A partnership is not regarded as an entity separate from the partners. The Partnership Act, 1932, defines partnership as the "the relation between persons who have agreed to share the profits of the business, carried on by all." A partnership firm is thus established by an agreement amongst the partners. This agreement may be oral or written. The object of constituting a partnership firm must be to—
(i) carry on a business which may be conducted by all the partners or by any of them on behalf of the rest, and
(ii) to share the profit of such business amongst themselves. The partnership deed contains the details of the agreement reached between the partners. The Indian Partnership Act, 1932, lays down the general provisions which govern a partnership business. A banker should take the following precautions while opening an account in the name of a partnership firm:
1. Number of Partners. The banker should very carefully examine the Partnership Deed, which is the charter of the firm, to acquaint himself with the constitution and the business of the firm. The banker should see that the number of partners does not exceed the statutory limit. According to Section 11 of the Companies Act, 1956, a partnership firm consisting of more than 10 persons for the purpose of carrying on banking business and of more than 20 persons for the purpose of carrying on any other business for the acquisition of gain or profit, shall be an illegal association unless it is registered under the Companies Act, 1956, or is formed in pursuance of some other Indian Law or is a joint Hindu family carrying on such business. If the number of partners exceeds these limits, the partnership becomes an illegal association of persons, which cannot enter into any contract, and cannot sue or to be sued. The banker must refuse to open an account in the name of a firm in such cases. The minimum number of partners in a firm must be two, excluding a minor partner, who is not competent to enter into a contract. A minor may be admitted into the partnership with the consent of all other partners of all other partners but he shall not be liable for the losses or debts for the firm. The banker should note the date when the minor partner will attain majority so that a fresh partnership letter signed by him and partners is obtained by the banker.
2. Title of the firm''''''''s Account. A firm''''''''s account should always be opened in the name of the firm and not in the name or names of the individual partner/partners.
3. Opening of an Account. An account in the name of a firm may be opened by a banker on receipt of an application from one or more of the partners should join to open the firm''''''''s account. If any partner has gone out of the country, the rest of the partners can open a bank account in the name of the firm. Specimen signatures of all partners should also be taken for the purpose of record. But if any of the partners is deprived of the right to open an account in the firm''''''''s name and this fact is within the knowledge of the banker, he should not open the firm''''''''s account at the request of such partner. The banker should, therefore, confirm the right of the applicant/applicants to open an account in the name of the firm from the partnership deed or from any other available evidence, e.g., the authority letter signed by all other partners.
4. The Partnership Letter or Mandate. The banker should take a letter signed by all the partners stating:
(i) the names or addresses of the partners;
(ii) the nature of the business undertaken by the firm; and
(iii) the name/names of the partner/partners who will operate the account on behalf of the firm and will have the authority to draw and accept bills etc., and to sell and mortgage the property of the firm.
The banker''''''''s should honour the cheques signed by all the partners or by those partners who are authorized to operate the account.
5. Revocation of authority to operate the account. The authority given in favour of a particular partner/ partners to operate the firm''''''''s account may be withdrawn by any of them by giving a notice to the banker. In such a circumstance, the banker should stop payment of cheques signed by such partners. A partner can also stop the payment of a cheque issued by any other partner on the firm''''''''s account.
The power to revoke the authority to operate the account is vested in any other partner who is a sleeping partner or is not authorized to operate the account.
6. A partner authorized to operate the firm''''''''s account cannot delegate his authority to another person without the consent in writing of all other partners. If such consent is given by all of them, the authorized partner may execute a Power of Attorney in favour of such other person.
7. If a cheque payable to the firm is endorsed by a partner in his own favour and is deposited by him to be credited to his personal account, the banker should do so after making an enquiry about it from other partners and after being satisfied about it. Otherwise, he will bear the risk of losing the statutory protection granted to the collecting banker under the Negotiable Instruments Act, 1881. The banker should be particularly careful in this regard if the partner sends such a cheque in response to a request from the bank to repay overdraft taken by him from the bank.
