Case Study - 1

Case Study Topic
1. Mr. Rahim, a retired officer of the government, has accumulated a little amount of money and wants to invest in some sort of business.

2. Mr. Karim has accumulated an amount of money but wants to start a business together with Mr. Rahim.

3. Both Mr. Rahim and Mr. Karim did business together and in last few years both of them made a huge amount of profit and now they want to invest that money in new venture with huge liabilities. M/S Bulu Private Ltd. wants to join them as well in their new business ventures.

Fact One: Mr. Rahim, a retired officer of the government, has accumulated a little amount of money and wants to invest in some sort of business.

Advice

Mr. Rahim can start a proprietorship concern with his little amount of money. In this case all risk and liability will be his own. He will enjoy that profit and bear the loss of his own account.

Proprietorship business has very little formalities. He can obtain a Trade License submitting his Tin certificate and Bank statement.

Fact Two: Mr. Karim has accumulated an amount of money but wants to start a business together with Mr. Rahim.

Advice:

Mr. Karim and Mr. Rahim can start a business in partnership if they come into a contract which is necessary for starting a partnership business.

What is Partnership Business?

“Partnership” is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.

In this case if Mr. Karim and Mr. Rahim of agreed the share profits of a business and enter into a contract in this regards, then we can say that they have entered into partnership with one another who are called individually, “partners” and collectively “a firm”, and the name under which their business is carried on is called the “firm-name”.

Section 239-266 of the Contract Act, 1872 has been repealed by the Partnership Act, 1932 (IX OF 1932), SEC. 73 and Schedule. II. The Contract Act, 1932 was repealed by section 73 of Partnership Act, 1932. Section 73 of Partnership Act, 1932 was in its turn later repealed by Act I of 1938.
Case Law
• The three essential elements of partnership-
i. an agreement between the persons concerned;
ii. this agreement should be for sharing profits of a business, and
iii. the business should earlier be a carried on by all o any one of them on behalf of all: AIR 1985 Ori 8, 10

Requirement, Conduct and Liabilities:

It should be mentioned here that in partnership business contract between the partners is very important. In partnership business contract prevails unless and until it conflicts with law.

For this purpose they have to abide by following conduct
Subject to contract between the partners –
(a) Every partner has a right to take part in the conduct of the business;
(b) Every partner is bound to attend diligently to his duties in the conduct of the business;
(c) Any difference arising as to ordinary matters connected with the business may be decided by a majority of the partners, and every partner shall have the right to express his opinion before the matter is decided, but no change may be made in the nature of the business without the consent of all the partners;
(d) Every partner has a right to have access to and to inspect and copy any of the books of the firm;
(e) In the event of the death of a partner, his heirs or legal representatives or their duly authorised agents shall have a right of access to and to inspect and copy any of the books of the firm.

Mutual Right and Liabilities
Subject to contract between the partners –
(a) A partner is not entitled to receive remuneration for taking part in the conduct of the business;
(b) The partners are entitled to share equally in the profits earned, and shall contribute equally to the losses sustained by the firm;
(c) Where a partner is entitled to interest on the capital subscribed by him, such interest shall be payable only out of profits;
(d) A partner making, for the purposes of the business, any payment or advance beyond the amount of capital he has agreed to subscribe, is entitled to interest thereon at the rate of six per cent. per annum;
(e) The firm shall indemnify a partner in respect of payments made and liabilities incurred by him
(i) In the ordinary and proper conduct of the business; and
(ii) In doing such act, in an emergency, for the purpose of protecting the firm from loss, as would be done by a person of ordinary prudence, in his own case, under similar circumstances; and
(f) A partner shall indemnify the firm for any loss caused to it by his willful neglect in the conduct of the business of the firm.
Every partner is liable jointly with all the other partners and also severally, for all acts of the firm done while he is a partner.

Following the above-mentioned guideline they should sign a contract to start a partnership business, a Firm.


Fact three: Both Mr. Rahim and Mr. Karim did business together and in last few years both of them made a huge amount of profit and now they want to invest that money in new venture with huge liabilities. M/S Bulu Private Ltd. wants to join them as well in their new business ventures.

Advice:
Here considerable fact is that:
1. Mr. Rahim and Mr. Karim together doing business for last few years
2. They made a huge amount of profit, which they want to invest with huge liabilities
3. M/s Bulu Private Ltd. wants to join them

From considerable fact we know that Mr. Rahim and Mr. Karim together doing a partnership business for last few years. In this year, they made a huge profit which increased their liabilities. In Partnership business, partners are personally liable for profit and loss of the Firm, which are divided between themselves as per their share.

When this venture becomes huge, the personal liabilities of the partners becomes so mammoth that it is better to convert the venture into a company. Company itself has it legal entity and personal liabilities of the share-holders perishes for the legal position of company.

Moreover, M/s Bulu Private Limited wants to join with Mr. Rahim and Mr. Karim. M/s Bulu Private Limited can issue share in favour of Mr. Rahim and Mr. Karim, which can be transferred in their favour against the huge capital they want to invest. Or Mr. Rahim and Karim can setup a company where M/s Bulu Private Limited can invest through purchasing share of the company. As a legal entity, M/s Bulu Private Limited, a company, can purchase share of other company.

Case law

A sole trader of boot and shoe incorporated his sole proprietorship concern as company under the name and style of Salomon & Co. Ltd. For the purpose of incorporation 7 subscriber of the Memorandum was he himself, his wife, his daughter and four sons and they remained the only members of the Salomon & Co Ltd. Mr. Salomon and his two sons remained the Board of Directors of the said company. The proprietorship concern was transferred for £40,000. Mr. Salomon took 20,000 shares £1 each share and debentures worth £10,000. And the rest share was distributed among the other family members. All the requirements of the Companies Act 1862 were complied with. Bad times came, the company was wound up, and after satisfying the debentures there was not enough to pay the ordinary creditors: --

Court of Appeal
The decisions of Vaughan Williams J. in the CA is that the company was merely acting as a nominee and agent of Mr. Solamon, therefore Salomon as principal had to indimnify the company’s creditors himself.

House of Lords
Mr. Salomon appealed in the House of Lords and House of Lords ruled out the Court Of Appeal’s decision and says:
(1) An one-man company is not an abuse of the company Act;
(2) All the relevant formalities have been complied with and
(3) The beneficial interests and control was silent in the act.

Thus – Salomon and Co Ltd. is different from Mr. Salomon as an individual and Mr. Salomon is not personally liable to creditors.

Benefits of my advice about joining with a company or setting a new company in favour of my clients:

• Members do not owe such duties either to other members or the company and ownership on a share of company is in general seen a s property right.

• Because of the Company’s artificial legal personality, its property and rights are vested in the company and not the members.

• A registered company continues to exist until it is wound up, either solvent or insolvent, regardless of the death, bankruptcy, mental disorder or retirement of any of its directors or members.

• Unless the article of a company restrict transfer of its share, shares in a registered company can be freely transferred and the transferee becomes the new member of the company upon registration of those shares in his/her name. Shares may also be mortgaged.

• Members of a company share the distributed profits of the company in proportion of the nominal value of their shares known as debentures.

• Private company must have at least 2 members and not more than 50 and Public company must have at least 7 members and can have unlimited members, exception Banking companies minimum 7 members and maximum 20 members.

• The affairs of the registered company are managed by its directors and other officers to the extent they are empowered to do so by the company’s articles.

• Management by the directors is distinct from ownership as to the share of the company by the members.

• Member of company is not agent for it and therefore cannot bind Company by his/her acts.

• Expenses: Company expenses are greater on formation, throughout life and on dissolution.