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DISTRIBUTION OF THE RESIDUE OF A PARTNERSHIP FIRM UPON DISSOLUTION
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DISTRIBUTION OF THE RESIDUE OF A PARTNERSHIP FIRM UPON
DISSOLUTION
AUTHORED BY - ZAINAB UL KUBRA
INTRODUCTION
Partnership results from a contract and
is governed by the Partnership Act, 1932.[1] There is no such provision in the Partnership Act
to declare a partnership firm to be a separate legal entity or a juristic
person, in contrast to the Companies Act, 2013,[2]
(or, its earlier versions), which has a specific provision declaring a company
to be a separate legal person independent of its shareholders/members.
The partnership is also
governed by the general provision of the Indian Contract Act, 1872[3]
on such matters where the Partnership Act is silent. It is expressly mentioned
that the provision of the Indian Contract Act which is not repealed will apply
to the Partnership until and unless such provision is contrary to any provision
of the Partnership Act, 1932.[4]
The rules of contract regarding the capacity to contract, offer, acceptance,
etc will also apply to the partnership. But the rules regarding the status of
minors will be governed by Section 30 of the Partnership Act, 1932[5]
since the act talks about the position of the minor. The partnership must
be created to carry the legal business. Co-ownership of property does not amount
to a partnership. They must all handle the
business, or any one of them may do it on their behalf. It makes two
predictions:
Each partner has the
right to run the company. There is a mutual agency between the partners.
Each partner represents the other partners as both a principal and an agent. He
can bind others with his deed and can also bind them with the acts of the other
partners.
According to the
agreement, partners would split gains and losses. Profit and loss distribution
may be equal or in proportion to the amount of capital invested. If the
partnership experiences losses, it aids in distributing the burden among the
members.
Meaning:
In Dy.
CST v. K Kelukutty,[6] the Supreme Court of India
defined "Partnership," and its essentials stating that (1) The
partnership must be the product of an agreement and such an agreement is
frequently in writing, in the form of a “Partnership deed,” (2) That is set up
to conduct business and the parties involved agree to split the firm's profits;
(3) That all or any of them will conduct the business on their behalf. This is
the "mutual agency" idea, according to which each partner acts as his
co-partners agent. This idea is taken from the well-known Cox v. Hickman[7]
case in England wherein, Lord Cranworth said, "The liability of one
partner for the actions of his co-partner is in truth the liability of the
principal for the acts of his agent.
Every partner is an agent of the partnership, and his position is governed by
the same rules
as that of an agent. A partner virtually embraces the character of
both a principal and an agent."
According to Section 4 of
the Partnership Act,1932[8]
“Partnership is the relation
between persons who have agreed to share the profits of a business carried on
by all or any one of them acting for all.”
Accordingly, ‘Partnership’ is defined as the relationship
of individuals who have contended to share the benefit of a company carried out
by all or any of them acting for all. Additionally, it is said that individuals
who have formed a partnership with one another are referred to as ‘Partners’
individually and ‘Firm’ collectively, and the name under which their business
is operated is referred to as the ‘Firm name’. The partnership firm is not
recognized by law as a separate legal entity from its partners, notwithstanding
this.
The Supreme Court has issued a few decisions in this
area;
For example, The Supreme Court ruled in Tanna &
Modi v. CIT[9] that a firm comprises
all of its partners. It's not a legal person. A partner represents a firm under
the Partnership Act. Unless otherwise stated, every action taken by a partner
of a firm against the firm binds the firm itself.
Likewise, the Supreme Court ruled that the Partnership
firm is not a separate legal entity in the case of N. Khadervali Saheb v. N.
Gudu Sahib.[10]
The partners are the true owners of the partnership's assets; a business name
is only a phony name provided to the partnership.
The Supreme Court ruled in Comptroller &
Auditor-General v. Kamlesh Vadilal Mehta[11]
that a partnership concern is a set of individuals partners rather than a legal
entity like a company.