Implied authority of a partner. A partner acts as an agent of the firm of the purpose of the business of the firm and binds the fir by his acts and deeds. According to Section 19(1) of the Indian Partnership Act, 1932, "the act of a partner which is done to carry on, in the usual way, business of the kind carried on by the firm binds the firm." This authority of a partner is called the implied authority. Every partner is liable both individually and jointly with other partners for all the acts of the firm or the instruments executed provided the same or done—
(i) in the name of the firm; and
(ii) in connection with the business carried on by the firm.
In Surjit Singh and Others vs. Ram Ratan Sharma (AIR, 1975 Gauhati 14), the High Court observed that from the very definition of partnership itself it follows that there is implied mutual agency to each of the partners of a registered partnership firm. When an amount was borrowed by a partner on behalf of the partnership firm, that act of his was binding on the firm as well as on the members of the firm. Similarly, when a promissory note is executed on behalf of a firm by its managing partner, and the money is utilized for the purpose of the firm, every partner is liable for the debt incurred [Gurrrum Subbaravude & Others vs. Moto Pothula Narsimhan & Others (A.I.R. 1975 A.P. 307)]
It is to be noted that while one of the partners can bind the firm for the debts incurred by him on behalf of the firm, it is not necessary that documents for the debt are signed by all the partners. Signature of only one partner will be sufficient. However, as a precaution on loan documents.
If a partner signs an instrument on behalf of the firm, his intention to do so must be apparent from the firm in which he was signed.
The liability of a partnership firm in respect of a promissory note signed by a partner was considered by the Madras High Court in M/s M.M Abbas Bros. and Other vs. Chethandas Fateh Chand and Another (A.I.R. 1979, Madras 272). In this case a partner of the firm signed a promissory note in his name and thereafter added the words "Partner M.M. Abbas Bros." The Court held that the words "Partner M.M. Abbas Bros." represented only a description and not indicate that he had signed the instrument as a partner. If the said partner had the intention of binding the firm, then he would have signed ''''''''for and on behalf of the firm''''''''. On another promissory note the partner had signed ''''''''for and on behalf of the firm''''''''. Pointing out the difference between the two, the Court held that "it is true that different legal result follows from the mere change in the collocation of the words. But it is inevitable as different results are produced in law by the mere change in the collocation (position or arrangement) of the words." The pronote in question was not thus not binding on the firm.
The general principle of law, the High Court held that every one of het partners in a mercantile firm is liable upon a bill drawn by a partner in he recognized trading name of the firm for a transaction incidental to the business of the firm, although the particular partner''''''''s name does not appear on the face of the instrument and although he is sleeping and secret partner. Partners are mutual agents and can bind the firm by their acts. Even in the absence of an indication under the signature that a person was signing as a partner, it may be possible to infer a liability on the firm provided it is found on the face of the instrument that the borrower is firm and not the individual partner who signed the instrument. A person merely describing himself as a partner cannot bind the firm. There must be some indication in the instrument to show that he was signing on behalf of the firm.
If a partner does something which is not related to the kind of business carried on by the firm, other partners and the firm will not be liable for the same. For example, if a partner of a firm dealing in cotton textiles enters into a contract for the purchase of foodgrains, the latter will not be binding on the firm unless other partners have authorized the said partner to undertake such business on behalf of the firm. The partner undertaking such unauthorized business will himself remain liable such transaction. Similarly, if a letter of guarantee or an indemnity bond is to be executed by a firm, it must be signed by all the partners unless the normal business of the firm is to give guarantees. One of the partners, in the normal course, cannot give guarantee on behalf of the firm, because such an act is not within the implied authority of a partner.
In Porbandar Commercial Co-operative Bank Ltd. vs. M/s Bhanji Lavji & Others (A.I.R. 1985 Gujarat 106), a loan from bank was guaranteed by two firms and the bond was signed by one partner of each firm. The Court held that merely by signing as sureties on behalf of their respective firms, the concerned two partners could not bind any other partner of the firm or the firms themselves for the purpose of repayment of the dues of the bank. The signatories to the surety bonds were held personally liable to repay.
