admitted into a firm with the consent of all the partners. The relations of partners being those of trust and confidence, only such person can be admitted in whom all the partners have confidence. This is, however, subject to a contrary arrangement between the partners. For there is nothing to prevent the partners from giving power to one or more of them of nominating a partner in the firm. Where a person so nominated is not acceptable to the other partners, the Court cannot force them to enter into partnership with him, “because the foundation of partnership is mutual confidence, which the Court cannot supply where it does not exist”. However, the rights arising out of a partnership deed are enforceable. The articles of a partnership between two persons contained a clause that one would have the right to bring his son into the partnership on his attaining 21 years of age. The other partner refused to accept the son. But it was held that he could not do so, the partnership articles being a contract. Where under the partnership articles a partner was entitled to nominate by his will a person to succeed him in the partnership, it was held that the person so nominated could not enforce the nomination because he was not a part y to the partnership agreement.
Section 31 – INTRODUCTION OF A PARTNER: (1) Subject to contract between the partners and to the provisions of section 30, no person shall be introduced as a partner into a firm without the consent of all the existing partners. (2) Subject to the provisions of section 80, a person who is introduced as a partner into a firm does not thereby become liable for any act of the firm done before he became a partner. Liability of new partner [S. 31(2)] Sub-section (2) of Section 31 declares that “a person who is introduced as a partner into a firm does not thereby become liable for any act of the firm done before he became a partner”. Thus the liability of the new partner commences from the date of admission. He is not liable for the pre-existing debts.
He may, however, agree with his partners to be liable for the debts incurred up to the date of his admission. But such an agreement is binding only in between the partners and does not give the right to any creditor to sue the new partner for past debts. In order to make the new partner liable to the creditors for debts incurred prior to his admission, a complete novation must be proved and this requires two things. First, the new partner or the new firm as constituted after his admission should have assumed liability for the past debts. Secondly, the creditors should be informed of the new arrangement and then the new partner becomes liable to those of the creditors who expressly or impliedly accept the new agreement. An implied agreement is inferred from the fact that a creditor, after he has knowledge of the change,
Business Laws
5
continues to deal with the new firm, or has brought an action against the new firm. An example of implied acceptance of the liability of the new partner is to be found in B.M. 1 Devaiah v Canara Bank : The documents on record in this case showed that the new partner had acknowledged preexisting liability and was also trying to clear the existing dues. The bank, which was informed of the entry of the new partner, did not withdraw the cash-credit facilities of the newly-constituted firm. The Court stated the principle to be this that a new partner can be held liable if he has assumed liability and the creditors have accepted him as a debtor. Applying this principle to the facts, the Court said that the conduct of the bank in maintaining dealings with the firm after notice of admission showed that the bank accepted the liability of the new firm and the new partner. The new partner accordingly became liable to pay the preexisting debts. The fact that the new partnership deed did not provide for assumption of such liability was immaterial because the other documents showed the intention of the partners. An implied rejection of the new arrangement occurs when a creditor, after knowledge of the admission, continues to deal with old partner alone. This happened in British Home 2 Assur ance Cor pn v Paterson : The plaintiff corporation appointed B their solicitor and instructed him to act for them in a mortgage transaction. While the business was pending, B took the defendant P into partnership and gave the plaintiffs notice in writing. The plaintiffs paid no attention to the notice, continued to correspond with B in his own name and finally sent the money to advance on the mortgage by cheque made payable to his order and accepted his receipt in his own name. B paid the money into his own account and misappropriated it. The plaintiffs s ued the new partner. It was held that the plaintiffs had by their conduct declined to accept the liability of the new partner. They had elected to deal with old partner alone and could not afterwards hold the new partner liable.
Outgoing Partner An outgoing partner means a partner who has retired from a firm and the business is continued by the remaining partners. Section 32 - RETIREMENT OF A PARTNER: (1) A partner may retire – (a) with the consent of all the otter partners, (b) in accordance with an express agreement by the partners, or
1 2003 AIR Kant 143. 2 (1902) 2 Ch 404.
Business Laws
6
(c) where the partnership is at will, by giving notice in writing to all the other partners of his intention to retire. (2) A retiring partner may be discharged from any liability to any third party for acts of the firm done before his retirement by an agreement made by him with such third party and the partners of the reconstituted firm, and such agreement may be implied by a course of dealing between such third party and the reconstituted firm after he had knowledge of the retirement. (3) Notwithstanding the retirement of a partner from a firm, he and the partners continue to be liable as partners to third parties for any act done by any of them which would have been an act of the firm if done before the retirement, until public notice is given of the retirement: Provided that a retired partner is not liable to any third party who deals with the firm without knowing that he was a party. (4) Notices under sub-section (3) may be given by the retired partner or by any partner of the reconstituted firm. Modes of Retirement A partner may retire from the firm in any of the following ways:
By Consent [S. 32(1)(a)] A partner may retire at any time with the consent of his partners. By Agreement [S. 32(1)(b)] Where there is an agreement between the partners about retirement, a partner may retire in accordance with the terms of that agreement. The Supreme Court regarded an agreement to be valid which permitted a partner to retire by one month‟s notice. By Notice [S. 32(1)(c)] Where the partnership is at will, a partner may retire by giving to his partners a notice of his intention to retire. A partnership “at will”, as defined by Section 7, means a partnership where no contract has been made between the partners for its duration or determination. The duration if the firm is left uncertain and it survives as long as each and every partner is willing. A partner can retire by notice only when the firm is “at will” as so defined. A clause held that a partner who wants to retire should give 6 months‟ notice will prevent the firm from being regarded as a frim at will, particularly where the firm has only two partners and the retirement of one will mean inevitable dissolution. An agreement of partnership provided that the death or retirement of a partner would not terminate the firm and a partner guilty of such conduct as would justify dissolution by Court would stand retired. It was held that the firm was not at will, for it could be dissolved only by the Court or by some other event.
Business Laws
7
Notice should be in writing, signed by the partner and should be served upon all the partners. As between the partners, the retirement becomes effective from the date mentioned in the notice or, if no date is mentioned, from the date of service. By Insolvency [S. 34] Section 34 - INSOLVENCY OF A PARTNER: (1) Where a partner in a firm is adjudicated an insolvent, he ceases to be a partner on the date on which the order of adjudication is made, whether or not the firm is thereby dissolved. (2) Where under a contract between the partners the firm is not dissolved by the adjudication of a partner as an insolvent, the estate of a partner so adjudicated is not liable for any act of the firm and the firm is not liable for any act of the insolvent, done after the date on which the order of adjudication is made. Two points are made out by the section. The first is that a partner ceases to be a partner from the date on which he is adjudicated an insolvent. This effect will follow whether the firm is dissolved or not. Secondly, where the firm is not dissolved, and consequently, therefore, it remains in business, the insolvent partner‟s estate is not liable for any act of the insolvent partner. This provision has been inserted to terminate the liability either way without the need of any public notice. By Death [S. 35] Section 35 - LIABILITY OF ESTATE OF DECEASED PARTNER: Where under a contract between the partners the firm is not dissolved by the death of a partner, the estate of a deceased partner is not liable for any act of the firm done after his death. When a partner dies, he, of course, ceases to be a partner. The firm may or may not thereby be dissolved. The estate of the deceased deserves to be protected from any further liability in liability in respect of any act of the firm done after the time of his death. The section is designed only to provide that protection. The section accordingly says that where by virtue of a contract between the partners, the firm is not dissolved by the death of the partner, the estate of the deceased partner is not liable for any act of the firm done after his death. No public notice is necessary to terminate the liability of the deceased partner. Death is also a 3 notice by itself. Thus in Bagel v M iller , the estate of a deceased partner was held to be not liable in an action for the price of goods sold and delivered where the order for goods was given in the lifetime of the deceased partner, but delivery did not take place till after his death.
3 (1903) 2 KB 212.