In the case of V. Subramaniam v. Rajesh Raghuvandra
Rao,[12]
it was also determined that unlike a company registered under the Companies
Act, a partnership business is merely a collection of its members and not a
separate legal body. Even the act of registering a firm does not make it a
separate legal person like a company. In contrast to shareholders in a company
who are not co-owners of the company's property, partners in a firm are
co-owners of the firm's assets.
Given these and other similar judgments of the Supreme
Court and the provisions of the Partnership Act, 1932,[13]
it should thus be clear that a partnership firm is not a separate or
independent legal entity, a separate juristic person, or a separate legal
person.
Nature
of Business:
It is a business organization where two or more
people have agreed to work together to run a business and make a profit.
It functions as a sole proprietorship's extension. It is preferable to
a sole proprietorship since a solo owner runs their business with little
funding and little expertise. A larger firm requiring more resources and
investment than the sole owner has access to cannot be considered such a
business due to the limited resources of a sole proprietorship. On the other
hand, in a partnership, several
partners pool their resources to create a contract and run a business together.
Essential
requirements for a partnership:
• It must involve at least two other people.
• The partners must have an agreement.
• There must be a legitimate commercial endeavour or
operation.
• The goal must be to make a profit that the partners
can split.
• There must be mutual agency in the agreement for
them to carry out the business either jointly or by one of them acting on
behalf of the others.
The
number of members:
Any pair of people or more can create a partnership. The Partnership
Act, 1932[14]
places no restrictions on the minimum or maximum number of partners. According
to the Companies Act, 2013[15],
a partnership must include a minimum of two partners and a maximum of 100
partners.
Under Section 464 of the 2013 Companies Act,[16]
it shall be considered an illegal association if it in any way surpasses the
upper limit.
In a partnership, two or more people have agreed to operate a business
together and share profits and losses equally. Forming a partnership agreement
is important to establish a legal relationship.
The foundation or basis on which it is found in the partnership
agreement. It can be spoken or written. A partnership deed is a legal name for the written
agreement.
Dissolution of a partnership firm:
When a partnership business needs to
be terminated by its owners and partners, whether on their initiative or as a
result of outside circumstances, the process is known as the dissolution of the
partnership. The partnership firm is not a distinct legal entity from its
partners in the eyes of the law. The relationships between partners and their
businesses are indivisible.
Settlement
of partnership account (Section 48)
Following the partnership's
dissolution, the partners' accounts must be handled according to normal
business procedures. Account settlement can be done in a variety of ways.
If it is paid out of
profit, a loss or a lack of capital will result. If the profit is insufficient
or none is made, the capital and the partners, as necessary, are used to make
the payment. The profit-sharing ratio is a percentage that the partners each
participate in.
The
Arbitration Act, 1940
Section 30[17]
of this act lays down the Grounds for setting aside an award. An award shall
not be set aside except on one or more of the following grounds, namely:
1.
That an arbitrator or umpire has
misconducted himself or the proceedings
2.
That an award has been made after the
issue of an order by the Court superseding the arbitration or after arbitration
proceedings have become invalid under section 35[18];
3.
That an award has been improperly
procured or is otherwise invalid.
CASE COMMENTARY
N.
Khadervali Saheb
v.
N.
Gudu Sahib
IN THE
SUPREME COURT OF INDIA
Vs
Ors.
CASE
NO.: Appeal (Civil) 5680-81 of 1994
Citation:
(2003) 3 SCC
Decided
On: 05/02/2003
N. Khadervali Saheb by LRs. and Anr. …petitionerv.N. Gudu Sahib and Ors.…respondent Honorable Judges: M.B. Shah, Ashok Bhan & Arun Kumar.