Borrowing power of a Partner. It is evident from Section 19(1) of he Indian Partnership Act, 1932, that a partner may justifiably do all that he is expected to do for carrying on the business of the firm in the usual way. It implied that a partner, who is not prohibited from managing the affairs of the firm, possesses the power to borrow money on behalf of the firm for the purpose of carrying on the firm''''''''s business. Such a debt be binding on the firm and all the partners shall be liable to pay the same. But if the powers of a partner are limited by the partnership deed or if he is not permitted to manage the affairs of the firm, he does not posses to borrow money on behalf of the firm.
According to Section 19(2), a partner does not posses, in the absence of any usage or custom of trade to the contrary, implied power to do the following:
(i) to submit a dispute relating to the business of the firm to arbitration;
(ii) to open a bank account on behalf of the firm in his own name;
(iii) to compromise or relinquish any claim or portion of a claim by the firm;
(iv) to withdraw a suit filed on behalf of the firm;
(v) to admit any liability in a suit against the firm;
(vi) to acquire immovable property on behalf of the firm or to transfer the same; and
(vii) to enter into partnership on behalf of the firm.
But he can do any of the above-mentioned acts with the express authority of other partners or if the usage or custom of the trade permits him to do so. For example, the immovable property of the firm cannot be transferred until all the partners jointly transfer their interest. If one of the partners is empowered by other partners in this regard he may do so on behalf of the firm.
Liability of the partners in respect of firm''''''''s debt. The liability of the partner of a firm is unlimited and every partner is liable to pay the obligations and debts of the firm to an unlimited extent. But if debts are due from the firm and also from the partners on the dissolution of the firm. Section 49 of the Indian Partnership Act, 1932, lays down that the debts of the firm shall be settled out of the property of the firm and the surplus, if any, shall be available for paying the private debts of the partners. But of the partners are also personally indebted, the personal assets of the partners shall be applied first to meet the claims of their individual creditors. Out of the remainder, if any, claims of the firm''''''''s creditors will be meet.
Example, A and B are partners in a firm having assets amounting to Rs. 40,000. The firm owes Rs. 50,000 to X in respect of goods supplied. Both the partners are adjudicated insolvent. Other claims against the partnership amounted to Rs. 22,000. B has assets worth Rs. 24,000 but owes Rs. 14,000.
According to Section 49 of the Indian Partnership Act, 1932 the personal debts of the partners would be repaid out of their personal assets while B''''''''s creditors will realize from B''''''''s assets (Rs.24,000- Rs. 14,000= 10,000) would be made available for appropriation amongst the firm''''''''s creditors. The firm''''''''s creditors, amounting to Rs. 80,000 (Rs. 50,000 + 30,000) would be able to recover Rs. 50,000(Rs. 40,000 + Rs.10,000) only and the rest of their claim would become irrecoverable.
But if the partners sign the loan documents in both of their capacities, i.e., individually as well as jointly the creditors of the firm and the partners. The banker should, therefore, insist that the partners of a firm sign the documents in both the capacities, i.e., individually as well as jointly. This will enable the banker to recover the amount from individual assets of the partners and also to exercise his right of set-off against the credit balance in their personal accounts with him. It is usual practice of a banker to seek a declaration to this effect from all the partners at the time of opening an account. The joint and several liability of the partners continues until—
(a) all the debts of the firm are discharged, or
(b) the constitution of the firm changes due to death, retirement or insolvency of a partner and the banker is informed thereabout.
The personal property of a partner may be attached even before judgement is delivered in a suit against the firm and its partners. In D.V. Krishna Murthy vs. P. Vishwanath (A.I.R. 1994 AP 43) the Andhra Pradesh High Court held that when each partner is liable, in the event of passing of a decree and in the event of passing of a decree and in the event of the apprehension that one of the partners is screening away the property and is removing the same out of the jurisdiction of the court, the court is competent to pass an order attaching his property under order 38 Rule 5 CPC.