Business Laws
8
By Expulsion [S. 33] Section 33 - EXPULSION OF A PARTNER: (1) A partner may not be expelled from a firm by any majority of the partners, save in the exercise in good faith or powers conferred by contract between the partners. (2) The provisions of sub-sections (2), (3) and (4) of section 32 shall apply to an expelled partner as if he were a retired partner. Power of Expulsion to be Provided A partner cannot be expelled from a firm by any majority of partners. But Section 33 provided that a partner may be expelled in the exercise in good faith of the power of expulsion, if any, given to the partners by their mutual agreement. Thus expulsion is justifiable only when it is authorised by an agreement between the partners. The power of expulsion must be exercised strictly on the grounds on which it is exercisable and also in absolute good faith in the interest of the firm. The courts strictly construe this power because of the possibility of abuse inherent to it. Thus, where in the exercise of their power conferred in most unfettered terms, majority of the partners expelled a partner on the ground that he had opposed the appointment of one of the partner‟s son as manager, the Court held the expulsion to be unwarranted and an abuse of power. But the Court does not interfere where the power seems to have been exercised in good faith and for proper purposes. Thus, where a clause is a partnership deed empowered the partners to expel a partner who was guilty of flagrant breach of duties, the Court refused to interfere when it found on evidence that that kind of breach of duties was establis hed. The Calcutta High Court approved the expulsion of a partner who paralysed the business of the firm by giving notice to the firm‟s bankers not to pay the firm‟s cheques and offered no explanation for his conduct even when full opportunity was given to him. The power of expulsion can be exercised by a majority and not by a single partner. Where, of the 3 partners, 2 were guilty of misconduct and the 3 rd proceeded to expel them, the Court held that if this expulsion were allowed it would reverse the meaning of the Section which contemplated expulsion by the majority of a minority and not vice versa. In such cases the better choice is dissolution. A partner who is properly expelled is in the same position as that of a retired partner. Where the expulsion is not proper, it is of no effect. The expelled partner is entitled to be reinstated in his position. He is, however, not entitled to damages for wrongful expulsion, unless the expulsion was given maliciously publicity or was otherwise maliciously harmful. Limitation for Instituting Proceedings Where the plaintiff- partner was expelled from the firm and kept out of its business and was also denied his share of profits, etc., it was held that the cause of Action for questioning the
Business Laws
9
validity of the ousting and for reinstatement as partner or for seeking dissolution arose at the time of expulsion and, therefore, the proceedings instituted four years thereafter were barred by time. Liability of retired partner Liability for Acts done before Retirement [S. 32(2)]
A retired partner remains liable to the creditors for the acts of the firm done before and up to the date of his retirement. However, Section 32(2) suggests a way out. The continuing partners may agree to release him from such debts. But, notwithstanding any arrangement between the partners, the retired partner remains liable to the creditors. To obtain a release from the creditors also, a complete novation has to be proved and this requires 2 things: First, the remaining partners must have agreed with the retired partner to release him from the existing debts and liabilities. Secondly, the creditors should be informed of the retirement and the new arrangement and then the retired partner will be discharged from his liability to a creditor who has expressly or impliedly agreed to release the retired partner and to accept the reconstituted firm as his debtor. An implied agreement arises when a creditor continues a deal with the reconstituted firm after he has knowledge of the retirement. A partner who has committed a tort or an infringement of a trademark remains liable to the injured party even though he had retired before the suit was filed. Liability for Acts done after Retirement [S. 32(3)] A public notice on the retirement should be given. The notice may be given either by the retired partner or by any partner of the reconstituted firm. It is in the interest of both. The consequences default in giving public notice are twofold, namely, holding out of the retired partner and estoppel against the firm. The retired partner shall continue to be liable by holding out for any act of the remaining partners which would have been the act of the firm if done before retirement. Such liability continues up to the date of public notice but is confined only to customers who dealt with the firm under the assumption that the retired partner was still a partner. It also does not extend to torts committed by the remaining partners after the retirement nor to acts of insolvency committed by the continuing partners. In two successive cases before the Madras High Court, long after a partner‟s retirement without public notice, other partners committed acts of insolvency, for which the retired partner was also sought to be declared as an insolvent. The court rejected the plea in both the cases. No public notice is, however, necessary in the case of a deceased partner, insolvent partner and a dormant partner. The proviso to Sub-section (3) of Section 32 clearly says that a “a retired partner is not liable to any third party who deals with the firm without knowing that he was a partner”. In a case before the Bombay High Court, a partner retired and some 3 years later the continuing partners incurred liability on a bill of exchange, the retired partner was held not liable for the same because the party suing him did not know that he ever was a
Business Laws
10
partner in the firm. It was not material that no notice of retirement was given either to the Registrar of Firms or through publication. Retirement of an unknown partner requires no publicity. The significance of the expression “estoppel of the firm” is that if the retired partner takes credit from a customer of the firm representing that he is still a partner of the firm, the firm would be liable if the act of the retired partner would have been an act of the firm if done by him before retirement. Rights of outgoing partner Right to Compete [S. 36]
Section 36 - RIGHTS OF OUTGOING PARTNER TO CARRY ON COMPETING BUSINESS: (1) An outgoing partner may carry on a business competing with that of the firm and he may advertise such business, but subject, to contract to the contrary, he may not – (a) use the firm-name, (b) represent himself as carrying on the business of the firm, or (c) solicit the custom of persons who were dealing with the firm before he ceased to be a partner. (2) AGREEMENT IN RESTRAINT OF TRADE: A partner may make an agreement with his partners that on ceasing to be a partner he will not carry on any business similar to that of the firm within a specified period or within specified local limits; and, notwithstanding anything contained in section 27 of the Indian Contract Act, 1872, such agreement shall be valid if the restrictions imposed are reasonable. The retired partner has the right to carry on any business competing with that of the firm. He may set up his new business at a place next door to the firm or anywhere else. He may advertise his business and attract customers. This is necessary to assure freedom of trade to every individual. But the interest of the firm which he has left also deserves protection. The Act, therefore, tries to assure that the partner should do nothing to injure the interest of the firm. To this end the following restrictions have been imposed upon his trade liberty [S. 36 (1)]: He cannot use the name of the firm. He may establish his new business under any other name, but not in the name if the firm which he has left. He should not represent that he is carrying on the business of the firm He should not solicit the custom of persons who were dealing with the firm before he ceased to be a partner. He does not have the right to break away the customers of the firm. Thus in
Business Laws
11
4
Trego v Hunt the retiring partner was restrained from drawing a list of the firm‟s customers.
Similarly, in Boorne v Wicker 5, a deceased partner‟s executor was restrained from attempting to solicit the customers of the former partnership. Any of these rights can be given to the retired partner only by an agreement between him and the continuing partners. If the partners think that the above statutory restrictions are not sufficient to safeguard the interest of the firm, they may agree that any partner on ceasing to be a partner will not carry on any business similar to that of the firm. This enables the continuing partners to deprive the retired partner of his right to compete. Such an agreement is in restraint of trade and is ordinarily void under Section 27 of the Contract Act. But Section 36(2) of the Partnership Act introduces this special exception and protects the validity of the agreement if the following conditions are satisfied: The agreement should specify either the period or the local limits of restraint. The restriction imposed should be reasonable. Thus the section allows restrictions on the trade liberty of the retired partner for a specified period or specified local limits and requires that the restriction should be reasonable. A restriction is reasonable „if it is not greater than will afford adequate protection to the late partners having regard to the nature and extent of the partnership business”. A restraint upon a doctor retiring from a firm of doctors not to practice within ten miles and for a period of 21 years has been held to be reasonable. Two persons entered into an agreement to run an estate agency in partnership. There was a covenant restraining one of them from practising as an estate agent on his own account, or with any other person or company, within 2 miles of the partnership premises and also within 2 years of the termination of the partnership. He left the partnership and commenced practice as an estate agent with another agent within the time period and within the given area. The Court enforced the covenant. The Court said the goodwill of the partnership was a legitimate interest which the other partner was entitled to have protected. The restrictive covenant could not be described as a covenant against competition. The covenant was no more than was adequate to protect the goodwill of the partnership. Right to Share Subsequent Profit [S. 37] Section 37 - RIGHT OF OUTGOING PARTNER IN CERTAIN CASES TO SHARE SUBSEQUENT PROFITS: Where any member of a firm has died or otherwise ceased to be a partner, and the surviving or continuing partners carry on the business of the firm with the property of the firm without 4 1896 AC 7 (HL). 5 (1927) 1 Ch 667.
