TYPES OF CONSTITUTION

Partnership Firms Joint Stock Companies HUFs Trusts Club & Societies

PARTNERSHIP FIRMS The law relating to partnership firms is codified in Indian Partnership Act 1932. U/s 4 of the Act, a partnership is a relationship between two or more persons who agree to carry on affairs of business & share the profits. The contract (agreement) may be written or oral. The document containing the written agreement is called partnership deed. Since partnership arises out of a contract, persons who are incapable of entering into contract (i.e. minors, insolvents, alien enemy) can not enter into relationship arrangement with others. Characteristic of a contract of partnership business can be carried on by all or any of them acting for all. liability of partners is unlimited. Not only properties of the firm, but the individual properties of partners are also liable for the satisfaction of the liabilities of the firm. All partners are jointly and severally liable for all the debts of the firm. Thus a partner has a two fold status. He is an agent of all other partners and also the principal to all of them. ln other words they are mutually agents to each other. This implies that a bank can sue a partner individually or jointly with other partners for realisation of its debt. Minimum and Maximum Number of Partners

The minimum number of partners can be two. The partnership Act does not provide for any ceiling in the number of partners. However, section 11 of Companies Act 1956, provides that the number of partners of a firm carrying on banking business should not exceed 10 and that carrying any other business 20. For computing this ceiling the following points may be noted:

i) Where one or more companies are partners of a firm, each company, irrespective of its number of share holders, is treated as one person/partner. ii) Firms can not become partners of another firm. Where a firm is said to be partner of another firm, the number of partners in the former are taken into consideration for computing this ceiling. A Minor admitted for the benefits is not to be counted towards number of members. Similarly a Hindu Undivided Family can not become partner of a firm. But the Karta or any other co-parcener of the HUF can become a partner of any partnership firm in his individual capacity.

LAW RELATING TO PARTNERSHIP 1) Registration of the Firm

It is not compulsory to register a firm. However unregistered firms suffer from certain handicaps, and these handicaps indirectly compel firms to get themselves registered. Effects of Non-registration (Sec.69) The partners of an unregistered firm can not sue the firm or any partners of the firm for enforcing rights arising out of a contract or from the partnership Act. An unregistered firm can not sue third parties to enforce its rights arising out of a contract. Though the rights of non-registered firm are affected, the right of third party to proceed legally against the firm to enforce its rights arising out of a contract is not affected by the fact that the firm is unregistered. Procedure for Registration (Sec. 58 and 59) A partnership firm can get itself registered Registrar of Firms of the State. Banks Preference Banks prefer to deal with registered firms particularly while sanctioning credit facilities, Reasons:

(i) It is easy to verify the particulars about the firm with the Registrar of Firms (ii) A registered firm is in a better position to pay its debts as it can sue outsiders to recover its debts. Minor as Partner A minor being incompetent to contract can not become a partner in a partnership firm. However, he can be admitted to the benefit of an already existing partnership with the consent of all partners (Sec.30 of Indian Partnership Act). The liability of a minor admitted to the benefit of partnership is limited to his share in the firm. His personal assets nor he personally can be held liable for the debt of the firm. Though a minor can not be declared insolvent, his share in a firm which is declared insolvent vests in Official Receiver/Official Assigner. On attaining majority a minor can opt-out of the partnership. He must exercise this option within six months form date of his attaining majority or from the date when he first knew about his interest in the partnership, whichever date is later. This option is exercised by giving a public notice [Public Notice is given by (i) giving notice to Registrar of Firms (ii) publication in at least one vernacular newspaper circulation in the district where the firm has principal place of business]. In case he fails to give a public notice, within the stipulated time limit, he is deemed to have become a partner and is personally liable for all liabilities of the firm from the date of his admission to the benefit of partnership. Right and Liabilities of Partners Act Subordinate to Partnership Deed

The rights, duties and liability of partners of a firm are determined as per the agreement between them (as recorded in the partnership deed). Where there is no agreement or the agreement is silent, the rights of partners are determined as per the provisions of the Partnership Act.

