ICAI Notes 3.3 - Registration and Dissolution of a Firm CA Foundation Notes | EduRev

Mercantile Law for CA CPT

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CA Foundation : ICAI Notes 3.3 - Registration and Dissolution of a Firm CA Foundation Notes | EduRev

The document ICAI Notes 3.3 - Registration and Dissolution of a Firm CA Foundation Notes | EduRev is a part of the CA Foundation Course Mercantile Law for CA CPT.
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Learning Objectives

  • Be aware of mode of getting a firm registered with the authorities.
  • Understand the effect of registration of a firm upon the rights of partners interse and the rights of the third parties.
  • Note the effect of non-registration on rights of partners and the third parties.
  • Learn the various circumstances when a firm is dissolved and the consequences and the effect of the dissolution upon rights and liabilities of various parties.

3.22 MODE OF EFFECTING REGISTRATION

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. It is not essential that the firm should be registered from the very beginning. When the partners decide to get the firm registered, as per the provisions of Section 58 of the Partnership Act, they have to file the statement in the prescribed form. The statement must be accompanied by the prescribed fee stating (i) the firm’s name, (ii) the principal place of business, (iii) the names of its other places of business, (iv) the date of joining of each partner, (v) the names in full and the permanent addresses of the partners, and (vi) the duration of the firm. The aforesaid statement is to be signed by all the partners or by their agents specially authorised in this behalf. Each partner so signing it shall also verify it in the manner prescribed.

When the Registrar is satisfied that the above mentioned provisions have been complied with, he shall record an entry of this statement in the register (called the Register of Firms) and shall file the statement. Subsequent alterations as alterations in the name, place, constitution, etc., of the firm that may occur during its continuance should also be registered.

When the Registration is complete? When the Registrar is satisfied that the provisions of Section 58 have been duly complied with, he shall record an entry of the statement in a Register called the Register of Firms and shall file the statement. Then he shall issue a certificate of Registration. However, registration is deemed to be complete as soon as an application in the prescribed form with the prescribed fee and necessary details concerning the particular of the partnership is delivered to the Registrar. The recording of an entry in the register of firms is a routine duty of Registrar.

3.23 CONSEQUENCES OF NON-REGISTRATION

Under the English Law, the registration of firms is compulsory. Therefore, there is a penalty for non-registration of firms. But the Indian Partnership Act does not make the registration of firms compulsory nor does it impose any penalty for non-registration. However, under Section 69, non-registration of partnership gives rise to a number of disabilities which we shall presently discuss. Although registration of firms is not compulsory, yet the consequences or disabilities of non-registration have a persuasive pressure for their registration.

These disabilities briefly are as follows:

(i) The firm or any other person on its behalf cannot bring an action against the third party for breach of contract entered into by the firm, unless the firm is registered and the persons suing are or have been shown in the register of firms as partners in the firm.
(ii) If an action is brought against the firm by a third party, then neither the firm nor the partner can claim any set off, if the suit be valued for more than Rs. 100 or pursue other proceedings to enforce the rights arising from any contract.
(iii) A partner of an unregistered firm (or any other person on his behalf) is precluded from bringing legal action against the firm or any person alleged to be or to have been a partner in the firm. But, such a person may sue for dissolution of the firm or for accounts and realisation of his share in the firm’s property where the firm is dissolved.

Non-registration of a firm does not affect the right of third parties against the firm or its partners, or the power of an Official Assigns, Receiver of Court under the Presidency-Towns Insolvency Act, 1909, or the Provincial Insolvency Act, 1920 to realise the property of an insolvent partner.

Let us now examine the following cases :

A & Co. is registered as a partnership firm in 1970 with A, B and C partners. In 1971, A dies. In 1972, B and C sue X in the name and on behalf of A & Co., without fresh registration. Now the first question for our consideration is whether the suit is maintainable.

