HINDU UNDIVIDED FAMILY (HUF)
A joint Hindu family possesses ancestral properties and
carries on ancestral business. The ownership of such property passes on to the
members of the family according to the Hindu Law. In case of joint Hindu family
governed by the Mitakshara School of Hindu Law, every male member of a family
acquires an interest in the joint property by birth. After the enforcement of
the Hindu Succession Act, 1956, the share of a deceased coparcener, who was
member of the joint Hindu family, is also divisible amongst his wife, daughters
and other female relatives as given in the Act. While dealing with the account
of a joint Hindu family and granting it a loan, the banker is naturally faced
with a difficult task of ascertaining the right of the coparceners in the joint
family. The banker should take the following legal precautions in this regard:
The eldest male member as the Karta manages the family
business and its assets. According to the law, the Karta has an implied
authority to take a loan, execute necessary documents and pledge the securities
on behalf of the family for the purpose of the business of the family. However,
to be on the safe side, the loan documents should be executed by all the adult
male members of the family or with their consent by the head of the family in
his capacity as its Karta or manager.
The power of the Karta to borrow money on the security of
the family property is subject to one limitation, i.e. the loan is taken for
the purpose necessary for or beneficial to the family. He can take a loan and
pledge the property of the family for the purpose of meeting the needs of usual
business of the family and not for any speculative business or for starting a
new business. Other coparceners will not be liable for a loan contracted for
the purpose other than that in the interest of the family business.
The coparceners liability in case of loans granted to a
joint Hindu family is limited to the extent of their interest in the joint
property. But if the adult coparceners themselves contract along with the Karta
of ratify the contract entered into by the Karta they become personally liable
for the loan.
PROPRIETORSHIP
A sole proprietorship, or simply proprietorship, is a type of business entity which legally has no
separate existence from its owner. Hence, the limitations of liability enjoyed
by a corporation and limited liability partnerships do not apply to sole
proprietors. All debts of the business are debts of the owner. It is a
"sole" proprietor in the sense that the owner has no partners. A sole
proprietorship essentially means a person does business in their own name and
there is only one owner. A sole proprietorship is not a corporation; it does
not pay corporate taxes, but rather the person who organized the business pays
personal income taxes on the profits made, making accounting much simpler. A
sole proprietorship need not worry about double taxation like a corporate
entity would have to.
Most sole proprietors will register
a trade name or "Doing Business As". This allows the proprietor to do
business with a name other than his or her legal name and also allows the
proprietor to open a business account with banking institutions.
An entrepreneur may opt for the sole
proprietorship legal structure because of the advantages it offers to small
businesses. There is better control and business administration possible since
there is only one owner, who can make decisions quickly without having to
consult others. In most cases, there are no legal formalities to forming or
dissolving a business. Furthermore, in many jurisdictions, a sole
proprietorship files simpler tax returns to report its business activity. All
of the profits from the business go right to the owner. A sole proprietorship
often has a lot of freedom from government regulations. Every form of business
ownership has some sort of government regulation, but in general, the sole
proprietorship has the least.
In the case of “Sole Proprietorship”, the Govt. does not
see any difference between the firm and the individual. If you are a plumber
named Raju Sharma and you start a plumbing service firm called “Flush” which is
a sole proprietorship, the government does not differentiate between “Flush”
and “Raju Sharma” This means that if someone sues “Flush” and “Flush” owes that
person a huge sum of money, it is as good as Raju Sharma owes that person a
huge sum of money. Raju Sharma's bank accounts, property and even his house may
be used to settle the claim.
This is the biggest disadvantage of sole proprietorships.
Because of this reason, sole proprietorships are generally started if the
business is small and there is “not much risk involved”.
Characteristics of
Sole Proprietorship
Single Ownership: A
single individual owns the sole proprietorship! That individual owns all the
assets and properties of the business. He alone bears all the risk of the
business.
No sharing of profit
& loss: The entire profit out of the sole proprietor ship
business goes to the sole proprietor. If there is any loss, it is also borne by
the sole proprietor alone. Nobody else shares any of the profit and loss of the
business.
