WHETHER A PARTNERSHIP FIRM CAN BE A MEMBER UNDER COMPANIES ACT, 1956

WHETHER A PARTNERSHIP FIRM CAN BE A MEMBER UNDER COMPANIES ACT, 1956

Section 14 Sub-Section (2) of the Companies Act, 1956 (Act) provides that a person who has agreed in writing to become a member and whose name is entered in the register of members shall be a member of the company. The provision speaks of ‘person’. An ordinary effect of the use of this expression is that only a person can become a member. Since a person means a natural person or a corporation, the question arises whether a partnership firm, which is not a person, can be a member. This was the question before the Calcutta High Court in Bansidhar Durgadutt vs CIT [1975 Tax LR 900 (Cal)]. A partnership firm was allotted certain shares and its name was registered in the register of members of the company. The Income tax authorities refused to recognize this as a valid allotment for tax purposes. The court over-rule d the objection and held that the allotment in favour of the Firm is not inoperative. The Court [at page 906]: “It appears that shares that when the shares are registered in the name of the firm such registration in effect would render all Partners as joint holders of the shares. In Palmer’s Company Law, (51-04, p. 802,24^th ed. 1987) it is said: “A firm can be registered in England under its partnership name although it’s not a legal entity. That as a Scottish partnership is regarded as a legal entity can be registered, under its firm name is not remarkable.” Similar observations have also been made in Buckley’s Companies Act, 75 (12^th edn). In Halsbury’s Laws of England, 109 (3^rd edn.Vol VI Art 227), it is observed that “if a firm with the authority of the firm, has subscribed to the memorandum the partners are joint holders of the shares subscribed for. Therefore it cannot be said any such registration is tainted with any illegality so as to vitiate it. Neither such registration is void, nor can it be treated as non est”. In practice, however the articles of association of most companies provide that only individuals, companies provide that only individuals, companies and registered associations will be accepted as members. The madras High Court held in Seth Mengraj v SMES Corporation, (1960) 2 Mad LJ 46 (Notes) that a partnership firm could not be a member as such.

            Note that there is nothing in the law which prohibits a firm from being a debenture holder. However, in case the debenture is convertible into shares either automatically or at eh option of the holder, it is advisable to restrict the same only to legal entities, as these debentures also involve contract or option to be a member of the company.

            Before the department expressed its view in the circular given below [Cir. No. 4/72 of 1972}, a company had a number of partnership firms on its register as member and was not able to crop names by itself and the department launched prosecution under Section150 for not keeping the register in accordance with the law. The company applied to CLB for an order. The CLB stayed the prosecution and directed the company to form a trust and transfer the shares in question to the trustees. Amriti Banaspati Company ltd., Ghaziabad, In re [(1995) 83 Com Cases 789 (CLB)].

Department’s views - The Department is also of the view that “a firm, not being a person cannot be registered as a member of a company except when the company is licensed under section 25. Companies which have firms registered as members should be advised to take steps to rectify the position within a specified time. In case the irregularity persists, action can be taken under section 150(2) of the Companies Act, 1956.” [Circular No. 4/72, dated 9-3-1972].

CONTEXT OF BENEFICIAL INTEREST (187C OF THE ACT)

Where in the case of Partnership firms, shares are acquired in the names of one or more or other partners, the partner will have to file declaration both under sub-section (1) and under sub-section (2), because they have also beneficial interest in the shared held by them on behalf of all the partners.

Department’s views- A partnership firm is not a person capable of being a member within the meaning of section 41 of the Companies Act, 1956 and since a partnership is not a legal entity by itself but only a compendious way of describing the partners constituting the firm, it is necessary that the names of all the members of the partnership firm should be entered in the Register of Member in the order that the right of the partnership as a whole to the shares in question may prevail. The holding of shares by one or more partners of a firm should not, therefore, ordinarily arise. However, where in a given case, the name or names, of only one or some of the partners are entered in the Register of members while the intention is that the partnership as a whole should have the right of membership in respect of the shares in question, it is obviously necessary for such partners who hold shares not only for themselves but for the benefit of all partners constituting the firm whose names are not entered in the register of members, to comply with the rules under Section 187C. (Circular No. 8/18/75-Cl-V, dated 31-3-1975).

h pa� + r � � �I� shares not only for themselves but for the benefit of all partners constituting the firm whose names are not entered in the register of members, to comply with the rules under Section 187C. (Circular No. 8/18/75-Cl-V, dated 31-3-1975).