Death of a partner: If a partner dies, the firm stands dissolved automatically, if an agreement to the contrary does not exist. It means that the firm is not dissolved on the death of a partner if the partnership deed specifically provides for this. The deceased partner''''''''s heirs cannot succeed him as partners. They can demand the share of the deceased in the firm from the surviving partners, or they may be admitted as new partners by the existing partners.
If the firm stands dissolved on the death of a partner, the banker must close the firm''''''''s account immediately on receipt of the intimation about the partner''''''''s death. This is important if the firm''''''''s account shows a debit balance at the time of a partner''''''''s death because the latter''''''''s estate would be liable to pay the debts incurred by the firm before his death. Hence, to determine the liability of the deceased partner, the banker should close the account of the firm soon after the death of a partner. If he defaults in doing so, the rule in Clayton''''''''s case will apply.
If the firm does not stand dissolved, it is reconstituted by the surviving partners with or without the admission of a new partner. The banker should open a new account in the name of the reconstituted firm and obtain a fresh mandate and undertaking from the partners. In any case the cheques drawn by the deceased partner should not be honoured by the banker without confirmation from the surviving partners.
Retirement of a partner. When a partner retires, his liability towards the banker or any other third party ceases in respect of all transaction undertaken subsequent to the date of his retirement. But if the banker is not informed about his retirement, the retiring partner continues to be liable for the transactions of the firm even after the date of his retirement. The retiring partner should give a public notice for this purpose to terminate his liability to the third parties.
If the bank account of the firm at the time of retirement of a partner shows a debit balance, the banker must close the account of the firm, in order to retain his right to claim money from the retiring partner. If this is not done, the rule in Clayton''''''''s case will apply. If an account shows a credit balance, the banker need not close it but the cheques drawn by the retiring partner should be honoured after securing confirmation from other partners. On the opening of a new account or on the continuance of the existing account after the retirement of a partner, a fresh mandate should be taken from the partners of the new firm.
Liability of partners on Reconstitution/Dissolution of the firm
On retirement of partners or on reconstitution or dissolution of the firm, and on receipt of notice thereof by the banker the liability of the partners shall be as follows:
(i) The liability for debts arising out of financial facility would continue in respect of retired partner(s) till the date of notice. Their liability for future loan ceases immediately on serving such notice.
(ii) Unless there is an agreement to the contrary, the firm''''''''s accounts should be closed, because the identity of the firm as a constituent of the Bank is changed. If the firm is reconstituted, fresh accounts should be opened.
(iii) If, on the reconstitution of the firm, the account is not closed, and the continuing partner(s) is/are allowed to operate the account(s) of the erstwhile firm, the continuing partner(s) will alone be liable for the financial facilities made after notice.
(iv) If the continuing partner(s) is/are treated as debtor, the retired partner(s) does/do not get discharge of the liability to repay the debt(s) as on the date of notice, unless released by the Bank expressly or impliedly.
(v) On receipt of notice, the proper course for the Bank is to freeze all the accounts, if there are more than one, merge them with each other and take the consolidated balance resulting from the merger of credits and debits in all the accounts. Such combination is compulsory.
(vi) Pledged goods held as security be realized by giving notice to the erstwhile partners, because they are entitled to the benefit of the security. Otherwise bank will be held for negligence and the erstwhile partners can claim discharge to the extent of the value of the pledged goods.
Insolvency of a partner. In case of insolvency of a partner, the partnership comes to an end, if an agreement to the contrary does not exist. The insolvent partner ceases to be a partner with effect from the date he is declared as insolvent and he shall not be liable to the firm for any of its transactions thereafter. The insolvent partner does not remain competent to operate the firm''''''''s account. The solvent partner can operate the account for winding up the affairs of the firm. The banker should honour the cheques drawn by the insolvent partner before his adjudication only after getting confirmation from the solvent partners. Bankers usually close the account of the firm and open a new account in the name of the reconstituted firm to determine the liability of the insolvent partner. Otherwise the rule in Clayton''''''''s case will apply.