Low capital: The
capital required by a sole proprietorship is totally arranged by the sole
proprietor. He raises the capital either from his personal resources or by borrowing
from friends, relatives, banks or financial institutions. Since there is only
one person raising capital, very low capital can be raised.
One-man control: The
controlling power in a sole proprietorship business always remains with the
owner alone. The owner or proprietor alone takes all the decisions to run the
business. He may take decisions though a consultant or some advice, but the
final decisions are always in his hand.
Unlimited Liability: The
liability of the sole proprietor is unlimited. This implies that, in case of
loss the business assets along with the personal properties of the proprietor
shall be used to pay the business liabilities.
Almost no legal formalities: The formation and operation of a sole proprietorship
requires almost no legal formalities. However, the owner may be required to
obtain a license from the local administration or from the health department of
the government, whatever is necessary depending on the nature of the business.
Partnership Firm
A partnership is not regarded as an entity separate from
the partners. The Indian Partnership Act, 1932, defines partnership as the
“relation between person who have agreed to share the profits of the business,
carried on by all or any of them acting for all.” A partnership firm is thus
established by an agreement amongst the partners. This agreement may be oral or
written. The object of constituting a partnership firm must be to –
Ø Carry on a business which may be conducted by all the
partners or by any of them on behalf of the rest, and
Ø To share the profits of such business amongst themselves.
The partnership deed contains the details of the agreement reached between the
partners. The Indian Partnership Act, 1932, lays down the general provisions
which govern a partnership business. A banker should take the following
precautions while opening an account in the name of a partnership firm:
Number of partners:
The banker should very carefully examine the Partnership Deed, which is the
charter of the firm, to acquaint himself with the constitution and business of
the firm. The banker should see that the number of partners does exceed the statutory limit. According to Section
11 of the Companies Act, 1956, a partnership firm consisting of more than 10
persons for the purpose of carrying on banking business and of more than 20
persons for the purpose of carrying on any other business for the acquisition
of gain or profit, shall be an illegal association unless it is registered
under the Companies Act, 1956, or is formed in pursuance of some other the
Indian Law or is a joint Hindu family carrying on such business. If the number
of partners exceeds these limits, the partnership becomes an illegal
association of persons, which cannot enter into any contract, and cannot sue or
be sued. The banker must refuse to open an account in the name of a firm in
such cases. The minimum number of partners in a firm must be two, excluding a
minor partner, who is not competent to enter into a contract. A minor may be
admitted into the partnership with the consent of all other partners but he
shall not the date when the minor partner will attain majority so that a fresh
partnership letter signed by him and partners is obtained by the banker.( to read “does not exceed”)
Title of the firm’s Account: A firm’s account should always be opened in the name of
the firm and not in the name of names the individual partner / partners.
Opening of an account:
An account in the name of a firm may be opened by a banker on receipt of an
application from one or more of the partners. Banks, however, insist that all
the partners should join to open the firm’s account. If any partner ha gone out
of the country, the rest of the partners can open a bank account in the name of
the firm. Specimen signatures of all the partners should also be taken for the
purpose of record. But if any of the partners is deprived of the right to open
an account in the firm’s name and this fact is within the knowledge of the
banker, he should not open the firm’s account at the request of such partner. The
banker should therefore, confirm the right of the applicant/applicants to open
an account in the name of the firm from the partnership deed or from any other
available evidence, e.g. the authority letter signed by all other partners.
The partnership Letter or Mandate: The banker should take a letter signed by all the
partners stating
Ø The names and addresses of the partners:
Ø The nature of the business undertaken by the firm; and
Ø The name /names of the partner/partners who will operate
the account on behalf of the firm and
will have the authority to draw and accept bills etc., and to sell and mortgage
the property of the firm.
Ø The banker should honor the cheques signed by all the
partners or by those partners who are authorized to operate the account.
