Law Commission Of India Report No. 7
Partnership Act, 1932
Forwarded to the Union Minister of Law and Justice, Ministry
of Law and Justice, Government of India by M.C. Setalvad, Chairman, Law
Commission of India, on July 13, 1957.
|
Chairman,
My
Dear Minister,
Law Commission, Bombay, July 13, 1957. 1. I have great pleasure in forwarding herewith the Seventh Report of the Commission on the Partnership Act. 2. At the first meeting of the Law Commission held on the 17th September, 1955, the Commission decided to take up the revision of the Partnership Act and entrusted the task to a sub-committee consisting of Shri G.S. Pathak and Shri G.N. Joshi. The consideration of the subject was initiated by Shri Joshi who in consultation with Shri Pathak prepared a draft report which was circulated to all members of the Commission and their views invited thereon. The views together with the draft report were discussed at meetings of the Statute Revision Section of the Commission held on the 17th November, 28th December, 1956 and the 7th February, 1957. Important suggestions made by the Members at these meetings were accepted and a revised draft prepared by Shri Joshi in the light of the discussions was circulated to the Members of the Commission. The draft report as revised was discussed at a meeting of the Statute Revision Section of the Commission held on the 9th March, 1957 and it was left to the Chairman and Shri Joshi to finally settle the report in the light of the discussion. 3. Dr. Sen Gupta has signed the report subject to a separate note which is appended to the report. 4. The Commission wishes to acknowledge the services rendered by its Joint Secretary, Shri D. Basu in the preparation of the report. Yours sincerely, M.C. Setalvad. Shri A.K. Sen, Minister of Law, Government of India, New Delhi. |
Partnership Act, 1932
The Partnership Act
Part I
General
1. History of the legislation.—Prior
to 1932, Chapter XI (sections 239 to 266) of the Indian Contract Act, 1872 (Act
IX of 1872) contained the law relating to partnership in India. As these
provisions were not exhaustive, it was considered expedient and necessary to
separate the law relating to partnership and to embody it in a separate
enactment; hence, the Indian Partnership Act, 1932 (Act IX of 1932). This Act is
based mainly on the English Partnership Act, 1890 (53 and 54 Vict., c. 39) which
codified the common law relating to partnership. The English Partnership Act,
1890 has been the basis of the law of partnership in all countries which have
adopted the English common law as the basis of their law, for example, some of
the countries constituting the Commonwealth and the United States of America.
2. Before the enactment of the Indian Partnership Act, 1932, the
whole subject was carefully examined by a Special Committee1 which
scrutinised the English Partnership Act and the judicial decisions in England
and in India with a view to adapting the English provisions to the needs and
conditions of India. Apart from minor differences necessitated by the peculiar
conditions of India, the basic principles embodied in the Indian Partnership
Act, 1932 are the same as those contained in the English Partnership Act, 1890
and in the Uniform Partnership Act prepared in the United States of
America.2 The difficulties felt and the defects disclosed in the
working of the English Partnership Act from 1890 to 1931 were considered by the
Special Committee3 which drafted the Indian Partnership Bill and
provisions were made in the Act so as to avoid these difficulties and defects.
1. Gazette of India, 1931, Pt. V, pp. 31 et seq.
2. A model code drown up and approved by the Conference of Commissioners
on Uniform State Laws on the 14th October, 1914 and adopted in some fo the
States of the United States of America.
3. Gazette of India, 1931, Pt. V, pp. 31 et seq.
3. Scope of the revision proposed.—We have examined the provisions
of the Indian Partnership Act, 1932, in the light of the judicial decisions in
India and in England and we find that, apart from the alterations which are set
out hereinafter, it is not necessary to make any other radical changes. In our
opinion, on the whole, the Act is comprehensive and adequate enough to meet the
growing needs and requirements of Indian trade, commerce and industry and
facilitates varied relationships between individuals who intend to associate
themselves for the purpose of carrying on trade and commerce.
4. Suggestion that a firm should be recognised as a legal entity, not
accepted.—It has been suggested to us that the fundamental principle on
which the Indian Partnership Act is based, viz., that a "firm" is not a legal
person or a legal entity, should be replaced by the contrary principle which
recognises a firm as a legal person or a legal entity, on the ground that such a
change would be useful to the business and commercial community as well as to
those who deal with a firm and that it would also simplify proceedings by and
against a firm. This question has for a long time engaged the attention of
jurists, lawyers and text-book writers in India England and the United States of
America. In England, it has been suggested that the English law of Partnership
should in this respect be assimilated to that of Scotland which recognises a
firm as a legal or juristic person. Lindley, in the Introduction to his book on
"Partnership", regretted that a firm was not recognised as a juristic person and
stated1
1. Lindley on Partnership, 11th Edn., 1950, p. 4.
"This non-recognition of the firm was a defect in the law of
Partnership; and it is to be regretted that the Partnership Act did not go
further than it did in the direction of assimilating English Law to the
Scotch".
However, notwithstanding a considerable body of opinion in England
being in favour of the recognition of a firm as a legal person, the British
Parliament has not so far accepted that principle.
5 . In the United States of America, before the Uniform
Partnership Act was drawn up, it was vehemently advocated that the principle
recognising a firm as a legal person should be adopted as the basis of the law
of partnership and at one stage the general opinion was in favour of the
adoption of this principle. But ultimately, "The Theory was not accepted, as it
was felt that it was in the last analysis based on an assumption which did not
accord with business practice".1
1. The Uniform Partnership Act - A Reply to Mr. Crane's
Criticism by William Draper Lewis, (1915-16) 29 Harvard Law Review, p.
167.
6 . The difficulties which result from the non-recognition of a
firm as a legal person, were carefully examined by the Special
Committee1 which drafted the Indian Partnership Bill and the
Committee tried to meet these difficulties by appropriate modifications of some
of its provisions, without altering the basic conception that a firm is not a
legal entity.