Limited Liability Partnership (LLP)
LLP, a legal form available world-wide, was introduced in India w.e.f. Apr 1, 2009. It is governed by Limited Liability Partnership Act 2008. It combines
advantages of ease of running a partnership and separate legal entity status and limited liability aspect of a company.
1. LLP is a separate legal entity separate from its partners and it can own assets in its name, sue and be sued.
2. Perpetual succession (death of partner does not affect the LLP)
3. Unlike corporate shareholders (who cannot individually manage the company), partners have the right to manage the business directly.
4. One partner is not responsible or liable for another partner''''s misconduct or negligence except in certain cases.
5. Liability of the partners is limited to the extent of his contribution in the LLP. No exposure of personal assets (contd............... next column) of the partner, except in cases of fraud.
6. Minimum 2 Designated Partners have to be there who are individuals and at least one of them should be resident in India. There is no limit on maximum no. of partners.
7. Partners can be resident individuals, a company or an LLP.
8. The business should be for profit business.
9. The rights and duties of partners in LLP, are governed by an agreement between partners. The partners have the flexibility to devise the agreement as per their choice.
10. In case no agreement is entered into, the rights & duties as prescribed under Schedule I to the LLP Act shall be applicable.
11. LLP shall maintain annual accounts. Audit of accounts is required if the contribution exceeds Rs. 25 lakhs or annual turnover
exceeds Rs.40 lakhs.
12. RoC shall be having jurisdiction over the incorporation of LLP.
1. LLP cannot raise funds from Public.
2. Any act of the partner without the other may bind the LLP.
3. No separation of Management from owners
Advantages : A LLP is indeed advantageous because of
(a) comparatively lower cost of formation,
(b) lesser compliance requirements,
(c) easy to manage and run and also easy to wind-up and dissolve,
(d) no requirement of minimum capital contributions,
(e) partners are not liable for the acts of the other partners and importantly no minimum alternate tax (as of date).
Process for incorporating an LLP
The ROC is authority having jurisdiction over the incorporation. The steps required are:
1. Decision on Partners and Designated Partners
2. Obtain Designated Partner Identification Number (DPIN) and a digital signature certificate.
3. Decide on the name of the LLP and check whether it is available.
4. Draft the LLP agreement
5. File the LLP Agreement, incorporation documents and obtain the Certificate of Incorporation.
Registered office : It is the place where all correspondence related with the LLP would take place, though the LLP can also prescribe any other for the same.
Comparison between LLP, Partnership & Company
Compulsory registration required Not compulsory. Registration with
with the ROC. Certificate of Unregd. firm cannot ROC is compulsory
Incorporation is conclusive evidence sue but can be sued
Name of public company to end No such requirement Name to end with
with the word "limited" and a private LLP company with the words "private limited"
3. Capital contribution
Private company should have a Not specified Not specified minimum paid up capital of Rs.1 lac and Rs.5 lac for a public company
4. Legal entity status
A separate legal entity Not separate legal A separate legal entity entity
Limited to the extent of unpaid capital Unlimited, to extent Limited to contribuof
personal assets tion of partners
6. No. of shareholders / Partners
Private Company - Min 2, Max 50 2-20 partners Min 2. No maximum
Public Company - Min 7, max no limit 2- 20 partners
7. Foreign Nationals as shareholder / Partner
Foreigner can be shareholders Cannot form Can be partners
Income taxed at 30% + surcharge Taxed at 30% Not yet determined
Quarterly meeting of Board of Not required Not required
Directors, annual meeting of shareholding mandatory
10. Annual Return
Annual Accounts/ Annual Return No return to be filed Annual statement
to be filed with ROC with Registrar of of accounts and
firms Returns to be filed
Compulsory, irrespective of share Compulsory if contribution is > Rs.40 lac
or annual turnover > Rs. 40 lakhs.
Voluntary or by Order of National By agreement of Voluntary or order
Company Law Tribunal partners, insolvency by NCLT