FACTS OF THE CASE
Briefly stated a partnership
business made up of four members of the same family was established. The
partners eventually turned to arbitration to resolve disagreements and
disputes. The award was rendered by the arbitrators on October 2nd, 1972. Some
of the partners filed complaints against the verdict following Section 30 of
the 1940 Arbitration Act.[19]
The other partners opposed the objection petition and urged that the award be
made a court rule in place of it.
The award was
contested based on the arbitrators' misconduct as well as another claim that
the award needed to be registered under Section 17 of the Registration Act.[20]
The trial court upheld both objections, concluding that the arbitrators had
engaged in misconduct and that the award was inadmissible as evidence because
it had not been compulsorily recorded.
This trial court's
ruling was contested before the High Court through a Civil Revision filed under
Section 115 of the Code of Civil Procedure.[21]
According to the High Court, there was no evidence of any legal wrongdoing on
the part of the arbitrators given the facts and circumstances of the case. As a
result, it was determined that the first argument against the award was
unsupportable. On the second issue, however—that the award had to be
compulsorily registered—the High Court accepted the trial court's conclusion.
The award could not be turned into a court rule since it was not recorded.
THE KEY ISSUES OF
THE CASE
·
Whether an award by which residue assets of a
partnership firm are distributed amongst the partners on the dissolution of the
partnership firm requires registration under Section 17 of the Registration
Act, 1908.[22]
THE CONTENTION
RAISED BY THE PARTIES
The arguments and
contentions raised by the plaintiff and defendant are discussed in detail
below-
THE
PLAINTIFF'S SIDE:
The first defense
put out by the plaintiff was that a partnership firm is not a separate legal
organization, but the partners are the true owners of the partnership
business's assets, and the name of the partnership is only a fictitious name
used for convenience.
The second argument
was that the partnership's assets belonged to its members and were owned by its
partners. Since each partner is the owner of the assets to the degree of his
participation in the partnership, each partner has an interest in all the assets
of the partnership company as long as the partnership exists.
The third argument
was that when the partnership business is dissolved, the partners' accounts are
settled and the partnership's assets are allocated to them by their ownership
stakes. As a result, the distribution of assets to an individual partner upon
the dissolution of a partnership business does not constitute a transfer of any
firm assets. Following the dissolution of the business, the assets that were
formerly owned by each partner are now divided among the partners individually.
None of the assets have had their ownership transferred or assigned. This is
the legal consequence of the distribution of assets on the dissolution of a
partnership firm.
Their final
counterargument was that the division of assets might be accomplished via
mutual agreement between the partners or through an arbitration ruling.
Since the document
does not transfer or assign an interest in any asset, the award used to record
the settlement in this instance does not need to be registered under Section 17
of the Registration Act.[23]
They also accepted a plea in the case S.V. Chandra Pandian and Others vs.
S.V. Sivalinga Nadar and Others[24] from the former
Supreme Court. The court ruled in this case that the partner would naturally
own all of the property that belonged to his share of the residual upon
distribution. "But since in the eyes of law it is money and not an
immovable property there is no question of registration under Section 17 of the
Registration Act[25].”
The
court further observed, "Even
if one looks at the award as allocating certain immovable property since there
is no transfer, no partition or extinguishment of any right therein there is no
question of application of Section 17(1) of the Registration Act.[26]
" As was noted in the preceding judgment, we are convinced that the award
in the current case likewise intends to disperse the remainder following the
settlement of accounts on dissolution. The arbitrators distributed their
residue when allocating the properties to the partners. The award was exempt
from Section 17 (1) of the Registration Act's registration requirements in such
cases.[27]
In the case of Ratan
Lal Sharma v. Purshottam Harit[28],
the defendant entered a plea. This Court was made aware of the ruling in
Pandian's case and was explained.
THE JUDGEMENT AND THE
RATIONALE BEHIND IT
The
two instances can be distinguished, according to the court. They can
nonetheless conclude that the award in this matter did not need to be
registered under Section 17 (1) of the Registration Act[29]
without being hindered by it.