1. Gazette of India, 1931, Pt. V, p. 33.
7. The non-recognition of a firm as a legal person renders
possible elasticity of relationship between the persons who enter into a
partnership. This is a great advantage to the business community, as it
facilitates the association of persons with varying, means and diverse abilities
to carry on business on the collective credit of all the partners. The common
law theory of partnership (known in the United States of America as the
'aggregate' theory), as has been worked out in the Indian Partnership Act meets
the requirements and needs of the business community. Under this theory, the
partners own in common the partnership property and they are joint principles in
partnership transactions. The activities carried on by the partners are not
regarded as being carried on by a legal personality distinct from their
individual personalities. The practical difficulties which have been experienced
in the administration of the law of partnership have been to a large extent
overcome by the modification of the procedure applicable to a firm.
8 . It is true that merchants and lawyers have different notions
respecting the nature of a firm. Commercial men and accountants are apt to look
upon a firm in the light in which the lawyers look upon a corporation, i.e. as a
body distinct from the members composing it. Thus, in keeping accounts
'merchants' habitually show a firm as a debtor to each partner for what he
brings into the common stock and each partner is shown as a debtor to the firm
for all that he takes out of this stock. But this is a business point of view
and not a legal conception. Mercantile usage relating to a firm has, however,
been adopted in the law of partnership, to a certain extent. Thus, a firm, not,
being a legal entity, could not, either in England or in India, sue or be sued
in the firm name or sue or be sued by its own partners, for one cannot sue
oneself. This difficulty with regard to the law of procedure has, however, been
removed both in England and in India under the pressure of considerations of
commercial convenience and a firm is now allowed to sue or be sued in the firm
name as if it were a corporate body. [See Rules of the English Supreme Court,
Order XLVIIIA and Order XXX of our Code of Civil Procedure, 1908 (Act V of
1908)]. The law of procedure has gone to the length of allowing a firm to sue
and be sued by another firm having some common partner or even to sue or be sued
by any one or more of its own partners (see order XXX, rule 9 of the Code of
Civil Procedure), as if a firm were an entity distinct from its partners. Again,
in taking partnership accounts and administering partnership assets the law has,
to some extent, adopted the mercantile view inasmuch as the liabilities of a
firm are regarded as the liabilities of the partners only in case they cannot be
met and discharged by the firm out of its own assets. Further, when there are
joint debts due from any firm as well as separate debts due from any partner,
the creditors of the firm are in the first place to satisfy their claims out of
the partnership assets and if there is any surplus then the share of each
partner in such surplus is applied in payment of his separate debts, if any, or
paid to him. Conversely, the separate property of a partner is applied first in
payment of his separate debts and the surplus, if any, is utilised in meeting
the debts of the firm (see section 49 of the Indian Partnership Act). Thus it is
clear that the law, English as well as Indian, has for some specific purposes,
relaxed its rigid application of the aggregate theory and given, to a limited
extent, a legal personality to a firm. Nonetheless, the general concept of
partnership is that a firm is not an entity or a person in law but is merely an
association of persons and the firm name is only a collective name for
individuals who constitute the firm or only a compendious mode of describing the
persons who have agreed to carry on business in partnership. It is in this view
of the matter that a firm is not entitled as such to enter into partnership with
another firm or individual and the firm in not a person in the strict sense of
the term. This legal position of a partnership is succinctly stated by Das C.J.
in a recent decision of the Supreme Court: Dulichand Laxminarayan rom v.
Commissioner of Income-tax, Nagpur,1 and we do not consider
it necessary to alter it.
1. AIR 19565 SC 354; (1952) 29 ITR 535. [See also Bhagwanji
v. Alembic Chemical Works, AIR 1948 PC 100: ILR 1948 Bom 293; Commissioner of
I.T. v. Figgis, AIR 1953 SC 455: (1953) 24 ITR 405].
9 . Upon a consideration of the judicial decisions and of the
defects disclosed in the administration of the existing law relating to
partnership in India, we have reached the conclusion that there are no cogent
and compelling reasons to justify the alteration of the basic principle of our
law of partnership and to disturb long-settled notions as regards the true
nature and character of a partnership and the relations of the partners inter
se and with the outside world. No serious inconvenience or embarrassment has
been experienced by the business community by the non-recognition of a firm as a
legal person, and the practical difficulties experienced in the administration
of the law have, to a large extent, been eliminated.
10. Suggestion for requiring partnership agreements to be in
writing—partially accepted.—It has been suggested that a provision should be
made in the Act requiring a partnership agreement to be in writing, as it would
have the obvious advantage of enabling the Courts to ascertain the terms of the
agreement and the rights of the partners with greater certainty than at present.
Since there are a large variety of partnerships in India, many of which are of a
very short duration or relate to a single venture or involve only a small
capital, and the existing law allows the terms of a partnership to be proved by
oral evidence or even by conduct of parties, we cannot introduce a comprehensive
provision requiring all partnerships to be in writing, without causing hardships
to the trading community as well as serious administrative difficulties. But as
the suggestion has come from a substantial section of the business community
itself and as, in practice, partnership agreements are reduced to writing
whenever the partnerships are substantial, we consider that the suggestion
should be accepted partially.
11 . We are of the opinion that partnerships in particular
adventures or undertakings which are completed within a period of six months
from their commencement should not be required to be in writing. We recommend
that a contract determining the rights and duties of partners should be in
writing in the case of every partnership at will and every partnership whose
duration is to be for six months or more, except in cases where the capital of
the partnership is less than rupees five hundred. We further recommend that in
cases where the contract of partnership is required to be in writing, the
partnership shall not be recognised for the enforcement of rights and
obligations of the firm and its partners unless the requirement of a contract in
writing is fulfilled.
