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Legal action if business partner not fulfilling partnership liability
17-Sep-2023 (In Corporate Law)
My Brother-in-law has started a small company along with his partner. After running for an year things didn't go well and he is not in the position to run the company anymore. So he has decided to shut the company and clear all the loans raised for the investment. The total investment made for the company was around 90 Lakhs out of which 80Lakhs has been invested by my brother-in-law and 10Lakhs by his partner. His partner is now not ready to share the liabilities. Documents we have 1. Partnership deed (agreement made on a stamp paper but not registered) 2. An agreement saying he is responsible for clearing all the personal loans (40 Lakhs) made for the investment(agreement made on a stamp paper but not registered) 3. Bank loan (25 Lakhs) in which he has signed as a partner and the sanction letter also shows that he is a partner 4. VAT Registration document where he has been mentioned as a partner.
In India registration of partnership deed is not compulsory. Having said that, due to restrictions which are part of the negative side of partnership not being registered,
• Your Brother in law( BIL) cannot file a suit against the other partner since the partnership is not registered.
• Cannot claim a set-off related to the debts owed.
Personal loan availed, if it is from bank,
you are not clear whether your BIL has taken loan along with the other partner ( Is the latter a party to the loan?). Assuming that he may not be a party, your BIL will have to pay the loan. If the other partner is a party, then, both are liable to pay this. Further, as per SARFAESI ACT, clauses in the documents signed at the time of taking the loan supersedes the agreement your BIL has entered into with the other partner.
If personal loan is from private financiers, then, based on the agreement your BIL has, he can insist the other partner to clear all the loans. If the private financiers insist, your BIL can provide them a copy of the agreement and convince them to collect this from the other partner. Here also this is subject to the other partner being a party in the availment of personal loan.
Regarding VAT, since the other partner has also registered, both are responsible on all compliances.
Regarding bank loan of 25 lacs, both are responsible to clear the amount. Bank will approach both your BIL and the other partner.
This advice is purely based on what you have placed as matter in our LCI. We need to study the documents and discuss to find alternatives to protect your brother in law.
Dr Gubbi, Counselor & Advocate, Bangalore
• Your Brother in law( BIL) cannot file a suit against the other partner since the partnership is not registered.
• Cannot claim a set-off related to the debts owed.
Personal loan availed, if it is from bank,
you are not clear whether your BIL has taken loan along with the other partner ( Is the latter a party to the loan?). Assuming that he may not be a party, your BIL will have to pay the loan. If the other partner is a party, then, both are liable to pay this. Further, as per SARFAESI ACT, clauses in the documents signed at the time of taking the loan supersedes the agreement your BIL has entered into with the other partner.
If personal loan is from private financiers, then, based on the agreement your BIL has, he can insist the other partner to clear all the loans. If the private financiers insist, your BIL can provide them a copy of the agreement and convince them to collect this from the other partner. Here also this is subject to the other partner being a party in the availment of personal loan.
Regarding VAT, since the other partner has also registered, both are responsible on all compliances.
Regarding bank loan of 25 lacs, both are responsible to clear the amount. Bank will approach both your BIL and the other partner.
This advice is purely based on what you have placed as matter in our LCI. We need to study the documents and discuss to find alternatives to protect your brother in law.
Dr Gubbi, Counselor & Advocate, Bangalore
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Adv. Dr. Gubbi S Subba Rao
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