REGISTRATION AND DISSOLUTION OF A FIRM In this Unit, we will understand the effect of registration of a firm upon the rights of partnersâ€™ inter-se and the rights of the third parties. We will also be looking at the various circumstances when a firm is dissolved and the consequences and the effect of the dissolution upon rights and liabilities of various parties. We will be covering the following key parameters:
- Mode of effecting registration
- Consequences of non registration
- Dissolution of firm
- Consequences and the effect of dissolution
- Mode of giving public notice
Title Question â€“ Registration of a firm
Registration means getting the partnership registered with the Registrar of the firm of the area in which the place of business of the firm is situated or proposed to be situated. Chapter VII of the Indian Partnership Act, 1932 deals with registration of firms. Sections 56-71 contain different provisions regarding registration of firms. The registration of a firm may be effected 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 (Section 58) stating,â€” (a) the firm name, (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 by all the partners, or by their agents specially authorised in this behalf.
Question 1 â€“ How do we know when the Registration process is completed?
Registration of a firm is complete when:
a) An application in the prescribed form with the prescribed fee and necessary details is delivered to the Registrar b) The Registrar given an acknowledgement of receipt of application c) The Registrar gives it final certificate of Registration d) A period of one month lapses after the application as in a) above is submitted to the Registrar However, Registration is deemed to be complete as soon as an application in prescribed form with prescribed fees and necessary details concerning the particular of partnership is delivered to the Registrar. Example-ABC a partnership firm was constituted on 01.04.2015. On 25th
April the partners resolved to get the firm registered with the Registrar of firm. The firm prepared the necessary documents for Registration on 26th
April which was signed on 28th
April. They sent the documents to the Registrar office on 30th
April by registered post which was received in the Registrar office on 4th
May 2015. The firm will thus be deemed to have been registered on 30th
Question 2 â€“ What if the Registration process is not completed?
Section 69 of the Act which deals with the effects of non-registration denies certain rights to an unregistered firm. Under the Act:-
Â· A partner of an unregistered firm cannot file a suit in any court against the firm or other partners for the enforcement of any right arising from a contract or right conferred by the Partnership Act 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. For example- If a partner of an unregistered firm is not paid his share of profits, he cannot claim it from the court.
Â· No suits 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. For example- If an unregistered firm has sold some goods to the customer, it cannot file a suit against the customer for the recovery of the price of goods. On the other hand, if any unregistered firm has purchased some goods from a supplier, such supplier can file a suit against the firm for the recovery of the price of goods.
Â· An unregistered firm or any of its partners cannot claim a set off (i.e. mutual adjustment of debts owned by the disputant parties to one another) or other proceedings in a dispute with a third. For example-If an unregistered firm owes Rs. 10,000 to A, a third party A owes Rs. 1,000 to the firm, A files a suit against the firm for recovery of Rs.10,000. In this case an unregistered firm cannot say that Rs.1,000 should be adjusted against Rs.10,000.
Non-registration of a Partnership firm shall not affect:
- The rights of third parties to sue the firm and/or its partners.
- The firms or partners in the firms 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 the act does not apply.
- any suit or claim or set-off not exceeding Rs. 100 in value which, in the Presidency towns, is not of a kind specified in Section 19 of the Presidency Small Cause Courts Act, 1882 (15 of 1882), or outside the Presidency- towns, is not of a kind specified in the Second Schedule to the Provincial small Cause Courts Act, 1887 (9 of 1887), to any proceeding in execution or other proceeding incidental to or arising from any such suit or claim.
- the enforcement of any right to sue 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.
- the powers of an official assignee, receiver or Court under the Presidency-towns Insolvency Act, 1909 (3 of 1909), or the Provincial Insolvency Act, 1920 (5 of 1920), to realise the property of an insolvent partner.
Example- A and B purchased a taxi and they were plying it in partnership. The firm was not registered. After 1 year, A sold the taxi without Bâ€™s consent and did not pay anything to B. B filed a suit against A to recover his share in the sale proceeds. A defended the suit on the basis that the firm was not registered. It was held that the suit was maintainable because it was for the realisation of the assets of a dissolved firm.
Thought Provoking Question â€“
Is the Registration of firm compulsory?
No, Registration of firms is not compulsory. Partnership Act, 1932 does not provide for compulsory registration of firms. It is optional for partners to set the firm registered and there are no penalties for non-registration.
Thus we conclude that the Partnership Act, 1932 does not make registration of a firm compulsory. It is optional. But it introduces certain disabilities which makes registration necessary at one time or other. Also the law has not provided anytime for registration of firm. It is possible at any time. An unregistered firm is not an illegal association.
Title Question â€“ Dissolution of a firm
Sonu and Monu were very good friends. They were running a business as a partnership firm. They were very successful. People were jealous of their relations. But one day people came to know that they have closed the business. Some dispute had arisen between the two on a trivial issue. Similarly, firm may come to an end because of dispute among the partners or firm running losses for last few years or because of order of the court and so on. We can say that the partnership firm is dissolved. According to Section 39 of the Indian Partnership Act, 1932, the dissolution of partnership between all partners of a firm is called dissolution of the firm. Thus the Dissolution of firm means the discontinuation of the jural relation existing between all the partners of the firm. Question 1 â€“ What are the modes of dissolution of firm?
