Partnership Law

Summary of Question- Dealing with Firm’s property.

Question - If a partner  brought his property at the time of constitution of a Firm into the stock of the Firm , whether the partner can deal with the property as if the  property is his own property without the consent of other partners.

Answer-  No

Rationale:

(i) The Hon’ble Supreme Court in the case reported in 1993 (1) SCC 589 referred to the various section of Partnership Act including section 14 & 15 thereof and observed as under:

“The above provisions make it clear that regardless of the character of the property brought in by the partners on the constitution of the partnership firm or that which is acquired in the course of business of the partnership, such property shall become the property of the firm and an individual partner shall only be entitled to his share of profits, if any accruing to the partnership from the realisation of this property and upon dissolution of the partnership to a share in the money representing the value of the property. It is well settled that the firm is not a legal entity, it has no legal existence, it is merely a compendious name and hence the partnership property would vest in all the partners of the firm.

Accordingly, each and every partner of the firm would have an interest in the property or asset of the firm but during its subsistence no partner can deal with any portion of the property as belonging to him, nor can he assign his interest in any specific item thereof to anyone.”

 

(ii) The Hon’ble Supreme Court in the case reported in AIR 1986 SC 1821 observed as under:

 “Section 15 of the said Act provides that the property of the firm shall be held and used exclusively for the purpose of the firm. In a partnership there is a community of interest in which all the partners take in the property of the firm. But that does not mean that during the subsistence of the partnership a particular partner has any proprietary interest in the assets of the firm. Every partner of the firm has right to get his share of profits till the firm subsists and he has also a right to see that all the assets of the partnership are applied to and used for the purpose of partnership business.” 

 

(iii) The Hon’ble Gujarat High Court in the case reported in AIR 2000 Guj 80 observed as under :

“Thus, Section 15 of the Act declares that subject to contract between the partners. the property of the firm shall be held and used by the partners exclusively for the purposes of partnership business. This legal position precludes the possibility of any property of the firm being shown as separate property of any partner so long as the partnership subsists.

 Looking to the provisions of the Act, it Is very clear that no partner can sell any part of the assets of the partnership firm as belonging to him and this being the position, no partner can ever validly sell or dispose of any of the partnership property as his own property. Partnership property vests in the firm and it does not vest in any of the partners and therefore it would not be possible for any partner to pinpoint any portion of the partnership property as his own property.

 A partner cannot deal with any portion of the partnership property as his own property for the reason that he is not like a co-owner of the property. A co-owner, without the consent of other co-owners, can transfer his interest to a third party and in that event, the third party shall have the same rights which the transferor had and the transferor shall be put in the same position as regards the other co-owners as the transferor himself was before the transfer.”

 

(iv) The Hon’ble Rajasthan High Court in the case reported in (1967) 65 ITR 662 (Raj) observed as under:

A perusal of section 14 would show that, unless there is a different contract between the partners, the property of the firm would include all property and right and interests in property originally brought into the stock of the firm, or acquired by purchase or otherwise, by or for the firm, or for the purposes and in the course of the business of the firm. It cannot be denied that the term "property" envisaged by this section includes both movable and immovable property and even the goodwill of the business. It is further clear from its perusal that, unless a contrary intention can be spelled out, if any property and right and interest in property are acquired with money belonging to the firm, then they will be deed to have been acquired for the firm. It may be pointed out that section 15 further provides that, unless there is a different contract between the parties, the property of the firm should be held and used by the partners exclusively for the purpose of the business. The word "exclusively" is a terms of strong connotation and its use in this section is a clear warning to the partners that, even if one or more of them are managing the property of the firm, it must be held and used by them only for the purposes of the business of the firm. This makes it crystal clear that they cannot claim to hold it in their individual capacity nor can they use it for their individual purpose as distinguished from the purpose of the business of the firm

 

(v) The Hon’ble Andhra Pradesh High Court in the case reported in AIR 1958 AP 555 observed as under:

The point is, whether a partner having regard to the nature and incident of partnership can be deemed to be entrusted with the property as against the other partner or partners. Section 15 of the Partnership Act provides that subject to the contract between the parties the property of the firm shall be held and used by the Partners exclusively for the purpose of the partnership business.

