Monthly Archives: January 2014

RETIREMENT OF PARTNER FROM PARTNERSHIP

Here is a small note on the legal steps to be taken when a partner retires from partnership, to have safe exit. What steps are to be taken by the firm, so that firm is escaped from future acts and wrong doings of the retired partner.

Following the appropriate procedure laid down in Partnership Act is highly important because firm could be sued for the acts of retired partner. The retired partner can be sued for the wrong-doing of the firm as well.

A firm, unlike a company is not separate entity in the eye of law. A Partnership is an association of people, a partner is an agent of the firm and a partner can represent all other partner and bind them.  Hence, any act of the partner will be considered as the act on behalf of the firm and vice-versa. As per partnership law, a partner is entitled to share profit and loss of the firm.  This being a legal status of the partner and the firm, it is important to announce to the public at large when partner is retiring from a partnership.

In the absence of a public notice of retirement, a third party can make claim against the firm for the acts of the retired partner, in similar way, third parties can sue the partner even for the act done by the firm.  Section 32 of the Partnership Act describe the procedure to follow on retirement.

Section 32: Retirement of a partner.

(1) A partner may retire-

(a) with the consent of all the other partners,

(b) in accordance with an express agreement by the partners, or

(c) where the partnership is at will, by giving notice in writing to all the other partners of his intention to retire.

(2) A retiring partner may be discharged from any liability to any third party for acts of the firm done before his retirement by an agreement made by him with such third party and the partners of the reconstituted firm, and such agreement may be implied by a course of dealing between such third party and the reconstituted firm after he had knowledge of the retirement.

(3) Notwithstanding the retirement of a partner from a firm, he and the partners continue to be liable as partners to third parties for any act done by any of them which would have been an act of the firm if done before the retirement, until public notice is given of the retirement: Provided that a retired partner is not liable to any third party who deals with the firm without knowing that he was a partner.

(4) Notices under sub- section (3) may be given by the retired partner or by any partner of the reconstituted firm.

The above section makes it abundantly clear that a public notice is to be given regarding retirement otherwise the retiring partner will be liable for the acts of the firm.

Hence it is important  to know,  how public notice is given. The same  is discussed in Section 72. Of the Partnership Act

Section 72 of Partnership Act is reproduced below;

72. Mode of giving public notice. A public notice under this Act is given-

(a) where it relates to the retirement or expulsion of a partner from a registered firm, or to the dissolution of a registered firm, or to the election to become or not to become a partner in a registered firm by a person attaining majority who was admitted as a minor to the benefits of partnership, by notice to the Registrar of Firms under section 63, and by publication in the Official Gazette and in at least one vernacular newspaper circulating- in the district where the firm to which it relates has its place or principal place of business, and

(b) in any other case, by publication in the Official Gazette and in at least one vernacular newspaper circulating in the district where the firm to which it relates has its place or principal place of business.

From these two sections it is very clear that if a retiring partner fails to  issue a public notice in any vernacular newspaper as well as in public gazette, he is liable to the acts of the firm and vice-versa.

Incase, the firm is a registered partnership, then the retiring partner/ firm should ensure that the entries in the Register of Firms are amended reflecting the retirement of the person concerned.

Partnership is an important legal structure, popularly followed as preferred choice of entity for all small and medium  sized enterprises. However, partners of a firm while retiring from the partnership, ignore the above legal prescriptions and fail to give public notice. This has resulted in many legal disputes and financial liabilities impacting the partner/ or the firm, for the acts not done by him or authorized by him and vice versa.

Rajesh Vellakkat  and Prathap.K

Software companies fall within the ambit of “Industry” as per Industrial Disputes Act and Procedure for dismissal of an employee mentioned in ID Act to be followed.