12. Suggestion as to compulsory registration of firms—partially
accepted.—It has been suggested that a provision should be made in the
Partnership Act for the compulsory registration of every firm. The question of
compulsory registration of a firm has engaged the attention of the Government
and the Legislature for a long time as, on account of want of registration,
difficulties have been experienced in the decision of questions relating to the
existence, and terms of partnerships and cognate matters. The question was
carefully considered by the Special Committee1 which drafted the
Indian Partnership Act but the Committee did not recommend compulsory
registration for the following reasons—
1. Gazette of India, Pt. V, p. 35.
"It has been pointed out repeatedly with much force that to
require small or ephemeral joint ventures to be registered would produce little
public benefit and would act as a clog to petty enterprise; and such ventures
are so numerous that any small benefit to be derived from registration would be
.......counter balanced by the clerical labour involved ......The English
precedent in so far as it makes registration compulsory and imposes a penalty
for non-registration has not been followed, as it is considered that this step
would be too drastic for a beginning in India, and would introduce all the
difficulties connected with small and ephemeral undertakings."
Hence, the
Indian Act made registration optional but provided inducement to register. The
provisions contained in the Act as regards registration and the consequences of
non-registration have been commented upon unfavourably. It has been urged that
it would be more satisfactory to make registration of all partnerships
compulsory and that if this is done, separate registration of firms under the
Income-tax Act may be dispensed with.
13 . Having regard to the advantages which would generally follow
from the registration of firms and to the fact that the business community has
already become familiar with registration, under the existing Act, we have come
to the conclusion that it is time that a bold step is taken and compulsory
registration of firms is introduced. At the same time we cannot overlook the
hardships and the administrative difficulties which are likely to arise if the
provision for compulsory registration is extended to small and ephemeral
undertakings, a large number of which take place in villages and small towns.
Having weighed these considerations we have reached the conclusion that the
proposed provision for compulsory registration should be confined to those
classes of partnerships which, we have already recommended, may be created only
by agreements in writing.
14 . It has been brought to our notice that under the existing
law, after the firms are registered, the Registrar of Firms is not kept informed
whether the registered firms continue to exist or are dissolved or have become
defunct. Generally speaking, parties do not send to the Registrar the
information referred to in sections 60(1), 61, 62, 63(1) and (2) of the
Partnership Act unless they are compelled by litigation or other urgent
necessity to do so, as the furnishing of such information is optional. In order
to enable the Registrar to keep his register up-to-date as far as possible we
recommend that a new provision be inserted making it obligatory on the part of
every registered firm whose duration is more than three years to send to the
Registrar within six months after the expiry of every three years from the date
of its registration an intimation that it is functioning and has not become
defunct or dissolved and providing, further, that if no intimation is received
by the Registrar within the prescribed time he may, after issuing a notice, make
a note in the register that the firm has ceased to exist.
15 . It has further been suggested that legislation on the lines
of the Registration of Business Names Act, 1916 in England should be enacted in
India, either separately or as a part of the Partnership Act. We are not
inclined to accept this suggestion for the same reasons which moved the Civil
Justice Committee to reject it in their Report. The Committee said:
"We consider that it would be impracticable in India to insist
upon. the registration of business names on the analogy of the English Act of
1916. In India the names of firms are very frequently changed. No reasonable
person puts much faith in the assumption that names appearing in the styles of a
firm are the names of the individual partners. The names of relatives, sometimes
relatives long deceased, sometimes minors, are used because they are thought to
be auspicious. There are other obvious difficulties connected with Indian
names.1
1. Report of the Civil Justice Committee, p.
465.
16. Suggestion for introducing limited partnership—not
accepted.—It has been suggested that partnerships with limited liability should
be recognised in India either by a special enactment or as a part of the
Partnership Act. A concrete suggestion made by the Iron, Steel and Hardware
Merchants' Chamber of India in this respect may be noted:
"Considering the recent amendment in the Indian Companies Act,
we feel that a provision should be made in the Indian Partnership Act, 1932 by
which limited liability partnerships can be entered into on the lines of the
Limited Partnership Act.1 The Indian Companies Act has become so
cumbersome that for a small business it is impossible to comply with all the
provisions unless a full-time Secretary is engaged. Before the amendment was
introduced in the Indian Companies Act, two or three partners used to find it
convenient to register a Private Limited Company and carry on the work. Now
there are so many restrictions on taking loans by the directors or shareholders
even in private limited companies that people will prefer to enter into a
partnership instead of forming a limited liability company. That risk can only
be minimised by introducing limited liability partnership."
1.
Edw. 7 VII, c. 24.
We have carefully considered this suggestion and have come to the
conclusion that having regard to the conditions prevailing in India, the
inherent shortcomings of limited liability partnerships, and the fact that even
in England, notwithstanding legislation permitting such partnerships, not many
such partnerships have been actually formed, it is neither necessary nor
expedient to make provision for limited liability partnerships in India. The
suggestion, if accepted, is also likely to result in rendering ineffective the
provisions of the Indian Companies Act which have been recently made stricter.
Part II
Sections
17. Examination of the provisions of the Act,
indicating the changes proposed.—We have so far dealt with questions
relating to the alteration of the basic principles embodied in the Indian
Partnership Act, in the light of the suggestions received from individuals and
commercial betties. We now proceed to an examination of the sections of the Act
seriatim in order to indicate the changes which will become necessary in
the light of our foregoing conclusions. We shall also indicate other changes
which in our opinion, are needed by reason of judicial decisions and otherwise.
These changes are embodied in the draft sections shown in the Appendix.
18. Section 1.—In conformity with our recommendation regarding
other Acts, the word 'Indian' should be deleted from the title of the Act
[sub-section (1) of section 1].
19. Sections 2-3.— No alteration is needed in sections 2 and 3.
20. Section 4.— It has been suggested that the words 'in writing'
should be inserted after the word 'agreed' in section 4, in order to provide
that a partnership agreement must be in writing. We have already examined this
suggestion in Part I and we think that our recommendations made in para. 10 and
11 can be more appropriately carried out by enacting a new section instead of
amending section 4.
21. Section 5.—In section 5, the words "or a Burmese Buddhist
husband and wife carrying on business as such" should be deleted, as Burma has
ceased to be a part of India.
