Reconstitution and Dissolution of a partnership Essay

ABSTRACT: The paper aims to study using secondary research resources. That what are concepts of Partnership reconstitution and dissolution according to the partnership act 1932. Under what circumstances a partnership firm is entitled to these two concepts respectively, what are the rights, duties and liabilities of each of the partners involved under each case. And according to what modes can the accounts be settled among the partners upon the winding up of the business. INTRODUCTION â€Å"Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any one of them acting for all (THE PARTNERSHIP ACT 1932) Partnership’ does not mean a body or association; it means a relationship between separate component persons. This is the kind of relationship that has to be followed for the betterment of business that they are jointly carrying out to full fill common interest of gaining profits from the business. There are three elements necessary for existence of a partnership: 1. the carrying on of a business.2. The business must be carried on in common. 3. The business must be carried on with a view to gain profits. (NICHOLSON, 2011). ESSENTIALS OF PARTNERSHIP All individuals share the risks and rewards of the business. Each partner is entitled to share the net profits of the business. Partners are jointly and severally responsible for all the debts and obligations of the business without any limit, including loss and damages Partners have equal rights to make decisions. All individuals share the ownership of the assets of the business. (TAYLOR, 2011) These all have to follow for a legal partnership to be present. In any one of them is missing than there will no partnership. HISTORY OF PARTNERSHIP Partnership law is as old as commerce itself. Thought started since 15th century when merchants from the Italian cities were brought to northern Europe the foundations of law. In 16th century ‘Italian Law Merchant was made for a business to be carried out. Firstly there were two principal forms of partnership. The first was the Commenda, whereby an investor, the Commendator, evaded the usury laws by putting money into a business in return for a share in the profit gained by the business carried out, but was liable for no more than his investment that he initially invested. It is also known as limited partnership. The other was the Societas, or ordinary partnership, in which all members were equally bound and responsible for the debts and could bind the firm. So now the principles were known. Later on statutes of 1865, 1890 and 1907 came for a clear view of partnership relationship. The Law of Partnership Act 1865, ‘Bovill’s Act’ was passed to undo the assumption that the existence of some payments from the profits of a business would comprise the recipient a partner or liable as such for the debts of the business. Later it was known as Limited Partnership Act. The Partnership Act 1890 codified the previous law. It provided no remedy and mechanism for limited partnership and depicts no difference between professional or ‘civil’ partnerships and business or ‘commercial’ partnerships. The Limited Partnerships Act 1907 introduced into English law the possibility that a person might be a partner in a firm but liable only to the extent of the capital he had invested initially.  (BLOOMSBURYPROFESSIONAL.COM) Today the most widely followed partnership act is â€Å"The Partnership Act 1932† , which consist of 8 chapters that lay principle and foundations of the procedure to be followed for a partnership and it have 1 schedule which is important as it keep on being updated. This act has to be followed in order to be called a legal partnership. DISSOLUTION AND RECONSTITUTION OF A PARTNERSHIP Dissolution of partnership means that there is discontinuance of the legal relationship between the partners of the firm. It is legal break up of partnership contract that was signed. There is a clear distinction between Dissolution and reconstitution of a partnership. Reconstitution of a partnership of a firm will take place in the events of retirement of a partner, death of a partner or insolvency of a partner. Thus firm has to be reconstituted with the remaining partners of the firm. Now they will deal with the business with a new partnership contract between them. Even in this case firm may continue to work provided the deed signed has such effect. Also when a new partner is admitted, a new partnership emerges so a firm is reconstituted. There will be a new contract between the new partners and the old relationship is no more valid. Each will have a different share of profits as per the new contract signed. Reconstitution involves only a change in the relationship of the partners of a business but in the case of dissolution of the firm there is a complete discontinuation in the relationship of the partners of a firm. Dissolution of a partnership can be dome under circumstances not just voluntarily. It can be dissolved under a mutual agreement when all partners agree to it and it is in accordance to the contract. It can be dissolved by giving a legal notice and under law. When there is a breach of terms and conditions by one partner than partnership can be dissolved. Also when the court gives out a notice it has to be dissolves. (MATHUR, 2010) Dissolution of partnership cannot just be said nor done as it have its own consequences. When it is discontinues than the partners are liable to wind up the business and the liability remains till they clear all dues of partnership. If any profit gained after dissolution than that has to be shared among the partners, one cannot get all. Premium has to be returned to each partner for his services dissolution also comes with different restrictions that are to be imposed. (GULSHAN, 2001) RECONSTITUTION OF A FIRM Firm can be reconstituted when number or status of partners has been changed. So we can say that firm changes its form when (i) we have to introduce new partner, (ii) one partner reaches the age of retirement, (iii) legitimate expulsion of a partner, (iv) one partner is unable to pay its debts, (v) death of a partner. These five factors are the main reason because of which reconstitution of a firm happens. Well constitution or reconstitution of a firm makes no difference, both words implies same meaning. The important element of a partnership act is agreement between all the partners of the firm. So whenever the changes are going to take place consent