Business Laws
12
any final settlement of accounts as between them and the outgoing partner or his estate, then, in the absence of a contract to the contrary, the outgoing partner or his estate is entitled at the option of himself or his representatives to such share of the profits made since he ceased to be a partner as may be attributable to the use of his share of the property of the firm or to interest at the rate of six per cent. per annum on the amount of his share in the property of the firm: Provided that where by contract between the partners an option is given to surviving or continuing partners to purchase the interest of a deceased or outgoing partner, and that option is duly exercised, the estate of the deceased partner, or the outgoing partner of his estate, as the case may be, is not entitled to any further or other share of profits, but if any partner assuming to act in exercise of the option does not in all material respects comply with the terms thereof, he is liable to account under the foregoing provisions of this section. When a partner retires from a firm for any reason whatever, it is the duty of the remaining partners to pay out the share of property and profits to the retired partner or to his representatives. But sometimes the continuing partners do not do so either because they are waiting for a more opportune moment or because they have obtained consent of the party entitled to the share. Either way the capital which should have been paid out remains in the business with its earning potential. What are the rights of the party entitled to the share? He has an option. He may receive interest at the rate of 6% p.a. on the amount of his share in the property of the firm. A partnership was dissolved by consent and it was agreed that the assets of the firm would be sold by auction. Even then one of the partners continued the business on the partnership premises and also with the capital and assets of the firm. It was held that he must account to the other partner for the profit which was earned by the use of his share in the property. This right exists even when only a part of the retired partner‟s share of assets is used in business, although in that case comparatively less profit would be attributable to his share. The concept of “share of partnership assets” has been explained as: „share of the partnership assets‟ means the outgoing partner‟s share in the proprietary ownership of assets belonging to the partnership. What has been stated is the partner‟s interest in net assets or the surplus of partnership assets after satisfying partnership liabilities. The amount of profit attributable to the use of such share belongs to the outgoing partner. The continuing partners may “show, if they can, that the profits have been earned wholly or partially by means other than utilisation of the partnership assets”, for example, exclusively by application of the continuing partner‟s skill or by reason of the firm‟s goodwill in which the retired partner had no share. “Those profits so far as earned by sources outside the partnership assets, are not profits in which the executors of the deceased partnership could be entitled to any share.” The continuing partners would also be entitled to any allowance reasonably sufficient to compensate them for the use of skill and trouble.
Business Laws
13
Where the representative of a deceased partner opted for interest, it was held that the estate of the deceased partner was not thereby deprived of its normal right to benefit from an increasing value of the assets pending realisation. Where, however, the continuing partners, having been given the option to purchase the retired partner‟s share, have exercised it, the right to share subsequent profits is lost. But the right will revive if the purchasing partners do not in all material respects comply with the terms of the purchase. The estate of a deceased partner is entitled to the benefits of any increase in the value of the partnership assets taking place after his death but before the final realisation. The rights of a retired partner cannot be confined to the date of his suit for dissolution and accounts. He has a continuing interest in the assets until they are realised or their value is taken. Section 37 does not entitle the sole remaining partner of a dissolved firm to prevent the former partner from obstructing his business. The retiring partnership does not require any independent interest in the property of the firm till the firm is dissolved and the accounts settled. He has a right to demand settlement but no right to interfere in matters of business.
Revocation of Continuing Guarantee [S. 38] A continuing guarantee given to a firm or to a third person in respect of the transactions of the firm is revoked as to future transactions from the date of any change in the constitution of the firm. This rule operates when there is no agreement to the contrary and the surety has not given his assent to the change. The rule is undoubtedly intended to protect the surety‟s interest. A change in the constitution of the firm might expose him to new kinds of risk. The simplest illustration is the decision of the Calcutta High Court in Neel Comul M ukh er jee v 6 Bi pro Dass M ooker jee . Here the conduct of a firm‟s cashier was guaranteed. Subsequently the constitution of the firm was altered and its name changed from “N. C. Mookerjee” to “N. Mookerjee & Son”. The surety was held not liable for the misconduct of the cashier after the change. Similarly, a guarantee was not permitted to be enforced in respect of a liability arising after one of the partners had withdrawn from the partnership. The operation of the section is confined only to continuing guarantees which is a sort of a running guarantee. Whether a particular guarantee is of a running variety or not depends upon whether it satisfies the requirements of its definition in Section 129 of the Contract Act. In Chorley and Tucker the concept of a continuing guarantee is thus explained. A specific guarantee provides for securing a specific advance of or advances up to a fixed sum, and ceases to be effective on the repayment thereof, while a continuing guarantee covers 6 ILR (1901) 29 Cal 597.
Business Laws
14
a fluctuating account such as an ordinary current account at a bank, and secures the balance owing at any time within the limits of the guarantee.
Dissolution Section 39 - DISSOLUTION OF A FIRM: The dissolution of a partnership between all the partners of a firm is called the "dissolution of the firm". Thus dissolution is something different from the retir ement of a partner, because in retirement the business is continued by one or more of the partners. Where immediately after dissolution, the firm is reconstituted and the business resumed by some of the partners, even if in the same name and place, that remains a dissolution. Where, on the other hand, on the death of a partner, his legal heirs joined the firm in accordance with the provisions of the partnership deed, the firm would not stand dissolved, although its constitutional documents would have to be altered. One out of 4 partners unilaterally dissolved the firm and instructed the bank to freeze the account. He was holding minority interest of 29%. The remaining partners holding 71% decided to continue the business of the firm. As per the agreement the bank account could be operated by any two partners. It was held that the 29% holder could not have dissolved the firm unilaterally nor the bank could freeze the a ccount at his instance.
Modes of Dissolution By Consent [S. 40] Section 40 - DISSOLUTION BY AGREEMENT:
A firm may be dissolved with the consent of all the partners or in accordance with a contract between the partners. A firm may be dissolved at any time with the consent of all the partners. This applies to all cases whether the firm is for a fixed period or at will. A dissolution was held to have taken place in the case of a partnership at will when the partners decided not to carry on the business of the firm from an agreed date. The period of limitation for filing a care for rendition of accounts commenced from the date and was not permitted to be prolonged by a partner subsequently giving a notice of dissolution. By Agreement [S. 40] A firm may be dissolved in accordance with a contract between the partners. The contract providing for dissolution may be contained in the partnership deed itself or in a separate agreement.