Therefore provisions of the Act are subordinate to any contract between partners and will apply only if the partnership deed is silent as to particular right and duty of partners. Therefore for finding out the right of a partner, the partnership deed is to be referred. Essential Features of a Partnership Deed Should bear signatures of all partners. Should be adequately stamped as per Stamp Act. Lunacy of a Partner: Cheque signed by other partners can be paid even after the lunacy of a partner. However cheque signed by the lunatic should be returned unpaid. Illiterate Partner: A partner who is illiterate should not be allowed to operate the account. DISSOLUTION OF A FIRM A firm is said to be dissolved when the partnership relation between the partners comes to an end. 1) Effect of Dissolution Each partner ceases to have authority (i.e. agent), to bind the firm. All partners at the time of dissolution remain jointly and severally liable for all dues of the firm outstanding on the date of dissolution. A partner retiring from partnership will continue to be liable to third parties for any act done after his retirement unless a public notice is given regarding the retirement.

RECONSTITUTION In the case the partnership deed provides for the continuation of the firm by the remaining partners and these partners opt for the same, then the firm is said to be re-constituted. FORMATION OF A NEW FIRM BY THE REMAINING PARTNERS Where the partnership deed does not provide for reconstitution, the firm cannot be reconstituted. It stands dissolved on the death/ insolvency/retirement of a partner(s). In such a case if the remaining partners decide to continue the business, it would be considered as a new partnership. All procedure applicable to advance given to a new partnership should be done afresh for this account. Action to be taken by Bank in case of Reconstitution Where the bank wants to keep the outgoing partners liable, it should not recognize reconstitution & following steps are required to be taken:

Give notice to the retiring partner/legal heirs of deceased partner to the effect that they would not be released of their liability. The account should be frozen under notice to all partners. No credit/debit should be allowed to avoid operation of rule laid down in Claytons case. In case the bank recognizes the reconstitution it should ask for:

i) Consent letter from guarantor. ii) Consent form mortgagors to the effect that the mortgage will continue to be available for the drawings of the reconstituted firm. iii) Confirmation of balance by all partners. In case of reconstitution of a firm due to the admission of a partner, a letter from the new partner should be taken to the effect that he undertakes the liability of the firm incurred before his admission. OPERATION OF ACCOUNT

Operation only by Authorised Persons: Only partners/person authorized by the partnership deed or separate authority letter signed by all partners should be allowed to operate the account. In case the authority is not given to any particular partner/s to operate the account, all partners will jointly operate the account. A partner authorized to operate account cannot delegate his authority to another person. Any partner, whether authorized to operate account or not can stop payment of a cheque. Revocation of mandate: Any partner (whether allowed to operate the account or not) can revoke/cancel authority given for operation of account. However, the authority cancelled, can be reinstated only under the signature of all partners. Death/Insolvency/Retirement of Partners: A firm gets automatically dissolved on the death, insolvency or retirement of one or more than one partners unless there is a specific provision in the partnership deed to the effect that the remaining partners, would continue the partnership in case of such eventuality. No public notice is required. Cheques signed by a partner, who is adjudged insolvent, should not be paid unless it is confirmed by other solvent partners. On the death/insolvency/retirement of a partner the operation of the account should be stopped. LIMITED LIABILITY PARTNERSHIP LLP

 Introduced in India from 1st April 2009 Governed by Limited Liability Partnership Act 2008. Main Features: LLP is a separate legal entity which separate from its partners. It can own assets in its name, sue or can be sued. Death of a partner does not affect the LLP. Partners have the right to manage the business entity. One partner is not responsible or liable for another partners misconduct or negligence except in certain cases. Liability of the partners is limited to the extent of his contribution in the LLP. No exposure of personal assets of the partner except in case of frauds Partners: Partners of a LLP can be resident Individuals, a company or an Limited Liability Partnership. Minimum 2 Designated Partners have to be there who are individuals and at least one of them should be resident of India. There is no limit on maximum number of partners. LIMITED LIABILITY PARTNERS All the Rights and duties of partners in LLP, are governed by an written agreement between partners. In case there is no agreement entered by partners, the rights and duties of partners will be governed as prescribed under Schedule I of the LLP Act 2008. LLP shall maintain annual account. Registrar of Companies shall have the jurisdiction over the incorporation of LLP. Advantage Limitation LLP can not raise fund from public. Any act of the partner without the other may bind the LLP No separation of management from owners. Comparative lower cost of formation. Compliance requirement is lesser than another. Easy to manage and run and also easy to wind-up or dissolve. No requirement of minimum capital contribution.