As regards the question whether in the case of a registered firm (whose business was carried on after its dissolution by death of one of the partners), A suit can be filed by the remaining partners in respect of any subsequent dealings or transactions without notifying to the Registrar of Firms, the changes in the constitution of the firm, it was decided that the remaining partners should sue in respect of such subsequent dealings or transactions even though the firm was not registered again after such dissolution and no notice of the partner was given to the Registrar. The test applied in the these cases was whether the plaintiff satisfied the only two requirements of Section 69 (2) of the Act namely, (i) the suit must be instituted by or on behalf of the firm which had been registered; (ii) the person suing had been shown as partner in the register of firms. In view of this position of law, the suit is in the case by B and C against X in the name and on behalf of A & Co. is maintainable.

Now, in the above illustration, what difference would it make, if in 1972 B and C had taken a new partner, D, and then filed a suit against X without fresh registration?

Where a new partner is introduced, the fact is to be notified, under Section 63 (1) of the Act to Registrar who shall make a record of the notice in the entry relating to the firm in the Register of firms. Therefore, the firm cannot sue as D’s (new partner’s) name has not been entered in the register of firms. It was pointed out that in the second requirement, the phrase “person suing” means persons in the sense of individuals whose names appear in the register as partners and who must be all partners in the firm at the date of the suit.

3.24 DISSOLUTION OF FIRM (SECTIONS 39-47) 

The Dissolution of firm means the discontinuation of the jural relation existing between all the partners of the firm. But when only one of the partners retires or becomes incapacitated from acting as a partner due to death, insolvency or insanity, the partnership, i.e., the relationship between such a partner and other is dissolved, but the rest may decide to continue. In such cases, there is in practice, no dissolution of the firm. The particular partner goes out, but the remaining partners carry on the business of the firm. In the case of dissolution of the firm, on the other hand, the whole firm is dissolved. The partnership terminates as between each and every partner of the firm.

Dissolution of a firm may take place (Sections 39-44)

(a) as a result of any agreement between all the partners (i.e., dissolution by agreement);
(b) by the adjudication of all the partners, or of all the partners but one, as insolvent (i.e., compulsory dissolution);
(c) by the business of the firm becoming unlawful (i.e., compulsory dissolution);
(d) subject to agreement between the parties, on the happening of certain contingencies, such as: (i) efflux of time; (ii) completion of the venture for which it was entered into; (iii) death of a partner; (iv) insolvency of a partner. In case of death, it is to be noted that a contrary agreement may be made by the partners only if their number exceeds two. If there are only two partners the only result of either’s death will necessarily be the dissolution of the firm.
(e) by a partner giving notice of his intention to dissolve the firm, in case of partnership at will and the firm being dissolved as from the date mentioned in the notice, or if no date is mentioned, as from the date of the communication of the notice; and
(f) by intervention of court in case of (i) a partner becoming of unsound mind; (ii) permanent incapacity of a partner to perform his duties as such; (iii) misconduct of a partner affecting the business; (iv) wilful or persistent breaches of agreement by a partner; (v) transfer or sale of the whole interest of a partner; (vi) improbability of the business being carried on save at a loss; (vii) the Court being satisfied on other equitable grounds that the firm should be dissolved.

3.25 CONSEQUENCES OF DISSOLUTION (SECTIONS 45-52)

(a) Continuing liability until public notice : In spite 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. For example, X and Y who carried on business in partnership for several years, executed on December 1, a deed dissolving the partnership from the date, but failed to give a public notice of the dissolution. On December 20, X borrowed in the firm’s name a certain sum of money from R, who was ignorant of the dissolution. In such a case, Y also would be liable for the amount. To this rule, there are some exceptions. Even where notice of dissolution has not been given, there will be no liability for subsequent acts of other partners in the case of : (a) the estate of a deceased partner : (b) an insolvent partner, or (c) a dormant partner, i.e., a partner, who was not known as a partner to the person dealing with the firm.

(b) Rights to enforce winding up : On a partnership being dissolved, any partner or his representative shall have right, against the others (i) to have property of the firm applied in payment of the debts of the firm, and (ii) to have the surplus distributed amongst the partners or their representatives according to their respective rights.

(c) Extent of continuing authority of the partners after dissolution : The authority of a partner to bind the firm and other mutual rights and obligations continue: (i) so far as may be necessary to wind up the firm, (ii) to complete the unfinished transactions pending at the date of dissolution and no other.