Business Laws
15
Both the above kinds of dissolution, namely, by consent and by agreement, are provided in the same section. But they are different. Partners can consent to a dissolution regardless of what their previous agreements are. But in dissolution by contract they have to follow their subsisting agreement, whether all the partners give their consent or not. Reconstitution after Dissolution A dissolution is, in the opinion of the Supreme Court, something different a continuation of the firm after reconstituting it. It will be a question of fact in each case whether the intention was to dissolve or to continue. Where the partnership was for a fixed period, after the expiry of which it was stated to have been dissolved by mutual consent of the partners and some of the partners continued the business in the name and style of the firm, it was held on facts that the assesse firm was entitled to relief under Section 25 (4) of the Income Tax Act, 1922. The court said: „Dissolution‟ and „reconstitution‟ are two distinct legal concepts, for, a dissolution brings the partnership to an end while a reconstitution means a continuation of the partnership under altered circumstances but in law there would be no difficulty in a dissolution of a firm being followed by the constitution of a new firm by some of the erstwhile partners who may take over the assets and liabilities of the dissolved firm. It is not possible to accept the contention of the appellant that upon a dissolution of a firm succession to the old business by another person would only arise if a solitar y partner takes over assets and liabilities and carries on the business as a sole proprietor thereof or if some of the erstwhile partners along with some strangers take over the assets and liabilities of the old firm and carry on the business. It is quite conceivable that in cases of dissolution of the firm brought about by a notice under Section 43 or by an order of the court under Section 44, some of the erstwhile partners may take over the assets and liabilities and carry on the same business by constituting a new firm and even such cases would be cases of succession to the old business within the meaning of Section 25(4) of the said Act. In another case before the Supreme Court, one of the three partners stepped out of the business because of old age foregoing his right to a share in the goodwill of the firm. The remaining two partners with their sons constituted a new firm and continued the same business at the same place and with the same registration number. A partner subsequently died. A suit was filed by the partners of the new firm for dissolution and rendition of accounts against the retired partner. The court said that the old firm was dissolved by mutual agreement. The new partnership came into existence in place of the old one. The retired partner was not a partner in the new firm. Nor he was being paid anything whatsoever by the new firm. Hence, he could not be sued for rendition of accounts.
Compulsory Dissolution [S. 41] Section 41 - COMPULSORY DISSOLUTION:
Business Laws
16
A firm is dissolved – (a) by the adjudication of all the partners or of all the partners but one as insolvent, or (b) by the happening of any event which makes it unlawful for the business of the firm to be carried on or for the partners to carry it on in partnership: Provided that, where more than one separate adventure or undertaking is carried on by the firm, the illegality of one or more shall not of itself cause the dissolution of the firm in respect of its lawful adventures and undertakings. The two events mentioned in the section, namely, the insolvency of all, or all but one, partners, or illegality of business, are known as grounds of compulsory dissolution because they operate to bring about such necessary dissolution that there can be no agreement to the contrary. No amount of clauses in the partnership agreement can prevent the operation of clauses of Section 41. The 2 clauses of dissolution of compulsory nature mentioned in the section are as follows: a. Insolvency Where all the partners of the firm have been adjudicated as insolvents, the partnership inevitably ends. This is so because partnership is a contract and insolvents, till they are not discharged, cannot contract either among themselves or with those dealing with the firm. The same result follows where only one partner remains solvent and all others have been adjudicated as insolvents. A single person cannot make a partnership end and, therefore, the matter is over. b. Illegality of Business Where the business of the firm is illegal but from the very beginning, the agreement of partnership by itself is unlawful under Section 23 of the Contract Act. Such a case does not fall within the scope of Section 41. The section applies when the business is lawful in the beginning but subsequently, on account of some change in law or outbreak of hostilities, the business becomes unlawful. Section 56 of the Contract Act says that when the performance of a contract becomes unlawful, the contract becomes void. Section 41 (b) of the Partnership Act says that when the business of a firm becomes unlawful, the firm is, by force of law, dissolved. The clause contemplates two kinds of possibilities. Either the business itself becomes unlawful, e.g., on the introduction of prohibition, wine business becomes unlawful, or the remaining lawful, but carrying it on it partnership becomes unlawful, as, for example, where there is no prohibition, there may still be prohibition on partnership running liquor licences. In such cases the business is lawful, but it is lawfully allowed only to individuals and not to organisations of individuals. Many licences are, for example, issued only to individuals and not to partnerships. A partnership for such business becomes an unlawful organisation though the business itself is lawful. In either case, the effect upon the firm is the same, i. e., the firm stands dissolved by a compulsory provision of law.
Business Laws
17
The proviso to the section deals with cases in which the firm is carrying on not one business, but more than one type of business. In such cases if atleast one type of activity remains lawful, the partnership escapes compulsory dissolution. It survives for the business which remains lawful, though its other business operation being now unlawful, would have to be abandoned. Contingent Dissolution [S. 42] Section 42 - DISSOLUTION ON THE HAPPENING OF CERTAIN CONTINGENCIES:
Subject to contract between the partners a firm is dissolved – (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. A firm is dissolved on the happening of any of the following contingencies provided that there is no agreement to the contrary: a. If the firm is constituted for a fixed period, by the expiry of that term. b. If the firm is constituted to carry out one or more adventures or undertakings, when they are completed. c. By the death of a partner. d. By the adjudication of a partner as an insolvent. Expiry of Term Where a firm is constituted for a fixed term, it becomes dissolved on the expiry of that term, unless the dissolution is prevented by an agreement between the partners. The Supreme Court held on the facts of a case before it that, in the absence of an agreement to the contrary, there was no question of the survival of a firm after the expiry of its term and the fact that the partners, subsequent to the expiry of the term, consented to refer their disputes to arbitration did not amount to an agreement to the contrary. Completion of Business A partnership is dissolved by operation of law when the business for which it was formed has been completed. The section says that where a firm is constituted to carry out one or more adventures or undertakings, it is dissolved by the completion thereof. Where, in a case before the Patna High Court, a partnership firm was working a salt licence and the control on salt having been lifted and the licence becoming inoperative, the question arose whether the firm had come into being only for working the licences or to carry on salt business whether with or without control and licence, Ramaswami, J said:
Business Laws
18
It is manifest that the object of the partnership was to exploit the salt licence and the salt agency and that the salt agency was the substratum or the underlying basis of the contract of partnership. It is clear that the intention of the parties was that the partnership should continue so long as the agency of salt continued or till separate agencies were obtained by the parties in their respective names. If this interpretation is right there was dissolution of the partnership under the provisions of Section 42(b) as soon as salt control was lifted and the agency and licence granted to the firm came to an end. Where a firm is constituted for a particular term or venture, and a partner dies earlier, it would end as from the date of death irrespective of the fact that neither the term has expired nor business completed. The Madras High Court refused to agree that wherever there is an adventure that itself amounts to a contract to the contrary. It is not necessary that a contract to the contrary should always be expressed. Death of Partner The effect of clause (c) of Section 42 is that in the absence of a contract to the contrary, a partnership is dissolved by the death of a partner. Death of a partner means the dissolution of the partnership. In a case before the Rajasthan High Court, it was contended against a firm that it should not be permitted to sue because one of the partners died and the firm becomes dissolved; if the business was continued, it should have been registered anew and that not have been done it was not competent to sue. The Court allowed the sectio n. The business in this case was continued by surviving partners along with the heirs of the deceased partner. There was held to be an automatic dissolution where one of the two partners died. There was a clause in the partnership deed that the firm would be continued for a certain number of years despite the death of one of the two partners. The court said that the clause did not save the firm from dissolution because the legal heirs of the deceased partner had expressed their unwillingness to the continuation of the firm. Insolvency of Partner A partnership is dissolved by the adjudication of a partner as an insolvent. Thus the insolvency even of a single partner operates as a dissolution. This being also subject to an agreement to the contrary, the partners can agree that the insolvency of a partner will not have the dissolving effect. Such an agreement will be subject to the provisions of the Act relating to compulsory dissolution, namely, that on the insolvency of all th e partners or all but one the firm would stand compulsorily dissolved. By Notice [S. 43] Section 43 - DISSOLUTION BY NOTICE OF PARTNERSHIP AT WILL:
Business Laws
19
(1) Where the partnership is at will, the firm may be dissolved by any partner giving notice in writing to all the other partners of his intention to dissolve the firm. (2) The firm is dissolved as from the date mentioned in the notice as the date of dissolution or, if no date is so mentioned, as from the date of the communication of the notice. Dissolution of Firm at Will When the partnership is at will, which means partnership the duration of which has not been fixed, it may be dissolved at any time by any partner by giving notice of his intention to dissolve it and should be served upon all the partners. The notice must not be ambiguous or vague. It must be factual, explicit and final. A notice that accounts should be rendered and that a certain work must not be proceeded with was held to be not a notice of dissolution. A majority resolution to dissolve the firm was also held to be not a notice of dissolution. But where the partners stopped the work some three years before a suit was filed by one of the partners for accounts, it was held that the firm stood dissolved from that time by implied agreement and, therefore, the suit for accounts was time-barred. He could not save himself from the bar of time by subsequently giving a notice of dissolution. The firm is dissolved as from the date mentioned in the notice or, if no date is mentioned, as from the date of communication of notice. Where a letter was addressed by a partner to his own lawyer appointing him as an arbitrator in the dispute between him and the other partners and asking him to consider the matter of the dissolution of the firm, it was held that this was neither a notice of dissolution, nor it had the effect of dissolving the firm. But where a partner gives notice at an importune moment or at a time when dissolution will give him some advantage over the other partners, the court may hold him in the firm till at least pending transactions are completed and liabilities paid out. Thus, where a partner was guilty of an act of fraud and admitted it and while the other partners was guilty of an act of fraud and admitted it and while the other partners expelled him from the firm, he claimed that he had given a notice of dissolution even before that end, it was held that as had served notice of dissolution to conceal his own fraud, the notice was invalid. The other partners were entitled to expel him. 7 A partnership which is not at will cannot be determined by notice. Thus in M oss v Elphick : A deed, constituting a partnership of two persons for an undefined time, provided that the firm could be terminated „by mutual agreement only‟. It was held that the notice of dissolution given by one of the partners was invalid as the operation of Section 43 was excluded by agreement to the contrary. Where there was a clear provision in the deed that the partnership could continue as long as there were atleast two partners, the Supreme Court held that the partnership and its continuance was not dependent upon the will of the partners and, therefore, no partner had the right to dissolve it by notice. Where the existence of a partnership was exclusively
7 (1910) 1 KB 846.