In other words, in the absence of any agreement to the contrary, all the partners hold, use and have interest in the whole of the partnership property. They have community of interest and hence their rights in the property are not mutually exclusive. So long as the partnership subsists this property cannot be deemed to be separate property of any partner. No partner therefore can claim exclusive interest in the property nor till the dissolution of partnership and the accounts any specific item of property can belong to any partner to the exclusion, of others.

 

Summary of Question- HUF as Partner , Legal Position

Question- Whether an HUF can become partner in Firm .

Answer – NO. This is the settled law that an HUF cannot become partner in a Firm. But Karta of an HUF , as   representative  of  the HUF,  can become partner, in which case  the  Karta alone will be treated as a partner in his/her (karta) individual capacity. Where Karta of an HUF  enters into a contract of partnership with a stranger, the Karta may be accountable to the other members of  the HUF for the profits received from the partnership business but that is something between the Karta and the HUF; so far as the partnership firm is concerned, only the Karta is a partner in the Firm ;  the other members of the HUF do not  become partners in the firm  

 Rationale

(i) The  Hon’ble  Supreme Court  in the case  reported in (1998 )2SCC 49 has observed as under :

“…………….. In law, an HUF can never be a partner of a partnership firm. Even if a person nominated by the HUF joins a partnership, the partnership will be between the nominated person and the other partners of the firm. Having regard to the definition of "partnership" and "partners" and in view of the principle laid down in Dulichand's case [1956]29ITR535(SC), it is not possible to hold that an HUF being a fluctuating body of individuals, can enter into a partnership with other individual partners. It cannot do indirectly what it cannot do directly. If a Karta or any other member of the HUF joins a partnership, he can do so only as an individual. His rights and obligations vis-a-vis other partners are determined by the Partnership Act and not by Hindu law. Whatever may be the relationship between an HUF and its nominee partner, in a partnership, neither the HUF nor any member of the HUF can claim to be a partner or connected with the partnership through a nominee. Where the Karta of an HUF enters into a partnership agreement with a stranger, the Karta alone in the eye of law is the partner. ................A Karta who enters into a contract of partnership with a stranger may be accountable to the other members of the HUF for the profits received from the partnership business. But that is something between the Karta and the HUF. But so far as the partnership firm is concerned, the Karta is a partner like any other partner. …………………”

 

(ii) The  Hon’ble  Supreme Court  in the case  reported in 1967 (66) ITR 613 observed as under:

 “A partnership under section 4 of the Indian partnership Act is "the relation between person who have agreed to share the profits of a business carried on by all or any of them acting for all." Under an agreement of partnership there must arise the relation of principal and agent inter se between the members of the partnership for the purpose of carrying on the business. The intention disclosed by the deed was that Lala Suraj Bhan was to be a partner, and be was described as manager and he signed the document in that capacity; it did not thereby seek to bring into existence a relationship of partners between the Hindu undivided family and the other members described as the second party. Nor can it be said that by this agreement it was intended to make all the adult members of the Hindu undivided family of Dina Nath Nanak Chand partners of the assessee- firm. None of the clauses of the deed of partnership evidences an intention that the members of the partnership were to be agents inter se or agents of the members of  the second party for the purpose of carrying on the business of the assessee-firm. In our view, the true interpretation of this clause is that Lala Suraj Bhan was the first party under the deed. He was merely described as the manager of the joint Hindu trading firm

(iii) . In the case  reported in [1968 ]68ITR 365 (SC ), the Hon’ble  Supreme court referred to its earlier decision in the case of Kalu Babu Lal and observed as under:

“The karta of the Hindu undivided family, however, may, and in fact, does, enter into partnership with outsiders on behalf and for the benefit of his joint family, but when he does so, the other members of the family do not, vis-a-vis the outsiders, become partners in the firm. So far as the outsiders are concerned, it is the manager who is recognised as a partner.”

 

(iv)  The  Hon’ble Supreme Court in the case reported in [1962 ] 44 ITR 887 (SC ) observed as under:

“It was again recently emphasised in the case of Charandas Haridas v. Commissioner of Income-tax  [1960]39ITR202(SC) , that where a Hindu undivided family becomes a partner through its karta, the coparcenary has no place in the partnership but only the karta is everything, and in Commissioner of Income-tax v. Nandlal Gandalap it was pointed out that both, under the Hindu law and under the law of partnership, the Hindu undivided family as such can exercise no control and management over the business of a partners ship, Of which the coparcenary is a member through the karta.”

