Winding up of a Partnership Firm? - Learn HOW

The Section 4 of Indian Partnership Act, enacted in 1932, defines partnership as “the relation between persons who have agreed to share the profit of a business carried on by all or any of them acting for all." There is an agreement that decides how profit and losses are divided between the partners in the partnership firm that can be oral or written while there should be a minimum of 2 persons and a maximum of 10 persons in the banking business and 20 persons in non-banking business to constitute a partnership firm.

While a partnership firm can be formed easily due to minor legal formalities, a contractual agreement, higher management, and lesser risk, it is always subject to misunderstanding, miscommunication, unlimited liability, and dissolution or winding up due to several reasons.

As defined under Section 39 of the Indian Partnership Act 1932, dissolution of partnership firm occurs when the partnership between all the partnership firms is dissolved. On dissolution, the partnership firm ceases to exist as a going concern. The partners no longer possess their right, and the relation among them changes, often reconstituting another new firm. The winding up of a partnership firm results in de-management of internal affairs, liquidation of assets and discharge of debt out of the realized proceeds. Sections 40 to 44 of the Indian Partnership Act 1932 deal with the dissolution of the partnership firm with or without the intervention of the court.

DISSOLUTION BY AGREEMENT

As provided under Section 40 of the Act, dissolution of a firm may be processed only with the consent of all the partners or in accordance with a contract between them. The partners may, by consent or by entering into an agreement, dissolve the firm. As one of the simplest methods of dissolution of partnership firm, a dissolution by partner’s agreement does not require the intervention of the court.

COMPULSORY DISSOLUTION

Section 41 of the Indian Partnership Act 1932 deals with dissolution in cases:

• When all partners or all except one partner become insolvent.
• When the business activity is carried on by the firm becomes unlawful.

DISSOLUTION ON THE HAPPENING OF CERTAIN CONTINGENCIES

Section 42 of the Act deals with the dissolution of the firm on the happening of certain events such as follows:

• When the term expires, if the contract of the firm is on a fixed term.
• On the completion of the task for which the firm was constituted.
• On the death of the partner provided the Continue Read....

SERVICE TAX RULES

Service Tax is a tax imposed by the central government of India on service providers on various service transactions; however, ultimately it is borne by the customers. The concept of service tax was brought into existence in 1994 by the then Prime Minister Manmohan Singh, terming such tax as an indirect tax levied under Ministry of Finance.

In this system of taxation, the service provides the tax and then recovers it from the customers. Such tax is charged to companies on accrual basis while to individual service providers on a cash basis. The scope of the Service Tax applies to the value of services provided is more than Rs. 10 lacs in a financial year and is geographically applicable to the whole of India except Jammu and Kashmir.

Service Tax aims at lowering the burden of taxation on businesses and individuals on the part of the government. Every service provider in India (except J&K) has to register itself if the value of such services is more than Rs. 9 lacs during a year, but the tax is payable only when the accumulative amount in a year is more than Rs. 10 Lacs.

The Finance Act 1994 has set guidelines or rules for the assessment and collection of service tax in India:-

Rule 1:- Short Title and Commencement

The Central Government’s rules to assess payment of service tax, the returns, and collection, known as service tax rules have been in effect since July 1994.

Rule 2:- Definitions

All the frequently and commonly terms are defined by the service tax rules including terms such as:

 ‘Act’- referring to the Finance Act 1994.

‘Assessment’- the self-assessment of service tax by the assessee and re-assessment

‘Person liable for paying tax’- referring to the recipient of services who will pay the tax ultimately.

‘Quarter’- Service Tax divides the financial year into four quarters of 3 months each

‘Rent’- this refers to the services provided by renting of immovable property.

Aggregator’- refers to a person who owns and manages a web-based software application enabling potential customers to connect with service providers.

‘Brand name/trade name’- this refers to a name, be it registered or not, that is used to indicate a connection, in the trade course, between a service and a person using that identity to avail the service.

‘security service’- relating to security and property.

