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PARTNERSHIP AND PRIVATE LIMITED COMPANY

3.2 LAW OF CONTRACTS

Submitted By

Vivaswan Deekshit

UID No. UG17- 112

Academic Year 2018-2019 Semester- III (JUNE – NOVEMBER)

Submitted To –

Mr. Manish Yadav , assistant Professor of Law

MAHARASHTRA NATIONAL LAW UNIVERSITY, NAGPUR

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Table of Contents
INTRODUCTION ....................................................................................................................... 3

RESEARCH METHODOLOGY ................................................................................................ 4

RESEARCH AIM AND OBJECTIVE ....................................................................................... 4

SCOPE AND LIMITATION ...................................................................................................... 4

1.1 PARTNERSHIP .................................................................................................................... 5

2.1 HISTORY OF PARTNERSHIP ........................................................................................... 5

3.1 ELEMENTS OF PARTNERSHIP ........................................................................................ 7

4.1 TYPES OF PARTNERSHIP ................................................................................................. 7

5.1 SHARING OF PROFITS ...................................................................................................... 8

6.1 GENERAL DUTIES OF PARTNERS ................................................................................. 9

7.1 CONDUCT OF BUSINESS ............................................................................................... 10

8.1 DISSOLUTION OF A FIRM .............................................................................................. 10

9.1 WHAT IS A COMPANY? .................................................................................................. 12

10.1 PRIVATE LIMITED COMPANY.................................................................................... 12

11.1 BENEFITS OF PRIVATE LIMITED COMPANY .......................................................... 13

12.1 SHARES............................................................................................................................ 14

13.1 DISSOLUTION OF A PRIVATE LIMITED COMPANY .............................................. 15

14.1 CONCLUSION ................................................................................................................. 18

BIBLIOGRAPHY .........................................................................................................................

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INTRODUCTION
Partnership is a formal arrangement in which two or more parties cooperate to manage and
operate a business. Partnership has been one of the oldest way of performing a task or particular
business. Partnerships are generally done in order to make the conduct of business easier and
more lucid.

There are various types of partnership, newest being the limited liability Partnership which is one
of the most widely used type of partnership. Famous examples being google and quora.

In our country India, partnership as an aspect of association guaranteed under article (19)(1)(C)
of the Constitution of India which right is always subject to reasonable restriction imposed by
law from time to time. In India partnership is governed by Indian Partnership Act, 1932.

Private limited company on other hand is a company which is privately held for small business.
private Limited Company is considered as an advanced form of Limited Liability Partnership
which is a type of partnership. In Private Limited Company the liability of the members of the
company is limited to the amount of shares respectively held by them.

Some of the famous examples of Private Limited Companies are Microsoft, American Express,
Adobe, Paypal. In India the Private Limited Company is governed by Companies act, 2013.

In this project we will study about the development and functioning of a partnership firm and
Private Limited Company with the help of Judicial decisions and acts.

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RESEARCH METHODOLOGY
The methodology used by the researcher is based on doctrinal mode of research as researcher has
used some credible sources relevant to research problem without any scope of doubt. Researcher
has used secondary data to outline this project. With regards to this view, the researcher has gone
through some research papers already done on this subject, articles available on internet and
books. The deductive methodology helps the researcher to make this project in an appropriate
way by gathering admissible data from various sources. The researcher has analyzed the statutes
related to topic and referred to secondary sources such as books, scholarly articles, etc.

RESEARCH AIM AND OBJECTIVE


The main Aim and Objective of doing this research project is to study Partnership and Private
limited Company through Judicial Decisions and Respective Acts.

SCOPE AND LIMITATION


Scope for this project is that this project will cover the concept of Partnership and Private limited
Company and it will be studied through acts and judicial Decisions.

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1.1 PARTNERSHIP
‘PARTNERSHIP’ is 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. Persons who have entered into
partnership are called individually ‘partners’ and collectively ‘a firm’, and the name under which
their business is carried are called the ‘firm name’.1

The framers of the contract act presented Kent’s definition as follows:

“Partnership is a contract of two or more competent persons to place their money, effects,
labour and skill, or some of all of them, in lawful commerce or business, and to share the profit
and bear the loss in certain proportions.”