(v).  The  Hon’ble Supreme Court in the case reported in  [1966 ]60ITR 428 (SC ) observed as under:

“The karta of the Hindu undivided family, however, may, and frequently does, enter into partnership with outsiders on behalf and for the benefit of his joint family, but when he does so, the other members of the family do not, vis-a-vis the outsiders, become partners in the firm. so far as the outsiders concerned, it is the manager who is recognised as a partner.”

(vi)   The Hon’ble Supreme court in the case  Chand reported in [1959 ]37ITR 123 (SC ) observed as under:

“It is now well settled that a Hindu undivided family cannot as such enter into a contract of partnership with another person or persons. The karta of the Hindu undivided family, however, may and frequently does enter into partnership with outsiders on behalf and for the benefit of his joint family. But when he does so, the other members of the family do not, vis-a-vis the outsiders, become partners in the firm. They cannot interfere in the management of the firm or claim any account of the partnership business or exercise any of the rights of a partner. So far as the outsiders are concerned, it is the karta who alone is and is in law recognised as, the partner”

(vii)  A Division Bench of the Hon’ble Delhi High Court in the case  reported in 186 (2012 ) DLT 59 relying on Supreme Court decisions held as under:

“From the judgments cited above it stands established that an HUF as such cannot be a partner in a firm but it is competent to the manager or karta acting on behalf of the HUF to enter into a valid partnership with a stranger or with the karta of another family. In the present case Mr. V.P. Verma had joined partnership with the respondent-firm as karta of HUF and there was no bar on him to join the partnership as karta of HUF.”

 

Summary of Question- Suit by Unregistered  Partnership.

Question- Whether  Unregistered Partnership can file suit if cause of action for the suit is based on Dishonour of  Cheque.

Answer – Yes.

 Rationale 

The Hon'ble Delhi High Court vide the order dated 13.12.2018 in C.R.P. No.19/2018 & C.M. Nos.4276-4277/2018, referring to section 69(1) and (2) of the Partnership Act,  observed and held :


‘5. The above provision deals with the effect of non-registration of a partnership firm and bars filing of a suit by or on behalf of such firm to enforce a right arising from a contract by or on behalf of such firm against any third party.’

‘7. The Kerala High Court in Afsal Baker (surpa) observed as under :-

“10. In the instant case, as noticed above, by virtue of Section 30 and 37 of the Negotiable Instruments Act, on the dishonour of a cheque, the statute creates a liability on the drawer, apart from the general law of contracts. The right to sue on the contract is available and open to the party. However, apart from that, the statute creates a liability as against the drawer of the instrument. If the suit is on the original cause of action based on the original contract between the parties, there is no doubt, the suit would be hit by Section 69 (2) of the Indian Partnership Act. But, in the instant case, what is sought to be enforced is the liability created under the Negotiable Instruments Act. It is not a case where suit is filed on the original cause of action by producing the cheques as a piece of evidence to prove the liability under the original contract. Here, the suit itself is laid on the instrument. A reading of the bar under Section 69(2)of the Indian Partnership Act would apply only where the suit is sought to be laid on a contract and not in a case where statutory right/liability is sought to be enforced. In the instant case, the suit being purely based on the liability under Section 30 and 37of the Negotiable Instruments Act, it is a suit based on statutory liability dehors the contract between the parties. The suit cannot be held to be barred under Section 69(2) of the Indian Partnership Act.

11. In the circumstances, I find no reason to differ from the conclusion arrived at by the court below to the effect that the suit is not barred under Section 69(2) of the Indian Partnership Act and that it is maintainable.’

‘8. In the instant case, the respondent is seeking enforcement of the liability of the petitioners created under Section 30 and 37 of the Negotiable Instruments Act, 1881 as the cause of action for the plaint is based on the dishonour of the said cheques. Since, the suit is not based on any contract between the parties, the bar under Section 69 (2) of the Act would not apply’