22 . It has been suggested by the Bombay State Bar Association
that the Act should be altered so as to make it applicable to a joint Hindu
family business. This question was considered by the Special
Committee1 which drafted the Indian Partnership Bill and the
Committee rejected the suggestion on the ground that the question related to a
purely domestic matter of Hindu Law and that it was unwise to complicate the
provisions of the Partnership Act by introducing therein rules of law which
appropriately constituted a branch of the personal law of the Hindus only. We
entirely agree with the conclusion reached by the Committee and the reasons
given by it. The capacity of a Karta of a joint Hindu family to enter
into a partnership with an individual or with the Karta of another joint
Hindu family has been settled by judicial decisions and does not require any
special provisions.
1. Gazette of India, 1931, Pt. V, pp. 34-39.
23. Section 6.—In view of our recommendation that certain kinds of
partnerships can be created only by an agreement in writing it is necessary to
exclude the application of section 6 in those cases and the section will have to
be amended accordingly.
24. Section 7-8.—No alteration is required in sections 7 and 8.
25 . We have added a new section 8A to give effect to our
recommendation in paragraph 11.
26. Section 9-11.—No alteration is necessary in sections 9 to 11.
27. Section 12.—The existing Act says nothing about the custody of
the books of the firm. The Indian Partnership Bill, as drafted by the Special
Committee,1 followed the English Act in providing that the books of a
firm shall be kept at its place of business or the principal place of business,
if there are more than one. But the Select Committee2 rejected the
clause relating to the custody of books and inserted clause (d) as it now
stands, on the ground that the principal place of business might well be in an
Indian State where the Act could not be directly enforced and that the principal
place of business could be defined only by the partners themselves. Having
regard to the fact that the Indian States have become a part of India and the
fact that the Act applies to the whole of India, the first ground relied upon by
the Select Committee no longer holds good. The second ground given by the
Committee does not appear to be convincing. We therefore consider it desirable
to redraft clause (d), incorporating the provision relating to the custody of
books as suggested by the Special Committee.
1. Gazette of India, 1931, Pt. v, p. 40.
2. Gazette of India, 1931, Pt. v, p. 1.
28. Section 13.—The official rate which is now allowed by the
Courts is 4 per cent. We think, therefore, that the rate of interest is clause
(d) of section 13 should also be fixed at 4 per cent. per annum and the clause
be amended accordingly.
29. Sections 14-17.—No alteration is considered necessary in
sections 14 to 17.
30. Section 18.—No alteration is necessary in section 18.
31. Section 19.—The Bombay State Bar Association has suggested
that "subject to section 22, a partner should have implied authority as regards
items (a), (c), (d) and (e) in sub-section (2) of section 19." In other words,
the scope of the implied authority of a partner on behalf of the firm should,
subject to section 22, be enlarged by including therein authority to?
1. Refer disputes to arbitration;
2. Compromise or relinquish any claim of the firm;
3. Withdraw a suit or proceeding filed on behalf of the
firm;
4. Admit any liability in a suit or proceeding against the
firm.
We are unable to accept this suggestion as the clauses limiting the
implied authority of a partner in section 19(2) are based upon long experience
and have given rise to no difficulties. It is not necessary to enlarge the scope
of the implied authority of a partner beyond what is stated in the section, as
it is open to the partners by an agreement either to enlarge or to restrict the
implied authority under section 20 of the Act.
32. Sections 20-29.—No alteration is necessary in sections 20 to
29.
33. Section 30.—There has been some controversy as to the
construction of an instrument which purports to admit a minor to a partnership
without making it clear that he is admitted only to the benefits of the
partnership. We think that when the major partners seek to admit into the
partnership a person known to them to be a minor, it may be assumed that they
intended to admit the minor only to the benefits of the partnership and that,
had they known the law, they would have made that clear in the instrument of
partnership. In order to remove doubts, this rule of construction, may be
introduced into sub-section (1) of section 30.
34. Sections 31-32.—No alteration is necessary in sections 31 and
32.
35. Section 33.—Expulsion being penal in its nature, it should not
be allowed to be imposed in violation of the principles of natural justice. We
recommend that at the end of sub-section (1) of section 33, appropriate words
should be added providing for an opportunity to be given to the partner to give
an explanation.
36. Sections 34-36.—No change is necessary in sections 34 to 36.
37. Section 37.—In section 37, the rate of interest should be
reduced from six to four per cent. per annum, in conformity with our
recommendation in paragraph 28.
38. Section 38.—No change is required in section 38.
39. Sections 39-43.—No alteration is necessary in sections 39 to
43.
40. Section 44.—There is a difference of opinion between the
Allahabad1 and Madras2 High Courts as to whether the right
of dissolution given by section 44 could be curtailed by agreement between the
partners. The Allahabad High Court is of the opinion that the provision in
section 44 is subject to the overall provision in section 11(1) to the effect
that the mutual rights and duties of the partners may be determined by contract
between them. But the Madras3 High Court has pointed out that the
provision in section 11(1) is itself "subject to the provisions of this Act".
1. Dropadi v. Bankeylal, ILR 1939 All 577.
2. Venkataswami v. Venkataswami, AIR 1954 Mad 9.
3. Venkataswami v. Venkataswami, AIR 1954 Mad 9.
We are of the opinion that the Madras view is to be preferred. The
opening words "subject to the provisions of this Act" in section 11(1) mean not
only that a contract, in order to be binding between the partners, must not be
in contravention of any of the provisions of the Act but also that if there is
any provision in the Act relating to a particular matter, such a provision will
override any agreement between the partners relating to the same matter. This
view, as has been pointed out in the Madras decision, is supported by various
provisions of the Act itself which expressly use the words "subject to contract
between the partners", wherever the Legislature intended the statutory provision
to be controlled by the agreement of the parties. Sections 12, to 17 and section
42 are instances of this character. A comparison of the provisions of sections
42 and 44, prima facie, demonstrates that the omission of the words
"subject to contract between the partners", in section 44 was deliberate and the
reason is not far to seek. While under section 42, the dissolution takes place
by operation of law unless there is a contract to the contrary, section 44
entitles a partner to invoke the discretionary jurisdiction of the court which,
as explained by the Judicial Committee in Rehmatunnissa v.