Revocation of authority to operate the account: The authority given in favor of a particular partner /
partners to operate the firm’s account may be withdrawn by any of them by
giving a notice to the banker. In such a circumstance, the banker should stop payment
of cheques, which are signed by all the partners. A partner can also stop
payment of a cheque issued by any other partner on the firm’s account.
The power to revoke the authority to operate the account
is vested in any partner who is a sleeping partner or is not authorized to
operate the account.
A partner
authorized to operate firm’s account cannot delegate his authority to another
person without the consent in writing of all other partners. If such consent is
given by all of them, the authorized partner may execute a Power of Attorney in
favor of such other person.
If a cheque payable to the firm is enclosed by a partner
in his own favour and is deposited by him to be credited to his personal
account, the banker should do so after making an enquiry about it from other
partners and after being satisfied about it. Otherwise, he will bear the risk
of losing the statutory protection granted to the collecting banker under the
Negotiable Instruments Act, 1881. The banker should be particularly careful in
this regard if the partner sends such a cheque in response to a request from
the bank to repay overdraft taken by him from the bank.
Implied authority of a partner: A partner acts as an agent of the firm for the purpose
of the business of the firm and binds the firm by his acts and deeds. According
to Section 19(1) of the Indian Partnership Act, 1932, “ the act of a partner
which is done to a carry on, in the usual way, business of the kind carried on
by the firm binds the firm.” This authority of a partner is called the implied
authority. Every partner is liable both individually and jointly with other
partner for all the acts of the firm or the instruments executed provided the
same are done –
Ø In the name of the firm; and
Ø In connection with the business carried on by the firm.
Ø It is to be noted that while one of the partners can bind
the firm for the debts incurred by him on behalf of the firm. It is not
necessary that all the partners sign documents for the debt. Signature of only
one partner will be sufficient. However, as a precautionary measure, banks take
the signatures of all the partners on loan documents.
Ø If a partner signs an instrument on behalf of the firm,
his intention to do so must be as apparent from in which he has signed. If a
partner does something, which is not, related to the kind of business carried
on by the firm, other partner and the firm will not be liable for the same. For
example, if a partner of a firm dealing in cotton textiles enters into a
contract for the purchase of food grains, the latter will not be binding on the
firm unless other partner have authorized the said partner to undertake such
business on behalf of the firm. The partner undertaking such unauthorized
business will himself remain liable for such transaction. Similarly, if a
letter of guarantee or an indemnity bond is to be executed by a firm, the
entire partners must sign it unless the normal business of the firm is to give
guarantees. One of the partners, in the normal course, cannot give guarantee on
behalf of the firm, because such an act is not within the implied authority of
a partner.
Borrowing power of a partner: If is evident from Section 19(1) of the Indian
Partnership Act, 1932, that a partner may justifiably do all that he is
expected to do for carrying on the business of the firm in the usual way. It
implied that a partner, who is not prohibited from managing the affairs of the
firm, possesses the power to borrow money on behalf of the firm for the purpose
of carrying on the firm’s business. Such a debt shall be binding on the firm
and all the partners shall be liable to pay the same. But if the powers of a
partner are limited by the partnership deed or if he is not permitted to manage
the affairs of the firm, he does not possess the power to borrow money on
behalf of the firm.
According to Section 19(2), a partner does not posses, in
the absence of any usage or custom of trade to the country, implied power to do
the following:
To submit a dispute relating to the business of the firm
to arbitration;
To open a bank account on behalf the firm in his own
name;
To withdraw a suit filed on behalf of the firm;
To admit nay liability in
a suit against the firm; (change to any)
To acquire immovable property on behalf of the firm or to
transfer the same; and
To enter into partnership on behalf of the firm.
But he can do any of the above-mentioned acts with the
express authority of other partners or if the usage or custom of the trade
permits to do so. For example, the immovable property of the firm cannot be transferred
until all the partners jointly transfer their interest. If one of the partners
is empowered by other partners in these regards he may do so on behalf of the
firm.