JOINT STOCK COMPANIES

Companies limThe Companies Act, 1956 recognizes a stock company as a legal person. It is a separate legal entity. TYPES OF COMPANIES

Companies limited by shares can be classified into three categories:

(I) Private Ltd. Co. (ii) Public Ltd. Co. (iii) Government Company. A Private Ltd. Co is a company which by its articles (I) restricts transfer of its shares (ii) prohibits itself from inviting subscription of shares/debentures from public, (iii) limits the number of its members to 50. A Public Ltd. Co does not have such restrictions. A Government Co. is a company where not less than 51% of the share capital is held by government (central/state/both). Company Limited by the guarantee: A company limited by guarantee is a registered company having the liability of its members limited by its memorandum of association to such amount as the members may respectively undertake to pay if necessary on liquidation of the company. DIFFERENCE BETWEEN A PVT. LTD. CO. AND A PUBLIC LTD. CO.

Points of Difference

Private Ltd. Co. 2 50 Restricted

Public Ltd. Co. 7 No limit Freely Transferable Permitted

i) ii) iii) iv) v) vi) vii)

Minimum number of shareholders Maximum number of shareholders Transfer of share

Invitation to public for shares & debentures and fixed deposits Certificate of commencement of Business Minimum Directors Minimum paid up capital

Prohibited

Not required

Required

2 1 lac

3 5 lac

DOCUMENTS RELATING TO COMPANY ACCOUNTS Certificate of Incorporation is like a birth certificate of a company and is issued by Registrar of Companies. This gives the conclusive proof that all formalities involved in formation of a company are duly complied with. Memorandum of Association (charter of the company ) Specifies relationship of the company with outside world. The memorandum of association of every company contains the following six clauses Name clause (which gives the name of the company), Place clause (gives address of the registered office of the company), Objects clause (gives the activities the company can pursue), Liability clause (gives that the liability of shareholders is limited), Capital clause (gives the maximum capital the company can issue/authorized capital), Association clause (gives the consent of the promoters under their signatures that they are desirous of forming a company). The object clause usually sets out the powers which the company can exercise for achieving its objectives. A loan given for an activity which is not stated in objective clause is unauthorized (ultravires) and cannot be recovered from the company. For this reason memorandum of association is also called charter of the company. Articles of Association (Document of indoor management) Like Memorandum of association it is also a public document. It contains the rules and regulations for internal management of the company like the powers of Board of Directors, Rules for conducting meetings, use of common seal, use of borrowing power etc. The Articles are subordinated to memorandum. A public limited company may opt not to register article of association. In that case the rules and regulations given in Table A in first schedule of the Companies Act will be taken as the article of association of the company. Certificate of Commencement of Business Required only in case of public limited companies. Omnibus Resolution A resolution (passed by Board) authorizing to open account in the name of the company with any bank at any place is called Omnibus resolution. An omnibus resolution can be accepted for opening current account. No credit/overdraft facility is sanctioned in the account, based on such resolution. OPERATION OF COMPANY ACCOUNT Cheque signed by an authorized person can be paid even after his death or insolvency.

 Cheques payable to a limited company should not be collected in personal account of any director, employee/ official of the payee company. Cheques issued by a company in favour of a third party and endorsed by the payee in favour of a director/employee of the company should not be collected without proper enquiry. Insolvency A company cannot be declared insolvent. Where a company cannot pay its debts it can be liquidated/wound up. Where one of the directors becomes insolvent, it does not affect operation of account. Cheques signed by him can be paid. However, after insolvency he cannot act as director. If one of the two directors of a Private. Ltd. Co. is adjudged insolvent, the operation in the companys account should be stopped till a fresh director is appointed. NON-PROFIT MAKING COMPANY A limited company need not add the word limited to its name if it is a non-profit making association formed for the promotion of art, literature, religion and licensed by Central Government under Sec. 25 of Companies Act, 1956. The word limited in the name of a company indicate that the liability of a share holder is limited to the extent of the face value of shares held by him. WINDING UP OF COMPANY Winding up or Liquidation is the process by which a company is dissolved. Winding up can be voluntary, either by shareholders or by creditors compulsory by Court, or through Court supervision., On the appointment of a liquidator, all the powers of Board of Directors cease to operate except when it is otherwise permitted in general body meeting resolution. In case of death/ resignation of the liquidator the company in general body meeting appoints the next liquidator. Order of payment on debts In case of winding up, the debts of the company are paid in the following order Workmen dues Secured Creditors Cost and charges of winding up Preferential debts (taxes etc.) Floating charges, Unsecured Creditors.

