How an association by Partnership Deed differs from Company Registration?

A business can be organised in several ways; it all boils down to the form of grouping chosen. Each has its own pros and cons. In this article, the author will examine the laws governing them, their peculiarities to give the reader an idea as to which association is the most suitable amidst the growing incertitude in the market.
Estimated Reading Time: 17 minutes

The Companies Act, 1956 was enacted with the aspiration to consolidate and amend the law relating to Companies. Per Contra, after a run for about 55 years, a contemporary, extensive, and revised legislation to accommodate the burgeoning Indian economy was coveted by various stakeholders. In the prospect of expanding international and national market, the Central Government assimilated the recommendation of the Parliament Standing Committee on Finance and notions of several stakeholders introduced the Companies Bill, 2012 in the Parliament. This modern bill brought new concepts such as E-Governance, Corporate Social Responsibility, Audit Accountability, etc. The bill was passed in August 2013. Let us discuss the difference between an association by Partnership deed and Company registration.

A Partnership arises from a Contract; therefore, a Contract is governed not only by the provisions of the Partnership Act in that regard-but also by the general law of contract. Initially, the law relating to partnership was contained in Chapter XI of the Indian Contract Act, 1872. This chapter was established on English precedents-and was not exhaustive as Indian Courts relied on analogies drawn from the English law several times. The act exhibited to be more suitable to the English people; hence a methodical and authoritative revision was essential. Upon suggestions stated in the report of the Special Committee, the India Partnership Bill was introduced in the Parliament. The bill received its assent in April, 1932 and came on the Statute sook as the law we recognise present-day.

A desire was felt by small and medium entrepreneurs for a substitute to a Partnership, which integrated both the features of limited corporations and traditional partnership firms.A report by the Naresh Chandra Committee[1] submitted in July 2003 endorsed the creation of a Limited Liability Partnership. This hybrid offered greater flexibility, fewer regulatory compliances, perpetual existence and limited liability. The Limited Liability Partnership Act was enacted by the Parliament in December, 2008.

A business can be organised in several ways; it all boils down to the form of grouping chosen. Each has its own pros and cons. All the three abovementioned, area form of an association. In this article, I’ll examine the laws governing them, their peculiarities to give the reader an idea as to which association is the most suitable amidst the growing incertitude in the market.

Association by Company

  1. Governing Law: The Companies Act, 2013[2]
  2. Creation: The word ‘Company’ customarily means a group of people associated for a common purpose, for e.g. charity, sports, business, etc. However, the word ‘company’ has no strict technical or legal meaning attached to it.[3]Like any juristic person, a Company is legally an entity apart from its members, capable of rights and duties endowed with the potential of perpetual succession.[4] Withal, a Company is not merely a legal institution, and it is a combined political, social, economic, and legal institution.[5] Section 2(20) of the 2013 Act defines company.

2(20) “company” means a company incorporated under this Act or under any previous company law;

In general terms, a company is formed when a group of persons come together to contribute money to a common pool; utilise the same for trade or business; share the profits arsing therefrom. The money here would be capital, persons who subscribe to the common pool are its members; the proportion of capital which each member is entitled is his share in the company. 

According to Prof. L.H. Haney, “A Company is an incorporated association, which is an artificial person created by law, having a separate entity, with a perpetual succession and a common seal.”

  • Status: A Company must be registered under the prevalent Companies Act. As per Section 464 of the Act, it is compulsory for all association or partnership of more than 50 members to register under the Companies Act. By registering itself, a Company becomes vested with independent corporate existence, distinct from its members. After registration, the company becomes a separate legal entity capable of suing and being sued in its corporate name. It can purchase and sell the property. It can enter into contracts with natural persons. It can even be fined under the relevant Company Law. Ergo, it does not possess the physical attributes of a natural person. Hence, it cannot divorce, be sent to jail, etc. It is intangible and exists only in the eyes of the law. The House of Lords in Salomon V. Salomon & Co. Ltd.[6] held that even where a single shareholder virtually holds the entire share capital of a Company, the company is to be differentiated from such shareholders. In Lee V. Lee’s Farming Ltd.[7], the Privy Council held that a company is independent and separate from that of its sole governing director and beneficial shareholder, expounding that they are two distinct entities.The principle of separate legal entity was first recognised in India in the case of Re, Kondoli Tea Co. Ltd.[8], where the Calcutta High Court held that a Company is a separate body altogether from its shareholders. In the 13th Century, Pope Innocent IV espoused the theory of legal fiction by expressing that corporate bodies could not be proscribed simply because they existed only in the abstract.  The Supreme Court in Vodafone International Holdings BV V. UOI[9] regarded the abovementioned principle as a foundation of separate entity principle.
  • Succession: Since a Company is an artificial legal person created by the law, law alone can dissolve it. In the words of Professor Grower, “Members may come and go, but the company can go on forever. During the war all the members of one Private Company, while in general meeting, were killed by a bomb. But the company survived, not even a hydrogen bomb could have destroyed it .[10] Therefore, an incorporated company never dies. The demise or insolvency of any of its members does not affect the continued existence of the company. The same is recognised by Section 9 of the 2013 Act.