Price,1 is in the nature of an equitable protection from
which "no man can exclude himself". In our opinion, the discretionary
jurisdiction of the court under section 44 is not, and should not, be liable to
be fettered by any agreement between the partners and this should be made clear
by inserting the following words at the beginning of section 44—
1. Rehmatunnissa v. Price, ILR (1917) 42 Bom 380
(388).
"Notwithstanding any contract to the contrary".
41.
Sections 45-55.—No alteration is considered necessary in sections 45 to 55.
42. Section 56.—We are of the opinion that this section should be
deleted. While section 1(2) of the Act provides that the Act extends to the
whole of India except the State of Jammu and Kashmir, section 56 empowers a
State Government to direct, by notification, that the provisions of Chapter VII
shall not apply to the State or to any part thereof. Action under the section by
a State Government may result in the provisions regarding registration of firms
in the Act not applying to that State or a part thereof. All the States are,
under the recent amendment of the Constitution, placed on a footing of equality
and it is desirable to have a uniform law as regards the registration of firms
in all the States which enjoy the same status. Whatever may have been the
position in 1932, the conditions then existing are now so changed as to justify
a uniform provision for all the States as regards registration of firms.
43. Section 57.—No alteration is considered necessary in section
57.
44. Section 57A.—Our recommendations as to compulsory registration
(in paragraph 13) should be embodied in a separate section and a time-limit
should also be prescribed for obtaining such registration, as shown in section
57A in the Appendix.
45. Section 58.—As we have prescribed a definite time-limit for
registration in section 57A, it is necessary to make a reference thereto, in
sub-section (1) of section 58. We also recommend that it should be provided in
sub-section (2), that the authorisation of an agent shall be by a special power
of attorney.
In sub-section (3) of section 58, verbal alterations have to be made in
view of the constitutional changes that have taken place since the enactment of
the Act.
46. Section 59.—Considering that we have recommended compulsory
registration of firms, it is necessary that those who intended to deal with a
firm should have knowledge whether the firm is registered under the Act. We,
therefore, recommend the insertion of a provision in section 59 to the effect
that a firm which is registered under the Act shall use the word "registered"
after the name of the firm.
Section 59A.—We have added a new section 59A to make provision for
penalties for failure to use or for the improper use of the word "registered"
after the name of a firm.
47. Sections 60-63.—No alteration is necessary in sections 60 to
63.
48. Section 63A.—Our recommendations in paragraph 13 relating to
intimation to the Registrar as regards the continuing existence of a firm should
be incorporated in a new section.
49. Sections 64-68.—No alteration is necessary in sections 64 to
68.
50. Section 69.—Commentators1 have referred to the
conflict of decisions on the question whether registration of a partnership is a
condition precedent to the filing of a suit and whether in case an unregistered
firm files a suit the defect could be remedied by the registration of the firm
after the institution of the suit. The earlier decisions which held that a suit
by an unregistered firm could be maintained if there was a subsequent
registration after the filing of the suit but before its disposal, have been
overruled by subsequent decisions.2 All the High Courts are now
agreed that registration of a firm under section 59 is a condition precedent to
the maintainability of the suit and that registration of a firm after the
institution of the suit cannot cure the defect arising from want of
registration. It has, however, been suggested that provision should be made in
the Act to the effect that if a suit is filed by a firm which is not registered,
the suit should be treated as competent and maintainable, if the firm obtains
registration before the decree is passed. In our opinion, it is not necessary to
make such a provision, as it would defeat the very object which is sought to be
achieved by the provisions contained in sections 59 to 69 of the Act.
1. See for Instance, pp. 425-426 of The Indian Partnership
Act by Pollock and Mulla (1950 Edn.) and pp. 235-236 of The Law of Partnership
in India and Pakistan by S.T. Desai (1956 Ed
2. Ponnuchami Goundar v. Mutusami Goundar, ILR 1942 Mad 335;
Dwijendranath v. Govinchandra, AIR 1953 Cal 597; Abdul Karim v. Ramdas
Narayandas, ILR 19512 Nag 81.
51 . The existing Act is anomalous in that though it does not
provide for compulsory registration of firms, it visits with serious
consequences firms which do not register themselves. This has been commented
upon.1 As we have provided for compulsory registration except in
regard to firms of short duration or with a small capital it is appropriate that
the operation of section 69 should be restricted to partnerships which,
according to our recommendations, require to be compulsorily registered under
the Act. It is, accordingly recommended that the words "In the case of firms
required to be registered under this Act" be inserted at the commencement of
section 69.
1. Pollock & Mulla Partnership Act, 1950 Edn. p.
424.
52 . As section 69 is to be made applicable only to such
partnerships as are required to be compulsorily registered, there is no need for
a provision like that contained in sub-section (3)(a) of section 69. Having
regard to our recommendations in regard to the requirements of a writing and
registration, a firm which, though required to be registered by the Act, is not
registered will not be a 'firm' in the eye of law and no question of its
dissolution under the Act could arise. We therefore recommend that clause (a) of
sub-section (3) of section 69 be omitted.
53 . In view of the proposed deletion of section 56, the second
part of clause (a) of sub-section (4) of section 69, beginning with the words
"or whose places.........will have to be deleted.
54 . We are of the opinion that as a partnership which has not
complied with the requirement of registration shall not be a partnership under
the Act, it is necessary to ensure that persons who have induced third parties
to deal with them on the representation that they are partners should not be
entitled to take advantage of their own default. It should therefore be provided
that such persons should be stopped as against such third persons from pleading
that there is no partnership at law, by reason of their non-compliance with the
statute. A subsection to this effect has been added to section 69.
55. Section 70.—No alteration is necessary in section 70.
56. Section 71.—In sub-section (2)(b) of section 71, a reference
to the new section 63A has been inserted.
Some officials concerned with the administration of the Act have
suggested a modification of the Schedule referred to in this section so as to
increase the fees mentioned in it. We are not, however, satisfied that an
increase is necessary.