Liability of partners in respect of the firm’s debts: The
liability of the partner of a firm is unlimited and every partner is liable to
pay the obligations and debts of the firm to an unlimited extent. But if debts
are due form the firm and also from the partners on the dissolution of the
firm, Section 49 of the Indian Partnership Act, 1932, lays down that the debts
of the firm shall be settled out of the property of the firm and surplus, if
any, shall be available for paying the private debts of the partners. But if
the partners are also personally indebted, the personal assets of all the
partners shall be applied first to meet the claims of their individual
creditors. Out of the remainder, if any, claims of the firm’s creditors will be
met.
But if the partners sign the loan documents in both of
their capacities i.e. individually as well as jointly, the creditors of the
firm can recover their debt simultaneously from the assets of the firm and the
partners, the banker should, therefore, insist that the partners of a firm sign
the documents in both the capacities i.e. individually as well as jointly. This
will enable the banker to recover the amount from individual assets of the
partners and also to exercise his right of set-of against the credit balance in
their personal accounts with him. It is
usual practice at the time of opening an account. The joint and several
liability of the partners continues until –
all debts of the firm are discharged, or
the constitution of the firm changes due to death,
retirement or insolvency of a partner and the banker is informed thereabout.
The personal property of partner of a partner may be
attached even before judgment is delivered in a suit against the firm and its
partners.
Death of a partner: If a partner dies, the firm stands dissolved
automatically, if an agreement to the contrary does not exist. It means that
the firm is not dissolved on a death of a partner if the partnership deed
specifically provides for this. This deceased partner’s heirs cannot succeed
him as partners. They can demand the share of the deceased in the firm from the
surviving partners, or they may be admitted as new partners by the existing
partners.
If the firm stands dissolved on the death of a partner,
the banker must close the firm’s account shows a debit balance at the time of a
partner’s death because the latter’ estate would be liable to pay the debts
incurred by the firm before his death. Hence to determine the liability of the
deceased partner, the banker should close the account of the firm soon after
the death of a parter. If he defaults in doing so, the rule in Clayton’ case
will apply.
It the firm does not stand dissolved, it is reconstituted
by the surviving partners with or without the admission of a new partner. The
banker should open a new account in the name of the reconstituted firm and
obtain a fresh mandate and undertaking from the partners. In any case the
banker should not honour the cheques drawn by the deceased partner without
confirmation from the surviving partners.
Retirement of a partner: When a partner retires, his liability towards the banker
or any other third party ceases in respect of all transactions undertaken
subsequent to the date of his retirement. But if the banker is not informed
about his retirement, the retiring partner continues to be liable for the
transactions of the firm even after the date of his retirement. The retiring
partner should give a public for this purpose to terminate his liability to the
third parties.
If the ban account of the
firm at the time of retirement of a partner shows a debit balance, the banker
must close the account of the firm, in order to retain his right to claim money
from the retiring partner. If this is not done, the rule in Clayton’s case will
apply. If an account shows a credit balance, the banker need not close it but
the cheques drawn by the retiring partner should be honored after securing
confirmation from other partners. On the opening of a new account or on the
continuance of the existing account after the retirement of a partner, a fresh
mandate should be taken from the partners of the new firm.(change to bank)
Liability of partners on Reconstitution / Dissolution of the firm
On retirement of partners or on reconstitution or
dissolution of the firm, and on receipt of notice thereof by the banker the
liability of the partners shall be as follow:
The liability for debts arising out of financial facility
would continue in respect of retired partner(s) till the date of notice. Their
liability for future loan ceases immediately on serving such notice.
Unless there is an agreement to the contrary, the firm’s
accounts should be closed, because the identity of the firm as a constituent of
the Bank is changed. If the firm is reconstituted, fresh accounts should be
opened.
If, on the reconstitution of the firm, the account is not
closed and the continuing partner(s) is/are allowed to operate the accounts(s)
of the erstwhile firm, the continuing partner(s) will alone be liable for
financial facilities made after notice.
If the continuing partner(s) is/are treated as debtor,
the retired partners(s) does/do not get discharge of the liability to repay the
debts(s) as on the date of notice, unless released by the Bank expressly or
impliedly.