Each partner present in a partnership shares all the organizational profit and has hand in every
business operation of the firm. Thus, making all the partners jointly and independently liable for
the partnership’s debt.2

2.1 HISTORY OF PARTNERSHIP


Partnerships have a long history; they were already in use in Medieval times in Europe and in the
Middle East. In Europe, the partnerships contributed to the Commercial Revolution which started
in the 13th century. In the 15th century the cities of the Hanseatic League, would mutually
strengthen each other; a ship from Hamburg to Danzig would not only carry its own cargo but
was also commissioned to transport freight for other members of the league. This practice not
only saved time and money, but also constituted a first step toward partnership3

The first partnership bill was drafted in 1879 by Sir Fredrick Pollock which was amended several
times, it got enacted as the partnership act 1890 which has proved to be one of the most

1
MULLA,The Indian Partnership Act, 7th edition, p.15.
2
https://www.law.cornell.edu/wex/partnership last visited on 5th July,2018.
3
Beerbühl, Margrit Schulte (13 January 2012). "Networks of the Hanseatic League”

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Successful pieces of legislation in English law. The Indian Partnership Act draws its inspiration
from the English act.4

The law Commission of India in its Seventh Report on Partnership Act, 1932 Part 1 traces the
history of the Indian Partnership Act in the following words:

“Prior to 1932, Chapter XI5 if the Indian Contract Act, 1872 contained the law relating to
partnership in India. As these provisions were not exhaustive, it was considered expedient and
necessary to separate the law relating to partnership and to embody in a separate enactment;
hence, the English Partnership Act, 18906 which codified the common law relating to
partnership. The English Partnership Act has been the basis of the law of partnership in all the
countries which have adopted the English common law as the basis of their law, for example,
some of the countries constituting the commonwealth and The United States of America”.

“Before the enactment of the Indian Partnership Act, 1932. the whole subject was carefully
examined by a special committee which scrutinized the English law and the Judicial decisions in
England and India with a view to adopting the English provisions to the needs and condition of
India, the basic principles embodied in the Indian Partnership Act, 1932 are same as those
contained in English Partnership Act, 1890 and in the Uniform Partnership Act prepared by the
United States Of America. The difficulties felt and the defects disclosed in the working of the
English Partnership Act from 1890 to 1931 were considered by the special committee which
drafted the Indian Partnership Bill and provision were made in the act to as to avoid these
difficulties and defects”.

4
MULLA, THE INDIAN PARTNERSHIP ACT, 7 th edition,p.4.
5
Report of the select committee on the Indian Contract Bill, dated 22 February 1870.
6
For a history of the English codification, Pollock, DIGEST OF THE LAW OF PARTNERSHIP, 15 TH edition,
1952.

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3.1 ELEMENTS OF PARTNERSHIP
There are three elements of a ‘partnership’:7

 There must be an agreement entered into by the entire person concerned.8


 The agreement must be to share profits of a business.
 The business must be carried on by all or any of the person concerned, acting for all.

All these elements must be there in order to constitute a partnership firm.

Supreme Court of India through the case Regional Director, Employees State Insurance
Corporation v. Ramanuja Match Industries9 held that:

“Position of a partner qua the firm is thus not that of a master and a servant or employer and
employee which concept involves an element of subordination, but that of equality. The status of
a partner qua the firm is different from employees working under the firm”.

the other two essentials of a partnership were given authority by Supreme Court in KD Kamath
& Co. v. CIT 10

4.1 TYPES OF PARTNERSHIP


There are three types of modern partnership forms which are as follows11:

 GENERAL PARTNERSHIP

This type of partnership involves two or more than two owners carrying out a business. In this
type of partnership the general partners share equal rights and responsibilities in connection with

7
Dulichand Laxminarayan v CIT AIR 1956 SC 354, para 11.
8
Rampratap v. Durgaprasad AIR 1925 PC 293; Hemchandra Dev & ors. v. Dhirendra Chandra Das & ors. AIR 1960
Cal 691.
9
(1985) 1 SCC 218, para 4 and para 9.
10
(1971) 2 SCC 873, para 28, [1971] 82 ITR 680 (SC).
11
https://smallbusiness.findlaw.com/incorporation-and-legal-structures/types-of-partnerships.html last visited on 5th
july,2018

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the management of the business proceedings, and the entire group can be bound to legal
obligations by any of the partner. Every individual has full responsibilities of all the business’s
debt and obligations.