57. Sections 72-73.—No change is suggested in sections 72 and 73.
58. Section 74.—There is a conflict of decisions between the
Calcutta, Lahore and Patna1 High Courts, on the one hand, and the
Madras, Bombay, Nagpur and Allahabad High Courts2, on the other, on
the question whether section 69 bars suits even in cases where the cause of
action arose before the commencement of the Act.3
1. Surendra, Nath v. Manohar De, 1935 ILR 62 Cal 213; Firm
Krishen Lal v. Abdul Ghafur, AIR 1935 Lah 893; Shahzadkhan v. Darbar Babu Kuppi,
ILR (1936) 15 Pat 810.
2. Syed Ibrahim Sahib v. Gurulinga Iyer, ILR 1939 Mad 980; Ramappa v.
Babu Sidappa, ILR 1939 Bom 104; Ramgopal v. Net Ram, AIR 1941 All 178; Syed
Fakir Hussain v. Chandra Bai, AIR 1940 Nag 367.
3. Section 69 of the Act came into force on the 1st October 1933.
One view1 is that section 69 does not prevail over section
74(b) and that a suit filed by a firm to enforce rights which had accrued before
the commencement of the Act would be maintained in spite of non-registration of
the firm as the rights had already accrued and they are not taken away expressly
by the Act. The other views is that the provisions of section 74 of the Act are
intended to apply to substantive rights and not to matters of procedure, and
that section 69 being a procedural provision must be considered as retrospective
in its operation. Consequently, the procedure laid down in section 69 must be
complied with in th case of every suit filed after the commencement of the Act,
whether it is based on a cause of action which arose before or after the
commencement of the Act.
1. Surrendra Nath v. Manohar De, 1935 ILR 62 Cal 213; Firm
Krishen Lal v. Abdul Ghafur, AIR 1935 Lah 893; Shazadkhan v. Darbar Babu Kuppi,
ILR (1936) 15 Pat 810.
As a long time has elapsed since the Partnership Act 1932 came into
force, this question would have had no practical importance now, but for the
fact that the Partnership Act, 1932, has been extended to what were part B
States only in 1951, by the Part B States (Laws) Act, 1951 (111 of 1951). The
question as to the retrospective operation of section 69 is, accordingly, bound
to arise in these territories and some provision has to be made to remove
uncertainty in the law. In our opinion, the proper view is to give retrospective
operation to section 69, and to achieve that object we recommend the insertion
of a new sub-section in section 74.
59 . In order to give a concrete shape to our proposals, we have,
in the Appendix, put them into the shape of draft amendments to the relevant
sections of the Act. The Appendix is not, however, to be treated as a draft
Amendment Bill.
M.C. Setalvad Chairman
M.C. Chagla, Member
K.N. Wanchoo, Member
P. Satyanarayana Rao, Member
N.C. Sen Gupta*, Member
V.K.T. Chari, Member
D. Narasa Raju, Member
S.M. Sikri, Member
G.S. Pathak, Member
G.N. Joshi, Member
N.A. Palkhivala. Member
*. Dr. Sen Gupta has signed the Report, subject to the note
appended at the end.
K. Srinivasan,
Durga Das Basu, Joint Secretaries
Bombay.
Dated: 13th July, 1957.
Appendix
Proposals Shown In The Form Of Draft Amendments To The Existing
Act
Changes made in the text of the existing sections have been shown in
italics wherever possible.
Section 1
In sub-section (1) of section 1, the word "Indian"' shall be omitted.
Section 5
In section 5, the words "or a Burmese Buddhist husband and wife carrying
on business as such" shall be omitted.
Section 6
In section 6, the words "Except in cases in which a contract of
partnership is required to be in writing" shall be added before the words "In
determining whether a group of persons is or is not a firm If
Section 8A
After section 8, the following section shall be inserted:
Chapter IIA
Formation Of A Partnership
Section 8A
(1) Every contract of partnership shall except in cases where
the partnership is to be for a term of less than six months be in
writing:
Provided that nothing in the foregoing sub-section shall apply to
the following cases, namely: —
(a) where, irrespective of the duration of the partnership,
the capital of the partnership is less than five hundred rupees;
(b) where, irrespective of the capital of the partnership, the
partnership is in particular adventures or undertakings which are completed
within a period of six months from the commencement of the partnership.
(2) When a contract of partnership is required to be in
writing, any variation of such contract shall also be in writing."
Section
12
In section 12, for clause (d), the following clause shall be substituted,
namely:
"The books of the firm shall be kept at the place of
business of the firm (or) the principal place of business (if there is more than
one such place) and every partner has a right to have access to and to
inspect and copy any of the books of the firms."
Section 13
In clause (d) of section 13, for the words "six per cent. per annum", the
words "four per cent. per annum" shall be substituted.
Section 30
In sub-section (1) of section 30, the following shall be inserted at the
end, namely:—
"Explanation.—When by the terms of an instrument of
partnership a person is a partner in a firm and such person is known to the
other parties to the instrument to be a minor, such person shall be deemed to
have only been admitted to the benefits of the partnership."
Section
33
In sub-section (1) of section 33, the following shall be inserted at the
end, namely:—
"and after giving the partner a reasonable opportunity of
showing cause why he should not be expelled".
Section 37
In section 37, for the words "six per cent. per annum," the words
"four per cent. per annum" shall be substituted.
Section 44
In section 44, for the words "At the suit of a partner, the court may"
the words "Notwithstanding any contract to the contrary, the court may,
at the suit of a partner" shall be substituted.
Section 56
Section 56 shall be omitted.
Section 57A (New)
After section 57, the following section shall be inserted, namely:—
"57A. Registration of firms.—(1) Every firm in respect of
which the contract between the partners determining their mutual rights and
duties is required by this Act to be in writing shall be registered in
accordance with this Act.
(2) Except as otherwise provided by
sub-section (3), every firm required to be registered under sub-section (1)
shall be registered within one year from the commencement of the
partnership.
(3) Every firm required to be registered as aforesaid and carrying on
business at the commencement of the Indian Partnership (Amendment)
Act,......shall, if it has not been already registered, be registered within six
months from the commencement of the said Act.
