This Registration of a Firm & Dissolution of a Firm – CA Foundation Law Study Material is designed strictly as per the latest syllabus and exam pattern.
Registration of a Firm & Dissolution of a Firm – CA Foundation Business Law Study Material
What is the procedure of registration of the firm? Explain.
The registration of a partnership is not compulsory. Therefore an unregistered firm is not an illegal association. But an unregistered firm suffers from certain disabilities and therefore registration is necessary for carrying on the business. The following is the procedure prescribed for the registration of a firm:
- The Registration of a firm may be effected at any time by sending by post or delivering to the Registrar of Firms of the locality, a statement in the prescribed form, and accompanied by the prescribed fee.
- The application for registration contains the following particulars; (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 and verified by all the partners or their agents specially authorized on this behalf.
- When the Registrar is satisfied that the above provisions have been duly complied with, he shall record an entry of the statement in the Register of Firms and then file the statement. Fie shall then issue under his hand a certificate of Registration. Any subsequent change or alterations in the Partnership Deed or constitution of the firm must also be registered from time to time.
- Registration is effective from the date when the Registrar files the state¬ment and makes entries in the Register of Firms and not from the date of presentation of the statement to him.
- Similarly, the date of issue of a certificate of registration shall not be re¬garded as the date from which registration is effective since the act of issue of a certificate is merely a clerical act and for legal purposes, the date of filing of all documents along with fees shall be regarded as the date of registration.
What are the consequences of the Non-registration of a firm? Discuss.
Consequences of non-registration (sec. 69): Under the Indian Partnership Act, 1932, registration of a firm is not compulsory. However, an unregistered firm and the partners thereof suffer from certain disabilities, which are as follows:
The suit between partners and firm [Sec. 69(1)]
A partner of an unregistered firm cannot file a suit against the firm or any partner thereof, for the purpose of enforcing a right arising from a contract or a right conferred by the Partnership Act.
Suits between firm & third parties [sec. 69(2)]
No suit can be filed by or on behalf of an unregistered firm against any third party for the purpose of enforcing a right arising from a contract unless the firm is registered and the persons suing are registered as partners in the Firm.
Claims of set-off [sec. 69(3)]
An unregistered firm cannot claim a set-off in excess of ₹ 100 in a suit, filed against the firm by a third party.
However, the following rights remain unaffected by Non-registration:
- A partner of an unregistered firm can file a suit for the dissolution of the firm or for accounts of the dissolved firm, or for claiming a share in the assets of the dissolved firm.
- The Official Assignee or Receiver acting for an insolvent partner of the un-registered firm may bring a suit for the realization of the properties of an insolvent partner or further realization of the property of the dissolved firm.
- An unregistered firm can file a suit or claim a set-off for a sum not exceeding ₹ 100 in value.
- Non-registration will not affect the enforcement of rights arising otherwise than out of contract e.g. for an injunction against wrongful infringement of a trademark etc.
- The right of a third party to file a suit against the unregistered firm or its partners remains unaffected.
What are the modes for dissolution of the firm without the order of the court?
A firm may be dissolved without the order of the court on any of the following grounds:
1. By agreement (Sec. 40)
A firm may be dissolved at any time with the consent of all the partners of the firm. The partnership is created by contract, it can also be terminated by contract.
2. By Compulsory Dissolution (Sec. 41)
A firm is dissolved
- by the adjudication of all the partners or of all the partners but one as insolvent, or
- by the happening of any event which makes the business of the firm unlawful.
3. Dissolution on the happening of certain contingencies (Sec. 42)
Subject to contract between the partners, a firm is dissolved
- if constituted for a fixed term, by the expiry of that term,
- if constituted to carry out one or more adventures or undertakings, by the completion thereof,
- by the death of a partner, and
- by the adjudication of a partner as an insolvent.
The partnership agreement may provide that the firm will not be dis¬solved in any of the aforementioned cases. Such a provision is valid.
4. Dissolution by notice (Sec. 43)
Where the partnership is at will, the firm may be dissolved by any partner giving notice in writing to all other partners of his intention to dissolve the firm. The firm is dissolved as from the date mentioned in the notice as the date of dissolution, or, if no date is mentioned, as from the date of communication of the notice.
What are the grounds for the dissolution of the firm at the order of the Court?