 LIMITED PARTNERSHIP

This type of partnership allows each partner to restrict their personal liability to the amount of
their business investment. In this type of partnership not every partner can be benefitted from this
limitation one of the participant of the partnership must accept general partnership status, thus
exposing themselves to full business’s debts and obligations. The general partner has got the
rights to control the business whereas the limited partner cannot participate in management
decisions.

 LIMITED LIABILITY PARTNERSHIP

Limited Liability Partnership is combination of both partnership and a corporation. It has the
feature of both these forms. As the name suggests partners have limited liability in the company
which means that personal assets of the partners are not used for paying off the debts of the
company. Nowadays it has become very popular form of business as many entrepreneurs are
opting this. There are a number of partners in the firm and hence they are not liable or
responsible for others misconduct. Everyone is liable for their own acts. In India All limited
liability partnership is governed under the limited liability partnership act of 2008. However in
India LLP was introduced in April 2009.12

5.1 SHARING OF PROFITS


The profits contemplated by the Act and the common law of partnership sometimes called ‘net
profits’, are the excess of returns over advances, the excess of what is obtained over the cost of
obtaining it. it was formerly known as speaks of the total receipts or gross returns of a business
as gross profit.13

12
https://www.legalraasta.com/limited-liability-partnership/ last visited on July 9, 2018
13
MULLA, THE INDIAN PARTNERSHIP ACT, 7 th edition, p.34.

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There must be an agreement present in order to share profits.14creditors who supervise the
conduct of their debtors trade, with an agreement to pay themselves off out of the profits, do not
become his partners15 and the same principle applies to trustees for debentures holders; a receiver
whom they have appointed under their powers is not their servant, and does not become so, or
make them liable for his contracts, even after he has ceased by the winding up of the company to
be its agent.16

6.1 GENERAL DUTIES OF PARTNERS


Section 9 of Indian Partnership Act, 1955 deals with the concept of general duties of partners in
partnership firm.

In the case of Navin Chandra Jethabhai v. Moolchand Sadaram 17 it was stated that this section is
of vital importance in relations of partners with each other and duties towards the partnership
firm.

This section is identical with s.257 of the contract act, save that ‘the firm’ is substituted for ‘the
partnership’ in accordance with the stricter use of terms in the present act.18

General duties of partners in partnership are as follows:

 The partners should carry business of the firm to the greatest common advantage.
 They should render to any partner or his legal representative full information of all the
things affecting the firm.19
 Good faith and utmost bona fides are required in the dealings between working and
sleeping partners when matters relating to accounts are concerned.20

14
Maliram Choudhary v. Jagannath Modi AIR 1972 Ori 17.
15
Cox v. Hickman LR 4 PC 19.
16
Gosling v. Gaskell [1897] AC 575; it would seem that after that date the receiver was personally liable on
contracts made by him, as having no principal who could be sued.
17
AIR 1941 Sindh 73, p 75(DB); AIR 1966 Bom 111(DB)
18
MULLA, INDIAN PARTNERSHIP ACT, 7th edition, p.70.
19
RN Oswal Hoisery v. CIT AIR 1969 Pun 8.
20
AIR 1930 Mad 141, p.143.

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 A partner, who is expressly entrusted with the conduct of a sale, was bound fully to
disclose the real facts to another partner and, not having done so, could not exclude him
from his share of profits actually realized by sale.21
 A partner must observe the utmost good faith in his dealing with the other partners.
 A sleeping partner is entitled to seek accounts of the firm whether dissolved or existing.22
 The obligations to perfect fairness and good faith is especially required to be observed
when one partner is trying to get rid of another or to buy him out.23

In the case of Const v. Harris24, Lord Elton stated that:

“A partner, who complains that the other partners do not do their duty towards him, must be
ready at all the times and offer himself to do the duty towards them.”

