What is Winding up of a Company: Process and Modes

What is meant by Addition of Partner?

The addition of a partner involves introducing a new member into an existing partnership firm. This decision requires the unanimous consent of all current partners unless the partnership agreement stipulates otherwise. The incoming partner must possess the legal capacity to enter into a contract, as outlined in the Indian Contract Act, 1872. New partners bring specialised skills and industry expertise, enhancing operational efficiency. Their networks open doors to new business opportunities and markets. Overall, this flexibility enables firms to bring in fresh capital, skills, and expertise to support growth and expansion.

Process Of Addition Of Partners

The process of introducing a new partner involves several key steps:

1. Agreement on terms and conditions: The existing and incoming partners must mutually agree on aspects such as profit sharing ratio, capital contribution, roles and responsibilities.
   
2. Execution of deed of admission: A supplementary agreement containing the terms of admission should be drafted and signed by all partners, including the new entrant.
   
3. Capital contribution: The incoming partner must bring in the agreed capital.
   
4. Intimation to Registrar: Form 3 along with the prescribed fee should be filed with the Registrar within 30 days of the change.
   
5. Notification to stakeholders: The firm must inform its bank, tax authorities, and vendors/suppliers about the new partner's admission.
   

Documents Requirement For Addition of Partners

The following documents are typically required for the addition of a partner:

• A Digital Signature Certificate (DSC) is necessary for e-filing with the Registrar of Companies (ROC).
  
• Form 3 must be filed to update the LLP agreement, reflecting the new partner’s inclusion.
  
• Form 4 is used to notify the ROC about the appointment and obtain the partner’s consent.
  
• A Limited Liability Partnership Identification Number (LLPIN) is essential for all filings.
  These documents ensure the smooth onboarding of a new partner while maintaining regulatory compliance under the LLP Act, 2008. of Admission/Supplementary Partnership Deed
  

Advantages Of Adding Partners in Partnership Firms

The introduction of a new partner offers several benefits to a partnership firm:

• Capital infusion to support business growth and expansion
  
• Fresh expertise and skills to enhance the firm's capabilities
  
• Shared responsibilities and decision-making
  
• Potential for increased profitability and market share
  

What is meant by Removal of Partner?

Partner removal in a partnership firm or LLP occurs when an existing partner exits, either voluntarily or by a decision of other partners, as per the partnership agreement. The process must comply with the Indian Partnership Act, 1932, which allows removal only if expressly stated in the agreement and with the consent of all partners (except the one being removed). In LLPs, removal must also adhere to the Limited Liability Partnership Act, 2008 and LLP agreement terms.

Why Removal of a Partner May Become Necessary?

The removal of a partner may become necessary due to several reasons:

• Voluntary retirement or withdrawal
  
• Breach of partnership agreement or trust
  
• Incapacity or inability to perform duties
  
• Misconduct or negligence detrimental to the firm
  
• Insolvency or bankruptcy
  
• Death of the partner
  

Steps Involved In Removing a Partner

The process of removing a partner typically involves:

1. Serving notice: A notice of the proposed removal, specifying the grounds, should be served on the concerned partner.
   
2. Considering reply: The concerned partner must be allowed to submit a response to the notice.
   
3. Majority approval: Obtain at least 75% approval from the remaining partners through a resolution.
   
4. Executing deed of retirement/reconstitution: The change in partnership should be documented through a formal deed.
   
5. Intimating Registrar: Form 4 with the applicable fee should be filed with the Registrar within 30 days.
   
6. Settlement of accounts: The outgoing partner's accounts should be settled as per the partnership deed or mutual agreement.
   

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Section 31: Introduction of a New Partner

Section 31 of the Indian Partnership Act, 1932, governs the introduction of a new partner into an existing firm. It stipulates that a new partner can only be admitted with the consent of all existing partners unless the partnership agreement provides otherwise.

Rights and Liabilities of a New Partner

Upon admission, the new partner becomes entitled to share in the profits and is liable for the losses and debts of the firm from the date of their entry, unless agreed otherwise. They have the right to access the firm's books of accounts and to participate in the management of the business. However, they are not liable for any acts of the firm before their admission, unless they expressly assume such liability.

Section 32: Retirement of a Partner

Rights of Outgoing Partner

Section 36: Right to Conduct a Competing Business

Unless restricted by an agreement, a retiring partner has the right to carry on a business competing with that of the firm and to advertise such business. However, they cannot use the firm's name or represent themselves as carrying on the firm's business.

Right To Share

The retiring partner is entitled to receive their share of the firm's assets, including goodwill, as per the terms of the partnership agreement or mutual understanding. They also have the right to share in the profits of the firm until the date of their retirement.

Section 37: Entitled to Claim

The outgoing partner has the right to claim their due share from the continuing partners. If not paid outright, they are entitled to interest at 6% per annum on the amount due.