As a
result, the appeals are accepted. The High Court's decision will be overturned,
the court declared. The objections to the award from October 2, 1972, would be
rejected consequently, and the court would be instructed to make the award a
rule. To proceed with the award by subsequent decree. The appeals were both
dismissed.
CONCLUSION
AND ANALYSIS
The plaintiff made compelling
arguments that the partnership business is not a separate legal entity and that
rather, the partners are the true owners of the asset, which is the property
or, in this instance, the firm, their arguments for making this the law and not
registering the company were both valid. In this instance, it was noted that
the court was convinced beyond a reasonable doubt that the award sought to
divide the remainder after the settlement of accounts upon dissolution and that
the arbitrators had distributed their residue when allocating the properties to
the partners. The award was exempt from Section 17 (1) of the Registration
Act's[30]
registration requirements in such cases.
I believe the
ruling was excellent; the court correctly cited the S.V. Chandra Pandian and
Others vs. S.V. Sivalinga Nadar and Others[31] case, which made
it apparent that registration under the registration statute is not required
following dissolution. To fall under the purview of Section 17 of the
Registration Act[32], the supreme court of India
also addressed the issue of whether such an award constitutes the formation or
transfer of any new rights in moveable or immovable properties. The parties had
exhausted their appeal rights, and the court's decision served as the final
decision and a precedent for cases to come.
BIBLIOGRAPHY
ü SCC Online.
ü Manu Patra.
ü Dhamija, A.D.A. (2020) Dr. Ashok Dhamija, Tilak Marg.
Available at: https://tilakmarg.com/notes/is-partnership-firm-an-independent-or-separate-legal-entity-or-juristic-person/
(Accessed: January 14, 2023).
ü Singh, A. (2014) Case comment on N. Khadervali Saheb and ANR. vs
N. Gudu Sahib and Ors, Academia.edu. Available at: https://www.academia.edu/7341915/Case_comment_on_N_Khadervali_Saheb_and_Anr_Vs_N_Gudu_Sahib_and_Ors
(Accessed: January 14, 2023).
ü -, J.A. et al. (2022) The Partnership Act, 1932, iPleaders.
Available at: https://blog.ipleaders.in/the-indian-partnership-act-1932/
(Accessed: January 14, 2023).
ü Registration Act, 1908.
ü Arbitration
Act, 1940.
ü Partnership
Act, 1932.
ü Companies Act, 2013.
[1] Partnership Act, 1932.
[3] Indian Contract Act, 1872.
[4] Supra note 1.
[5] Partnership Act 1932, s. 30.
[6] Dy. CST v. K Kelukutty, 1985 SCC (4) 35.
[8] Partnership Act 1932, s.4.
[9] Tanna & Modi v. CIT
(2007) 7 SCC 434.
[10] N. Khadervali Saheb v. N. Gudu
Sahib (2003) 3 SCC 229.
[11] Comptroller &
Auditor-General v. Kamlesh Vadilal Mehta (2003) 2 SCC 349.
[13] Supra note 1.
[14] Ibid.
[17] Arbitration Act 1940, s. 30.
[18] Arbitration Act 1940, s. 35.
[19] Arbitration Act, 1940 s. 30.
[20] Registration Act,1908 s. 17.
[21] Code of Civil Procedure, 1908 s.
115.
[22] Ibid.
[23] Supra note 22.
[25] Supra note 22.
[26] Registration Act,1908 s. 17 (1).
[27] Ibid.
[29] Supra note 27.
[31] Supra note 27.
[32] Supra note 17.
Article Information
DISTRIBUTION OF THE RESIDUE OF A PARTNERSHIP FIRM UPON DISSOLUTION
Authors: ZAINAB UL KUBRA
- Journal IJLRA
- ISSN 2582-6433
- Published 2023/04/24
- Volume 2
- Issue 7
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International Journal for Legal Research and Analysis
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