File Copyright Online - File mutual Divorce in Delhi - Online Legal Advice - Lawyers in India

Is Partnership Firm a Legal entity or a Body Corporate?

This Article deals with the question,
Whether a partnership firm is a Legal entity or a Body Corporate?

Also all the tries to answer all the questions revolving around the premise.

In a layman's term Partnership firm is an association between two or more persons who come together for a common objective. Further, A Partnership firm is governed by the Partnership Act, 1932 (Hereinafter referred to as The Act) and the partnership deed executed between the partners (A partnership deed can be in oral and in the written form however in the state of Maharashtra a written agreement is required)
Section 4 of The Act defines Partnership" - is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.

Persons who have entered into partnership with one another are called individually, "partners" and collectively "a firm", and the name under which their business is carried on is called the "firm-name".

From the above definition we can understand that a firm is formed by the partners constituting it where either one partner when authorized by all the other partners can act for all or all the partners can act jointly to carry the business under the name of the Firm.

The major question that arises here is:
can a partnership firm be considered as a legal entity? as the definition in clear words specifies that the partners collectively form a Firm.

There are two imports that can be drawn to answer the question that a Firm is a separate legal entity or not
  1. The English law does not recognize Partnership as a Separate legal entity and;
  2. The Scottish law recognizes Partnership as a separate legal entity
However our partnership law is based on English law and we have also adopted the notions of English lawyers as regards a partnership firm.[1]

Under the Indian Partnership Act, 1932, a firm is recognized as an entity apart from the persons constituting it, and that the entity continues so long as the firm exists and continues to carry on its business. It is true that the Indian Partnership Act goes further than the English Partnership Act, 1890, in recognizing that a firm may possess a personality distinct from the persons constituting it; the law in India in that respect being more in accordance with the law of Scotland, than with that of England. But the fact that a firm possesses a distinct personality does not involve that the personality continues unchanged so long as the business of the firm continues. The Indian Act, like the English Act, avoids making firm a corporate body enjoying the right of perpetual succession[2]

The general concept of a partnership, firmly established in both systems of law, still is that a firm is not an entity or 'person' in law but is merely an association of individuals and a firm name is only a collective name of those individuals who constitute the firm. In other words, a firm name is merely an expression only a compendious mode of designating the persons who have agreed to carry on business in partnership[3] [4] [5]

Referring to Section 4 of the Act, a Partnership is a relation between persons and since the word person is not defined in the Partnership Act, 1931 therefore, definition of the word 'person' occurring in Section 3(42) of the General Clauses Act, 1897 shall apply for the interpretation of Section 4 of The Act. However the fact that the definitions of the General Clauses Act shall apply only when there is nothing repugnant in the subject or text of the existing Act.

according to lawyers, English or Indian, the definition of person be totally repugnant to the subject of partnership law as they know and understand it to be[6]

From the above case it becomes clear that the definition of person 'person' occurring in Section 3(42) of the General Clauses Act, 1897 shall not apply for the interpretation of Section 4 of The Act.

For an entity to be Legal/ Juristic person it shall comprise of the following 5 attributes:

  1. The entity shall be different from its members
  2. Perpetual succession
  3. It must be competent to enter into a contract
  4. Is capable to sue or being sued in its own name
  5. Can hold the property in its own name

Examining the above 5 Attributes:

  1. The entity shall be different from its members

    Since a partnership is merely an association of individuals and the law does not recognize partnership to have a personality or existence distinct from its partners; in other words a partnership is not different from the partners constituting it. a firm is only a compendious name for certain persons who carry on business or have authorized one or more (of) their Partnersto carry it on in such a way that they are jointly entitled to the profits and jointly liable for the debts and losses of the business. [7]
     
  2. Perpetual succession

    Perpetual succession is defined as:
    That continuous existence which enables a corporation to manage its affairs, and hold property without the necessity of perpetual conveyances, for the purpose of transmitting it. By reason of this quality, this ideal and artificial person remains, in its legal entity and personality, the same, though frequent changes may be made of its members.[8]

    From the definition it becomes clear that the partnership does not have a perpetual succession as the firm collapses on changes in the partners of the firm which can be due to death or retirement of the partners.
     