Liabilities of Outgoing Partner

Section 32(3) and (4): Liability to the third party

The retiring partner remains liable to third parties for all acts of the firm until public notice of their retirement is given. They are also liable for any obligations incurred by the firm before their retirement unless discharged by agreement.

Section 32(2): Agreement of Liability

The retiring partner and the continuing partners may agree to discharge the retiring partner from all liabilities of the firm, but such an agreement is not binding on third parties unless they are aware of it.

Section 33: Expulsion of a Partner

A partner may be expelled from the firm by a majority of partners if such power is conferred by an express agreement between the partners. The power to expel must be exercised in good faith. Unless agreed otherwise, the expelled partner can claim the value of their share as if the firm were dissolved on the date of expulsion.

Section 34: Insolvency of a Partner

If a partner is adjudicated as insolvent, they cease to be a partner from the date of the insolvency order. Their share in the firm vests with the Official Assignee or Receiver appointed by the court. The firm is dissolved unless the solvent partners buy the insolvent partner's share and continue the business with proper intimation.

Section 35: Death of a Partner

In the event of a partner's demise, their legal heirs or executors step into their shoes. The firm dissolves from the date of death unless the partnership deed provides for continuity. The deceased partner's share in the firm's assets, goodwill, and profits is settled as per the partnership agreement or mutual understanding.

Section 38: Continuing Guarantee Revocation

The estate of a deceased or insolvent partner, an expelled or retired partner, is not liable for the firm's debts contracted after their death, insolvency, expulsion or retirement. A continuing guarantee given to a firm or a third party in respect of the firm's transactions is revoked as to future transactions by any change in the firm's constitution.

Conclusion

Changes in the composition of a partnership firm through the addition or removal of partners are significant events. While new partners can infuse capital and expertise, the exit of partners due to retirement, expulsion, insolvency or death can impact the firm's continuity and harmony. The Partnership Act provides a framework for inducting and removing partners. The terms of entry and exit should be clearly documented in the partnership agreement to minimise disputes. Intimations to the Registrar and third parties should be made promptly. With some foresight and planning, partnership firms can manage changes in their constitution smoothly and continue their business journey.

Frequently Asked Questions

Rules for Selecting Company Name Under the Companies Act

When you select a company name, it must comply with the Companies Act to ensure uniqueness and legal approval. Here are the key rules to follow:

Avoid Similar or Identical Names

Your company name must not closely resemble an already registered business. The ROC conducts a company name check, and if the proposed name is found to be too similar to an existing one, it will be rejected. For example, if "GreenTech Solutions Pvt Ltd" is already registered, "GreenTech Solution Pvt Ltd" may be rejected due to similarity.

Restriction on Certain Words

You cannot use words that suggest a connection with the Central or State Government, local authorities, or government bodies, unless prior approval is obtained. For instance, names like "India National Bank Ltd" or "Government Infrastructure Pvt Ltd" require special permissions.

Prohibited Expressions

Some words and expressions are restricted under Rule 8B of the Incorporation Rules. You must seek approval from the Central Government before using them in your LLP or company name.

Mandatory Suffix for Entity Type

The company name must clearly indicate its legal structure.

• A One Person Company (OPC) should have "(OPC) Private Limited" in its name.
  
• A Private Company must include "Private Limited" (Pvt Ltd).
  
• A Public Company must end with "Limited" (Ltd).
  

A Brief About Acceptable Name for LLP

An acceptable LLP or company name in India consists of three key components. The Name Part that gives the business a unique identity, such as "Bright" in Bright Solutions LLP. The Object Part that reflects the company's activity, like "Solutions" indicating a service-based business. The Constitution Part that defines the legal structure, such as "LLP" in Bright Solutions LLP.

Name Part

The Name Part is the unique and distinguishable element of a company or LLP name. It must comply with the Companies Act 2013 or the LLP Act 2008 and should not be identical or deceptively similar to existing companies, LLPs, or registered trademarks within the same industry. The ROC verifies the name to ensure distinctiveness and prevent duplication.

For example, a name like Bluewave Technologies LLP is acceptable because it is unique and clearly identifiable. However, Bluewave Tech LLP may be rejected as it closely resembles an existing name. Similarly, GreenVista Textiles Private Limited is a valid name, but Green Vista Private Limited may be considered too similar to an existing business and could face rejection. Ensuring a distinct name that does not match or closely resemble an existing company improves the chances of approval.

Object Part

The Object Part in a company or LLP name defines its primary business activity. It must be clearly stated to indicate the company's purpose and ensure compliance with naming regulations.

If two companies have similar name parts but different object parts, both names may still be approved, as long as they belong to distinct industries. However, names without a clear object part or with generic words like "dash Private Limited" are too vague and may be rejected by the ROC because it does not specify what the company does.