The employees of software companies have a general impression that none of the labour laws and workmen welfare legal measures are available to them as they are in the category of white collar jobs.  It is prevalent among software companies to terminate services of employees by giving one or two months’ notice or salary in lieu of notice that might have been mentioned in the respective employment contract that they might have signed with the employer.  Employees, assuming that they have no other legal remedy or special protection available under Industrial Disputes Act, Factories Act, and other labour welfare legislations, quietly discontinue the employment without raising any demands.  There are some instances where a loyal employee who has contributed all his youth and energy for the company are forced to discontinue the job without providing any benefits.  Here is an attempt to know where the law stands in this regard:

Section 2(j) of the Industrial Disputes Act 1947 defines “Industry” as

Industry” means any business, trade, undertaking, manufacture or calling of employers and includes any calling, service, employment, handicraft, or industrial occupation or a vocation of workmen;

Using this definition, the word Industry is connected with the work workmen.  The workmen is defined in Section 2(s) of the Industrial Disputes Act as hereunder:

 

workman” means any person (including an apprentice) employed in any industry to do any manual, unskilled, skilled, technical, operational, clerical or supervisory work for hire or reward, whether the terms of employment be express or implied, and for the purposes of any proceeding under this Act in relation to an industrial dispute, includes any such person who has been dismissed, discharged or retrenched in connection with. or as a consequence of, that dispute, or whose dismissal, discharge or retrenchment has led to that dispute, but does not include any such person-

(i) who is subject to the Air Force Act, 1950 (45 of 1950), or the Army Act, 1950 (46 of 1950), or the Navy Act, 1957 (62 of 1957); or

(ii) who is employed in the police service or as an officer or other employee of a prison ; or

(iii) who is employed mainly in a managerial or administrative capacity; or

(iv) who, being employed in a supervisory capacity, draws wages exceeding one thousand six hundred rupees per mensem or exercises, either by the nature of the duties attached to the office or by reason of the powers vested in him, functions mainly of a managerial nature.

From the two definitions above it is clear that a skilled worker ( software engineer) comes under the definition workmen and a software company is an Industry whereby Industrial Disputes Act is applicable.

However, the  questions to be looked at is what should be the procedure to be followed in case of dismissal of an employee.  Dismissal, retrenchment, layoff, etc. of a workman and the remedies available are discussed in Chapter V-A and Chapter V-B of Industrial Disputes Act.  Chapter V-A Especillay Section 25 C-E are for Industrial establishments where 50 to 100 employees are working.  For these Section, a separate definition of industrial establishment is provided.  The industrial establishment is defined under S 25-A as hereunder.

industrial establishment” means

 (i) a factory as defined in clause (m) of Section 2 of the Factories Act, 1948 (63 of 1948); or

(ii) a mine as defined in clause (f) of Section 2 of the Mines Act, 1952 (35 of 1952); or

(iii) a plantation as defined in clause (f) of Section 2 of the Plantations Labour Act, 1951 (69 of 1951).

Hence to qualify the application of Chapter V-A and provisions relating to layoff the Industrial Establishment should be a factory under Factories Act.  Section 2(m) of the Factories Act 1948 defines what is a factory.

m) “factory” means any premises including the precincts thereof-

(i) whereon ten or more workers are working, or were working on any day of the preceding twelve months, and in any part of which a manufacturing process is being carried on with the aid of power, or is ordinarily so carried on, or

(ii) whereon twenty or more workers are working, or were working on any day of the preceding twelve months, and in any part of which a manufacturing process is being carried on without the aid of power, or is ordinarily so carried on,- but does not include a mine subject to the operation of the Mines Act, 1952 (35 of 1952), or a mobile unit belonging to the armed forces of the Union, a railway running shed or a hotel, restaurant or eating place.

Explanation. I–For computing the number of workers for the purposes of this clause all the workers in different groups and relays in a day shall be taken into account;

Explanation. II.–For the purposes of this clause, the mere fact that an Electronic Data Processing Unit or a Computer Unit is installed in any premises or part thereof, shall not be construed to make it a factory if no manufacturing process is being carried on in such premises or part thereof;

The explanation 2 of the said definition makes it clear that a mere electronic data processing unit or computer unit installed in a premises shall not be construed to make it a factory.  If no manufacturing process is being carried out in such premises.  Most of the software companies are not doing any manufacturing activities.  It mainly provides services.  Manufacturing process is defined in Factories Act 1948.  S 2(k) of the Factories Act is reproduce below:

Manufacturing Process” means any process for-

(i)     making, altering, repairing, ornamenting, finishing, packing, oiling, washing, cleaning, breaking up, demolishing, or otherwise treating or adapting any article or substance with a view to its use sale, transport, delivery or disposal, or

