Q1) Moni and Tony were partners in the firm M/s MOTO & Company. They admitted Sony as partner in the firm and he is actively engaged in day-to-day activities of the firm. There is a tradition in the firm that all active partners will get a monthly remuneration of ₹ 20,000 but no express agreement was there. After admission of Sony in the firm, Moni and Tony were continuing getting salary from the firm but no salary was given to Sony from the firm. Sony claimed his remuneration but denied by existing partners by saying that there was no express agreement for that. Whether under the Indian Partnership Act, 1932, Sony can claim remuneration from the firm?

Provisions:

By virtue of provisions of Section 13(a) of the Indian Partnership Act, 1932 a partner is not entitled to receive remuneration for taking part in the conduct of the business. But this rule can always be varied by an express agreement, or by usage of trade, in which event the partner will be entitled to remuneration. Thus, a partner can claim remuneration even in the absence of a contract, when such remuneration is payable under the continued usage of the firm.

In other words, where it is customary to pay remuneration to a partner for conducting the business of the firm, he can claim it even in the absence of a contract for the payment of the same.

 Facts of the case:

In the given problem, existing partners are getting regularly a monthly remuneration from firm customarily being working partners of the firm. The newly admitted partner claimed remuneration which was denied by the existing partners.

 Analysis:

Where it is customary to pay remuneration to a partner for conducting the business of the firm, he can claim it even in the absence of a contract for the payment of the same.

As Sony also admitted as working partner of the firm, he is entitled to get remuneration like other partners.

Conclusion

Sony can claim remuneration from the firm.

Q2) State the difference between Partnership and Club

Q3) Mr. A. Mr. B and Mr. C were partners in a partnership firm M/s ABC & Co., which is engaged in the business of trading of branded furniture. The name of the partners was clearly written along with the firm name in front of the head office of the firm as well as on letter-head of the firm. On 1st October, 2018, Mr. C passed away. His name was neither removed from the list of partners as stated in front of the head office nor from the letter-heads of the firm. As per the terms of partnership, the firm continued its operations with Mr. A and Mr. B as partners. The accounts of the firm were settled and the amount due to the legal heirs of Mr. C was also determined on 10th October, 2018. But the same was not paid to the legal heirs of Mr. C. On 16th October, 2018, Mr. X, a supplier supplied furniture worth ₹ 20,00,000 to M/s ABC & Co. M/s ABC & Co. could not repay the amount due to heavy losses. Mr. X wants to recover the amount not only from M/s ABC & Co., but also from the legal heirs of Mr. C. Analyses the above situation in terms of the provisions of the Indian Partnership Act, 1932 and decide whether the legal heirs of Mr. C can also be held liable for the dues towards Mr. X

Provisions:

Generally, the effect of the death of a partner is the dissolution of the partnership, but the rule in regard to the dissolution of the partnership, by death of partner, is subject to a contract between the parties and the partners are competent to agree that the death of one will not have the effect of dissolving the partnership as regards the surviving partners unless the firm consists of only two partners. In order that the estate of the deceased partner may be absolved from liability for the future obligations of the firm, it is not necessary to give any notice either to the public or the persons having dealings with the firm.

Facts of the case:

C, a partner of the firm passed away. The firm continued the its operations with Mr. A and Mr. B as partners. They continued using C’s name as a partner. C’s account was not settled. Mr. X supplied furniture to the firm after C’s death and now wishes to recover the amount due not only from the firm but also from the legal heirs of C.

Analysis:

In the light of the provisions of the Act and the facts of the question, Mr. X (creditor) can have only a personal decree against the surviving partners (Mr. A and Mr. B) and a decree against the partnership assets in the hands of those partners. A suit for goods sold and delivered would not lie against the representatives of the deceased partner.

Q4) Ram & Co., a firm consists of three partners A, B and C having 1/3rd share each in the firm. According to A and B, the activities of C are not in the interest of the partnership and thus want to expel C from the firm. Advise A and B whether they can do so quoting the relevant provisions of the Indian Partnership Act, 1932.

Provisions:

As per Section 33 of the Indian Partnership Act, 1932 a partner may be expelled from the firm if the following conditions are fulfilled:

1. the power of expulsion must have existed in a contract between the partners;
2. the power has been exercised by a majority of the partners; and
3. It has been exercised in good faith.

The test of good faith includes:

1. that the expulsion must be in the interest of the partnership;
2. that the partner to be expelled is served with a notice; and
3. that the partner has been given an opportunity of being heard.