The unsecured Creditors are paid pari passu their claim. Loans to companies

Besides obtaining important document like MOA, Article Of Assn., Certificate of Incorporation & Certificate of Commence of Business (as the case may be), we requires a Board Resolution passed by Board of Directors. Common Seal All the loan document should bear the common seal of the company. Registration of Charge Under the provision of Companies Act 1956, a company is considered to be a legal entity itself. Every charge created by a company on its assets should be registered with the Registrar of Companies within 30 days of creation of the charge. Failure to do this registration will not be accepted in the court of law. Even modification or satisfaction will have to be registered with ROC. Due to these provisions, it is necessary to carry out a search at the ROC before extending any credit facility to a company

HINDU UNDIVIDED FAMILY

Joint Hindu Family or Hindu Undivided Family (HUF) is governed by Hindu Law except to the extent altered by certain acts. Two Schools of Hindu Law There are two schools of Hindu Law: Mitakshara, which prevails throughout India except West Bengal and Dayabhaga which prevails in Bengal. i) Mitakshara Law Under Mitakshara school of Hindu law all male member have a right on the joint family property by birth (even from the time of conception) which is called as Doctrine of ownership by birth. The HUF consists of one common living ancestor and his male descendents upto three generations next to him. The HUF is also known as COPARCENERY and the male members are called coparceners. All co-parceners have equal right on the property of HUF. As per The Hindu Succession (Amendment) Act 2005 which came into force w.e.f. 09.09.2005 the daughters have been given equal rights as sons. ii) Dayabhaga School of Law They treat father as the absolute owner of property and sons do not acquire any interest in property by birth.

Karta and Co-parceners The eldest male member of the HUF is called Karta and other male members are called coparceners.

 As per law, Karta has power to incur debt, execute document, pledge securities on behalf of the family for the purpose of family business for the legal necessity of the family. His liability is unlimited while that of the co-parceners is limited to the shares in the joint family estate. Accordingly the consent of co-parceners is not required. While giving loan/overdraft to a HUF the bank should be extra careful because the banks prefer to obtain loan documents executed by all major male members of the family or with their written consent by the head of the family. Further the liability of co-parceners is limited only to the extent of their share in HUF property. However, if the documents are executed by all co-parceners they become personally liable. Where there is a minor co-parcener, his guardian should sign the document on his behalf. Upon attaining majority, express consent should be obtained form him. Ancestral Business The HUF carries on the ancestral business and possesses ancestral properties. The bank must verify the purpose for which the loan is availed. In case the Karta borrows for any new business, the co-parceners, unless they have joined in executing document, are not liable for the debt. But in case of a HUF consisting of father and sons, the new business started by father is deemed to be ancestral and co-parceners can be made liable to the extent of their shares in family property. (Achutta Narayanayya Vs. Ratnaji) Operation of Account A co-parcener, even though not permitted to operate the account, can countermand the payment of a cheque. The Karta can give a mandate in favour of a major co-parcener to operate the account. Mandate in favour of a third party to operate the account is not acceptable unless all coparceners execute an indemnity. For opening a HUF account, apart from the accounting opening form, a half yearly declaration letter regarding change in family on PNB 36 signed by KARTA is obtained.

TRUST
DEFINITION AND MEANING OF TRUST Trust is defined in Sec.3 of Indian Trust Act 1882. Trust is an obligation, annexed to the ownership of property and arising out of a confidence reposed in and accepted by the owner or declared and accepted by him for the benefit of another or of another and the owner. In simple words, a trust is said to be created when the ownership of a property is transferred to, somebody with an obligation to hold and manage the same for the benefit of another. Usually there are three parties to a trust viz.