7.1 CONDUCT OF BUSINESS


The general conduct of business according to the Indian Partnership Act25 is as follows:

 Every partner has a right to take part in the conduct of the business.
 Every partner is bound to attend diligently to his duties in the conduct of business.
 Any difference arising as to ordinary matters connected with the business may be decided
by a majority of the partners, and every partner shall have the right to express his opinion
before the matter is decided, but no change may be made in the nature of the business
without the consent of all the partners.
 Every partner has right to have access to inspect and copy any of the books of the firm.

8.1 DISSOLUTION OF A FIRM


Sec 39 of the INDIAN PARTNERSHIP ACT deals with dissolution of a firm which states that
dissolution between all the partners of a firm is called the dissolution of the firm.

21
Dunne v. English (1874) Eq 524; Carter v. Horne (1728) Eq Ab 7; Parker v. Mckenna [1874] 10 Ch App 96.
22
Budh Ram Balak Ram v. The Dhuri Co operative etc socirty AIR 1972 Punj 185, pp 188-189.
23
Blisset v. Daniel (1853) 10 Hare 493 ;Maddeford v. Austwick (1826) 1 Sim 89.
24
(1824) Turn & R 524.
25
INDIAN PARTNERSHIP ACT,1932

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 A firm is not said to be dissolved by the fact of one or more members ceasing to be
partners in it while others remain, but only when all and every member of the firm cease
to carry on its business in partnership.26
 But where there are only two partners in a firm and one retires or relinquishes his share in
favour of the other, the firm dissolves. however, where there are more than two partners,
the relinquishment of his right by one of the partners in favour of another does not
dissolve the firm.27

This section deals with the concept and consequences of dissolution of the firm and do not
abrogate the terms of the contract between the partners relating to the consequences to ensue, in
the event of death of a partner, when the firm is not to stand dissolved by such death, nor to the
right which the partners has in the assets and property of the firm.

Types of dissolution

 Dissolution by agreement
 Compulsory dissolution
 Dissolution on happening of certain contingencies
 Dissolution by notice of partnership at will
 Dissolution by the court

26
MULLA, INDIAN PARTNERSHIP ACT, 7th edition, p.197.
27
Karumuthi Thiagarajan Chettiar v. EM Muthappa Chettiar AIR 1961 SC 1225 p.1230.

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9.1 WHAT IS A COMPANY?
A “Company” is an association of individuals formed for some common purpose. It is
incorporated and registered under the Companies Act, 2013.

It has a legal identity which is separate from that of its members. In India, a Company is
incorporated by complying with the procedure stated in the Companies Act 2013. A Company
thus incorporated is registered with the Registrar of Companies which is governed by The
Ministry of Corporate Affairs.

CHARACTERSTICS OF A COMPANY28

 A company has a separate legal entity from its owners. The members of a company have
no liability to the creditors of a company for debts incurred by the company.
 A company has perpetual succession, i.e. continued or uninterrupted existence until it is
legally dissolved. It continues in existence irrespective of the changes in membership.
 Shares of a company limited by shares are transferable by a shareholder to any other
person.
 A company can acquire, own, enjoy and alienate property in its own name.
 A company has the capacity to sue and be sued.
 It is possible for a company to make a valid and effective contract with any of its
members and other entities.
 A company enjoys better avenues for borrowing funds. It can issue debentures, secured
as well as unsecured and can also accept deposits from the public etc

10.1 PRIVATE LIMITED COMPANY


A private limited company is a type of company which has a minimum paid up share capital of
Rs. 100 thousands or higher capital as may be prescribed in section 2 (68)29 of Indian Companies
Act,2013.

28
https://www.incometaxindia.gov.in/pages/acts/companies-act-2013.aspx last visited on 5th july 2018.
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Section 2 (68), Indian Partnership Act, 2013. the article states that ”private company means a company having a
minimum paid-up share capital of one lakh rupees or such higher paid-up share capital as may be prescribed”.

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A Private Company becomes a “small company” if the paid up share capital does not exceed
fifty lakh rupees or such higher amount as may be prescribed which shall not be more than five
crore rupees and turnover as per last profit and loss account does not exceed two crore rupees or
such higher amount as may be prescribed which shall not be more than twenty crore rupees.
Provided nothing shall apply to a holding company or a subsidiary company.