(ii)   pumping oil, water, sewage or any other substance; or

(iii) generating, transforming or transmitting power; or

(iv)  composing types for printing, printing by letter press, lithography, photogravure or other similar process or bookbinding; or

(v)    constructing, reconstructing, repairing, refitting, finishing or breaking up ships or vessels; or

(vi)  preserving or storing any article in cold storage;

The High Court of Bombay in The Assistant Director Employees’ State Insurance Corporation & Another v M/S Western Outdoor Interactive Pvt. Ltd. & Another First Appeal No. 143/2012 interpreting whether a software company is covered under ESI Act made some interesting observation relating to manufacturing process as defined in Section 2(k) of Factories Act mentioned above and concluded that even software service companies come under the definition of manufacturing process and ESI Act is applicable to them.  Despite all these definition and judgment referred above, it is not very clear whether software companies will come under Industrial Disputes Act, Factories Act, and whether provisions relating to layoff, retrenchment, and whether V-A and V-B of Industrial Disputes Act is applicable to software companies.  In this context, it is pertinent to mention a Madras High Court judgment Seelan Raj R. And 14 Others vs P. O., I Addl. Labour Court and others on 14 August, 1997.  In this case, relying on the explanation II of the Factories Act defining what is a factory, court  concluded that a software development activity or software service company even if doing a manufacturing process is not a factory under the Factories Act and thus it is not an Industrial Establishment.  Hence Section 25C to 25E and Chapter V-B of Industrial Disputes Act is not applicable to software company, and accordingly, dismissed the writ appeal filed by the employer.  This judgment is challenged in the Supreme Court.  However, to our understanding Supreme Court has not pronounced any final judgment on this so far. 

From the above discussions, it is clear that the prevailing position of law is that a software company is an industry as defined under Industrial Disputes Act but it is not a factory under the Factories Act.  However, it should be considered as a factory for the purpose of ESI Act.  A software establishment is thus not an industrial establishment as defined in Section 25A or 25C of Industrial Disputes Act.  The provisions relating to layoff or retrenchment is not applicable to them.  Hence, the question arises what should be the procedure to be followed to terminate employee working in software companies and what are the remedies available to employees in cases of termination.

Termination of an employee other than by way of a disciplinary proceedings is legally termed as retrenchment.  Retrenchment is defined in section 2(oo) of Industrial Disputes Act and is reproduced hereunder:

Retrenchment” means the termination by the employer of the service of a workman for any reason whatsoever, otherwise than as a punishment inflicted by way of disciplinary action, but does not include 

(a) voluntary retirement of the workman ; or 

(b) retirement of the workman on reaching the age of superannuation if the contract of employment between the employer and the workman concerned contains a stipulation in that behalf; or 

(bb) termination of the service of the workman as a result of the non-removal of the contract of employment between the employer and the workman concerned on its expiry or of such contract being terminated under a stipulation in that behalf contained therein; or 

(c) termination of the service of a workman on the ground of continued ill- health; 

Section 25F. Conditions precedent to retrenchment of workmen.- No workman employed in any industry who has been in continuous service for not less than one year under an employer shall be retrenched by that employer until—

(a) the workman has been given one month’ s notice in writing indicating the reasons for retrenchment and the period of notice has expired, or the workman has been paid in lieu of such notice, wages for the period of the notice:

(b) the workman has been paid, at the time of retrenchment, compensation which shall be equivalent to fifteen days’ average pay 2[ for every completed year of continuous service] or any part thereof in excess of six months; and

(c) notice in the prescribed manner is served on the appropriate Government 3[ or such authority as may be specified by the appropriate Government by notification in the Official Gazette].

The procedure to be followed for retrenchment is provided in section 25G and 25H.

25G Procedure for retrenchment.

Where any workman in an industrial establishment, who is a citizen of India, is to be retrenched and he belongs to a particular category of workmen in that establishment, in the absence of any agreement between the employer and the workman in this behalf, the employer shall ordinarily retrench the workman who was the last person to be employed in that category, unless for reasons to be recorded the employer retrenches any other workman.

25H. Re-employment of retrenched workmen.