Dissolution by the Court (Sec. 44)
At the suit of a partner, the court may dissolve a firm on any one of the following grounds:
If a partner has become of unsound mind. The suit for dissolution, in this case, can be filed by the next friend of the insane partner or by any other partner.
B. Permanent incapacity
If a partner becomes permanently incapable of performing his duties as a partner. Permanent incapacity may arise from an incurable illness like paralysis. The suit for dissolution, in this case, must be brought by a partner other than the person who has become incapable.
C. Guilty of misconduct
If a partner 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. The suit for dissolution on the ground mentioned in this clause must be brought by a partner other than the partner who is guilty of misconduct.
D. Persistent breach of agreement
If a partner wilfully and persistently commits a breach of the partnership agreement regarding management or otherwise conducts himself in such a way that it is not reasonably practicable for the other partners to carry on business in partnership with him.
E. Transfer of the whole interest
If a Partner has transferred the whole of his interest in the firm to an outsider or has allowed his interest to be sold in execution of a decree. Transfer of partner’s interest does not by itself dissolve the firm. But the other partners may ask the court to dissolve the firm if such a transfer occurs.
If the business of the firm cannot be carried on except at a loss. Since the motive, with which partnerships are formed, is the acquisition of gain, the courts have been given the discretion to dissolve a firm in cases where it is impossible to make profits.
G. Just and Equitable clause
If the court considers it just and equitable to dissolve the firm. This clause gives discretionary power to the court to dissolve a firm in cases that do not come within any of the foregoing clauses but which are considered to be fit and proper cases for dissolution. For example: In case of a deadlock in the management, partners not being on talking terms; speculation by partner on the stock exchange, etc., the court can order the dissolution of the firm.
What are the rights of a Partner on the dissolution of a firm?
The following are the rights of a partner on the dissolution of a firm:—
1. Right to have the business wound up (Sec. 46)
On the dissolution of a firm, a partner has the right:
- to have the business of the firm wound up and the debts of the firm settled out of the property of the firm and
- to have the surplus distributed among the partners according to their rights.
2. Continuing authority of partners for purpose of winding up (Sec. 47)
The partner’s authority to act for the firm and to bind their co-partners continues even after the dissolution of the firm for the following two purposes :
- to wind up the affairs of the firm (for example recovering money from debtors)
- to complete transaction begun but unfinished at the time of the dissolution.
3. Right to share in personal profits earned after dissolution (Sec. 50)
Every partner has a right to share in any secret profits derived by any partner under any transaction carried out in the firm name or by use of the property or business connection of the firm, after the dissolution but before winding up.
4. Right to have premium returned on premature dissolution (Sec. 51)
Where a partner has paid a premium (goodwill) on entering into partner¬ship for a fixed term, and the firm is dissolved before the expiration of that term, he shall be entitled to repayment of the whole or a reasonable part of the premium. The amount of repayment will depend upon (a) the terms upon which he became a partner & (b) the length of the time during which he was a partner.
5. Rights where partnership contract is rescinded for fraud or misrepresentation (Sec. 52)
Where a partner was induced to join the firm by the fraud or misrepresentation of any other partner, the aggrieved partner has the right to rescind the partnership agreement and is entitled: (a) to a lien on, or a right of retention of, the surplus of the assets of the firm remaining after the debts of the firm have been paid, for any sum paid by him for the purchase of a share in the firm and for any capital contributed by him; (b) to rank as a creditor of the firm in respect of any payment made by him towards the debts of the firm; and (c) to be indemnified by the partner or partners guilty of fraud or misrepresentation against all the debts of the firm.
6. Right to restrain the use of the firm name or firm property (Sec. 53)
After a firm is dissolved, every partner may restrain any other partner:
- from carrying on a similar business in the firm name or
- from using any of the property of the firm for his own benefit, until the affairs of the firm have been completely wound up.
What is the mode of settlement of accounts of a dissolved firm?
The partners may lay down their own procedure for the settlement of accounts after dissolution. In the absence of a prior agreement between the partners in this regard, the accounts may be settled in accordance with the provisions provided in sections 48, 49, and 55 of the Indian Partnership Act which is discussed below:
- Goodwill shall be included in the assets and it might be sold separately or along with other property of the firm.
- Losses, including deficiencies of capital, shall be paid first out of profits, next out of capital, and lastly, for the balance, the partners shall individually subscribe in their profit sharing ratio.