Related Read: Difference Between LLP and Partnership

Examples of Common Object Parts in Company and LLP Names

Constitution Part

The Constitution Part indicates the legal structure of the business. It must match the type of entity being registered, ensuring clarity in compliance and business operations. Here are the specific terms which are used for different entities:

• Private Limited Company (Pvt Ltd) - For privately held businesses
  
• One Person Company (OPC) - For single-owner companies
  
• Limited Company (Ltd) - For publicly listed businesses
  
• Limited Liability Partnership (LLP) - For partnership-based entities with limited liability
  

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Minimum Authorised Capital For Certain Words

When registering a company, using specific words in its name requires meeting minimum authorised capital requirements as per the Companies Act 2013. Words like "Corporation," "International," and "Industries" have higher capital requirements to ensure that only financially strong businesses use them. This helps maintain credibility and prevents misuse of these terms by companies with limited resources.

Before you apply to register a company name, verifying the capital requirements is essential to ensure compliance and avoid rejection. The table below outlines the required minimum authorised capital for specific words:

When Will Companies House Refuse to Register a Company Name?

Companies House may reject a name if it does not comply with legal guidelines. Below are the key reasons why a company name may be refused:

• Identical or Too Similar to an Existing Name: If the proposed name is the same or closely resembles an already registered company, it will be rejected.
  
• Offensive or Illegal Names: Any name containing offensive, abusive, or illegal terms will not be approved.
  
• Implying Government Affiliation: Names suggesting an association with the government, public authorities, or international organisations require special approval.
  
• Use of Sensitive Words or Symbols: Certain words, such as "Royal," "Bank," or "Trust," require prior consent before use.
  
• Misleading Use of Business Terms: Using terms like "Limited" (Ltd.), "Public Limited Company" (PLC), or "LLP" incorrectly or misleadingly can lead to rejection.
  

Objections to Company Names

Even after registration, objections to a LLP or company name may arise if it does not comply with legal requirements. Ensuring that the name is unique and non-misleading is crucial to avoiding disputes. Common reasons for objections include:

• Too Similar to an Existing Business: If a company name closely resembles another registered entity, the affected business can file an objection.
  
• Misleading Information During Registration: If false or inaccurate details were provided while registering the name, objections may be raised.
  
• Failure to Meet Registration Conditions: A name that does not adhere to naming regulations or lacks necessary approvals may face challenges.
  
• Opportunistic Registration: If a name is registered to take advantage of another company’s goodwill, it can be legally disputed.
  

Related Read: How much does an LLP cost in India?

How to Check Company Name Availability Online?

Before registering a company, you must check whether the proposed name is available to avoid rejection. The Ministry of Corporate Affairs (MCA) portal provides an online tool to verify company name availability. Here’s a step-by-step guide to checking a company name online:

1. Visit the MCA Website: Go to www.mca.gov.in.
2. Access the Name Availability Tool: Under the ‘MCA Services’ section, select ‘For Services’ from the drop-down menu and then select ‘Check Company/LLP Name’.
3. Enter the Proposed Name: Type the desired company name in the search box and click on the ‘Search’ button.
4. Review the Results: The portal will indicate whether the name is available or already registered.

Additional Checks for Better Approval Chances

• Trademark Search: Use the Razorpay Rize Name Search Tool to check for potential trademark conflicts.
• Alternative Name Options: Verify multiple name options to avoid rejection and ensure compliance with naming rules.

Conclusion

Choosing the right company or LLP name is crucial for legal compliance and brand identity. Ensure the name is unique, relevant, and adheres to MCA guidelines to avoid objections. Conduct a thorough name availability check on the MCA portal and verify potential trademark conflicts before finalising a name. A well-chosen name not only simplifies registration but also builds a strong brand identity while ensuring long-term legal compliance.

Frequently Asked Questions

Company is a Separate Legal Entity

A company is recognised as a separate legal entity, distinct from its shareholders. Even if it is fully owned by a single person or a group, the company maintains its independent status. This distinction ensures the company can continue existing regardless of changes in ownership.

However, while a company has legal recognition, it is not considered a citizen and cannot claim fundamental rights granted to individuals.

Example

Suppose John and Mary start a bakery and register it as a private limited company (e.g., "Sweet Treats Pvt. Ltd."). The company can enter into contracts, own property, and sue or be sued in its own name. If the company faces a lawsuit, John and Mary’s personal assets are protected, and only the company’s assets are at risk

Corporate Taxation

As a separate legal entity, a company is taxed independently from its owners. Corporate tax rates vary based on the type of company, its turnover, and prevailing tax laws. This separation ensures that individual shareholders are not personally liable for the company's tax obligations, reinforcing financial security and stability.