On receipt of notice, the proper course for the bank is
to freeze all the accounts, if there is more than one merge them with each
other and take the consolidated balance resulting from the merge of credits and
debits in all the accounts. Such combination is compulsory.
Pledged goods held as security be realized by giving
notice to the erstwhile partners, because they are entitled to the benefits of
the security. Otherwise bank will be held for negligence and the erstwhile
partners can claim discharge to the extent of the value of the pledged goods.
Insolvency of a partner: In case of insolvency of a
partner, the partnership comes to an end, if an agreement to the contrary does
not exist. The insolvent partner ceases to be a partner with effect from the
date he is declared as insolvent and he shall not be liable to the firm for any
of its transactions thereafter. The insolvent partner does not remain competent
to operate the firm’s account. The solvent partner can operate the account for
winding up the affairs of the firm. The banker should honor the cheques drawn
by the insolvent partner before his adjustment only after getting confirmation
from the solvent partners. Bankers usually close the account of the firm and
open a new account in the name of the reconstituted firm to determine the
liability of the insolvent partner. Otherwise the rule in Clayton’s case will
apply.
JOINT
STOCK COMPANIES
A
company is a legal entity distinct from its shareholders. The Companies Act
1956 defines the laws relating to operations of the company. The liability of
shareholders is limited to the extent of their shareholdings as against a
partnership where the liability of partners is joint and several.
The
memorandum of Association is the document that defines the objectives and
powers of the company in dealing with outsiders. It is the charter of the
company. The Articles of Association is the documents that specifics the
internal rules and regulations governing the company.
The
two major types of companies are:
Private
Limited Company
Public
Limited Company
The
differences between a private limited company and public limited company are as
follows:
Sr.
No.
|
Item
|
Private
Limited Company
|
Public
Limited Company
|
1.
|
Minimum
members
|
2
|
7
|
2
|
Maximum
members excluding employees and ex-employees
|
50
|
Unlimited
|
3
|
Minimum
directors
|
2
|
3
|
4
|
Certificate
to commerce business
|
No
such requirement. Can commence business immediately on getting a Certificate
from the registrar of companies
|
Certificate
to commerce business is essential
|
5
|
Name
of the company
|
Should
contain the word ‘Private Ltd’
|
Should
contain the word “Ltd” at the end
|
6.
|
Transfer
the shares
|
Shares
cannot be transferred to third parties without the consent of other
shareholders
|
No
such restriction
|
7.
|
Subscription
from the public
|
Cannot
invite subscription from the public to shares / debentures.
|
No
such restriction
|
8
|
Memorandum
& Articles of Association
|
Required
|
Required
|
9
|
Certificate
of Incorporation
|
Required
|
Required
|
Consider
the following scenario:
Fitness
India Private Limited is a new company started by Sathish, Sundar
and Sudhir. They are the directors and have invested Rs. 5 lakh each in the
company. They need a bank account to route their business transactions. What
are the documents required for opening the account?
The
following documents are required to open a current a/c of a company:
- Certified copy of the updated Memorandum of Association
- Certified copy of the updated Articles of Association]
- Certified copy of the Certificate of Incorporation
- Board Resolution specifically authorizing the opening of a current a/c with the bank
Since
a company is an impersonal entity, the Board of Directors takes its decisions.
A resolution of board evidences the decision taken by the board.
A
resolution appointing the bank, as bankers to the company and naming the
person(s) authorized to operate the account should contain the following:
- Authority of persons signing the cheques with limitations, if any
- Authority that can be executed on the company’s behalf should be specific. The documents creating charge over the company’s assets or otherwise binding the company should be specified.
- Authority should be specific for signing of indemnities, guarantees, purchase/sale of securities and withdrawal of securities from the bank.
The
Board Resolution should be certified by the Chairman, countersigned by the
company secretary and signed by two directors of the company. The certificate
of commencement of business is an additional document required in case of
Public Limited companies. The specimen signatures of the directors, authorized
to operate the account, duly certified by the Chairman will also be obtained. Any
change in the directors or their
authority to operate the account has to be evidenced by a fresh
resolution.