(4) The Registrar may register a firm after the expiry of the period
specified in sub section (2) or sub-section (3), as the case may be, if he is
satisfied that there was sufficient cause for not presenting the application for
registration within that period."
Section 58
For section 58, the following section shall be substituted, namely:—
"58. Application for registration.—(1) The registration
of a firm may subject to section 57A be effected at any time within the
period prescribed by sub-sections (2) and (3) of section 57A by sending by
post or delivering to the Registrar of the area in which any place of business
of the firm is situated or proposed to be situated, a copy of the instrument of
partnership and a statement in the prescribed form and accompanied by the
prescribed fee, stating—
(a) the firm's name,
(b) the place or principal place of business of the firm,
(c) the names of any other places where the firm carries on
the business,
(d) the date when each partner joined the firm,
(e) the names in full and permanent addresses of the
partners,
(f) the duration of the firm.
(2) Each partner or his agent duly authorised by a special
power of attorney in this behalf shall sign and verify the statement in the
manner prescribed.
(3) A firm's name shall not contain any of the following
words, namely:—
"Bharat", "India", "Indian Republic", "President of
India", or words expressing or implying the sanction, approval or patronage
of Government, except when the Union Government or the State Government
signifies its consent to the use of such words as part of the firm's name by
order in writing".
Section 59
Section 59 shall be renumbered as sub-section (1) thereof, and after
sub-section (1) as so renumbered, the following sub-section shall be inserted,
namely:—
"(2) A firm which is registered under sub-section (1) shall
use the word "registered" immediately after its name."
Section 63A
(New)
(3) If any firm fails to comply with the provisions of
sub-section (2) every one of its partners shall be punishable with a fine which
may extend to rupees ten for every day of such non-compliance unless he proves
that he had no knowledge of such non-compliance or that he exercised due
diligence to prevent such noncompliance.
(4) Every person who trades or carries on business under any
name with the word "Registered" or any abbreviation thereof added to it shall,
unless the trade or business is that of a firm of that name which has been
registered under subsection (1) be punishable with a fine which may extend to
rupees fifty for every day of such use.
After section 63, the following
section shall be inserted, namely:—
"63A. Intimation to the Registrar of the continuing
existence of the firm.—(1) Every registered firm which has been in existence for
a period of three years shall send to the Registrar, within six months from the
expiry of every period of three years after the registration of the firm, an
intimation (in the prescribed form), stating that the firm is continuing and
also containing, as on the date of the intimation, the particulars referred to
in clauses (a) to (f) of sub-section (1) of section 58.
(2) On receipt
of such intimation the Registrar shall make a record of such intimation in the
entry relating to the firm in the Register of Firms and shall file the
intimation along with the statement relating to the firm filed under section
59.
(3) The Registrar may accept the intimation referred to in sub-section
(1) after the expiry of the period specified therein, if he is satisfied that
there wax sufficient cause for not sending the intimation within that
period.
(4) If a registered firm makes default in sending intimation under
sub-section (I), the Registrar shall send a notice to the firm of his intention
to treat the firm as defunct, and if no intimation in accordance with that
sub-section is received by the Registrar within a month after the notice is
served on the firm, the firm shall be treated as defunct and the Registrar may
make a note in the Register of Firms that the firm has ceased to exist.
(5) On the making of such a note the firm shall from the date thereof
be deemed to be a firm not registered under this act."
Section 69
(a) At the beginning of section 69, the following words be
inserted—
"In the case of firms required to be registered under this
Act";
(b) in sub-section (3), clause (a) shall be omitted;
(c) in clause (a) of sub-section (4), the words and figures
"or whose place of business in the said territories are situated in areas to
which, by notification under section 56, this Chapter does not apply" shall be
omitted.
(d) After sub-section (4), a new sub-section (5) shall be
inserted as follows:—
"Nothing in section 11 or this section shall entitle
persons who have induced third parties to have dealings with them on the
representation that they are partners, to plead as against such third parties
that there was no partnership in law between them."
Section 71
In clause (b) of sub-section (2) of section 71, for the words "62 and 63"
the words "62, 63 and section 63A" shall be substituted.
Section 74
Section 74 shall be renumbered as sub-section (1) thereof, and after
sub-section (1) so renumbered, the following sub-section shall be inserted,
namely:—
"(2) Notwithstanding anything contained in sub-section (1)
(d), the provisions of subsections (1) and (2) of section 69 shall apply to all
suits instituted in the territories which immediately before the 1st day of
November, 1956, formed part of any Part B State (other than the State of Jammu
and Kashmir), even if the cause of action with respect to the said suits had
arisen before the date on which this Act had been extended to Part B States by
the Part B States (Laws) Act, 1951 (Act 111 of 1951)."
Note By Dr. N.C. Sen Gupta
I regret to have to disagree with
the opinion of the majority on a few points.
The proposed section 11 and section 57A are large innovations. I feel
that the necessity, utility, and above all, their practicability have not been
duly considered.
The majority report recognises the hardship to the people as well as the
serious administrative difficulties involved in a written contract being
compulsory for a partnership. What overriding public advantage is to be derived
from it is not however so clear.
It cannot be denied that it would be advantageous to the partners
themselves to have the terms reduced to writing and it is true that it would
give relief to Courts in determining the exact terms of the contract when the
matter comes to Court. But it must be remembered that unlike Memoranda and
Articles of Association of Companies, a Partnership Agreement is a purely
private agreement between the partners and its terms do not bind any stranger
dealing with them. No public interest is likely to be served by enforcing such a
writing instead of leaving it to partners to decide the question on
consideration of their convenience and advantage.
The principal consideration which, according to the report, weighed with
my colleagues seems to have been that the suggestion has come from a substantial
section of the business community.
I have not seen the suggestions from the business community and am not
aware what reasons have been put forward by them for it. It is the reasons we
have to consider and not their bare opinions. And, I greatly doubt that those
who have made it voice the opinion or reflect the feelings of the huge mass of
traders of the entire country.
