Is a Partnership Firm a Body Corporate? A Legal Perspective

A partnership firm is a popular form of business organisation in India, especially among small and medium enterprises. It involves two or more individuals who come together to conduct business with a common goal of sharing profits and losses. The legal framework for partnership firms in India is primarily governed by the Indian Partnership Act, 1932. 

However, when it comes to more complex legal questions, such as whether a partnership firm qualifies as a “body corporate,” the answer requires a deeper exploration of various legal definitions and statutory provisions, particularly under the Companies Act, 2013. 

The Concept of Partnership Firm

Before addressing the question of whether a partnership firm is a body corporate, it is essential to understand what a partnership firm is, according to Indian law.

Definition of a Partnership Firm

Section 4 of the Indian Partnership Act, 1932, defines a partnership as “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.” The individuals who come together to form a partnership are called “partners,” and collectively, they constitute the “firm.” The name under which the business operates is known as the “firm name.”

A partnership firm is thus an association of individuals, where the business is carried out by the partners on behalf of the firm. The firm itself is not considered separate from the partners, meaning it does not have a legal personality distinct from its partners.

Legal Characteristics of a Partnership Firm

To determine whether a partnership firm is a body corporate, it is necessary to examine the legal characteristics that define a body corporate and compare them with those of a partnership firm.

1. Distinct Legal Personality: A body corporate, such as a company or a limited liability partnership (LLP), is characterised by having a legal personality separate from its members. This means that the entity can own property, enter into contracts, sue and be sued in its name. However, a partnership firm does not enjoy this characteristic. The firm is not distinct from its partners and any legal action involving the firm must include the partners as parties.

2. Perpetual Succession: One of the hallmarks of a body corporate is perpetual succession, which means that the entity continues to exist even if its members change due to death, retirement or other reasons. A partnership firm, on the other hand, lacks perpetual succession. The firm dissolves upon the death or retirement of a partner unless otherwise agreed upon in the partnership deed.

3. Capacity to Enter into Contracts: A body corporate has the legal capacity to enter into contracts in its own name. However, a partnership firm cannot do so. Contracts entered into by the firm are, in effect, contracts entered into by the partners collectively or by one partner acting on behalf of all partners.

4. Ability to Sue and Be Sued: While a body corporate can sue and be sued in its name, a partnership firm can only sue or be sued in the name of its partners. The firm itself does not have the standing to initiate or defend legal proceedings independently of its partners.

5. Ownership of Property: A body corporate can own property in its name. In contrast, any property owned by a partnership firm is, in fact, owned collectively by the partners. The firm, not being a separate legal entity, cannot hold property in its name.

The Definition of “Body Corporate” Under the Companies Act, 2013

The Companies Act, 2013, provides a specific definition of what constitutes a “body corporate.” According to Section 2(11) of the Companies Act, 2013:

“Body corporate” or “corporation” includes a company incorporated outside India, but does not include—

(i) a co-operative society registered under any law relating to co-operative societies; and

(ii) any other body corporate (not being a company as defined in this Act), which the Central Government may, by notification, specify in this behalf.

From this definition, it is clear that a body corporate must be an incorporated entity. This includes companies, limited liability partnerships (LLPs) and other entities incorporated under specific laws. However, a partnership firm is not an incorporated entity; it is an unincorporated association of individuals. Consequently, a partnership firm does not fall within the definition of a body corporate under the Companies Act, 2013.

Legal Precedents and Interpretations

Indian courts have consistently held that a partnership firm is not a body corporate. The distinction between a body corporate and a partnership firm has been emphasised in various judicial pronouncements.

1. Supreme Court of India on Partnership Firms: In the landmark case of Duli Chand v. M/s. Mahabir Prasad Trilok Nath (1956), the Supreme Court of India held that a partnership firm is not a legal entity and has no legal personality distinct from its partners. The firm is merely a collective name for the partners who constitute it.

2. High Court Judgments: Several High Court judgments have reiterated that a partnership firm cannot be considered a body corporate. The courts have emphasised that a firm is not separate from its partners and does not possess the characteristics of a body corporate, such as perpetual succession and distinct legal personality.

The Implications Under Section 186 of the Companies Act, 2013

Section 186 of the Companies Act, 2013, deals with the provisions related to loans, guarantees and investments by companies. This section restricts a company from making certain investments and loans unless it complies with specified conditions.

Given that a partnership firm is not a body corporate, it is not directly governed by Section 186 of the Companies Act, 2013. However, if a private company intends to make investments in a partnership firm or provide loans, guarantees or securities to a partnership firm, the company must still comply with the relevant provisions of the Companies Act, 2013. 

For example, such transactions may require board approval or compliance with related party transaction provisions under Section 188 of the Companies Act, 2013.

Can a Partnership Firm Be a Shareholder or Partner in Another Firm?

Another important question that arises from the discussion is whether a partnership firm can become a shareholder in a company or a partner in another firm. 

Given that a partnership firm is not a legal entity or body corporate, it cannot be registered as a member of a company. This was clarified by the Department of Company Affairs (DCA) in Circular No. 4/72, dated 9-3-1972, which stated that a partnership firm, not being a legal person, cannot be registered as a member of a company, except in the case of a Section 8 company (formerly Section 25 company under the Companies Act, 1956).

Similarly, a partnership firm cannot enter into a partnership with another firm, individual or Hindu Undivided Family (HUF) because it is not considered a “person” under the law.

Conclusion

A partnership firm is not considered a body corporate under Indian law. The legal characteristics that define a body corporate, such as distinct legal personality, perpetual succession and the capacity to enter into contracts in its own name, are absent in a partnership firm. Consequently, a partnership firm cannot be treated as a body corporate under the Companies Act, 2013 or any other law.