(Sections 18-30)

The law of partnership has often been stated to be a branch of the general law of principal and agent. The law which regulates the liability of partners for the acts of their co-partners in a branch of the law of agency and in the absence of any specific rule upon the subject under the head of partnership, we must look into the law of agency for the solution of our present question. Each partner is the agent of his co-partners for the purpose of conducting debts and obligation in the usual course of partnership business.

“Subject to the provision of this Act, a partner is the agent of the firm for the purpose of the business of the firm.”

1. Cox v. Hickman, (1860) 8 HLC 268 (P) 312: Lord Wensleydale said: So if two or more agree that they should carry on a trade and share the profits of it, each is principal and each is an agent for the other, and each is bound by the other’s contract in carrying on the trade, as much as a single principal would be by the act of an agent who was to give the whole of the profits to his employer.”

The settled position of law is that the act of the partner of the firm can well be constructed as an act on behalf of all the partners if the circumstances warrant such a conclusion.

2. Structee Mech India v. Bharat Kumar Pahlajrai, MANU/TN/0227/1982 : AIR 1982 Mad 51: Letter written by a partner stating that the firm had suspended the payments treated as act of insolvency by all the partners.

3. N.V. Kamat v. Alfredo Antonio Doe Martins, MANU/SC/0203/1985 : (1985) 2 SCC 574: Where the vehicle belonging to the firm is being driven by the partner it can be said that it is done with the permission of the owner namely, the firm or with its implied authority. The vehicle can be said to be driven by the insured itself or with his permission.

4. Agricultural Insurance Co. In Re, (1870) LR 5 Ch: James, LJ., stated that as between the partners and the outside world (whatever may be their private relation between themselves) every partner is the unlimited agent of every other in everything connected with the partnership business.

According to Mr. Justice Story—

“Every partner is an agent of the partnership and his rights, powers, duties and obligations are in many respects governed by the same rules and principles as those of an agent: a partner virtually embraces the character of both a principal and agent”.

5. Hawken v. Bourn, (1841) 8 M&W 703: Parke B said: “A partner in an undertaking is, by virtue of the relation constituted a general agent for his co-partners in all matters relating to the partnership and he has all the authorities necessary for carrying on the undertaking and such as are usually exercised by the partnership”.

6. Structure Meel of India v. Bharat Kumar Pahlajrai, MANU/TN/0227/1982 : AIR 1982 Mad 51: It has been held that under sections 2(a) and 18 of the Partnership Act, the act of one partner of the firm can well be constructed as an act on behalf of all the partners if the circumstances warrant such a conclusion.

A partner is an agent of the firm. This agency is only for the purposes of the business of the firm. He can enter into contracts, purchase and sell goods, borrow money and do similar acts insofar as they are necessary for the carrying on of the business of the firm and firm will be bound by every such act. If he, on the other hand, does an act unconnected with the business of the firm e.g., purchases materials for the construction of his own building or borrows money for his daughter’s marriage, the firm will not be bound by that as he is not firm’s agent for that purpose.

Thus in India, the liability of the partner is joint and several. In England, the position of law is different. In England; for contracts entered into for carrying on the business of the firm the liability is joint but for torts and other wrongs the liability is joint and several. Every partner is declared by section 25 to be liable, with all his co-partners and also severally, for all the acts of the firm done while he is a partner.

Section 25 provides that every partner is liable jointly with all the other partners and also severally for all acts of the firm done while he is a partner. A firm is not a legal entity. It is only a collective or compendious name for all the partners. In other words, a firm does not have any existence away from its partners. A decree in favour of or against a firm in the name of the firm has the same effect as a decree in favour of or against the partners.

1. Dena Bank v. Bhikhabhai Prabhudas Parekh & Co., MANU/SC/0317/2000 : (2000) 5 SCC 694: While the firm is incurring a liability it can be assumed that all the partners were incurring that liability and so the partners remain liable jointly and severally for all the acts of the firm.

2. ITO (III) v. Arunagiri Chettiar, MANU/SC/0543/1996 : (1996) 9 SCC 33: Section 25 does not make a distinction between a continuing partner and an erstwhile partner and make liable every partner for all acts of the firm done while he is a partner.

