4 Jun 2010

Proprietor different from concern?

That the legal status of the shareholders and the directors is different from the company and liabilities for one's action cannot be transposed on the other is well accepted ever since the decision of Solomon v. Solomon which set to terms the development of corporate law. As far as partnership (not to speak of the Limited Liability Partnerships) is concerned, the law provides that the liabilities of the firm can befall upon the partners for there is no separate legal entity in that case. But what is the status of a sole proprietor. Can he argue that the actions were committed by the proprietorship firm and thus he cannot be visited with the consequential liability for the actions of the proprietorship?

The specific instance arose recently before an Adjudicating Officer of the Securities and Exchange Board of India where a stock broker, against whom allegations relating to violation of the SEBI Act were being considered, argued in his defence that the actions undertaken by the sole proprietorship and by him in his individual capacity were mutually exclusive and could not be considered while determining the liability for violation of the law.

The Adjudicating Officer, however, was no convinced. Being of the opinion that there was no different in the identity of the proprietor as contra-distinguished from that of the proprietorship firm, the stock broker was declared liability of violating the law. Certain observations of the Adjudicating Officer in this regard are worth noting;
Rule 8(1)(f) and Rule 8(3)(f) of the Securities Contract Regulation Rules, 1957 have been carved in order to protect the interest of securities market and especially those investors who trade through or are counterparties to the investors who trade through such broker. In cases of sole proprietorship as that of Kewal, responsibility is more since proprietor and proprietorship concern for all practical purposes are one and the same and if they are involved in some transactions bearing financial liability, it may affect the interest of clients, buyers/sellers and their counterparties, settlement/deliveries, and the business itself. Whether the alleged transaction which does not have underlying securities transaction actually rendered a liability or rendered an asset is immaterial since such risks are not contemplated to be undertaken by a broker under these rules.
In a sole proprietorship, no separate PAN (Permanent Account Number) is required. The PAN of the proprietor is the PAN of the firm and proprietor files income tax return for the proprietorship in his personal name. The same holds for trading and dealing in securities market wherein demat account, trading account and KYC forms have Proprietor’s identity and PAN. Further, in a sole proprietorship, there is no legal distinction between a sole proprietor and his/her business. The proprietor realizes all the profits, bears all the losses, and incurs all the liabilities of the business. 

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