Any
instruction to the bank has to be issued by the authorized directors only.
Since the company is independent of the directors, it does not affect the
existence of the company. Hence, a cheque signed by a director can be
paid even after the death of the director unlike in the case of a partnership
or proprietorship firm.
Official Liquidator
In
case of liquidation of a company, the court appoints an official liquidator. He
is required to open an account as the official liquidator of the company. All
money received by him shall be deposited in the account. Only “order cheques”
should be issued on such accounts.
Clubs
Clubs may be run as a business
or as a not-for-profit entity. It could be registered as a company or society
or trust. The procedure to be followed for opening the account of a club and
allowing operation will depend upon its constitution.
Self Help Groups (SHGs)
SHGs are unregistered
associations of up to 20 members. Poor people for their mutual benefits form
sHGs. Though SHGs are not registered, banks open accounts of SHGs to help the
poor members
Government Departments and Municipal
Bodies
Government Departments/Bodies/Agencies can
open saving account provided they satisfy the following conditions:
They
do not receive any funds from the government budget for their functioning.
They
submit a declaration that they do not receive any budget allocation.
When a government agency receives subsidy or grant
for implementing a special programme sponsored by the government, it can open a
savings account with authorization from the government department.
The RBI
has specifically mentioned that a saving account cannot be opened for Government
agencies like (remove
The)
Municipal
Corporations or Municipal Committees
Panchayat
Samitis
State
Housing Boards
Other
Government bodies receiving budgetary allocation
A current account can be
opened for government departments, bodies and companies.
SOCIETIES AND
CHARITABLE INSTITUTION
Societies,
charitable and religious institutions, libraries, schools, colleges, etc., not
engaged in trading activities, maintain their account with the banks. The banks
should observe the following precautions in dealing with them:
The society must be incorporated:
The Societies Registration Act, 1860, provides for the registration of
societies for the promotion of literature, science, fine arts or for charitable
purposes. Such institutions may also be incorporated under the Companies Act,
1956, or the Co-operative Societies Acts. A society gets the legal recognition
as an entity separate from its members only after its incorporation under any
of these Acts. Thereafter, it is empowered to enter into valid contracts and to
sue or be sued. The banker should, therefore, ensure that the applicant society
is a properly incorporated body. An unregistered society cannot be sued in law.
Rules and by-laws of the Society:
A registered society is governed by the provisions of the Act under which it
has been registered. It may have its own Constitution, Charter or Memorandum of
Association and rules and by-laws, etc., to carry on its activities. A copy of
the same should be furnished by the society to the banker to acquaint the
latter with the powers and functions of the persons managing its affairs. The
banker should ensure that the persons observe these rules responsible for
managing the society.
Resolution of the Managing Committee: For opening a bank account,
the Managing Committee of the society must pass a resolution
- Appointing the bank concerned as a banker of the society;
- Mentioning the name / names of the person or persons, who are authorized to operate the account; and
- Giving any other directions for the operation of the said account.
- The bank must obtain a copy of resolution for its own record must obtain a copy of the resolution.
Borrowing Power of the Society: In case a registered society intends to borrow, the
banker must ascertain the borrowing powers of the society from its Charter or
Memorandum. The purpose for which such borrowing is permissible must also be
noted and the powers of the managing committee or its office-bearers to create
a charge over the assets of the society for the purpose of borrowing should be
enquired into. The Managing Committee must pass a resolution for this purpose
and a copy thereof must be sent to the banker.(change
to “powers” and change “the” to “a”)
Death or Resignation: In case the person
authorized to operate the account on behalf of a society dies or resigns, the
banker should stop operation of the society’s account till the society
nominates another person to operate its account.
Care to be exercised in case of Personal
Accounts: If
the person authorized to operate the society’s account is also having his
personal account with the same branch of the bank, the banker is under an
obligation to ensure that the funds of the society are not being credited to
the personal account of the said perso
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