The only persons who would be interested in the writing or benefit by it
are the partners. But they may have their own difficulties, considering probably
the innumerable partnership businesses which are carried on in remote villages
of this vast country and we cannot hope to assess the difficulties or solve them
by an ex-cathedra opinion.
That it would cause hardship to myriads of existing partnership is
recognised. It is not so clearly visible why they should have a writing,
nevertheless. The hardship would be particularly on old existing firms who have
been carrying on for years without a deed.
A very pertinent question to ask would be what would happen if there is
no writing. The result would be to make it impossible under section 91 of the
Evidence Act to prove a partnership. Now, suppose two persons are carrying on a
business as partners, and their books clearly show how they have been sharing
profits for years. This provision would enable the partner who is bossing the
show to deny the partnership and make it impossible for the other partners to
prove the partnership in the absence of a deed. This provision would therefore
be of real benefit to fraudulent partners to defeat the rights of a partner. As
was found, in the case of the Statute of Frauds, the statute could be used to
perpetrate a fraud without the benefit of the equitable principle which enabled
English Courts to get round the Statute in such cases.
I shall presently deal with the "hardships and administrative
difficulties" referred to in the report, only to be brushed aside.
Section 57A
The proposals not only make a writing compulsory, they also make
registration compulsory under Clause 57A.
Here again the first question to ask is what would happen if the firm is
not registered. The proper logical conclusion would be to say, as it has been
said in respect of companies by section 11 of the Companies Act that trading by
such firms would be illegal and forbidden under penalties. My colleagues realise
the impossibility of such a provision and leave the consequences virtually as
they are under section 69 of the existing Act, though my colleagues are of the
opinion, contrary to decided cases, that subsequent registration after suit
should not get over the bar in section 69 because as they point out at page 12
an unregistered firm whose registration is compulsory, is not a firm in the eye
of law.
It is pertinent to note that the proposals nowhere provide that an
unregistered firm is not a firm at all in the eye of law. The difficulties of
such a view would appear on examination. If it is not a firm, what is it?
Section 4 of the Partnership Act which has not been sought to be altered
gives definitions of 'Partnership' and 'firm' which would certainly include a
business of this character, even though unregistered.
There is no law even in these proposals which forbids joint trading by
two or more persons. Such trading will lawfully go on. What are such businesses
if not a firm according to the definition of section 4?
It will be remembered that not only joint businesses of this nature but
also joint family businesses exist in any number. It is not proposed to touch
them. If joint family business as also other joint ventures can go on without
registration, what reason of public interest is there in requiring partnerships
to be registered?
The considerations of administrative difficulties in insisting on writing
and registration have been referred to in the report but we are asked,
nevertheless, to take this bold step having regard to the advantages which have
not however been elucidated.
As I have indicated, in connection with the requirements of writing,
there is no advantage to the public in making the registration compulsory. For
whatever is contained in the Partnership Deed is a matter between the partners
only which does not bind any one except the partners. Further, a partnership,
unlike a Company, makes the partners jointly and severally liable,—so that any
person dealing with the firm is amply protected if only he takes the ordinary
care of ascertaining beforehand who are the partners. In the Companies Act not
only registration, but numerous other things are necessary,—reports are to be
filed from time to time which give the public an exact idea as far as possible
of the assets and the solvency of the company. That is a matter of great
importance. Because the liability of the company is limited to the value of the
shares. The same reason does not exist in the case of partnership. As I have
pointed out before, the compulsory registration might, on the other hand, become
an instrument of fraud. Considering that the existing partnerships are also
required to be registered within a limited time, it would put a serious pressure
upon the existing partners and enable a fraudulent partner to deny his
obligation arising out of the contract of partnership by a plea simply that the
partnership has not been registered. I do not visualise any other benefit to the
public from this clause.
No doubt one might say that registration of every contractual legal
relation between the persons is desirable so that they should be placed on an
absolutely unchallengeable footing. But that is obviously a counsel of
perfection.
On the other hand, the administrative difficulties recognised by the
Report are that there are not merely ephemeral partnerships but fairly
substantial partnerships spread all over the length and breadth of the country
in remote villages which have been carrying on without registration. To require
all of them to be registered would place an impossible burden on the thousands
of business undertakings in the villages.
The administrative difficulties are enormous. At present the only thing
mentioned in the Partnership Act is that it may be registered. It is obvious
that mere registration does not carry us very far, unless returns are made
keeping the Registers up-to-date not only in respect of the matters which the
Report provides but also in respect of other matters. It must be remembered that
at present, at any rate in West Bengal, partnerships are registered by the
Registrar of Joint Stock Companies who has his office in Calcutta and there is
no sort of agency in the Mufassil. To make registration of village partnerships
compulsory, there must be at least one full-fledged registration office in each
district if not in smaller areas and there must also be provisions such as we
have in the Registration Act for the copies of the registers and partnership
deeds to be sent to other registration offices. A huge lot of paper work will
have to be done. The Registrar of Partnerships would become a different official
from the present Registrar. One can visualise the vast amount of expenditure and
the enormous staff which will be required for the purpose of an efficient
organisation for compulsory registration of Partnership initially and for the
registration of other reports and other things in the course of years. The
expenditure of public fund upon this must necessarily be enormous and the
organisation will take time. In the absence of any public benefit from incurring
this expenditure and complexity, I cannot agree that compulsory registration of
partnership should be introduced now. In my opinion, therefore, the amendments
sought in sections 11 and 57A of the Draft as well as the consequential
provisions in sections 58, 59, 63 (a) and 69, except the addition suggested
after sub-section (4) of section 69, should be omitted.
With regard to section 59, sub-section (2), also I consider this
amendment superfluous. In the case of companies the use of the word 'Limited'
and now the word 'Private' is necessary in order to give the persons dealing
with the companies the exact idea of the status of the company which is
material, because the liability of the company is limited to the capital and
does not extend to the members personally. There is not the same necessity for
the use of the word 'registered' beyond encumbering the business name of the
firm.
N.C. Sen Gupta
Courtesy:- Legal Point Foundation
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