  3. Power to enter into a contract

    The partnership firm is not regarded as a legal entity, therefore the firm cannot on its own create or enter into any contract. Any Partner authorized by all the partners or all the Partners of the firm shall execute the contract. Subject to the Partnership agreement, the firm is made party to the contract in order to make all the partners at the time of the Execution of the contract jointly and severally liable to contract.
     
  4. May or may not be sued in its own name

    Order XXX of the Civil Procedure Code, 1908 reads as- Suits by or Against Firms and person carrying on business in names other than their own

    Here we deal with the question whether a Firm can institute a suit in its own name?
    Rule I of Order 30 that any two or more persons claiming or being liable a partners may sue or be sued in the name of the firm (if any) of which such persons were partners at the time of the accruing of the cause of action. As stated by us earlier, a firm is not under the law a juristic person, but is a compendious name for all the persons who are members of the firm (partners).

    The effect of using the name of the firm, as provided in Rule I, is merely to bring all the partners before the Court and the procedure indicated in Rules 1 and 2 of Order 30 is only a convenient method for showing the persons who constituted the firm at the time of the accruing of the cause of action, and a decree in favor of or against a firm, in the name of the firm, has the same effect as a decree in favor of or against all the partners. The various rules of Order 30 make this clear.

    Rule 1 of Order 30, in providing the mode or form of the suit, prescribes a requirement that the two or more persons who, claiming or being liable as partners, sue or be sued in the name of the film must be persons who were partners at the time of the accruing of the cause of action.[9]

    A firm can sue or be sued subject to two conditions:

    1. If the Firm is a registered Partnership
       
    2. The persons suing, i.e., all the partners of the firm at the time of the institution of the suit, are or have been shown in the Register of Firms as partners in the firm, while under Rule I of Order 30 two or more persons who claim as partners may sue, or who are liable as partners may be sued, in the name of the firm (if any), provided such persons were partners at the time of the accruing of the cause of action.


    From the above it becomes clear that Order 30 of CPC allows the name of the firm is used merely to bring all the partners before the court and person who constituted the firm at the time of accruing of the cause of action but a firm can sue or be sued subject to the conditions stated above.
     
  5. Can hold the property in its own name

    According to Section 14 of the Partnership Act, 1932 specifies any property and rights and interest in property acquired with money belonging to the firm are deemed to have been acquired for the firm.

    A Partnership is not a juristic person; the legal entity is the partner himself. All partners in their individual capacity ought to additionally be part of as parties to the agreement to sell or to the conveyance deed and execute it in their individual capacity. Once an immovable property is transferred to a firm it vests in all the partners of the firm and not within the firm, since the firm has no separate legal existence.

Answering the basic questions that arise once it's established that Partnership Firm is not a separate legal entity:

  1. Can a Partnership Firm become a Shareholder in a Company?

    Neither the Indian Partnership Act, 1932 nor the Companies Act, 1956 has answered this question. As per the clarification issued by the Department of Company Affairs DCA Circular [Circular No. 4/72, dated 9-3-1972], a firm of partnership, (not being a legal person) cannot be registered as a member of a company. However, as an exception, a firm of partnership can become a member of charitable company. In other words, in case where the company is licensed under section 25 of the Companies Act, 1956, a firm of partnership can become a member of such a company. A partnership firm cannot be a shareholder in any of the Company.

    Similar is the position in the Companies Act, 2013, however if the Partnership firm wishes to hold shares then it can do so by applying for the same in individual capacity of the partners.

  2. Can a Partnership firm become a partner in another Partnership Firm?

    A firm is not a "person" and as such is not entitled to enter into a partnership with another firm or Hindu undivided family or individual[10]
    From the above it case the position of the Partnership firm becomes clear that it cannot enter into a partnership with another firm or Hindu undivided family or individual.