9 Effect of registration – From the date of incorporation mentioned in the certificate of incorporation, such subscribers to the memorandum and all other persons, as may, from time to time, become members of the company, shall be a body corporate by the name contained in the memorandum, capable of exercising all the functions of an incorporated company under this Act and having perpetual succession with power to acquire, hold and dispose of property, both movable and immovable, tangible and intangible, to contract and to sue and be sued, by the said name.

Green L.J. in Stepney Corporation V. Osofsky[11], delivered that “A corporate body has no soul to be saved or body to be kicked.”

  • Registration: Obtain DSC & DIN à Name Reservation à Drafting of MoA & AoA à Filing e-forms with ROC à Incorporation Certificate
  • Ownership of Assets:A Company is capable of holding, enjoying, and disposing of property in its own name. The property is vested in the corporate body. Therefore, no member can claim ownership on any of the company’s assets. The property of a Company can clearly be distinguished from that of its shareholders. As per Evershed L.J. in Short V. Treasury Commissioners[12], “Shareholders are not, in the eyes of law, part-owners of the undertaking. The undertaking is something different from the totality of the shareholdings. A member does not have an insurable interest in the property of the company.[13] Since, the property of the company is not the property of the shareholders, there is no committal to subdivide the property upon change of membership in the company. Correspondingly, any claims of the company’s creditors will be against the property of the company. Moreover, the management is divorced from the capital, this has helped ensure liquidity.
  • Liability:Since a Company is detached from its members, the members are not liable for any of the company’s debts. Each shareholder’s liability is limited to the shares held by him. Hence, each member is bound to pay the nominal value of the shares held by him. If the shares are fully paid, the member is under no further liability. If a company is limited by guarantee, then the member is liable to contribute only to the assets of the company.  This guaranteed amount can only be demanded, in case, the company is being wound up.
  • Minor’s Position:Section 3 of Indian Majority Act, 1785, reads that a minor is a person who has not yet attained the age of eighteen years. Therefor a minor cannot enter into contract. However, a minor can hold shares in a Company with the consent of his guardian.[14] Albeit, the shares cannot be purchased directly as it subsumes as an agreement. The guardian on behalf of his minor can purchase shares of the company and gift it to him. The share ought to be fully paid, as a minor cannot be held accountable for unpaid share. Company Law Board in Nandita Jain v. Bennett and Colman Co. Ltd.[15] held that there would be no personal covenant to bind the minors, if the fully paid shares are transferred. The minor will, however, receive his share consequent to liquidation proceedings.  Another way of holding shares is by transfer of shares to the guardian of the minor. The guardian acts as a trustee until the minor attains majority. In the case of Master Gautam R. Padival (Minor) V. Karnataka Theatres Ltd.[16], the Company Law Board held that a minor who has obtained shares by transfer could be registered as a member of the company. Thus, a minor can also vote in general body meetings contingent on number of shares held by him. A minor upon attaining majority can repudiate his liability on shares on the ground of minority if he does not wish to remain a member. The company in such a circumstance, cannot plead estoppel.[17] Per Contra, a minor cannot be a Director in a Company, since being a Director requires a DIN; to obtain DIN, one must be above the age of eighteen.