Business Laws
20
dependent upon the fact whether a licence to run a cinema hall was granted or not, it was held to be a frim at will. The Supreme Court has expressed the opinion that in a partnership consisting of two partners only, if there is any provision regulating the mode of retirement, it will in essence be an agreement as to dissolution. The firm will not be “at will” and the provision relating to retirement will have to be followed for dissolution also. In ignorance of this decision the Calcutta High Court had held that in a partnership consisting of two persons only, a provision that a partner will retire by six months‟ notice only will not prevent the operation of Section 43 and a partner could dissolve the firm by notice, though for retirement he would need to wait for six months. In such cases retirement and dissolution becomes indistinguishable. The Bombay High Court has held that a provision in a deed of partnership that any partner could retire by two months‟ notice did not amount to a provision for the dissolution of the firm and, therefore, the firm was at will. The firm consisted of more than two partners. A firm at will can be dissolved with the consent of all the partners. Where all the partners but one retire, this may involve a dissolution, but not a necessary dissolution; the single partner may take in some other partners and the firm shall be deemed to have been continued. Where a partner sent a notice of dissolution to his only other partner and died before the other received the notice, it was held that the firm because dissolved by the death of a partner and not by notice. Dissolution by Court [S. 44] Section 44 - DISSOLUTION BY THE COURT:
At the suit of a partner, the Court may dissolve a firm on any of the following grounds, namely: (a) that a partner has become of unsound mind, in which case the suit may be brought as well by the next friend of the partner who has become of unsound mind as by any other partner; (b) that a partner, other than the partner suing, has become in any way permanently incapable of performing his duties as partner; (c) that a partner, other than the partner suing, is guilty of conduct which is likely to affect prejudicially the carrying on of the business regard being had to the nature of the business; (d) that a partner, other than the partner suing, wilfully or persistently commits breach of agreements relating to the management of the affairs of the firm of the conduct of its business; or otherwise so conducts himself in matters relating to the business that it is not reasonably practicable for the other partners to carry on the business in partnership with him; (e) that a partner, other than the partner suing, has in any way transferred the whole of his interest in the firm to a third party, or has allowed his share to be charged under the
Business Laws
21
provisions of rule 49 of Order XXI of the First Schedule to the Code of Civil Procedure, 1908, or has allowed it to be sold in the recovery of arrears of land revenue or of any dues recoverable as arrears of land revenue due by the partner; (f) that the business of the firm cannot be carried on save at a loss; or (g) on any other ground which renders it just and equitable that the firm should be dissolved. Grounds of Dissolution by Court By Section 44 the court is empowered to order the dissolution of a firm at the suit of a partner in the following cases: Insanity When one of the partners had become a person of unsound mind, any partner, including the insane, may apply for dissolution. Insanity renders the partner incapable of performing his duties as a partner and is, therefore, a good ground for putting an end to the firm. Dissolution may be necessary both to protect the interest of the insane and the other partners. Permanent Incapacity Where any partner, other than the partner suing, has become permanently incapable of performing his duties as a partner, any partner may apply for dissolution. The incapacity may be due to illness, mental or physical, but it should be of a permanent nature. In Whitwell v 8 Arthur a partner suffered from an attack of paralysis and that would have been a good ground for dissolution but for the fact that the medical evidence showed that the attack was only temporary and he was already improving. Misconduct When a partner, other than the partner suing, is guilty of conduct which is likely to affect prejudicially the business of the firm the court may order dissolution. It is not necessary that the misconduct should be connected with the business of the firm. Its only connection with the firm need be that it will damage the business prospects of the firm. Thus, conviction for travelling without ticket, or for breach of trust is sufficient, but misconduct in personal life 9 v Milford may not be so. In Snow : A partner of a firm of bankers committed adultery with several women in the city where the business the business was carried on and his wife had left him. The other partners applied for dissolution on this ground. The court rejected the action. Persistent Breach of Agreement
8 (1865) 147 RR 73. 9 (1868) 18 LT 142.