Rule 3:- Appointment of Officers

The Central Board of Excise and Customs (CBEC) is empowered to appoint central excise officers. Unlike VAT which is Continue Read...

Legal Challenges Faced by a Startup in India

Running a startup is in itself a challenge. It is important to minimize risks and avoid conflicts wherever possible. An important area where startups seem to falter is the legal aspect of running a business. Failure to meet all legal requirements can land a startup in trouble. For a startup, it is not feasible to pool in resources to the same extent as a well-established corporate house. Given the cumbersome nature of the Indian judicial system, it is in the best interests of startups to avoid a run-in with the law. With awareness, this risk can be prevented or mitigated. This article highlights the legal challenges that a startup can potentially face in India.

• Business structure: Perhaps the first thing to be precise about when starting a business is the kind of business that you want a startup to be. Depending on that, the structure of the business is formulated- whether it would be a sole proprietorship, partnership, private limited company, public company or a limited liability partnership. For each of these business structures, there are certain legal requirements that need to be followed. For example, a limited liability company has to be registered with the Ministry of Corporate Affairs under the Limited Liability Partnership Act 2008. Similarly, a company incorporated as a private limited company has to abide by regulations pertaining to private companies.

When finalizing a business structure, it is also important to make sure that all the necessary agreements pertaining to the startup- the Articles of Association, Memorandum of Association and co-founders agreement- are in place. This is to ensure that there are no legal complications when a dispute arises in the future.

• Taxation: Full compliance with tax laws is a must to avoid penalties and punishment. Startups have to be clear about their tax liabilities towards the central and state governments. Different sectors attract different taxes. For example, the rollout of GST was followed by numerous workshops and explainers on the subject. Startups have to make sure that they are aware of the new taxes, their liabilities and how it impacts their business model. Moreover, under the Startup India scheme of the Government of India, startups that fulfill certain conditions are given certain exemptions from taxes.

• Labour Laws: When a startup commences operations and hires employees, it is subject to the labor laws of the country. A significant challenge for startups is to ensure that it is compliant with all the applicable labor laws. Some of these laws pertain to minimum wages, payment of gratuity and provident fund, maternity benefits, and prevention of sexual harassment at the workplace. Startups registered under the Startup India initiative can make a self-declaration for nine labor laws within one year of incorporation and get an exemption from labor inspection.

• Listing Requirements: If a startup wishes to list its securities in a stock exchange, it has to comply with relevant SEBI regulations. These regulations pertain to the conditions that a startup has to fulfill before it can list its securities, the disclosures that are to be made, the compliances to be adhered to, etc. These are updated regularly, and hence it is essential for a startup to be informed of all the latest developments.

• Business licenses: To run a business smoothly, the required licenses have to be obtained. Some licenses are industry-specific. For example, a startup engaged in food business has to obtain licenses pertaining to food safety, food adulteration, and health. The conditions mentioned in the license have to be complied with. Failure to obtain these licenses or following the prescribed conditions can lead to costly litigation and severely affect the prospects of the startup.

• Protection of Intellectual Property: As startups advance, they create intellectual property (IP) along the way. It includes codes, algorithms, designs, research findings, etc. It is essential to protect this IP to prevent its misuse by other competitors or entities and Continue Read

Understanding the difference: Borrower vs Guarantor

In today’s world of expense and need for financial assistance, borrowing of loan has become a common practice. In this cycle of borrowing money from banks and repaying the borrowed sum, borrower and guarantor play a significant role. We must understand the liabilities of both parties. Before that, we must get clarity about the concepts of borrower and guarantor.

BORROWER

In simple words, we can define borrower as an individual who obtains money from the opposite party with a legal contract to repay the borrowed sum with the stated interest. The money is borrowed for a specified period. It is essential for the borrower to understand all the terms and condition stated in the agreement. Borrower’s liability is absolute and unconditional, and the loan agreement shall continue until the entire amount with the promised interest is paid. The borrower is known as principal debtor.