Association by Partnership Deed

  1. Governing Law:The Indian Partnership Act, 1932[18]
  2. Creation: The English law relating to partnership itself went through several changes after 1872 and was finally codified by the Partnership Act, 1890. It was perceived that Chapter XI of the Indian Contract Act, 1872 was not exhaustive and was vague on several points. Thus, regardless of several amendments a need was felt for a redesigned, extensive law. Chapter XI of the Contract Act, 1872, was repealed and new comprehensive legislation was passed in 1932. The Indian Partnership Act is based mainly on the English Partnership Act, 1890. There are slight variations, with the main framework being the same. The preamble of the act states that it is an act to define and amend the law relating to partnership. The Act, like the English Act, does not recognise the separate legal entity of a Partnership Firm.Section 3 of the Act expressly provides that the repealed provisions of the Indian Contract Act, 1872, save in so far as they are inconsistent with the express provisions of this act, shall continue to apply. Furthermore, Section 74 states that the act is not retrospective and applies only to anything done or suffered after the commencement of the act. Therefore, a combined reading of Section 2(e), 3, 5, and 74 affirms that the Act is not a complete code in itself. The rules relating offer and acceptance, consideration, free consent, etc. contained in the Indian Contract Act, 1872 are applicable to a Partnership also.
  3. Status: Kent’s analysis was that “Partnership deed is a contract of two or more competent persons to place their money, effects, labour, and skill or some or all of them, in lawful commerce, or business and to divide the profits and bear the loss in certain proportions. Section 239 of the repealed Chapter was also along these lines. Pollock’s exposition was that “Partnership is the relation which subsists between persons who have agreed to share the profits of a business carried on by all or any of them on behalf of all of them. In The Registrar of Firms, Societies and Non-Trading Corporation, West Bengal & Anr. V. Tarun Manna & Ors.[19], the Calcutta High Court held that partnership is the relation between persons created by contract whereby the parties to such contract have agreed to share the profits of the business with a further condition that the proposed business must be carried out by all or any of them acting for all. Section 4 of the 1932 Act defines a partnership deed.

4 “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 deed 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”.

We find that the definition is along the lines of Pollock. This is a more business-like and exhaustive definition, bringing out the fundamental principle of mutual agency, i.e. the partners when carrying out business, are agents as well as principals. It also suggests that the partnership deed is the relation arising out of an agreement and not the agreement itself.[20]A partnership Firm registered is neither a person nor a legal entity, It is merely a collective name for the individual members of the Partnership.[21] Section 5 and 6 help determine the existence of a Partnership. In Ross V. Purkyns[22], it was held that although the right to participate in profits is a strong test of partnership, yet whether the relation exists must depend upon the whole contract between the parties, and that circumstance is not conclusive. The entire deed must be considered to decide the existence of a partnership.[23]

  • Succession: Section 7 of the 1932 Act provides that, when no provision is made in the Partnership agreement or partnership deed as to its duration or when no provision hints at the determination of the duration of the partnership, the partnership deed is at will. Correspondingly, if there is a provision in the contract for the determination of partnership, then it is not a partnership at will. The provision regarding the duration of partnership or its determination, in the partnership contract, may be express or implied. If the duration has been fixed and is made to continue thereafter without specifying any duration for the same, then subsequently it becomes a partnership at will.[24] It is a partnership deed at will if the duration is nowhere to be found either by any express provision in the Partnership Agreement or any implication; the same is dependent on contingencies.[25]If a Partnership deed provides that the Partnership deed is to continue ‘till there are two partners’, it is not a Partnership at will.[26]
  • Registration: Registration is not compulsory under the Partnership Act, nor it imposes any penalty for non-registration. The main objective for registration is for third party dealings with the firm. Section 58 and 59 prescribe the procedure for registration of firms. However, the consequences of non-registration are given in Section 69, which is more or less virtual behaves registration at some point. The handicap caused by Section 69 can be overcome by getting the firm registered before a suit is filed. It cannot be rectified by subsequent registration.[27]
  • Ownership of Assets: Duty to properly use the firm’s property is governed under Section 14 and 15 of the 1932 Act. Although every partner has an interest in the property, no one can deal with any specific item as his own.[28]The mere use of the property by a Partnership deed for business does not make the property as belonging to the partnership.[29] Whatever brought by a Partner into the Partnership firm and its continued use, cannot be presumed to have become Partnership Property.[30]
  • Liability: Under Section 25 of the 1932 Act all partners are jointly liable for the debts of a Partnership firm. The liability is both joint and several. A person can only incur liability as a partner for such acts while acting as a Partner of the firm, and not after he has ceased to be a partner.[31] Liability under the act is unlimited, which means the personal assets of the partner can be acquired to pay off the debts of the firm. Section 26 – 28 deal with contrasting liabilities.
  • Section 26 provides for the liability of the firm for wrongful acts of a partner in general.[32]
  • Section 27 provides for liability for tort and breach of trust by a partner entered into a partnership deed, viz. misapplication of money or property belonging to third persons.[33]
  • Section 28 provides for liability in cases of holding out, where a person who is not a partner conducts himself to be a partner or allows others to do it, he is estopped from denying this as regards those persons who have acted on the faith of such conduct.[34]
  • Minor’s Position: A contract is essential for the existence of a Partnership deed. Section 11 of the Indian Contract Act provides that a person must be competent to enter into a contract. As per the ratio given in Mohori Bibee V. Dharmodas Ghose[35], a minor is incompetent to contract. Section 30 of the 1932 Act clearly states that a minor is not competent to contract. However, a minor can be admitted to the benefits of a Partnership with the consent of all other partners.[36]A minor so admitted, within six months after attaining majority or obtaining knowledge that he has been admitted to the benefits of a Partnership, whichever is later, has the right to elect to become or not become a partner in the firm by giving public notice to that effect. Notwithstanding, a minor cannot become a partner of the firm which has ceased to exist.[37]