If the expulsion does not fulfil all the conditions the expulsion is null and void.

Facts of the case:

In the above case A, B and C are partners of the firm. A and B want to expel C as his activities are against the interest of the firm.

Analysis:

In the given case A and B the majority partners can expel the partner only if such expulsion is in good faith as stated above. Since C’s activities are against the interest of the firm, he can be expelled. However, for valid expulsion, he must be served with a notice and must be given an opportunity of being heard.

Conclusion:

Considering the above facts, C’s expulsion is valid.

Q5) Shyam, Mohan and Keshav were partners in M/s Nandlal Gokulwale and Company. They mutually decided that Shyam will take the responsibility to sell the goods, Mohan will do the purchase of goods for firm and Keshav will look after the accounts and banking department. No one will interfere in other’s department. Once, when Shyam and Keshav were out of town, Mohan got the information that the price of their goods is going down sharply due to some government policy which would result in heavy loss to firm if goods not sold immediately. He tried to contact Shyam who has authority to sell the goods. When Mohan couldn’t contact to Shyam, he sold all goods at some reduced price to save the firm from heavy loss. Thereafter, Shyam and Keshav denied accepting the loss due to sale of goods at reduced price as it’s only Shyam who has express authority to sell the goods. Discuss the consequences under the provisions of the Indian Partnership Act, 1932.

Provisions:

According to Section 20 of Indian Partnership Act, 1932, the partners in a firm may, by contract between the partners, extend or restrict the implied authority of any partner. Notwithstanding any such restriction, any act done by a partner on behalf of the firm which falls within his implied authority binds the firm, unless the person with whom he is dealing knows of the restriction or does not know or believe that partner to be a partner.

Further, according to Section 21, a partner has authority, in an emergency to do all such acts for the purpose of protecting the firm from loss as would be done by a person of ordinary prudence, in his own case, acting under similar circumstances, and such acts bind the firm

Facts of the case:

Shyam, Mohan and Keshav were partners. They had divided the work among themselves. Once due to rapidly falling prices, Mohan decided to sell all goods at some reduced price to save the firm from heavy loss. Shyam and Keshav denied accepting the loss claiming that Mohan did not have the authority to sell.

Analysis:

On the basis of the provisions and facts provided in the question, though Shyam was expressly authorized to sell the goods, Mohan sold the goods at some loss. It was clear that Mohan has done what a person of ordinary prudence does in an emergency to protect the firm from heavy loss. Hence, this sale will bind the firm.

Conclusion:

The firm is bound by the sale as it was an emergency and Mohan acted in good faith and in the interest of the firm.

Q6) What are the consequences of Non-Registration of a Partnership Firm? Discuss

Registration of a partnership firm under the Indian Partnership Act, 1932 is optional. However, an unregistered faces certain disqualifications. These consequences are so grave that a firm would opt for registration. The following are the disabilities of an unregistered firm:

1. No suit in a civil court by firm or other co-partners against third party: 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.

2. No relief to partners for set-off of claim: 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 100 or pursue other proceedings to enforce the rights arising from any contract.

3. Aggrieved partner cannot bring legal action against other partner or the firm: 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 realization of his share in the firm’s property where the firm is dissolved.

4. Third party can sue the firm: In case of an unregistered firm, an action can be brought against the firm by a third party.

Q7) A & Co. is registered as a partnership firm in 2015 with A, B and C partners. In 2016, A dies. In 2017, B and C sue X in the name and on behalf of A & Co., without fresh registration. Decide whether the suit is maintainable. Whether your answer would be same if in 2017 B and C had taken a new partner D and then filed a suit against X without fresh registration?

Provisions:

As per section 69 of the Partnership Act, 1932 if a partnership firm wants to sue a third party two conditions must be fulfilled:

1. the firm must be registered; and
2. the partners suing should be named as partners of the firm.

In case of a registered firm if the firm continues its business after the death of a partner without any fresh registration 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. The suit shall be valid if it is filed by the remaining partners in respect of such subsequent dealings or transactions. However, in case the firm takes a new partner the suit cannot be filed without fresh registration.

Facts of the case:

In the above case A & Co. a registered partnership firm with A, B and C as partners. A dies and without fresh registration the firm sues X. 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. Further in 2017, B and C had taken a new partner, D, and then filed a suit against X without fresh registration.