11.1 BENEFITS OF PRIVATE LIMITED COMPANY


 SEPRATE LEGAL ENTITY: A company is a legal entity and a juristic person
established under the Act. Therefore a company has a wide range of legal capacity like
owning property and incurring debts. The members (Shareholders/Directors) of a
company have no personal liability to the creditors of a company for company’s debts.
 UNINTERRUPTED EXISTENCE: A company has ‘perpetual succession’,
meaning uninterrupted existence until it is legally dissolved. A company being a separate
legal person, is unaffected by the death or other departure of any member and continues
to be in existence irrespective of the changes in ownership.
 EASY TRANSFERIBILITY: Ownership of a business can be easily transferred in a
company by transferring shares. The signing, filing and transfer of share transfer form
and share certificates are sufficient to transfer ownership of a company. In a private
limited company, the consent of other shareholders maybe required to effect share
transfers.
 OWNING PROPERTY: A company being an artificial person, can acquire, own, enjoy
and alienate, property in its name. The property owned by a company could be
machinery, building, intangible assets, land, residential property, factory, etc., No
shareholder can make a claim upon the property of the company – as long as the
company is a going concern.
 LIMITED LIABILTY: Limited liability is the status of being legally responsible only to
a limited amount for debts of a company. Unlike proprietorships and partnerships, in
a private limited company the liability of the shareholders in respect of the company’s
debts is limited to the equity invested by them in the company.

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12.1 SHARES
Shares of a company is limited by the shares purchased. It is transferable by a shareholder to
another person. Shares can be transferred to anyone the shareholder chooses. A signed copy of
the share transfer form would be handed over to the buyer of shares along with share
certification. Technically, there are no restrictions on transfer of shares in a public limited
company. Hence a share holder could transfer the shares to any person he wishes to. Securities or
other interest in a public limited company is freely transferable. However, any contract or
agreement in respect of transfer of securities is enforceable as a contract. In case of private
limited companies, the law allows private limited companies to impose restrictions on the
transfer of their shares. There is never a complete ban on shares

TYPES OF SHARES

 Equity Shares
 With voting rights or
 With differential rights as to dividend, voting or otherwise in accordance with such
rules as may be prescribed
 Preference Shares

Provided that nothing contained in the Companies Act 2013 shall affect the rights of
preference shareholders who are entitled to participate in the proceeds of winding up
before the commencement of this Act.

ISSUE

Private Companies are free to include in their Articles of Association any provisions in regard to
voting rights of their members, holding equity shares or preference shares. The share capital of a
company limited by shares may be of two kinds only- equity share capital and preference share
capital.

A private limited company cannot offer its shares or debentures to the public for subscription.

TRANSFER

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The right of transfer of shares in a private company is to be restricted by the articles of such
companies. Any restrictions imposed by the articles are binding on the members of the company
by virtue of Section 10 of the Companies Act

The two main restrictions found in the articles of most private companies are

 the directors are given absolute and uncontrolled discretion in the matter of approval of
transfers for registration and
 The members are given the right of pre-emption for purchasing the shares offered by
any member.

BUYBACK

Any company limited by shares or guarantee and having a share capital, can buy back its own
securities. The term “buyback” means the buying by a company of its own shares or securities
from the holders of those shares or securities. The share capital bought back has the effect of
reduction of share capital to the extent of the face value of the shares bought back and there is
cash outflow from the company to the extent of the price of the shares paid to the shareholders.
The buyback of shares results into cessation of membership of the shareholders whose shares are
bought back and their names are omitted from the Register of Members.

13.1 DISSOLUTION OF A PRIVATE LIMITED COMPANY


Dissolution of a private limited company is a tedious, but necessary, procedure. Without doing
so, you would need to annually meet the requirements of the Registrar of Companies (which
means spending money on audit and compliances). The bigger reason you would want to do this,
of course, is because it releases the assets and investments made by you. The procedure for
winding up of a company can be initiated voluntarily by the shareholders or forced by a tribunal
or a court.

Section 42530, of Companies Act, 1956, deals with modes of winding up.

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Sec 425, Companies act, 1956 “Modes of winding up. The winding up of a company may be either-(a) by the
Court; or (b) voluntary; or (c) subject to the supervision of the Court.(2) The provisions of this Act with respect to
winding up apply, unless the contrary appears, to the winding up of a company in any of those modes.”