Limited Liability Partnership – The best of both worlds?

Before the Naresh Chandra Committee, the idea was suggested to the Law Commission back in 1957. However, it was not accepted then due to some inherent shortcomings. It was after the J.J. Irani Expert Committee on Company Law, 2005[38], that a need was felt to extend LLP’s to small businesses. The Limited Liability Partnership Act, 2008[39] is distinct from both, Companies and firms, yet seeks to fill in the vacuum left by them and provide an alternative.

The internal management of an LLP is governed by the contractual agreement between the partners. It is easier, less burdensome, and cheaper to open an LLP as compared to a Company. There is no cap on the maximum number of members. However, if the number falls below two, then the continuing partner shall be held liable. In a LLP, a partner’s liability is limited to his agreed contribution. Hence, they are agents of the LLP and not of each other. Therefore, they aren’t accountable for the debts of the partnership. Furthermore, no partner is liable for the independent and unsupervised acts of other partners. Moreover, an LLP is a body corporate having separate legal existence with perpetual succession. This means that it has capacity to sue, be sued, deal with and enjoy property. LLP is a central law, unlike Partnership Act, where there are differences in administration in each state. In addition, there are no fixed requirements as to meetings, resolutions, AGM’s, etc. A minor cannot be made a partner any can he be admitted to the benefits of Partnership.

LLP Agreements offer greater flexibility, for e.g. partners can fix the duration of the LLP in the agreement. LLP is most suited to small enterprises as mandatory auditing of the LLP is not required if the turnover does not exceed ₹40 lakhs or contribution does not exceed ₹25 lakhs. The partnership must have two designated partners accountable for filing returns, documents, etc. with the Registrar.

The Government of India has allowed FDI in LLP firms, subject to certain conditions.[40] This permits foreign nationals and companies to form LLP’s in India, in turn attracting foreign direct investment. This helps generate jobs and stimulate growth in the economy. However, FDI in LLP’s is authorised only if 100% FDI is allowed, only under the automatic route. Regardless of the impasse, this can help enable several joint ventures in India.

Conclusion

Since the most popular form of doing business is by incorporating a Company. However, many professionals in India are barred from practising through companies. LLP has opened gates for them and small enterprises to provide services of any kind and form commercially efficient vehicles suited to their requirements.[41]

It offers a perfect marriage of general Partnership and a Limited Company. It offers more flexibility, with fewer compliances and tax burden in turn, uplifting the entrepreneurial spirit. There have been over 85,000 registered LLP’s in India till February 2017.[42] The sheer growth in the number of LLP’s can be taken as a sign of its success. Interestingly, in M/s Real Image LLP with M/s Qude Cinema Technologies Pvt. Ltd.[43], the Chennai Bench of NCLT, passed an Order permitting an LLP to merge with a Company in pursuance to Sections 230 – 232 of the Companies Act, 2013. It held that the objective of both the Acts is to promote the ease of doing business and create such a desirable business ambience.

Also read Ernest v. Nicholls


[1]Naresh Chandra Committee Report, 2003 available on http://reports.mca.gov.in/Reports/3-Naresh%20Chandra%20committee%20report%20on%20regulation%20of%20private%20companies%20and%20partnerships,%202003.pdf (Accessed on 07/03/2020)

[2] The Companies Act, 2013 available on http://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf(Accessed on 07/03/2020)

[3] Buckley J in Stanley, re, (1906) 1 Ch 131, 134

[4] Hahlo and Trebilcock, HAHLO’S CASEBOOK ON COMPANY LAW (2nd Edn) 42

[5] A.A. Berle, Jr, THE CORPORATION IN MODERN SOCIETY (1959) Foreword

[6]Salomon V. Salomon & Co. Ltd. (1897) AC 22

[7]Lee V. Lee’s Farming Ltd. (1961) AC 12

[8] Re, Kondoli Tea Co. Ltd. (1886) ILR 13 Cal. 43

[9]Vodafone International Holdings BV V. UOI (2012) 6 SCC 613

[10] L.C.B. Gower, MODERN COMPANY LAW (2nd Edn. 1957) 71

[11] Stepney Corporation V. Osofsky (1937) 3 All E. R. 289 at 291 C.A.