Business Laws
22
When a partner, other than the partner suing, persistently commits breach of agreements relating to the management of the firm or otherwise so conducts himself in matters relating to the business that it is not reasonably practicable for the other partners to carry on the business in partnership with him, the court may order dissolution. Any conduct which is destructive of mutual confidence between the partners is sufficient. Breach of agreement and conduct destructive of mutual confidence give rise to a ground for dissolution of the firm. “Keeping erroneous accounts and not keeping receipts, a refusal to meet on matters of business, continued quarrelling, and such a state of animosity as precludes all reasonable hope of reconciliation and friendly cooperation, have been held sufficient to justify a dissolution.” “A father‟s treatment of his partner -son (opening his private letters, and like some parents, failing to realise that his son is now a grown-up man) have been held to justify a dissolution. Transfer of Interest When a partner, other than the partner suing, has transferred the whole of his interest in the firm to a third party, or as allowed his interest to be charged, or has allowed it to be sold in, the recovery of arrears of land revenue, or of any dues recoverable as arrears of land revenue, the court may order dissolution. Perpetual Losses When the business of the firm cannot be carried on save at a loss the court may dissolve it. The whole object of partnership is to make profits and if that object cannot be attained, it is needless for the firm to continue. Thus where the whole of the capital contributed by the partners had already been spent and there were no business prospects unless they contributed further capital which they refused to do, the court granted dissoluti on. Just and Equitable Dissolution may be ordered when on any other ground the court thinks is just and equitable that the firm should be dissolved. The expression, “just and equitable” gives the court a very wide discretionary power, which is not to be fettered by any rules, to order dissolution whenever in the circumstances it seems to be desirable. Where the terms of a partnership deed provided to a partner the facility of withdrawing from the firm by transferring his interest to others, the court said that this would keep the right to seek dissolution in abeyance unless a crisis is created by others by refusing to pay him out. The court equally concerns itself with the interest of the other partners. Where the managing partner supplied to the firm from his personal business certain material for which he overcharged, this was held to be a breach of faith entitling other partners to demand dissolution. It was not necessary that a notice of dissolution under Section 43 should have been given. The court has to take into account all the facts and circumstances and mould relief according to the exigencies of the case. Where dissolution was prayed for, the court provided the relief of retirement. Mismanagement of affairs has also been held to be a good ground for ordering dissolution. The firm was running a cinema theatre. The plaintiff partner was entitled to receive a
Business Laws
23
minimum guaranteed sum as his share of profit on monthly basis and the same was not being paid to him. No explanation was given for the same. Copies of accounts and of income tax returns were also not given to him. The accounts submitted for income tax purposes also did not seem to be correct. All this showed that the defendant partner was mismanaging the affairs. The court ordered dissolution. Whether Right to Apply for Dissolution can be Excluded The right of a partner to ask for dissolution on any of the grounds cannot be excluded by any agreement to the contrary. Where no other mode of dissolution is available, Section 44 being the lender of last resort, its operation cannot be allowed to be nullified. The Allahabad High Court has, however, held differently. In a case before it, a partnership deed provided that a partner could withdraw by selling his interest to his co-partners or, in the event of their failure to buy it, by selling his it to others and dissolving the firm. The other partners failed to buy and, therefore, dissolution was prayed for, but was not granted, the court saying that the provisions had taken away a partner‟s right to cause dissolution. This view is however, no longer tenable. Following a Privy Council decision, the J & K High Court stated that “it can be safely said that Section 44 confers an absolute and independent right and it is not open to the partners to take away that right by means of an agreement between them”. The court accordingly held that the requirement of the partnership agreement that there should be one month‟s notice and reference of every dispute to arbitration must give way to the clear provisions of Section 44. Though the power of the court under Section 44 should be invoked only where other modes of dissolution are unavailing, yet this does not mitigate against the discretionary power of the court under the section. Suits for Accounts without seeking Dissolution The Bombay High Court has expressed the following opinion: Generally the suits like the present one are suits for accounts and dissolution. Even if the suit is only for accounts, the court would (order) dissolution. It is also open for the courts, irrespective of the parties‟ pleadings, to call upon the plaintiff to amend his plaint suitably so as to include the prayer for accounts and dissolution. This naturally follows from the fact that without seeking dissolution, accounts ordinarily cannot be demanded. The present case is titled only a suit for accounts, but it would virtually be a suit for dissolution. But there has been decision of the Privy Council pronounced in 1922 that where the suit is by one partner against another for recovery of a sum of money and the relief is capable of being granted without taking general account, it should be allowed though it may arise out of partnership business or be connected with it.
Suit for Partition without Dissolution
Business Laws
24
A suit for partition of the assets of the firm without dissolution is not possible. An agreement to create a partnership need not be express. It can arise out of mutual understanding evidenced by a consistent course of conduct. The intention of parties in purchasing property was for the common pool of business. Existence of partnership could be inferred. Accounts were daily looked into. There was no finalisation of accounts between them. A suit for partition of property without there being dissolution was held to be not maintainable. Property Situate out of Territorial Jurisdiction of Court A suit for dissolution is not to be barred on the ground that certain immovable properties of the firm were situated beyond the territorial jurisdiction of the court. The primary object of a dissolution suit is not relief in respect of some immovable property. A suit was filed for declaration of the dissolution of a partnership firm. The theatres of the firm which were a part of its property were situate beyond the jurisdiction of the High Court. The head office of the firm was within jurisdiction. The notice of dissolution was issued and received within jurisdiction. It was held that the High Court had jurisdiction to entertain the suit.
Effects of Non-Registration [S.69] Section 69 - EFFECT OF NON-REGISTRATION: (1) No suit to enforce a right arising from a contract or conferred by this Act shall be instituted in any Court by or on a behalf of any persons suing as a partner in a firm against the firm or any person alleged to be or to have been a partner in the firm unless the firm is registered and the person suing is or has been shown in the Register of Firms as a partner in the firm : Provided that the requirement of registration of firm under this sub-section shall not apply to the suits or proceedings instituted by the heirs or legal representatives of the deceased partner of a firm for accounts of the firm or to realise the property of the firm. (2) No suit to enforce a right arising from a contract shall be instituted in any court by or on behalf of a firm against any third party unless the firm is registered and the persons suing are or have been shown in the Register of Firms as partners in the firm. (2A) No suit to enforce any right for the dissolution of a firm or for accounts of a dissolved firm or any right or power to realise the property of a dissolved firm shall be instituted in any Court by or on behalf of any person suing as a partner in a firm against the firm or any person alleged to be or have been a partner in the firm, unless the firm is registered and the person suing is or has been shown in the Register of Firms as a partner in the firm : Provided that the requirement of registration of firm under this sub-section shall not apply to the suits or proceedings instituted by the heirs or legal representatives of the deceased partner of a firm for accounts of a dissolved firm or to realise the property of a dissolved firm. (3) The provisions of sub-sections (1), (2) and (2A) shall apply also to a claim of set-off or other proceedings to enforce a right arising from a contract but shall not affect –
Business Laws
25
(a) the firms constituted for a duration upto six months or with a capital upto two thousand rupees; or; (b) the powers of an official assigned, receiver or Court under the Presidency Towns Insolvency Act, 1909, or the Provincial Insolvency Act, 1920, to realise the property of an insolvent partner. (4) This section shall not apply – (a) to firms or partners in firm which have no place of business in the territories to which this Act extends, or whose places of business in the said territories are situated in areas to which, by notification under section 56 this Chapter does not apply, or (b) to any suit or claim of set-off not exceeding one hundred rupees in value which, in the presidency towns, is not of a kind specified in section 19 of the Presidency Small Cause Courts Act, 1882, or outside the Presidency towns, is not of a kind specified in the Second Schedule to the Provincial Small Cause Courts Act, 1887, or to any proceeding in execution or other proceeding incidental to or arising from any such suit or claim. Registration Optional Registration of firms is not compulsory. It is optional and there is no penalty for nonregistration. The English Law provides for compulsory registration. But that was not followed here. It would have been too drastic and creative of difficulties. Yet registration becomes necessary at one time or the other, because Section 69 seriously cuts short the capacity of an unregistered firm and its partners to sue. The firm cannot, for example, sue any person for the price of goods supplied by it. This disability is too great a compelling force to bring the firm to the Register. Section 69 is mandatory in character. Its effect is to render a suit by a partner in respect of a right vested in him or acquired under a contract when he entered into as a partner to be not maintainable. Registration provides protection to third parties against false denials of partnership and evasion of liability. Registration constitutes a conclusive proof against persons shown as partners and of the composition of the firm. The burden of proving that the firm is registered as required under the Act is on the firm or the partner suing. Effects of non-registration
Suits between partners and firm [sub-s(1)] A partner of an unregistered firm cannot sue the firm or his present or past co-partners for the enforcement of any right arising from a contract or conferred by the Partnership Act. Only a partner of a registered firm whose name appears in registration can sue for the enforcement of such rights.
Business Laws
26
This difficulty may be overcome by getting the firm registered before an action is brought. But once a dispute between the partners has arisen, all of them may not sign the application form, and consequently the firm may remain unregistered. It is, therefore, advisable to have the firm registered as soon as it is constituted. In a case before the Andhra Pradesh High Court, on the death of a partner, his interest developed upon his sons who became partners. But this change was not registered with the Registrar and, therefore, for purposes of suits the firm became an unregistered firm. The sons attempted to enforce the partnership agreement but the suit was not allowed. Their contention that they should be permitted to sue as the coowners of the property was also not accepted. Thus the only chance was dissolution and then to realise the assets of a dissolved firm. When a suit is filed without registration, it is liable to be dismissed and cannot be rectified by subsequent registration. The Andhra Pradesh High Court has suggested a way out of wasting of party‟s filing expenses by rejecting his suit by holding that the same suit can be treated as a valid suit from the date of the registration of the firm taking the period of limitation from the date of registration. This point was also considered by the Supreme Court in Raptakos Br ett v 10 Ganesh Pr oper ty , namely, whether registration during pendency of the suit could revive the suit or make the same competent at least from the date of registration, but no conclusive opinion was given. Where a partnership was reconstituted but was not registered whereas the original partnership was registered, the court finding that the dispute related to the original partnership, allowed the case about it to be filed.