  3. Can Partnership be considered as a Body Corporate for the purposes of Companies Act, 2013

    The Definition of Body Corporate under Section 2 (11) of the Companies Act, 2013 Specifically say that it does not include a co-operative society registered under any law relating to co-operative societies and any other body corporate (not being a company defined in this Act), which the Central Government may by notification specify in this behalf.
No notification by the Central Government specifying that a registered partnership firm shall not be included in the definition of "body corporate" has been brought to my notice. Therefore, the applicant being a registered partnership firm, it can be treated as a "body corporate".[11]

From the above it becomes clear that a Partnership can be treated as a Body corporate for the purposes of Companies Act, 2013 however following must be noted that while considering the above judgement for interpreting all the sections of Companies Act, 2013
  • According to the DCA Circular [Circular No. 4/72, dated 9-3-1972] a Partnership Firm cannot be a member in a Company except in Section 25 Company (of Companies Act, 1956).
  • A partnership is not a Legal Entity

Now lets examine some other definitions of:
Body Corporate - A corporation public or private.

Corporation:
An artificial person or legal entity created by or under the authority of the laws of a state or nation, composed, in some rare instances, of a single person and his successors, being the incumbents of a particular office, but ordinarily consisting of an association of numerous individuals, who subsist as a body politic under a special denomination, which is regarded in law as having a personality and existence distinct from that of its several members, and which is, by the same authority, vested with the capacity of continuous succession, irrespective of changes in its membership, either in perpetuity or for a limited term of years, and of acting as a unit or single individual in matters relating to the common purpose of the association, within the scope of the powers and authorities conferred upon such bodies by law.

Referring to the above definitions; a Partnership cannot be considered as a Body Corporate as it's not an Artificial Person for the reasons explained above. And the fact that Partnership is included in the definition of Body Corporate of Companies Act, 2013 is merely because there is no clear exception to exclude it from the definition and the actual meaning of the term was not considered in the Judgement. Therefore from the above we can conclude that a Partnership is a Body Corporate for the purposes of Companies Act, 2013 but other than that the partnership cannot hold the character of Body Corporate as the Indian Partnership Act, 1932 does not bestow that character on to it.

End-Notes:
  1. Commissioner of Income Tax, Madras Vs. R.M. Chidambaram Pillai and Ors (AIR1977SC 489)
  2. Bhagwanji Morarji Goculdas v. Alembic Chemical Works Co. Ltd
  3. Commissioner of Income Tax, Madras Vs. R.M. Chidambaram Pillai and Ors (AIR1977SC 489)
  4. Dulichand Lakshminarayan Vs The Commissioner Of Income-Tax,Nagpur (1956 AIR 354)
  5. Malabar Fisheries Co. Vs.Commissioner of Income Tax, Kerala (AIR1980SC 176)
  6. Commissioner of Income Tax, Madras Vs. R.M. Chidambaram Pillai and Ors (AIR1977SC 489)
  7. Malabar Fisheries Co. Vs.Commissioner of Income Tax, Kerala (AIR1980SC 176)
  8. Black Law Dictionary Page 1299 by HENRY CAMPBELL BLACK, M. A. 4th Edition
  9. Shanker Housing Corporation ... vs Mohan Devi And Eight Ors. on 2 December, 1977
  10. Dulichand Lakshminarayan V. The Commissioner Of Income-Tax,Nagpur (1956 AIR 354)
  11. Re: Kediya Ceramics and Ors. (IA 254/2017 in CA (CAA) No. 95/NCLT/AHM/2017)
Written By: Dimpal Jangid

Law Article in India

Ask A Lawyers

You May Like

Legal Question & Answers



Lawyers in India - Search By City

Copyright Filing
Online Copyright Registration


LawArticles

Section 482 CrPc - Quashing Of FIR: Guid...

Titile

The Inherent power under Section 482 in The Code Of Criminal Procedure, 1973 (37th Chapter of th...

How To File For Mutual Divorce In Delhi

Titile

How To File For Mutual Divorce In Delhi Mutual Consent Divorce is the Simplest Way to Obtain a D...

Whether Caveat Application is legally pe...

Titile

Whether in a criminal proceeding a Caveat Application is legally permissible to be filed as pro...

The Factories Act,1948

Titile

There has been rise of large scale factory/ industry in India in the later half of nineteenth ce...

Constitution of India-Freedom of speech ...

Titile

Explain The Right To Freedom of Speech and Expression Under The Article 19 With The Help of Dec...

Copyright: An important element of Intel...

Titile

The Intellectual Property Rights (IPR) has its own economic value when it puts into any market ...

Lawyers Registration
Lawyers Membership - Get Clients Online


File caveat In Supreme Court Instantly