(d) Settlement of partnership accounts: (a) In settling the accounts of a firm after dissolution, the following rules, laid down by Section 48 of the Indian Partnership Act, subject to an agreement by the partners, must be observed.

(i) Losses including deficiencies of capital are to be paid first out of profits then out of capital and lastly by the partners individually in the proportions in which they were entitled to share profits : 

For example, X and Y were partners sharing profits and losses equally and X died. On taking partnership accounts, it transpired that he contributed Rs. 6,600 to the capital of the firm and Y only Rs. 400. The assets amounted to Rs. 2,000. The deficiency (Rs. 6,600 + Rs. 400 – Rs. 2,000 i.e. Rs. 5,000) would have to be shared equally by Y and X’s estate. If in this case, the agreement was that on dissolution the surplus assets would be divided between the partners according to their respective interests in the capital and on the dissolution of the firm a deficiency of capital was found, then the assets would be divided between the partners in proportion to their capital with the result that X’s estate would be the main loser. It may be noted that prima facie, accounts between the partners shall be settled in the manner prescribed by partnership agreement. The above-mentioned rules apply subject to any agreement between partners. The rules laid down in Section 48, just specified, as to what will be the mode of settlement of accounts in the usual course of business. But if the partners, by their agreement, express any different intention as to the mode in which losses will have to be borne eventually or the manner in which capital or advances will have to be paid to any partner, such an intention must be given effect to. However, any such agreement cannot affect the rights of the creditors of the firm.

(ii) The assets of the firm, including any sums contributed by the partners to make up deficiencies of capital, must be applied in the following manner and order :

(a) in paying the debts of the third parties;
(b) in paying to each partner rateably what is due to him from the firm for advances as distinguished from capital;
(c) in paying to each partner rateably what is due to him on account of capital and;
(d) in distributing the residue, if any, among partners in the proportions in which they were entitled to share profits.

The significance of the foregoing provisions is that if the assets of the firm are not sufficient to pay off the liabilities of the firm including the amount due to each partner on account of capital, each partner would individually be liable to contribute towards the losses, including deficiencies of capital, in the proportion in which he is entitled to share profits.

Suppose A, B and C were partners under the agreement that they were to share equally in the profits and losses of the firm. In a suit between them for dissolution and accounts, it is ascertained that contributions of A, B, and C to the capital of the firm, were Rs. 10,000, Rs. 5,000 and Rs. 1,000 respectively. The assets of the firm after paying debts of the firm and advances made by the partners, as distinguished from their contributions to the capital of the firm, are Rs. 7,000.

The deficiency of capital (which must be regarded as loss) being Rs. 9,000, each partner must contribute to the assets an equal share of the deficiency, i.e. Rs. 3,000. After this is done, the assets then available, Rs. 7,000 + Rs. 9,000 or Rs. 16,000 will be distributed among the partners with the result that each will have suffered a loss of Rs. 3,000. In actual practice, it will not be necessary for A and B to pay Rs. 3,000 each but the matter will be settled on the basis of notional contributions so that C whose capital is Rs. 1,000 only will pay Rs. 2,000 out of Rs. 9,000 with the firm. A will take Rs. 7,000 and B Rs. 2,000. Assuming that A and B contribute to the capital deficiency Rs. 3,000 each and C cannot, A and B will share Rs. 13,000, i.e., Rs. 7,000 plus Rs. 6,000 in the proportion of Rs. 10,000 : 5,000. A will suffer a loss of Rs. 4,333 in all and B Rs. 3,667.

Where there are joint debts due from the firm and also separate debts due from any partner: (i) the property of the firm shall be applied in the first instance in payment of the debts of the firm, and if there is any surplus, then the share of each partner shall be applied to the payment of his separate debts or paid to him; (ii) the separate property of any partner shall be applied first in the payment of his separate debts and surplus, if any, in the payment of debts of the firm (Section 49).

In terms of Section 51, the partner paying a premium on entering into partnership for a fixed period becomes entitled to the return of an appropriate portion of the premium. We shall discuss the provisions of Section 51 later in detail.