The dissolution of partnership may be in any of the following ways: 1. Dissolution without the order of the court or voluntary dissolution [Section 40-43]: a) By mutual agreement (Section 40) A firm may be dissolved by mutual agreement between/among partners. Even a firm for a fixed duration may be dissolved by mutual agreement b) Compulsory dissolution (Section 41) In the following cases, a firm is compulsorily dissolved:
- If all partners, or all the partners except one partner of the firm are declared insolvent, or
- If some event take place which make it UNLAWFUL for the firmâ€™s business to be carried on.
c) On happening of certain contingencies (Section 42) In the absence of any provision to the contrary in the partnership agreement, in the following four cases the firm will automatically be dissolved:
- On the expiry of the fixed term for which the firm was constituted,
- On the completion of venture or undertaking for which the firm was constituted,
- On the death of a partner,
- On the insolvency of a partner
d) By notice of partnership at will (Section 43) Where the partnership is at will, the firm may be dissolved by any partner by giving notice in writing to all other partners of his intention of dissolving a firm. Acceptance of notice is not required. Notice once given cannot be withdrawn without the consent of all other partners 2. Dissolution by the court [Section 44] The right of a partner to file a suit for dissolution on any of the ground cannot be excluded by any agreement. a) Insanity/unsound mind If a partner (not a sleeping partner) has become of unsound mind, then court may allow dissolution of firm on a petition made by any other partner or legal representative of the insane partner. Temporary sickness is no ground for dissolution of firm. b) Permanent incapacity When a partner (not a sleeping partner) has become permanently incapable of performing of his duties as a partner, then court may allow dissolution of firm on a petition made by any other partner. Such permanent incapacity may result from physical disability or illness etc. Example- Partner becomes blind or is paralyzed due to polio. c) Misconduct (Section 45) When any partner is guilty of any misconduct which is likely to adversely affect the carrying on of the business, the court may allow dissolution of firm on the petition made by any other partner. It is not necessary that misconduct must relate to the conduct of the business. The important point is the adverse effect of misconduct on the business. In each case nature of business will decide whether an act is misconduct or not. Example- Travelling on railway by a partner without ticket. d) Persistent breach of agreement When a partner willfully or persistently commits breach of agreement with regard to matters relating to the business of the firm, any other partner may apply to the court for dissolution of the firm. Following comes in to category of breach of contract:
- Keeping erroneous accounts
- Holding more cash than allowed
- Refusal to show accounts despite repeated request etc.
e) Transfer of interest When a partner has transferred the whole of his interest in the firm to a third party, then any other partner may apply to court for dissolution of firm. f) Continuous losses Where the business cannot be carried on except at a loss, any partner may apply to court for dissolution of court. g) Just and equitable grounds Where the court is satisfied that it is just and equitable to dissolve the firm, it may allow dissolution using it discretionary power. For example:
Question 2 â€“What are the consequences of dissolution?
- Continued quarrel between partners
- Refusal to meet on matters of business
- Complete deadlock in management due to partners not on speaking terms
- Lack of confidence and good faith among partners, etc
Consequent to the dissolution of a partnership firm, the partners have certain rights and liabilities, as are discussed: (a) Continuing liability until public notice- Inspite of dissolution of the firm, partners continue to be liable for any act done by any of them, which would have been an act of the firm if done before the dissolution, until public notice is given of the dissolution. (b) Rights to enforce winding up- On dissolution of partnership, any partner or his representative shall have right, against other partners â€“
- To have property of the firm applied in payment of the debts of the firm and
- To have the surplus distributed among the partners or their representatives according to their respective rights.
(c) Authority of partners after dissolution- The authority of a partner to bind the firm & other mutual rights and obligations continue-
- Which are necessary to wind up the firm.
- To complete the unfinished transactions pending at the date of dissolution.
(d) Settlement of Partnership A/câ€™s- i. Losses including deficiencies of capital are to be paid â€“ (I) Out of profits, then (II) Out of capital, then (III) By partners individually in their profit sharing ratio ii. Assets of the firm + Contributions by partners on A/c of deficiencies of capital must be applied in following order:â€“ (i) To pay debts of outsiders then (ii) To pay partnerâ€™s loan then (iii) To pay partnerâ€™s capital then (iv) Balance will be shared in profit sharing ratio (e) Personal profits earned after dissolution- and till the firm is wound up, partners must A/c for, the profits from carrying on business of the firm, to the other partners. (f) Return of premium on partnershipâ€™s premature dissolution (Section 51)- In case of dissolution of partnership earlier than the period fixed for it, the partner paying premium is entitled to return of the premium as such part thereof as may be reasonable, regard being had to the terms of agreement & to the length of time during which he was a partner, except when partnership is dissolved:â€“
- Due to death of one of the partners or
- Mainly due to misconduct of the partner paying the premium or
- Pursuant to an agreement containing no provisions for the return of the premium or any part thereof.
Thus we conclude that Dissolution of a firm means the breaking up or extinction of the relationship which subsisted between all the partners of the firm under various circumstances contemplated by Act. A partnership can be dissolved only in accordance with the manner prescribed under the Act.
Title Question â€“ Mode of Giving Public Notice
In every case where public notice of any manner in respect of partnership firm is required to be given under this act, it must be given
- By notification in the official Gazette, and
- In at least one vernacular (local language) newspaper circulating n the district where the firm to which it relates has its place or principal place of business.
In case of registered firms, in addition to above notification, a notice is also required to be served on the Registrar of firms.