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REASONS OF WINDING UP OF A COMPANY:

 The company is unable to pay its debts.


 The company has by special resolution resolved that the company be wound up by the
Tribunal.
 The company has acted against the interest of the sovereignty and integrity of India, the
security of the State, friendly relations with foreign states, public order, decency or
morality.

 If the company has not filed financial statements or annual returns for the preceding five
consecutive financial years.
 If the affairs of the company have been conducted in a fraudulent manner or the company
was formed for fraudulent and unlawful purposes or the persons concerned in the
formation or management of its affairs have been guilty of fraud, misfeasance or
misconduct in connection therewith and it is proper that the company be wound up.

STEPS OF VOLUNTARY WINDING UP OR DISSOLUTION OF A COMPANY:

Following are the steps to dissolve a private limited company31

 Convene a Board Meeting with two Director or by a majority of Directors. Pass a


resolution with a declaration by the Directors that they have made an enquiry into the
affairs of the Company and that, having done so, they have formed the opinion that the
company has no debts or that it will be able to pay its debts in full from the proceeds of
the assets sold in voluntary winding up of the company. Also, fix a date, place, time
agenda for a General Meeting of the Company after five weeks of this Board Meeting.
 Issue notices in writing calling for the General Meeting of the Company proposing the
resolutions, with suitable explanatory statement.
 In the General Meeting, pass the ordinary resolution for winding up of the company by
ordinary majority or special resolution by 3/4 majority. The winding up of the company
shall commence from the date of passing of this resolution.

31
https://www.indiafilings.com/learn/winding-company/ last visited on 5th july 2018

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 On the same day or the next day of passing of resolution of winding up of the Company,
conduct a meeting of the Creditors. If two thirds in value of creditors of the company are
of the opinion that it is in the interest of all parties to wind up the company, then the
company can be wound up voluntarily. If the company cannot meet all its liabilities on
winding up, then the Company must be wound up by a Tribunal.
 Within 10 days of passing of resolution for winding up of company, file a notice with the
Registrar for appointment of liquidator.
 Within 14 days of passing of resolution for winding up of company, give a notice of the
resolution in the Official Gazette and also advertise in a newspaper with circulation in the
district where the registered office is present.
 Within 30 days of General Meeting for winding up of company, file certified copies of
the ordinary or special resolution passed in the General Meeting for winding up of the
company.
 Wind up affairs of the company and prepare the liquidators account of the winding up of
the company and get the same audited.
 Call for final General Meeting of the Company.
 Pass a special resolution for disposal of the books and papers of the company when the
affairs of the company are completely wound up and it is about to be dissolved.
 Within two weeks of final General Meeting of the Company, file a copy of the accounts
and file and application to the Tribunal for passing an order for dissolution of the
company.
 If the Tribunal is satisfied, the Tribunal shall pass an order dissolving the company within
60 days of receiving the application.
 The company liquidator would then file a copy of the order with the Registrar.
 The Registrar, on receiving the copy of the order passed by the Tribunal then publish a
notice in the Official Gazette that the company is dissolved.

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14.1 CONCLUSION
now we can say that Partnership and Private Limited company are directly or indierectly
connected with each other through the Limited Liability partnership.

this devlpment from partnership to Private Limited Company has been a long process, done in
order to make conduct of nosiness more lucid by decreasing the formalities involved in conduct
of business.

After doing this project Researcher was able to find the answers of all the research questions
which were put forward before starting this research study. The project was within in its scope
and limitations and mentioned earlier.

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BIBLIOGRAPHY
BOOKS

 MULLA, THE INDIAN PARTNERSHIP ACT, 1932.


 KS ANANTHARAMAN, LECTURES ON COMPANY LAW, 12th edition.

STATUTES

 THE INDIAN PARTNERSHIP ACT,1932


 COMPANIES ACT,2013
 INDIAN CONTRACT ACT.1872

WEBSITES

 LAW.CORNELL.EDU
 MCA.GOV.COM
 INCOMETAXINDIA.GOV.IN
 LEGALRAASTA.COM

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