Analysis and conclusion:

Where a new partner is introduced, the fact is to be notified to Registrar who shall make a record of the notice in the entry relating to the firm in the Register of firms. In this case the second condition partners suing should be named as partners of the firm is not fulfilled, as the name of D is not registered.

Therefore, in the first case the firm can sue the third party without fresh registration. However, in the second case the firm cannot sue as D’s name has not been entered in the register of firms and partner suing i.e., D is not named as a partner of the firm.

CA Foundation Business Laws (100 Marks)

Q8) Subject to agreement by partners, state the rules that should be observed by the partners in settling the accounts of the firm after dissolution under the provisions of the Indian Partnership Act, 1932

Answer: Subject to a contract between the partners while settling the accounts of a firm after dissolution, the following rules shall be observed:

1. Losses, including deficiencies of capital, shall be paid first out of profits, next out of capital, and, lastly, if necessary, by the partners individually in the proportions in which they were entitled to share profits.

2. 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 firm to third parties;

b) in paying to each partner rateably what is due to him from capital;

c) in paying to each partner rateably what is due to him on account of capital; and

d) the residue, if any, shall be divided among the partners in the proportions in which they were entitled to share profits.

Q9) MN partnership firm has two different lines of manufacturing business. One line of business is the manufacturing of Ajinomoto, a popular seasoning & taste enhancer for food. Another line of business is the manufacture of paper plates & cups. One fine day, a law is passed by the Government banning Ajinomoto’ use in food and to stop its manufacturing making it an unlawful business because it is injurious to health. Should the firm compulsorily dissolve under the Indian Partnership Act, 1932? How will its other line of business (paper plates & cups) be affected?

Provisions:

According to Section 41 of the Indian Partnership Act, 1932, a firm is compulsorily dissolved;

(a) by the adjudication of all the partners or of all the partners but one as insolvent, or

(b) by the happening of any event which makes it unlawful for the business of the firm to be carried on or for the partners to carry it on in partnership.

However, where more than one separate adventure or undertaking is carried on by the firm, the illegality of one or more shall not of itself cause the dissolution of the firm in respect of its lawful adventures and undertakings.

 Facts of the case:

The company was manufacturing Ajinomoto, a popular seasoning & taste enhancer for food. Later, the government imposed a ban on use of Ajinomoto in food thus making the line business of Ajinomoto unlawful.

Analysis:

Here, MN has to compulsorily dissolve due to happening of law which bans the usage of ajinomoto. Else the business of the firm shall be treated as unlawful. However, the illegality of ajinomoto business will in no way affect the legality or dissolution of the other line of business (paper plates & cups). MN can continue with paper plates and cup manufacture.

Conclusion:

Hence, the firm need not be compulsorily dissolved as it can continue the other line of business.

Q10) M/s XYZ & Company is a partnership firm. The firm is an unregistered firm. The firm has purchased some iron rods from another partnership firm M/s LMN & Company which is also an unregistered firm. M/s XYZ & Company could not pay the price within the time as decided. M/s LMN & Company has filed the suit against M/s XYZ & Company for recovery of price. State under the provisions of the Indian Partnership Act, 1932;

(a) Whether M/s LMN & Company can file the suit against M/s XYZ & Company?

(b) What would be your answer, in case M/s XYZ & Company is a registered firm while M/s LMN & Company is an unregistered firm?

(c) What would be your answer, in case M/s XYZ & Company is an unregistered firm while M/s LMN & Company is a registered firm?

Provisions:

According to provisions of Section 69 of the Indian Partnership Act, 1932 an unregistered firm cannot file a suit against a third party to enforce any right arising from contract, e.g., for the recovery of the price of goods supplied. But this section does not prohibit a third party to file suit against the unregistered firm or its partners.

Facts of the case:

M/s XYZ & Co. is an unregistered firm. The firm has purchased some iron rods from another unregistered partnership firm M/s LMN & Co. M/s XYZ & Co could not pay the price within the time as decided. M/s LMN & Co filed a suit against M/s XYZ & Co for recovery of price.

Analysis and conclusion:

(a) On the basis of above, M/s LMN & Company cannot file the suit against M/s XYZ & Company as M/s LMN & Company is an unregistered firm.

(b) In case M/s XYZ & Company is a registered firm while M/s LMN & Company is an unregistered firm, the answer would remain same as in point a) above.

(c) In case M/s LMN & Company is a registered firm, it can file the suit against M/s XYZ & Company.

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