Suits between Firm and Third Parties [S. 69(2)] An unregistered firm cannot sue any third party for the enforcement of any right arising from contract. A suit can be brought only by or on behalf of a registered firm and that also by persons whose names appear as partners in the register of firms. In Ruby General I nsurance 11 Co Ltd v Pearey L al K umar the words “arising from a contract” were held to be akin to the words “arising out of the contract” and were construed widely in the context of arbitration clause. But even so these words would not apply to statutory or common law rights because such rights do not have their roots in contract. This view was expressed by the Supreme 12 Court in Raptakos Br ett v Ganesh Pr oper ty . It was held that the right to evict a tenant was not a right arising from a contract but was a statutory right under the Transfer of Property Act. The eviction proceeding was, therefore, not barred. The Supreme Court followed this 13 ruling in H aldir am Bhuji awala v Anand Kumar Deepak Ku mar and held that a suit to prevent infringement of a trade mark is not barred by the section whether the firm is registered or not. The Court said that it is well settled that a passing off action is a common 10 AIR 1998 SC 3085. 11 AIR 1952 SC 119. 12 Supra Note 10. 13 AIR 2000 SC 1287.
Business Laws
27
law action based on tort. This sub-section also does not affect the right to apply for an interim relief under Section 9 of the Arbitration and Conciliation Act, 1996. Where a partner forcibly broke upon the shop of the firm and removed certain articles and surrendered the godown of the firm with an ulterior motive, it was held that such acts of misconduct did not fall within the scope of Section 69. Hence, the suit was for recovery of damages and was maintainable even if the firm was not registered. A suit was filed on behalf of a registered firm for recovery of a loan. The names of the two suing partners were not appearing in the registration of the firm. The court said that the suit was not maintainable. This difficulty once again can be overcome by getting the firm registered before an action is brought. The action of an unregistered firm is, however, liable to be dismissed and it cannot be rectified by subsequent registration. A fresh suit will have to be filed after registration provided that it is still within the period of limitation. The names of those filing a suit must appear in the registration. Thus the Supreme Court laid down that where on account of the admission of some new partners and of some minors into the benefit of the firm, there was a discrepancy between the names on the register and the names included in the suit, the suit was not maintainable. This disability was not allowed to be overcome by convincing the action by amendment of the plaint and substituting the names of individual partners as claimants in place of the firm while the whole tenor of the body of the plaint showed the firm as the claimant and there was nothing to show how and in what capacity the money was owed by the third party to the partners. The court held that the action must fail. Set-off and other Proceedings The above two disabilities also apply to a claim set-off or other proceedings to enforce a right arising from a contract. A “claim of set-off” mean that if, for example, an unregistered firm is sued by a third party to recover a sum of money the firm cannot say that the money owing by that third party to the firm should be set-off against the claim. The words “other proceedings” had created some difficulty as to their import, particularly in reference to the question whether they included “arbitration proceedings”. The Supreme Court has now by its decision 14 in Jagdish Chandr a Gupta v Kajar ia Tr ader s (I ndia) Ltd , settled the controversy. A clause in a deed of partnership provided that in case of dispute between the partners, the matter will be referred to arbitration. A dispute having arisen, one partner appointed an arbitrator to which the other party gave no response. An action was then commenced to enforce the arbitration clause of the agreement. The other partner contended that the firm was not registered and, therefore, the suit should be dismissed. The Supreme Court held that the suit was not maintainable. “It is impossible to
14 AIR 1964 SC 1882.
Business Laws
28
think that the right to proceed to arbitration is not one of the rights which are founded on the agreement of the parties. The words of Section 69(3) „or other proceedings to enforce a r ight arising from a contract‟, are sufficient to cover the present matter”. This is a welcome decision. If arbitration proceedings were allowed, unregistered firm would, by providing for arbitration in the partnership deed, escape the disa bility contained in the section. Where a dispute between an unregistered firm and the other party was referred to arbitration at the instance of the other party and the arbitrator have submitted his award which went in favour of the firm, the question arose whether the firm had the right to get the award converted into a court decree and then enforce it. The Madhya Pradesh High Court allowed the enforcement of the award and the Supreme Court affirmed the decision. The court was of the view that Section 69(3) was not attracted. Enforcement of an arbitration agreement is barred. But when the other party activated the arbitrati on clause against the unregistered firm, and the arbitrator firm, and the arbitrator gave his award, the matter went beyond the scope of the agreement. It was then an award which was sought to be enforced and not a clause in the agreement. Where a reference to arbitration was possible without recourse to the court, it was held that an unregistered firm could do so. Exceptions The section, however, admits of the following exception: Actions for dissolution and accounts: First, an unregistered firm and its partners can bring an action for the dissolution of the firm or for accounts of a dissolved firm. They can also enforce any right or power to realise the property of a dissolved firm. Thus the disability to sue disappears with the dissolution of the firm. “It seems that the intention of the Legislature was to inflict disability for nonregistration only during the subsistence of the partnership”. A and B purchased a taxi to ply it in partnership. They had done business for about a year when A, without the consent of B, disposed of the taxi. B brought an action to recover his share in the sale proceeds. A‟s only defence was that the firm was not regist ered. The court held that the business having been closed on the sale of the taxi, the action was for the realisation of the assets of a dissolved firm and, therefore, maintainable. The right to go to the court for dissolution and accounts continues to enjoy full respect in spite of the fact that the firm was not registered and there was an arbitration clause which was not enforceable because of non-registration. In an earlier decision to the same effect the court did not accept the proposition that arbitration having the effect of preventing the party from going to a court would mean that the party is without a remedy. Such result must not have been intended by Parliament and, therefore, the remedy by way of dissolution and accounts was allowed. Such cases have to be distinguished from cases for accounts only and not for
Business Laws
29
dissolution and accounts. Thus, the Kerala High Court did not permit a suit to be entertained in which the partners of a unregistered firm applied for a declaration as to the shares to which each partner was entitled and for rendition of accounts on that basis by evolving a scheme for any consequential reliefs. The court concluded: So the legal position is that a suit by a partner/partners of an unregistered firm against the firm or fellow partners for accounts without a prayer for dissolution of the firm is not maintainable. Similarly, it has been held by the Bombay High Court that a suit for damages for misconduct can be brought by one partner against another even if the firm is not registered, because enforcing the claims of a firm is a realisation of its assets. Where the debts of an unregistered firm, being in dissolution, were allotted to a partner, he was allowed to sue. It was not a suit by the firm, and even if it was, it was one for realisation of assets. In spite of the exception stated in Sub-section (3) it has been found as an effect of the totality of the provisions that a partner cannot seek reference to arbitration of a dispute regarding the right itself to dissolve the firm. But by operation of the exclusionary expression “but shall not effect” in Section 69(3) the effect is that the disability is not to apply to the exceptional situations enumerated in the provision and one of them is the enforcement of any right arising from the dissolution of a firm or right for accounts of a dissolved firm or any right or power to realise the property of a dissolved firm. Accordingly, where the partnership is already dissolved by consent (or even otherwise), a partner can seek reference to arbitration in the terms of the arbitration clause in the contract of any dispute arising from the dissolution. An application for enforcement of the arbitration clause in a deed of partnership is maintainable for seeking dissolution of the partnership whether the partnership is registered or not. A partnership deed provided for settlement of partnership disputes by arbitration. But some of the partners gave a good-bye to the arbitrati on clause and instituted legal proceedings for settlement of their disputes. The other set of partners raised objections and insisted that the matter should go in for arbitration. The first set dissolved the firm. They faced the further allegation that they were wasting the partnership resources over litigation. Looking at the state of complications, the court refused to stay the legal proceedings. Where the partners went on retiring from the firm one after the other so that only one partner was left and the firm for that reason became automatically dissolved, it was held that the suit filed by the sole remaining partner to recover dues to the firm from the defendant was maintainable. A partner of an unregistered firm had filed a suit against his co- partners claiming declaration of shares, proper administration of firm and rendition of accounts. The suit was dismissed under Section 69(1). Subsequently the same partner filed another suit praying for dissolution of the firm. This suit was held to be maintainable under Section 69(3)(a). The court said that the subsequent suit was not barred by the doctrine of res judicata because the cause of action was different in the two suits.