Example

Tech Innovators Pvt. Ltd." earns ₹2 crores in a financial year. The company pays corporate tax at the applicable rate (e.g., 25% for companies with turnover up to ₹400 crore), separate from the personal income tax liabilities of its shareholders. The shareholders are not personally liable for the company’s tax dues.

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Limited Liability

Limited liability protects shareholders by restricting their financial responsibility to the amount they have invested in the company. This means that even if the company faces financial losses or legal claims, the personal assets of shareholders remain secure. This feature makes private limited companies an attractive option for entrepreneurs and investors.

Example

If "Green Energy Pvt. Ltd." takes a loan and fails to repay it, the shareholders are only liable up to the amount unpaid on their shares. Their personal assets, such as their homes or personal savings, cannot be used to settle the company’s debts.

Company has Transferability of Shares

Shares in a company can be transferred freely unless restricted by the company's articles of association. This feature enhances liquidity, allowing investors to buy or sell shares easily.

While shares of public companies are freely transferable, private companies may impose certain restrictions on share transfers to maintain control over ownership.

Example

A shareholder in "Family Foods Pvt. Ltd." wants to transfer shares to her son. She can do so, provided the company’s Articles of Association allow it and the required approvals are obtained. This enables her to pass on ownership without affecting the company’s existence.

Company is a Juristic Person

Under the Companies Act, a company is considered a juristic person, meaning it has legal rights and obligations similar to a natural person. However, an authorised individual must represent it in legal matters, usually a Board of Directors or a specifically empowered Director.

While a company can file lawsuits, it cannot take an oath or serve as a witness in court, as these actions require a natural person.

Example

"Urban Developers Pvt. Ltd." can purchase land, enter into contracts, and hire employees in its own name. It is treated as a legal person, distinct from its shareholders, and can enforce its rights in court through an authorized representative.

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Company has Perpetual Succession

A company's existence is independent of changes in ownership or shareholder status. Even if a majority shareholder (owning 99.99% of shares) passes away, the company continues to operate until it is formally wound up. This ensures stability and continuity in business operations.

Example

"Dabur India Ltd." was incorporated in 1884 and has continued to exist and operate despite changes in ownership, management, or the death of shareholders. The company’s existence is not affected by such changes and continues until it is formally dissolved

Common Seal (If Applicable)

A common seal acts as the official signature of the company, used to authenticate important documents like contracts and deeds. While the Companies Act of 2013 has made it optional for private companies, some organisations still choose to adopt it for added authenticity and formal recognition.

Example

"Metro Pvt. Ltd." adopts a common seal as its official signature. When signing a property purchase agreement, the document is stamped with the company’s common seal, signifying its authenticity and approval by the board of directors. While optional, some companies still use it for formal documents

Decree Against Company & Corporate Veil

A company is generally not liable for an employee's wrongful acts unless they occur within the scope of employment. For liability to arise, the wrongful act must be directly linked to business operations rather than simply occurring during work hours.

The "corporate veil" protects shareholders from personal liability, but courts can lift this veil in cases of fraud or misconduct.

Example

An employee of "RapidMove Logistics Pvt. Ltd." causes damage to a client’s goods while making a delivery as part of his job. The client sues the company, not the employee personally. However, if the directors used the company to commit fraud, the court could hold them personally liable by lifting the corporate veil.

Company can Own Property

A company, as a separate legal entity, can own property in its name, and its assets are distinct from those of its members. Members do not have direct ownership over company assets but may have a right to claim remaining assets after the company is wound up.

Example

"TechHive Innovations Pvt. Ltd." purchases office equipment and furniture. These assets are owned by the company itself, not by any individual shareholder or director. If a shareholder leaves, the equipment still belongs to the company.

Company can be Trustee

A company can act as a trustee if its Memorandum of Association (MoA) permits it. The objects clause in the MoA defines the company's ability to function as a trustee. Companies often act as trustees in managing trusts, employee benefit funds, or asset management services, ensuring structured administration of assets.

Example

"SecureTrust Pvt. Ltd." is appointed as the trustee to manage a scholarship fund for underprivileged students. The company manages the fund’s assets and disburses scholarships according to the trust’s rules.

Capacity to Sue and Be Sued

As a separate legal entity, a company has the right to initiate legal proceedings and can also be sued in its own name. This ensures accountability and allows the company to protect its rights, enforce contracts, and address disputes independently of its owners or directors.

Example

"PureWater Solutions Pvt. Ltd." discovers that a supplier has delivered defective water filters. The company files a lawsuit against the supplier in its own name. Similarly, if the company fails to pay its rent, the landlord can sue the company directly.

Importance of Understanding Company Features

Understanding these features is crucial for ensuring legal compliance and making informed business decisions. It helps entrepreneurs, investors, and stakeholders navigate corporate operations effectively while minimising risks. Recognising the legal and financial implications of these features enables better decision-making in establishing and managing a company.

Frequently Asked Questions