PARTNERSHIP ACCOUNT - LAW

LAW  RELATING TO PARTNERSHIP

1.  Registration of the Firm

(a)  It is not compulsory to register afirm. However, unregistered firms suffer from certain handicaps, and 

      certain handicaps indirectly compel firms to get themselves registered.

      

      Effect of Non-registration (Section 69)

• No partners of an unregistered firm can not sue the firm or any partners of the firm for enforcing rights arising out of a contract or from the partnership Act.
• An unregistered form cannot sue third parties to enforce its rights arising out of a contract.
• Though the rights of non-registered firm  are affected the right of third party to proceed legally against the firm to enforce its rights arising out of a contract is not affected to all fact tat the firm is unrestered.

(b)  Procedure  for4 Registration  (Section 58 & 59)

• A partnership firm can get itself registered at anytime (even years after its formation) with fees. The Firms of the state where the head office of the firm is located.
• For registration, the partners have to file an application giving details of the firm alongwith fees.The Registrar records these particulars in the "Register of irm" maintained in his office and issues a "Certificate of Registration". Registration is effective from the date when Registrar makes the entry in the register.

(c)    Bank's Preference

• Banks prefer to deal with registered firms particularly while sanctioning credit facilities, Reasons :(i) It is easy to verify the particulars about the firm with the Registrar of Firms, (ii)  A registered firm is in a better position to pay its debts as it can sue outsiders to recover its debts.

2.   Minor as Partner

• A minor being incompetent top contract can not become a partner is a partnership firm.
• However, he can be admitted to the benefit of an already existing partner ship with the consent of all partners (Section 30 of Indian Partnership Act.).
• The liability of a minor admitted to lthe benefit of partnership is limited to his share in the firm. His personal assets nor he personally can b e held liable for the debt of the firm.
• Though a minor can not  be declared insolvent,his share in a firm which is declared insolvent vests in official Receiver/Official Assigner.

         Minor Attains Majority

• On attaining majority a minor can opt-out of the partnership.
• He must exercise this option within six months from the date of his attaining majority or from the date when he first knew about his interest in the partner ship, whichever date is later.
• This option is exercised by giving a public notice {Public Notice is given by (i) giving notice to Registrar of firms (ii)  publication in at least one vernacular newspaper circulation in the district where the firm has principal place of business}. 
• In case he fails to give a public notice, within the stipulated time limit, he is deemed to have become a partner and is personally liable for all liabilities of the firm from the date of his admission to the benefit of partnership.

3.   Right and Liabilities of Partners

       Act Subordinate to Partnership Deed

• The rights,duties and liability of partners of a firm are determined as per the agreement between them (as recorded in the partnership deed).
• Where there is no agreement or the agreement is silent, the rights of partners are determined as per provisions of the Partnership Act.
• Therefore provisions of the Act are subordinate to any contract between partners and will apply only if the partnership deed is silent as to particular right and duty of  partners.
• Therefore for finding out the right of a partner one should first refer the partnership deed.

       Essential Features of a Partnership Deed

• Should bear signatures of all partners
• Should be adequately stamped as per Stamp Act.

      OPERATION OF ACCOUNT

1. Operation only lby Authorised persons : Only partners/person authorized by the partnership deed or separate authority letter signed by all partners should be allowed to operate the account. Cheque signed by other partners can be returned unpaid.
2. A partner authorized to operate account  cannot delegate his authority to another person.
3. Any Partner can stop payment of a cheque : Any partner,whether authorized to operate account or not can stop payment of cheque.
4. Revocation of mandate : Any partner (whether allowed to operate the account or not) can revoke/cancel authority given for operation of account. However, the authority cancelled,can be reinstate only under the signature of all partners.
5. Death/Insolvency/Retirement of Partners : A firm gets automatically dissolved on the death,m insolvency or retirement of one or more than one partners unless there is a specific provision in the partnership deed to the effect that the remaining partners, would continue the partnership in case of such eventuality. No public notice is required.

• Cheques signed by a partner, who is adjudged insolvent, should not be paid unless it is confirmed by 0ther solvent partners.
• On the death/insolvency/retirement of a partner the operation of the account should be stopped.
• If the account has credit balance, the balance should be given to all surviving partners under their joint signatures or anybody authorized by them.
• In case there is debit balance (i.e. over draft/cash credit account) no further debit or credit should be allowed  in order to keep the deceased/insolvent/retired partner's estate liable for the debt.

         Lunacy of a Partner : Cheque signed by other partners can be paid even after the lunacy of a partner

         However, cheque signed by the lunatic should be returned unpaid.

       DISSOLUTION OF A FIRM

-     A firm is said to be dissolved when the partnership relating between the partners comes to an end.

1. Effect of Dissolution

• Each partner ceases to have authority (i..e. agent), to bind the firm.
• All partners at the time of dissolution remain jointly and severally liable for all dues of the firm outstanding on the date of dissolution.
• A partner retiring from partnership will continue to be liable to third parties for any act done after his retirement lun less a public notice is  given regarding the retirement.

       RECONSTITUTION 

• In the case the partnership deed provides for the continuation of the firm by remaining partners and these partners opt for the same, then the firm is said to be re-constituted.

Action to be taken by Bank in case of Reconstitution

• Where the Bank wants to keep the outgoing partners liable, it should not recognize reconstitution.
• If the bank does not recognize the reconstitution it should do the following:

i)   Give notice to the retiring partner/legal heirs of deceased partner to the effect that they would not be

      released of their liability.

ii)   The account should be frozen under notice to all partners.

iii)   No credit/debit should be allowed to avoid operation of rule laid down in Clayton's case.

-     In case the bank recognizes the reconstitution it should ask for :

i)   Consent letter from guarantor.

ii)   Consent from mortgagors to the effect that the mortgage will continue to be available for the 

      drawings of the reconstituted firm.

iii)  Confirmation of balance by all partners

 -    In case of reconstitution of a firm due to the admission of a partner, a letter from the new partner should        be taken to the effect that he undertakes the liability of the firm incurred before his admission.

FORMATION OF NEW FIRM BY THE REMAINING PARTNERS

• Where the partners deed does not reconstitution, the firm cannot be reconstituted. It stands dissolved on the death/insolvency/retirement of a partner(s).
• In such a case if the remaining partners decide to continue the business, it would be considered as a new partnership.
• All procedure applicable to advance given to a new partnership should be done fresh for the account.