of all partners is mandatory. The following paragraphs will be explaining each clause in detail and its application with respect to Pakistani society. (Saeed, 2012_)_ INTRODUCING NEW PARTNER Under Section 31 of the partnership act of 1932 says that we need the willingness of all partners before new partner has to be introduced in the firm. We cannot introduce the new partner unless it has been stated in contract. For instance if a current partner sold his share in the partnership, the person who buys the share is not liable to become partner except if other partners shows their positive consideration. One more thing minor can never be a partner if it has been clearly stated in contract. New partner is not accountable for paying the debts of the firm prior to his entrance. (Saeed, 2012_)_ RETIREMENT OF A PARTNER Another reason for the reconstitution of a firm is when partner wants to get retirement. Partner can be retired when he/she gets the consent of all other partners. It is clearly stated Partnership gives the notice to the partners if they have to get retirement. The methodology through which partners can get retirement is precisely mentioned in an agreement. Another point which cannot be missed is that the partner who is going to be retired has to give notice to the public about his decision in order to obtain freedom from liability of the debts of the firm. _(_ Saeed, 2012_)_ EXPULSION OF A PARTNER In law expulsion has exclusive meaning which says that it is the coercive retirement of an individual from a partnership by the other members because some inappropriate event has occurred. Due to this it is undesirable for an individual to be the part of the firm. Partnership – section 25 of the partnership act provides: _no majority of the partner can expel any partner unless the power to do so has been conferred by the express agreement between the partners._ CAUSES OF EXPULSION OF A PARTNER Expulsions takes place due to some reasons which include misconduct, dishonesty, unethical act, insolvency. Misconduct usually involves individual committing material or persistent breaches of the partnership member’s agreement or willfully neglecting to abide by any of his/her responsibilities. When individual commits crime he is dishonest. A partner cannot be in partnership anymore as soon as he is adjudged an insolvent. _(SILKIN, 2012)_ DEATH OF A PARTNER Firm is reconstituted when there is a death of a partner. Due to the death of partner, partnership can be dissolved until and unless it has explicitly stated that partnership will continue after this event. If partnership has to be dissolved after the death of the partner then remaining partners has to wrap up their work. When partnership is dissolved it does not necessarily means that it has been terminated. Sometimes businesses needs time to finish up their work. This continues until the liquidation is completed . (Lawyers.com) INSOLVENCY OF A PARTNER Insolvent means that when one person is failed to pay its debts. Reconstitution of a firm happens when partner becomes insolvent. A partner can become insolvent on two bases. First of all partnership business is going and when partnership is going too dissolved. Partners have to declare it officially or get it signed by many people when they want insolvency of a partnership. (BATASNATIN.COM) Under section 51 of partnership act, when partner is declared guilty of insolvency on the basis of petition of the partners or any one partner initiated, petition of more than three creditors in the partnership qualified as provided in section twenty of the act. _(PARTNERSHIP ACT, 1932)_ CONCLUSION To conclude we see, that we have covered detailed understanding of all our objectives. How a firm reconstitutes and how it is dissolved, how the various partners are subjected to fulfill each of their duties and are entitled to claim their rights. How the accounts are settled and affairs of the partnership are wound up. Structure of partnership business changes from time to time. These laws provide the ability to make any reconstitution among the business when any partner leaves or enters. Conflict is human nature, and in cases where conflicts interfere among the relations of businesses these laws are there to protect and safeguard our rights. Dissolution provides various advantages and safeguards the rights of each  partner. It provides liability provisions that which helps the partners to avoid costly litigations, and because it’s a contract, it binds all the partners to conform to each other’s rights, and make sure no one is done wrong. Provides guidelines for distribution of assets so that everyone gets their equitable share and no rights are misguided. This leads to a peaceful termination of the business. Also it lays down general rules and guidelines about what roles the Partners are going to play at the end of the business, one might notify the customer while the other Might handle liquidation or other aspects of the business, so on and so forth. In case of a dissolution agreement among the partners, they can create their own terms and they do not have to rely upon the default state laws, this is a very big advantage of such a process which allows both partners to benefit from the particular situatio n REFERENCES Mathur. B, (2010), â€Å"_Business Law_†. pg 588-590 Gulshan, S. (2001). â€Å"_Business law_†. (4th ed., pp. 154-160). New Delhi. Taylor, M. (2011_). â€Å"Essentials elements of a partnership agreement†_ Link: http://partnership.ezinemark.com/essentials-elements-of-a-partnership-agreement-32336052262.htm Nicholson. (2011). [Web log message]. Link: Retrieved from http://www.scribd.com/doc/52490419/Lecture-8-Law-of-Partnership Bloomsburyprofessional.com. (2007). â€Å"_Partnership law_†. Link: http://www.bloomsburyprofessional.com/ Saeed, K.A. (2012). â€Å"_Mercantile and Industrial Laws of Pakistan_†. Second Edition. Karachi: Oxford University Press. Silkin, L. (2012). â€Å"_Partnership and LLP’s: Expulsion_† Link:http://www.lewissilkin.com/en/Knowledge/2012/February/~/media/Knowledge%20PDFs/Partnerships%20and%20LLPs/Expulsion%20February%202012.ashx Lawyers.com_. â€Å"Termination of partnership†_ Link: http://business-law.lawyers.com/small-business-law/Termination-of-Partnerships.html Batasnatin.com. _†Insolvency of Partnerships & corporations when partnership may be declared insolvent†_ Link:http://www.batasnatin.com/law-library/civil-law/obligations-and-contracts/836-insolvency-of-partnerships-a-corporations.html