[12]Short V. Treasury Commissioners (1948) 1 KB 116

[13] Macaura V. Northern Assurance Company Ltd. (1925) AC 619

[14] Dewan Singh V. Minerva Films Pvt. Ltd. (1959) Comp Cases 263 (P&H)

[15]Nandita Jain v. Bennett and Colman Co. Ltd. (Appeal No. 27 of 1972)

[16]Master Gautam R. Padival (Minor) V. Karnataka Theatres Ltd. Company Petition No. 13/111. SRB of 1997

[17] Sadiq Ali V. Jai Kishori (1928) 30 Bom. L.R. 1346

[18] The Indian Partnership Act, 1932 available on https://www.mca.gov.in/Ministry/actsbills/pdf/Partnership_Act_1932.pdf (Accessed on 07/03/2020)

[19]The Registrar of Firms, Societies and Non Trading Corporation, West Bengal & Anr. V. Tarun Manna & Ors. AIR 2010 Cal. 79 (DB)

[20] Pooley V. Driver (1877) 5 CH. D. 458

[21] Mahabir Cold Storage V. CIT AIR 1991 SC 1357

[22]Ross V. Purkyns (1875) L.R. 20 Eq. 331

[23] Steel Brothers & CO. Ltd. V CIT AIR 1958 SC 315, K.D. Kamath & Co. V CIT (1971) 2 SCC 873

[24] Arunachalam & Co. V. M. Sadasivam AIR 1985 Mad. 354

[25] Gobardhan Chakraborty V. Abani Mohan AIR 1991 Cal. 195

[26] M.O.H. Uduman V. M.O..H Aslum AIR 1991 SC 1020, Moss V. Elphick (1910) KB 846

[27] Haldiram Bhujiawala V. Anant Kumar Deepak Kumar AIR 200 SC 1287

[28] Addanki Narayanappa V. Bhaskara Krishnappa AIR 1966 SC 1300

[29] Miles V. Clarke 1953 1 All ER 779

[30] Arjun Kanoji Tankar V. Santaram Kanoji Tankar (1969) 3 SCC 555

[31] Bagel V. Miller (1903) 2 KB 212

[32] Hamlyn V. John Houston & Co. (1903) 1 KB 81

[33] Cleather V. Twisden (1884) 28 Ch D 340

[34] Waugh V. Carver (1793) 2 H Blacks 235

[35]Mohori Bibee V. Dharmodas Ghose ILR 30 Cal 539

[36] CIT V. Dwarkadas Khetan & Co. AIR 1961 SC 680

[37] Shivgouda Rajvi Patel V. Chanderkant Neelkanth Sadlge AIR 1965 SC 212

[38] Report of the Expert Committee on COMPANY LAW, 2005 available on http://reports.mca.gov.in/Reports/23-Irani%20committee%20report%20of%20the%20expert%20committee%20on%20Company%20law,2005.pdf (Accessed on 07/04/2020)

[39] Limited Liability Partnership Act, 2008 available on http://www.mca.gov.in/Ministry/actsbills/pdf/LLP_Act_2008_15jan2009.pdf (Accessed on 07/04/2020)

[40] DIPP, 2011-Consolidated FDI Policy, effective from October 1, 2011 available on http://dipp.nic.in/English/policies/FDI_Circular_02_2011.pdf (Accessed on 07/04/2020)

[41] Utsav Gandhi & Ravi Thakur, A Study on Limited Lability Partnership as an Emerging Business Form for Entrepreneurs, Nirma University

[42] Niti Kiran, Growth Unlimited, BUSINESS TODAY available on https://www.businesstoday.in/magazine/focus/growth-unlimited/story/249170.html#:~:text=This%20is%20the%20growth%20in,%2C%20or%20LLPs%2C%20since%202012.&text=There%20were%20over%2085%2C000%20registered,per%20cent%20between%202014%20%26%202015. (Accessed on 07/04/2020)

[43]M/s Real Image LLP with M/s Qude Cinema Technologies Pvt. Ltd. (CP/123/CAA/2018) On June 11, 2018

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