Wednesday, September 23, 2015

HOLDING OF PROPERTY - BY PARTNERSHIP FIRM

Holding of property - BY PARTNERSHIP FIRM

A “Partnership” is typically defined as a relationship between individuals i.e. two or more persons, who have agreed to share the profits/ losses of the business, which is carried on by all or any one of them acting for all. Such persons are called “partners” and the business concern is known as “partnership firm”.  The document containing the terms of the partnership agreement, powers of the partners and objectives of the partnership is known as a “partnership deed”.

The Indian Partnership Act, 1932 (hereinafter called the “Act”), governs the conduct of the partnership business and the minimum number of partners prescribed is two, whereas the maximum number is 10 in case of firms doing Banking business and 20 in other cases. A minor can be admitted only to the benefits of the partnership business. The partnership concern is to be registered with the Registrar of Firms and on registration a registration certificate is issued.

Section 14 of the Act defines what constitutes Partnership property. The property of the firm is nothing but the joint property of the partners held in their joint names as opposed to the properties owned by the individual partners in their personal names. Partnership property consists of property originally brought in by the individual partners as their capital contribution or may consist of property purchased by the partners jointly out of the funds belonging to the partnership concern.

Issues may arise to determine the ownership/ title of the immovable property, in cases where either the property belonging to a partner is put to firm’s use or in cases where the immovable property is jointly owned by the partners i.e. by the partnership firm and the same is converted and title to a jointly held property is conferred to an individual partner. In such cases the courts have drawn a judicious line to distinguish and differentiate between the two.

Section 22 of the Act states that in order to bind the firm and all its partners thereof, every act must be done in the name of the firm or expressly on behalf of the firm. It is desirable to make the firm duly represented by one or more of its partners as a party to any such transaction. It is also clarified that a mere description of the signatory that he/ she is a partner of a firm may not be sufficient to bind the firm. In cases where an immovable property is to be acquired or sold off by way of purchase/ sale or by way of lease or otherwise, it is essential to make all or some of the partners as parties and not just the firm in its name.

A Partnership is not a legal entity and the name of the partnership firm is only a collective expression representing all the partners constituting the firm. Thus a transfer of property can only be made by or in favour of a legal or juridical person as provided in Section 5 of the Transfer of Property Act.

A Partnership firm unlike a Company registered under the Indian Companies Act, does not have a separate legal identity, different from partner and a partnership firm cannot sell or purchase property in its name.  A partner has no implied authority to sell or buy any immovable property on behalf of the partnership.  The legal entity is the partner himself.  All partners in their individual capacity should also join as parties to the agreement to sell or to the conveyance deed and execute it in their individual capacity. When an immovable property is transferred to a firm it vests in all the partners of the firm and not in the firm, since the firm has no separate legal existence.

At certain times, a single partner represents the partnership firm, which is not a correct practice.  In such cases, the said partner should have power of attorney or authority of other partners to execute the documents. Even if a partnership is formed between an individual and a partnership firm the deed of the partnership should be signed by all the partners of the firm. Transfer of property by or in favour of a firm without the names of partners is ineffective.

However, the distribution of the assets of the firm on dissolution, where a partnership property is divided or distributed among partners or taken over by one or more partners from others, does not amount to transfer of property and needs no registration.  Such a deed attracts stamp duty under a separate category Dissolution deed and not as a conveyance deed.

If the property purchased was in the name of a partner of the firm and on his death, his share, right, interest in the property would vest in his heirs or legal representatives. In case of transfer of such property, the heirs/legal representatives of the deceased partner should also join the execution of the document.  

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