Solutions to Assignments
MBA and MBA (Banking & Finance)
MMPC- 013 - Business Law
Question No. 2.
Explain the process of formation and registration of a Partnership Firm.
Solution:
The development of business and growth in business transactions lead to the
replacement of the proprietary form of organizations with partnership enterprises.
Partnership is a form of business organization, where two or more persons come
together for jointly carrying on some business. In partnership two or more persons
pool their resources; both money and material, to their mutual advantage and
thus share the business risk.
Towards the end of 19th century it was considered absolutely crucial to regulate
the partnership form of business, so as to control the evils (many evils crept in
over passage of time) from spreading and contaminating the business organization
and mercantile transactions.
Partnership is a mere voluntary collective and has no force of law to its
constitution. Thus, the concept of partnership is that a firm is not an entity or a
person in law but is merely an association of persons and the firm name is only
a collective name for individuals who have agreed to carry on business in
partnership. A Partnership arises from a contract, and therefore, such a contract
is governed not only by the provisions of the Partnership Act in that regard, but
also by the general law of contract in such matters, where the Partnership Act
does not specifically make any provision. Thus, the rules relating to offer and
acceptance, consideration, free consent, legality of object, etc, as contained in
the Indian Contract Act, are applicable to a contract of Partnership also.
Section 4, The Indian Partnership Act, 1932, lays down the definition of
“Partnership”, “Partner”, “Firm” and “Firm-Name”.
“Partnership” is the relationship between persons who have agreed to share the
profits of the business carried on by all or any of them acting for all”.
There are three aspects to partnership: partners, firm, and the firm name.
Persons who have entered into partnership with one another are called individually
‘partners’ and collectively ‘a firm’, and the name under which the business is
carried on is called the ‘firm’s name’.
Formation of Partnership
Partnership comes into existence by contract and this contract may be written or
oral- or implied, which is inferred from the conduct of the parties in business
circumstances. According to the definition of partnership under the Indian
Partnership Act, 1932, there must be an agreement between the partners of a
partnership firm.
To constitute a valid contract, the parties to the contract must be competent to
contract, their consent must be free and objective should not be forbidden by law
or immoral or opposed to public policy. However, two exceptions may be noted:
i) A minor may be admitted to the benefits of an existing partnership firm with
the consent of all other partners.
ii) As relations of partners inter se are that of agency, no consideration is
required to create the partnership.
Partnership Deed
As already stated the agreement of partnership may be oral. But it is advisable to
have it in writing so as to avoid any future disputes. The written document that
contains the mutual rights and obligations of partners is known as partnership
deed. The deed must be stamped according to the provisions of the Indian Stamp
Act and copy of the same must be given to each partner and at the time of
registration, a copy of the deed should be filed with the Registrar of Firms. The
partnership deed is not a public document and therefore binds only third parties
so far as they have notice of it.
Contents of Partnership Deed
The exact terms of the partnership deed (or agreement) will depend upon the
circumstances but generally a partnership deed contains the following covenants:
i) The firm name, date of establishment, duration of partnership .
ii) Full names and permanent addresses of all the partners and the date when
each partner joined the firm.
iii) Nature and scope of business; the place or principal place of business of the
firm,.
iv) Total capital and the contribution by each partner.
v) Provision for further capital and loans by partners to the firm.
vi) Partner’s drawings,
vii) Interest on capital, loans, drawings and current account
viii) Salaries, commission and remuneration to partners,
ix) Profit sharing ratio of partners.
x) Guideline for maintaining proper books of accounts, inspection and audit,
Bank Accounts and their operation.
xi) Rights and duties of the partners.
xii) Whether and in what circumstances, notice of retirement or dissolution
can be given by a partner.
xiii) Provision that death or retirement of a partner will not bring about
dissolution of partnership,
xiv) Valuation of goodwill on retirement, death, dissolution, etc.
xv) The method of valuation of assets (and liabilities) on retirement or death
of any partner.
xvi) Provision for expulsion of a partner.
xvii) Provision regarding the allocation of business activities to be performed
by individual partners
xviii) The arbitration clause for the settlement of disputes. The terms contained
in the partnership deed may be varied with the consent of all the parties,
and such consent may be express or implied by a course of dealing. [Section
11(1)]
Registration of Partnership
Registration of Partnership in not mandatory in India. But registering with a
document deed puts into black and white all the intentions and the purposes of
the partnership as well as its functioning. However, it is to be noted that registration
only creates an instance or evidence of the existence of partnership, and not a
creation of a legal entity.
Registration means getting the firm registered with the Registrar of the firm in
the area where the business is situated or proposed to be situated.
Application for Registration
The registration of a firm may be affected at any time by sending by post or
delivering to the Registrar of the area in which any place of business of the firm
is situated or proposed to be situated, a statement in the prescribed form and
accompanied by the prescribed fee, stating:
a) the name of the firm;
b) the place or principal place of business of the firm;
c) the names of any other places where the firm carries on business;
d) the date when each partner joined the firm;
e) the names in full and permanent addresses of the partners; and
f) the duration of the firm
The statement shall be signed and verified by all the partners or by their agents
specially authorised in this behalf. (Section 58)
Registrar on being duly satisfied, record an entry of the statement in “Register of
Firm” and then issue a certificate of registration. The firm, which is registered,
shall use the brackets and word (Registered) immediately after its name. If, any
change is made in points (a) to (f) above same should be duly notified to the
registrar so that the same is incorporated in the register of the firm.
Effects of Non-Registration
Non-registration (section 69) leads to following effects:
i) The partners of a firm cannot sue each other or the firm for enforcing any
right arising from a contract or conferred by the Partnership Act,
ii) The firm cannot institute a suit against a third party. Thus the firm cannot
sue but can be sued.
iii) The third party can sue the firm as well as any partner.
However, the Act allows the following suits:
a) A suit for the dissolution of a firm.
b) A suit for rendering of accounts of a dissolved firm.
c) A suit for realisation of the property of a dissolved firm.
d) A suit or claim of set-off, the value of which does not exceed one hundred
rupees,
e) A proceeding in execution or other proceeding incidental to or arising from
a suit or claim for not exceeding one hundred rupees in value.
f) A suit by a firm which has no place of business in the territories to which the
Indian Partnership Act extends.
g) A suit for the realisation of the property of an insolvent partner.
h) A suit by a firm whose places of business are situated in areas which are
exempted from the application of Chapter VII of the Indian Partnership Act,
1932.
Exceptions: Non-registration of a firm does not, however affect the following
rights:
a) The right of third parties to sue the firm or any partner.
b) The right of partners to sue for the dissolution of the firm or for the settlement
of the accounts of a dissolved firm, or for realization of the property of a
dissolved firm.
c) The power of an Official Assignees, Receiver of Court to release the property
of the insolvent partner and to bring an action.
d) The right to sue or claim a set-off if the value of suit does not exceed Rs. 100
in value.
e) The right to suit and proceeding instituted by legal representatives or heirs
of the deceased partner of a firm for accounts of the firm or to realise the
property of the firm.