GUARANTOR

A guarantor is referred to a person who guarantees to pay the debt of the borrower in case of his incapability to fulfill the obligation. A guarantor is also regarded as surety. The guarantor guarantees the payment of the loan and has no claim over the asset or service purchased by the borrower. Usually, the guarantor is either the part of the family, close relative or friend. The guarantor has a primary responsibility to repay the money borrowed.

According to sec 128 of the Indian Contract Act, 1872 the liability of the surety is co-extensive with that of the principal debtor unless the contract otherwise provides it. Therefore when a default is made in making repayment by the principal debtor, the banker will be able to proceed against the guarantor/surety even without exhausting the remedies against the principal debtor. As such, where a banker has claimed the guarantor on account of the default made by the principal debtor, the liability of the guarantor is immediate. In case, the said guarantor refuses to comply with the demand made by the creditor/banker, despite having sufficient means to make payment of the dues, such guarantor would also be treated as a willful defaulter’’.

This section clearly shows that if the borrower is unable to pay the debt, the burden to pay back the loan amount lies on the shoulder of the guarantor and it may also affect the credit score of the guarantor if he is unable to repay the loan.

SARFAESI ACT, 2002

Securitization and reconstruction of financial assets and enforcement of security interest Act of 2002 deals with the registration of Asset Reconstruction Companies by the RBI. It supports the financial institution to auction the properties of the defaulter of the loan without the intervention of the court. Under this Act, financial institutions have various rights under sec 13 of the SARFAESI Act. It rectifies as well as identifies the problem related to Non-Performing Assets. Securitization, asset reconstruction, security enforcement without the court’s intervention are the three different processes to recover the non-performing assets. It helps in the rapid recovery of the NPA. If any default is made, the bank can seize the securities except the agricultural land without any intervention from the bank. If the asset is unsecured, the bank has to move to the court and file a civil case against the defaulter. In case of any default, the bank can give written notice to the defaulter to clear its dept within 60 days. If the borrower is unable to comply with the notice the bank can take the property security, sell off the property or appoint any person to handle the case. It also states few rights of the borrowers. If the borrowers at any time before the auction can remit the dues and save his security if any authorized officer acts illegally, he will be penalized, and the borrower will be entitled to compensation if any grievances the borrower can approach DRT and after that DRAT before 45 and 35 days respectively.

INSOLVENCY AND BANKRUPTCY CODE, 2016

The Insolvency and bankruptcy code, 2016 is the laws in India which aim to merge the existing laws by creating a single law for bankruptcy and insolvency. It was introduced in Lok Sabha in 2015, but it was passed in 2016. IBC has brought a standard shift in the recovery process by introducing the concept of ‘creditor in control' instead of ‘debtor in possession.' It is used for the recovery of bad debts by the banking sector or for safeguarding the Continue Read

Proposed Wage Code - Significance and Issues

The subject of labour is mentioned in the Concurrent List in the Constitution, which means that both Centre and states can make laws on it. At present, there are multiple laws governing different labour issues such as industrial disputes, payment of wages and bonus and working conditions in factories. To establish a uniform structure and for ease of compliance, the Code on Wages, 2017 (hereinafter referred to as the Code) was introduced in the Lok Sabha in 2017. It is one of the codes proposed to be introduced as part of labour law reforms. The other codes are Code on Industrial Relations, Code on Social Security and Code on Occupational Safety, Health, and Working Conditions. This article discusses the key features of the Code on Wages and the changes that it brings to the existing regime.

Wage Code- Key Features

• The Code applies to all employees except members of the Armed Forces.
• The Central or state government will fix the minimum wage payable to the employees. While the Central Government will set minimum wages for employment such as railways, mines, oil field, major ports and air transport services among others, the state government will set minimum wages for all other establishments.
• The central or state government has to take some factors into account while fixing the minimum wage. These factors include the skill required, the difficulty of the work assigned to the worker, the geographical location of the place and such other factors that the government deems necessary.
• The Code specifies the components that the minimum wage fixed or revised by the Central or state government may contain. It also lays down the procedure to be followed for fixing or revising minimum wage.
• The minimum rates of wages have to be reviewed or revised by the government (central or state) at an Continue read