PROPERTY OF THE FIRM AND ITS APPLICATION (Section 14,15)

INTRODUCTION

According to Section 4 of the Indian partnership Act 1932, a firm is the collective name of people who have entered into the partnership with one another to carry on a business together. It is not the legal entity like a company, it is a group of individual partners.[1]

In a partnership firm there is certain property attached to the firm and its partners with which the firm will carry on its business. It includes rights and interest in the property which are bought into the stock of the firm or were acquired by the purchase by the firm. It also includes the Goodwill of the business. 

THE PROPERTY OF THE FIRM

According to section 14 of the Indian partnership Act 1932, subject to the contract between the partners, the property of the firm includes all property and rights and interest in the property, originally bought into stock of the firm, or acquired, by purchase or otherwise, by or for the firm, or for the purposes and in the course of business of the firm, and includes also the goodwill of the business.

Unless the contrary intention appears, property and rights and interest in property acquired with money belonging to the formed are deemed to have been acquired for the firm.[2]

Property of a firm can stand to mean the assets, joint-stock, common stock or joint estate which the partners are entitled collectively. It also includes same-benefits arising out of a contract, benefit of lease or renewal of lease, benefit of license or quota, renewal of lease, benefit of license or quota, lands and buildings etc.

Thus the property of the firm includes-

1. Property originally bought into the stock of the firm and rights and interest in the same property.
2. Property further purchased by the firm for its business and rights and interest in the same. 
3. Goodwill of the business.

In the case of Arm Group Enterprises Ltd. vs Waldorf Restaurant[3], the firm with totally new partners excluding the sole proprietor is claiming the status of a direct tenant under the act of 1950 and resisting execution of the compromise decree against it. The court held that " under section 14 of the partnership Act 1932 in the absence of an agreement to the contrary the property exclusively belonging to a person, on his entering into a partnership with others does not become the property of the partnership mainly because it is used for the business of the partnership. Such property will become property of the partnership only if there is an agreement, express or implied, that the property was under the agreement of the partnership to be treated as a property of the partnership."

In the case of Anuj Kanoji Tankar vs Shantaram Kanoji Tankar [4], the plaintiff started a business in 1973 as sole proprietor and the defendant joined later as a partner in 1953. The assets, rights and interests were equally shared in this partnership. Later the disputes started arising and the partnership was called to be terminated. The defendant claimed his share of the property from the partnership. The defendant contended that according to section 14 of partnership Act, 1932 all assets with the aid of which the business was carried on by the plaintiff must be deemed in law to have become partnership assets under the deed of partnership. 

The court held that the right of the defendant to share the assets brought into the business depends upon the terms of the agreement of the partnership. There is no rule that whatever is brought by a partner in the partnership and is continued to be used by the members is presumed to have become the property of the partnership.

In the case of Narayanappa vs Bhaskara Krishanappa[5], the supreme court held that when the partnership begins by the individual investments of the partners. The said property ceases to be exclusive to each partner once the functioning of the partnership begins, it becomes the trading assets of the partnership in which all the partners would have interest. The only claim that he would have is on his share of the profits that the firm would generate from time to time.

https://thelegallock.com/final/contract-of-guarantee-sec-126

Goodwill of the firm-

Goodwill of the firm is the reputation of the firm which it built over time in respect to the profits it has generated and will generate in the future. It constitutes a good market value, trust of its customers and better connections in the market as compared to the new firms and businesses. It is very important for a firm to have a goodwill in the market and thus it is considered as the property of the partnership firm. 

For example- A has two options to purchase raw material for his factory, dealership B and C. B has a good reputation for timely and high quality material procurement so A engages with them. 

This way the goodwill of a firm generates profits for them and thus, is considered a property of the firm. 

In the case of Ganpat Rai vs Abnash Chander[6], it was held that along with all the property and assets that has been in the stock of the firm or has been purchased later will also have goodwill included in the property of the firm. At the time of the final decree, all the assets along with the goodwill of the firm, then are to be valued and distributed among the partners. 

In case of Jayalakshmi vs Shanmugham and ors.[7], the court held that according to section 14 of Indian partnership Act, 'goodwill' is also the intangible property of the firm as it brings in the profits in the business that the firm is carrying on. The benefits of tenancy rights can also be the part of goodwill in the absence of any contract to the contrary. It has to be noted that parties have to agree to include tenancy rights in the capital assets of their partnership firm. 

Since goodwill is not defined anywhere in the partnership Act, it is for the firm to recognise as it is an intangible asset. 

APPLICATION OF THE PROPERTY OF THE FIRM 

According to Section 15 of Indian partnership Act 1932, subject to the contract between the partners, the property of the firm shall be held and used by the partners exclusively for the purposes of the business.

It means that once the property has been acquired by the firm it can only be used for the business of the firm and not for any personal use by any partner or any other kind of business. 

In the case of Reddi veerraju vs Chittori Lakshminarasamma [8], the plaintiffs who were partners in a partnership firm, mortgaged some money to the defendants. However the mortgage claim was exhausted since no claim was made within the period of limitation. 

The court held that the rights of the partners regarding their firm assets are restricted by the section 14 and 15 of the Partnership Act such that this firm property cannot be used for any other business other than the firm itself. 

CONCLUSION

It is thereby observed that the In a partnership firm there is certain property attached to the firm and its partners with which the firm will carry on its business. It includes rights and interest in the property which are bought into the stock of the firm or were acquired by the purchase by the firm. It also includes the Goodwill of the business. Also, goodwill of the firm is the reputation of the firm which it built over time in respect to the profits it has generated and will generate in the future.

[1] Comptroller and Auditor General versus Kamlesh Vidalal Mehta, (2003) 2 SCC 349

[2] section 14, the Indian partnership Act 1932, page 12. 

[3] 2003(1) RCR (Rent) 594 (SC)

[4] 1969 (3) SSC 555

[5] AIR 1966 SC 1300

[6] AIR 1973 J&K 74

[7] AIR 1988 Ker 128

[8] AIR 1971 AP 266

https://indiankanoon.org/doc/804661/

By Muskan Gupta

BBA LLB

GIBS( GGSIPU)