Business Laws
30
Recovery of insolvent‟s share Secondly, the official assignee, receiver or court acting for an insolvent partner may bring an action for realisation of the insolvent‟s share, whether the firm was registered or not. Value of suit Rs. 100 Thirdly, an unregistered firm or its partners may sue or claim a set-off where the subjectmatter of the suit does not exceed Rs. 100 in value. [S. 69(4)(b)]. Statutory and non-contractual rights Fourthly, statutory and non-contractual rights are outside the scope of the disability inflicted by the section. If a person damages the property of the firm, he can be sued whether the firm is registered or not. An unregistered firm has been allowed to sue to enforce the payment of a cheque in its capacity as a payee, it being a statutory right under the Negotiable Instruments Act. A similar firm has been allowed to sue a carrier for loss of goods which the firm was the bailee, it being a statutory right under Section 180 of the Contract Act. Railways have been held liable for damages for loss of the consignment of an unregistered firm. A claim for such liability is under the Tort law against a common carrier. An unregistered firm has been allowed to sue for a permanent injunction to prevent passing off or infringement of its trade mark. The suit of the heir of a deceased partner for a declaration that he is entitled to be admitted into the firm was allowed to proceed although the firm was not registered. Statutory tenancy rights are enforceable whether the firm which is holding the tenancy is registered or not. The partners of an unregistered firm were allowed to recover possession of their property to which they succeeded by taking over a firm in which some of them were partners. Where all the partners of a firm had gone out and the business of the firm was not registered. Section 69 does not stand in the way of an unregistered firm defending proceedings filed against it. It only precludes initiation of proceedings by such a firm. An unregistered firm has been allowed to exercise its property rights are protected by the Transfer of Property Act to evict a tenant. In a curious decision the Patna High Court did not allow an unregistered firm to enforce its insurance claim in respect of its motor vehicles. An insurance claim is not so much a claim under a contract as an action to collect the property of the firm and also very much like collecting the payment of a cheque and should have been allowed by bringing it in that category. The insurer should have been paid in good grace. Interim relief An application before the court for interim relief under Section 9 of the Arbitration and Conciliation Act, 1996 has been held to be maintainable whether the firm is registered or not.
Business Laws
31
Suits by third parties Lastly, third parties can always sue a firm whether registered or not. The disability is that of the firm and not of persons outside it. Criminal proceedings A criminal proceeding under Section 138 of the Negotiable Instruments Act, 1881 for the dishonour of a cheque is not in the nature of a civil suit and, therefore, the bar of Section 69 would not prevent an unregistered firm from launching such a proceeding. Non- partnership matters Where there is no evidence of a partnership, e.g. a lender to take a share in the profits and losses of a business, a proceeding for the recovery of the loan would not attract the provisions of Section 69. Where the partners of a dissolved firm became co-owners of the property of the erstwhile partnership firm by mutual acceptance of shares as co-owners, and a suit having been brought by one of them complaining of disproportion in shares, it was held that the suit was an individual suit and not a proceeding by a partnership. Section 69 was not attracte d.
LLP vis-à-vis Traditional Partnership Distinctions No. Traditional Partnership 1. Unlimited personal liability of each partner for dues of the partnership firm. Personal property of each partner also liable. 2. Written agreement not essential. 3. Partnership can be registered under Partnership Act. Registration is not mandatory. 4. Not a legal entity separate from its partners 5. 6.
7.
Limited Liability Partnership No personal liability of partner, except in case of fraud.
Incorporation document essential. LLP is incorporated under LLP Act. Incorporation is mandatory. It is a legal entity separate from its partners, having perpetual succession
Property cannot be held in name of Property can be held in name of LLP. partnership firm. Partnership deed/agreement is executed. 'Incorporation Document' is required to be Even verbal agreement is valid. executed. In addition, LLP Agreement is required in almost all cases, though such LLP agreement is not mandatory. Documents are required to be filed with Registrar of Companies (ROC) is the Registrar of Firms (of respective State) administrating authority.
Business Laws
8.
Death of partner dissolves a firm, in absence of agreement 9. Minimum two and maximum twenty partners 10. Each partner can take part in business of firm. 11.
32
Death of partner does not dissolve LLP.
Minimum two partners. No limit on maximum number of partners Each partner can take part in business of firm, but LLP Agreement can provide to the contrary. All partners are liable for statutory Only designated partners are liable for compliances under Partnership Act statutory compliances as are required under LLP Act (not necessarily in respect of other Acts).
12.
Partner cannot enter into business with firm, though he can give loan to firm.
Partner of LLP can enter into business with LLP. He can also give loans to LLP.
13.
Every partner of firm is agent of firm and also of other partners. He can bind partnership firm as well as other partners by his acts.
Every partner of LLP is agent of LLP but not of other partners. Thus, he can bind LLP by his acts but not other partners. However, LLP agreement can restrict powers of individual partner.
14.
Filing of accounts, statement of solvency and annual return not required.
Filing of accounts, statement of solvency and annual return not required.
15.
Partnership can be 'at will' i.e. any Individual partner can resign but cannot partner can resign or dissolve firm dissolve the LLP.
16.
Death of partner dissolves partnership Death of partner does not dissolve LLP. unless there is contract to contrary
17.
Public notice is required for retirement of a partner.
Filing of return of retirement of partner with ROC is required, but no provision for public notice of retirement of partner.
18.
Partnership firm can be dissolved.
LLP can be would up.
19.
No specific provision to enter into LLP can enter into compromise, compromise, arrangement, arrangement, amalgamation, reconstruction amalgamation, reconstruction etc. This etc. can be done only under civil laws.
20.
Minor can be admitted to benefit of partnership.
There is no specific provision to admit minor to benefit of partnership. It is doubtful if this can be done.
Business Laws
33
Similarities 1.
Partner is not employee of firm
Partner is not employee of LLP.
2.
Liability of a person for 'holding out', i.e. representing himself as partner, though he is not
Liability of a person for 'holding out' i.e. representing himself as partner, though he is not [clause 29 of LLP Bill, 2008]
3.
Partner of firm entitled to remuneration Partner of LLP entitled to remuneration only if partnership agreement so only if LLP agreement so provides provides
4.
New partner can be introduced only New partner can be introduced only with with consent of all existing partners consent of all existing partners, unless LLP Agreement provides otherwise.
5.
Insolvent person cannot continue as Insolvent person partner of firm. partner of LLP.
6.
Rights of partnership can be assigned.
7.
Partner liable to firm for any personal Partner liable to LLP for any personal profits made by him by use of property, profits made by him by use of property, name or business connection of firm. name or business connection of LLP
8.
Partner cannot undertake competing Partner cannot undertake competing business without consent of other business without consent of LLP. partners Otherwise, liable to account for and pay profits to LLP
9.
Partner liable to firm if he commits Partner liable to LLP if he commits fraud. fraud.
cannot
continue
as
Rights of partnership can be assigned.