(e) Personal profits earned after dissolution (Section 50) : Where a firm is dissolved by the death of a partner and the surviving partners or the surviving partners along with the representatives of the deceased partner carry on business of the firm, any personal profits by them, before the firm is fully wound up, must be accounted for by them to other partners. Thus a lease expiring on the death of a partner, which is renewed by the surviving partners, before final winding up, belongs to the partnership.

This section has to be read with Section 53 which provides that in the absence of an agreement to the contrary, each partner or his representative is entitled to restrain (by injunction) other partners from carrying on a similar business in the name of the firm or from using the property of the firm for their own benefit till the affairs of the firm are completely wound up.

(i) Return on premium of partnership’s premature dissolution : According to Section 51, in the case of dissolution of partnership earlier than the period fixed for it, the partner paying the premium is entitled to the return of the premium of such part thereof as may be reasonable, regard being had to the terms of agreement and to the length of time during which he was a partner, except when the partnership is dissolved:
(a) by the death of one of the partners; 
(b) mainly due to the misconduct of the partner paying the premium;
(c) pursuant to an agreement containing no provisions for the return of the premium or any part thereof.

For example, X and Y become partners for 10 years; X pays Y a premium of Rs. 2,000. At the end of 8 years a quarrel arises between X and Y and a dissolution is declared. In such a case, X will be entitled to a return of such amount of the premium from Y as may be deemed reasonable. What is reasonable will depend upon the circumstances of each case.

The partner paying the premium gets a proportionate part of the premium where the partnership is dissolved:
(i) Without the fault of either party; or
(ii) owing to the fault of both; or
(iii) on account of the fault of the partner receiving the premium; or
(iv) due to the insolvency of the partner receiving the premium, where the partner paying the premium was unaware of the other’s embarrassing circumstances at the time of entering into the partnership.

(ii) Rescission of partnership for fraud act. (Section 52) : A partnership agreement is a contract bases on amount of confidence. In the case of fraud or misrepresentation practised by one partner or the other, the party misled has the right to resign the partnership agreement and is entitled to; (i) a lien on the surplus, after payment of firm’s debts, for any sum paid by him for purchase of a share in the firm or for any capital contributed by him: (ii) to rank as a credit of the firm in respect of any payment made by him towards firm’s debts; and (iii) to an indemnity from the partners guilty of fraud or misrepresentation against all the debts and liabilities of the firm.

Goodwill on dissolution (Section 55) : What the purchaser of goodwill acquires is (i) the right to carry on the same business under the old name and (ii) to represent himself to the customers of the old firm as the successor in the business of the old firm. The partners selling the goodwill of a firm can : (i) carry on a similar business; (ii) also compete with the business sold by them to purchaser and (iii) advertise their business in such manner as they deem fit, but, subject to an agreement to the contrary, they cannot use the firm name, represent themselves as carrying on the old business, and solicit the customers of the old firm.

3.26 MODE OF GIVING PUBLIC NOTICE (SECTION 72)

In every case where the public notice of any matter in respect of partnership firm is required to be given under this Act, it must be given by publication in the Official Gazette and in at least one vernacular newspaper circulating in the district where the firm to which it relates, has its place or principal place of business.

In the case of registered firms, apart from the aforesaid notification, a notice is also required to be served on the Registrar of Firms under Section 63 where the matters relate to (a) the retirement or expulsion of a partner, or (b) dissolution of the firm, or (c) the election, on attaining majority, to be or not to be a partner, by a person who as a minor, was admitted to the benefit of partnership.

3.27 SUMMARY

Registration of a firm is effected by the Registrar of Firms by recording in the Register of Firms an entry of the statement relating to registration furnished to him. The Act does not make registration of the firm compulsory, yet the effect of the rules relating to the consequences of non-registration is such as practically necessitates the registration of the firm at one time or other. Certain disabilities have been imposed on partners of an unregistered firm seeking to enforce certain claims in the Civil Courts. A firm which is not registered is not able to enforce its claim against third parties in the Civil Courts; and any partner who is not registered is not able to enforce his claim either against third parties or against the fellow partners. An unregistered partner may, however, sue for the dissolution of the firm or for accounts only if the firm is already dissolved.

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.       

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