Page 153 - DMGT407Corporate and Business Laws

Corporate and Business Laws

Notes (v) A person of unsound mind is not competent to enter into a partnership.
(vi) A company, incorporated under the Companies Act, 1956 can enter into a contract of
partnership.

(vii) Section 5 provides that the following persons are not treated as partners: (a) The members
of a HUF carrying on family business as such. (b) A Burmese Buddhist husband and wife
carrying on business.

6.1.3 ‘Partners’, ‘Firm’ and ‘Firm Name’ (s.4)

“Persons, who have entered into partnership with one another are called individually ‘partners’
and collectively a ‘firm’ and the name under which their business is carried on is called the ‘firm
name’”. In law, a ‘firm’ is only a convenient phrase for describing the two or more persons who
constitute the partnership and the firm has no legal existence apart from those persons. Thus, if
A, B and C are partners in a firm, the firm really means A, B and C taken together. Unlike a joint
stock company which is a legal entity under the Companies Act, 1956, a firm has no separate
existence apart from its partners. A firm is not a body corporate. The rights and obligations of
the firm are in fact the rights and obligations of the partners comprising the firm. The legal
position of a firm is that it cannot possess property and, therefore, it cannot be a debtor or a
creditor. The rights which a partner enjoys and the duties which he owes, are enjoyed against
and owed to the other partners and not to the firm; and if an action between the partners be
necessary to enforce such rights and duties, the individual partners and not the firm are the
parties to the action. A firm as such cannot be a member of a partnership. Further, as all the
partners put together are known as ‘a firm’, the assets of the firm are joint property of the
partners and the partners are personally liable for all the business obligations of the firm.
This is the legal position of partnership, but in business practice, there is a trend to approximate
it to an entity with a separate existence from the partners. Thus, we do talk of the assets, liabilities
and goodwill of the firm. Its financial statements are prepared. Under s.25 of the Companies Act,
1956, a partnership firm may be a member of a company. Also the firm is recognised as a
separate unit for tax purposes. Also under order 30 of the Civil Procedure Code, actions can be
instituted by or against the firm in its firm name, whether by the partners or third parties.
Partners may choose any name as their firm’s name provided it does not go against the rules
relating to trade name or goodwill. That is to say, the name adopted should not be such as will
mislead the public into confusing them with a firm of repute already in existence. Further, s. 58(3)
provides that a firm name shall not contain any of the following words, namely: Crown, Emperor,
Empress, Empire, Imperial, King, Queen, Royal, or words expressing or implying the sanction,
approval or patronage of Government except with the written consent of the State Government.

A firm may carry the names of the partners who own it, such as: “Ram & Shyam”, or “Ram &
Son”, or “Ram & Sons”, or “Ram Brothers”. Further, the use of “& Co.” after the name of one of
the partners (Ram & Co.) establishes prima facie the existence of a partnership. The name may be
a fictitious one also, such as “Ideal Confectionery”. Using a fictitious firm name instead of the
partners’ real names has an advantage. It enhances the future sale price of the business, including
goodwill by ensuring that the firm will not have to substitute names of the new owner when the
selling partners leave.

From the above discussion, one may infer that partnership is different from a firm. Partnership
is merely an abstract legal relation between the partners. But a firm is a concrete thing signifying
the collective entity for all the partners. Thus, partnership is an invisible tie which binds the
partners together whereas a firm is the visible manifestation of that relationship between the
partners who are bound together in a relationship of agency.

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