Where any workmen are retrenched and the employer proposes to take into his employ any persons, he shall, in such manner as may be prescribed, give an opportunity to the retrenched workmen who are citizens of India to offer themselves for re-employment, and such retrenched workmen] who offer themselves for re-employment shall have preference over other persons

For larger establishments with more than 100 employees, the procedure for retrenchment is defined in section 25M.  It is reproduced below:

Conditions precedent to retrenchment of workmen.

(1) No workman employed in any industrial establishment to which this Chapter applies, who has been in continuous service for not less than one year under an employer shall be retrenched by that employer until,-

(a) the workman has been given three months’ notice in writing indicating the reasons for retrenchment and the period of notice has expired, or the workman has been paid in lieu of such notice, wages for the period of notice; and

(b) the prior permission of the appropriate Government or such authority as may be specified by that Government by notification in the Official Gazette (hereafter in this section referred to as the specified authority) has been obtained on an application made in this behalf.

(2) An application for permission under sub-section (1) shall be made by the

employer in the prescribed manner stating clearly the reasons for the intended retrenchment and a copy of such application shall also be served simultaneously on the workmen concerned in the prescribed manner.

(3) Where an application for permission under sub-section (1) has been made, the appropriate Government or the specified authority, after making such enquiry as it thinks fit and after giving a reasonable opportunity of being heard to the employer, the workmen concerned and the person interested in such retrenchment, may, having regard to the genuineness and adequacy of the reasons stated by the employer, the interests of the workmen and all other relevant factors, by order and for reasons to be recorded in writing, grant or refuse to grant such permission and a copy of such order shall be communicated to the employer and the workmen.

(4) Where an application for permission has been made under sub-section

(1) and the appropriate Government or the specified authority does not communicate the order granting or refusing to grant permission to the employer within a period of sixty days from the date on which such application is made, the permission applied for shall be deemed to have been granted on the expiration of the said period of sixty days.

(5) An order of the appropriate Government or the specified authority granting or refusing to grant permission shall, subject to the provisions of sub-section (6), be final and binding on all the parties concerned and shall remain in force for one year from the date of such order.

(6) The appropriate Government or the specified authority may, either on its own motion or on the application made by the employer or any workman, review its order granting or refusing to grant permission under sub-section (3) or refer the matter or, as the case may be, cause it to be referred, to a Tribunal for adjudication:

Provided that where a reference has been made to a Tribunal under this sub-section, it shall pass an award within a period of thirty days from the date of such reference.

(7) Where no application for permission under sub-section (1) is made, or where the permission for any retrenchment has been refused, such retrenchment shall be deemed to be illegal from the date on which the notice of retrenchment was given to the workman and the workman shall be entitled to all the benefits under any law for the time being in force as if no notice had been given to him.

(8) Notwithstanding anything contained in the foregoing provisions of this section, the appropriate Government may, if it is satisfied that owing to such exceptional circumstances as accident in the establishment or death of the employer or the like, it is necessary so to do, by order, direct that the provisions

of sub-section (1) shall not apply in relation to such establishment for such period as may be specified in the order.

(9) Where permission for retrenchment has been granted under sub-section (3) or where permission for retrenchment is deemed to be granted under sub-section (4), every workman who is employed in that establishment immediately before the date of application for permission under this section shall be entitled to receive, at the time of retrenchment, compensation which shall be equivalent to fifteen days’ average pay for every completed year of continuous service or any part thereof in excess of six months.

From the reading of the above sections, for all industry, it is mandatory that before retrenching or terminating services of employee, the management should give 1 month notice or salary in lieu of notice, a retrenchment compensation which is equivalent to 15 days average pay for any completed year and a notice is issued to the appropriate government (labour commissioner) intimating such retrenchment.  Section 25G mentioned above further mandates that if retrenchment is carried out in an industrial establishment in order to reduce the workforce, then it should be the last person employed who should be retrenched.  The law further mandates that in case of recruitment of similar category jobs, the retrenched employee should get preference over other candidates.

In the larger establishments, the procedure for retrenchment is more stringent and requires prior permission from labour commissioner.  The failure of large establishment to do so prescribes even penalties including imprisonment to the employer.  The above discussions abundantly makes it clear that Indian Law is not permitting any hire and fire in any industry.

The misconceived understanding of software company employees that none of the labour laws are applicable to software companies/ employees is wrong.  The above referred legal provisions establishes otherwise.

Rajesh Vellakkat