The person who transfers the property and reposes confidence is called the Author of the trust or Creator of the trust or Donor or Settler. The transferee of the property on whom confidence or trust is reposed is called the trustee. The person for whose benefit the trust is formed, is called beneficiary or donee. Trust Deed is the document through which a trust is formed. It records the right and obligations of the trustees. A trust deed should be registered. APPOINTMENT OF TRUSTEES The trust deed generally mentions the names of the trustees. Alternatively it may name a person who will appoint trustees. It may provide that new trustees can be appointed by the surviving trustees/legal representative of surviving trustee. In this case, the appointment is done by executing a deed of appointment by the outgoing and incoming trustees. The trust deed may provide that new trustees will be appointed by Court. OPENING OF TRUST ACCOUNT Documents Required (I) Trust deed (in case of private trusts) or Certificate from Charity Commissioner (in case of public trust) or Order of Court (in case there is no trust deed), (ii) Latest deed of appointment, (iii) Certified copy of resolution by all trustees regarding opening and conduct of bank account, (iv) List of all trustees. SCRUTINY OF TRUST DEED AND OPERATION OF ACCOUNT Joint Signatures Unless the trust deed provided otherwise, all trustees must join in operating the account (Sec. 48 of Indian Trust Act). All trustees can sign a resolution and instruct bank to allow one or more of them to operate the account. In the absence of such instruction all trustees must join in signing the cheque. No Delegation Unless the trust deed provides otherwise, trustee(s) cannot delegate his/their powers. (Sec.47). Borrowing Power Unless the trust deed gives power to borrow money, trustees cannot borrow or overdraw account. To be on safe side the bank should ask for personal guarantee of trustees, while giving advance. Death of Trustee

If the sole trustee dies, the operation in the account should be stopped. Cheques signed by him are not to be paid. If one of the trustees dies/retires the surviving trustees can operate the account if the trust deed provides of. For example, if the trust deed provides that minimum two trustees can operate the accounts, the operation of the account need not be stopped as long as the number of surviving trustees is two or more. Insolvency Even if a person is declared insolvent, he can continue to be the trustee. The trust property cannot be attached to pay the dues of a trustee who is declared insolvent. BREACH OF TRUST In case of a trust account, the bank must take all possible precautions to protect the interest of the beneficiaries of the trust. So far as the use of trust money is concerned, banks responsibility is as good as that of trustee. In case there is misuse of money within his knowledge, he will be liable for breach of trust and will be required to compensate the beneficiary for any loss. Breach of Trust can be established where bank allows transfer of funds form trust account to the personal account of the trustee or where a cheque favouring the trust is collected in the personal account of the trustee. BANK IS NOT BOUND BY TRUST It is an accepted practice that the bank should guard against misappropriation in all accounts where there are circumstances to indicate that it is a trust. However there is no responsibility on the part of a bank to enquire as to whether an account is a trust account or not. A bank is not bound by trust, if it is not within his knowledge.

CLUB AND SOCIETIES

Club and societies are non-profit making organisation and represent a group of persons. Its purpose may be for the promotion of art, literature or such other purpose. Clubs and Societies can be registered or unregistered. A club can be registered under: The Societies Registration Act, 1860 or Companies Act, 1956 (Sec.25 non-profit making company) The Registrar of Societies, after registering the bye-law of the society, issues a Registration Certificate. These gets the status of a legal entity only after their incorporation and can enter into a valid contract in their own.

While opening account in the name of a registered association bank should obtain (I) copy of certificate of Registration (ii) copy of Bye-laws (i.e. Rules, Regulations), (iii) a certified copy of resolution of the Executive/Managing/ Governing Body) to open account and giving names of office bearers to operate account. (This should be certified by Chairman of the meeting of that body.)

While opening account in the name of a registered association bank should obtain copy of certificate of Registration copy of Bye-laws (i.e. Rules, Regulations), a certified copy of resolution of the Executive/Managing/ Governing Body) to open account and giving names of office bearers to operate account. (This should be certified by Chairman of the meeting of that body.) UNREGISTERED ASSOCIATIONS Examples of unregistered associations are: Some schools Some clubs Other associations not registered. Should be opened only in case of very reliable persons. All members of managing committee/governing body should sign the resolution as per the rules. In no case overdraft should be given in such accounts. No loan should be sanctioned to an unregistered club. OPERATION OF ACCOUNT Payment of cheques Cheques signed by an authorized signatory can be paid even after his death, insolvency or retirement. Collection of Cheques Cheques favouring the club/association should not be collected in the personal account of its office bearers / employees as bank can be held guilty of conversion. Cheques drawn by the club in favour of third parties should not be collected in the personal account of office bearers/employees for the above mentioned reason.