- Assets of the firm, including partners’ contributions to make deficiencies of capital, shall be applied firstly, for paying the debts of the firm to third parties,
secondly A there remains any surplus, it shall be utilized in paying each partner the number of advances given to the firm. Such payments are made in the ratio of advances made by the partners. thirdly, if still there remains any surplus, it shall be utilized for paying each partner rateably on account of capital.
and finally, the residue to be divided amongst partners in their profit sharing ratio.
- Payment of firm debts and separate debts: Where there are debts of the firm as well as individual debts of the partners, then the following rules shall apply:
- The property of the firm shall be first utilized in payment of the debts of the firm; and if there remains any surplus, then the share of each partner in such surplus shall be applied in payment of his individual debts, or if there is no such individual debt then his share shall be paid to him.
- The individual property of any partner shall be applied first in the payment of his individual debts; and if there remains any surplus, it shall be utilized in the payment of the debts of the firm.
What are the instances in which Public Notice must be given by a partner as per the Partnership Act? What is the mode of serving a Public Notice?
1. The Partnership Act requires that public notice must be given in each of the following cases:
(a) On minor attaining majority
A minor partner on becoming a major must give public notice of his intention to remain or not remain a partner. [Sec. 30(5)]
(b) Retirement of a partner
When a partner retires from the firm, he must give public notice to terminate further liability. [Sec. 32(3)]
(c) Expulsion of a partner
When a partner is expelled from the partnership business he must give public notice to terminate further liability. [Sec. 33]
(d) Dissolution of the firm
When a partnership firm is dissolved, the partners of the dissolved firm must give public notice to terminate further liability [Section 45(1)]
2. Mode of the Public Notice
According to Sec. 72, the Public Notice becomes effective when the following steps have been taken:
- The notice has been published in the Official Gazette.
- The notice has been published in at least one vernacular newspaper (ie. which is published in the Indian language) circulating in the district where the concerned firm has its place or principal place of business.
- If the firm is registered, the notice has been sent to the Registrar of Firms.
ABC & Associates, an unregistered firm purchased some goods worth ₹ 2000 from ‘R’ in whose favour a cheque was issued which was dishonoured. At the same time, the firm sold some other goods to ‘R’ amounting to ₹ 1200. Later ‘R’ sued some the firm for recovery of ₹ 2000. The firm contended that since ‘R’ owned ₹ 1200 to the firm, the said amount should be adjusted against the claim of 7 2000. Is R’s suit maintainable against the firm ? Further comment on the validity of the contention made by the firm.
hit the right of a third party to file a suit against an unregistered firm remains unaffected. Therefore the suit filed by R against the firm is maintainable. An unregistered firm cannot claim a set-off exceeding 7100. Therefore the contention of the firm to set-off ₹ 1200 shall not be held valid. Only a set-off of ₹ 100 shall be permissible.
X entered into a partnership in an existing firm-RST Associates for a period of 10 years and paid ₹ 5,00,000 as a premium. The firm was dissolved after the expiry of 3 years because of the insolvency of a partner. X now claims the refund of the premium. Advise X as to his rights. Would your answer be different if the firm is dissolved on account of the misconduct of X?
HintIn case of premature dissolution of the firm, the partner paying the premium shall be entitled to claim a refund of unexpired part of premium. Thus in this case X shall be entitled to refund of ₹ 3,50,000 (5,00,000/10 × 3 = 1,50,000; 5,00,000 – 1,50,000 = 3,50,000) as the unexpired premium.
Refund of premium is not permitted where the premature dissolution of the firm is taking place on account of the misconduct of the partner paying the premium. Thus if the firm is being dissolved on account of X’s misconduct he shall not be entitled to a refund of the premium.
(i) P, X, Y, and Z are partners in a registered firm A & Co. X died and P retired. Y and Z filed a suit against W in the name and on behalf of a firm without notifying the Registrar of firms about the changes in the constitution of the firm. Is the suit maintainable?
Hint: A registered firm can sue the third party. If a partnership firm continues to carry on business after the death of a partner or if a partner retires from the firm, then if the firm is registered, then such changes in the constitution of the firm must also be updated from time to time with the Registrar of the firm. However, non-compliance in this regard does not result in disabilities for the firm since the firm is a registered one. Thus the right of the firm to sue the third party shall remain unaffected even if changes are not notified to the Registrar. Thus the suit is maintainable since the suit is filed in the name & on behalf of the firm & the firm is a registered one.