3. Ashutosh v. State of Rajasthan, MANU/SC/0520/2005 : (2005) 7 SCC 308 (Para 13): Each partner shall be liable as if the debt of the firm has been incurred on his personal liability. An endorsee of a promissory note executed by a managing director of the firm has a right to hold all the partners liable as the makers of the promissory note.

The liability of partners is joint and several where an advances of Rs. 50 lakhs was taken from the plaintiff by a person who was not a partner under the partnership of the firm and the cheque was made in the name of the firm and promissory notes were executed by the partners of the firm. An application for attachment was filed by the plaintiff. The Supreme Court had to decide as to prima facie whether order against partners lies. It was held by the Supreme Court that prima facie the liability of the appellants could not have been ignored.

4. R.S. Rajendran v. Shankar Sundaram, MANU/SC/7026/2008 : AIR 2008 SC 1170: This has been held by Supreme Court that this liability is for such acts of the firm which are done while he is a partner. Therefore if a partner ceases to be a partner of the firm on account of death as otherwise he will not be liable for the acts of the firm. Section 28(2) provides: “Where after a partner’s death the business is continued in the old firm name, the continued use of that name, or of the deceased partner’s name as a part thereof shall not of itself make his legal representative or his estate liable for any act of the firm done after his death.

5. Goldburg v. Jenkins, (1889) 15 VLR 36: Hodge, J. pointed out that the power of a partner to bind his co-partners depends upon the question of agency. The law of partnership starts with this principle that each partner is the agent of all the partners for transacting all the ordinary partnership businesses.

6. K.A. Louiz v. A.A. Augustin, MANU/KE/0194/2004 : AIR 2005 Ker 1: “Where the petitioner, a partner in partnership firm paid the entire amount in realisation of decree against the firm and filed suit to recover half of amount against the defendant, the other partner and defendant made no specific denial regarding payment made by petitioner in his written statement and did not get himself examined to controvert the oral evidence adduced by him, it was held that the plaintiff would be entitled to amount to a decree against defendant in realisation of amount falling on his share.

Problem: 1. ‘X’, a creditor of a firm consisting of ‘A’ and ‘B’ sued A and obtained a decree against him. Having failed to recover anything on his decree against ‘A’. X files a suit against B. Advise ‘B’.

Ans. Every partner is jointly and severally liable for all acts of the firm done while he is a partner. Therefore ‘X’ is entitled to file a suit against ‘B’. X’s failure to implead B in his suit against ‘A’ is no defence.

2. ‘X’ sues A, B, C alleging that they were partners. At the hearing A admitted ‘X’s claim and judgment was thereupon passed in favour of X for the amount claimed. ‘X’ wants to proceed with the suit against B and ‘C’. Advise B and C.

Ans. ‘X’ can proceed with the suit against ‘B’ and ‘C’ under section 25.

“1. Subject to the provisions of section 22, the act of partner which is done to carry on in the usual way, business of the kind carried on by the firm, binds the firm.

The authority of a partner to bind the firm conferred by this section is called “Implied authority.”

2. In the absense of any usage or custom of trade to the contrary, the implied authority of a partner does not empower him to—

(a) submit a dispute relating to the business of the firm to arbitration.

(b) open a banking account on behalf of the firm in his own name.

(c) compromise or relinquish any claim or portion of a claim by the firm.

(d) withdraw a suit or proceeding filed on behalf of the firm.

(e) admit any liability in a suit or proceeding against the firm.

(f) acquire immovable property on behalf of the firm,

(g) transfer immovable property belonging to the firm, or

(h) enter into partnership on behalf of the firm.”

Section 19(1) provides that this implied authority of a partner is often referred to as his ordinary or apparent or ostensible authority. The learned English author (Lindley) prefers the term implied authority.

1. Bank of Australia v. Breillat, (1847) GMPC 193: The Privy Council adopted the passage from “Story on agency” in which the general power of a partner as agent of the firm has been well summed up in the following words:

Every partner is, in contemplation of law, the general and accredited agent of the partnership, as it is sometime expressed, each partner is praepatius negotiis societatis and may consequently bind all the other partners by his acts in all matters which are within the scope and object of the partnership.

In the words of Pollock: 

“The act of a partner done in the name of a firm will not bind the firm merely because they are convenient or prudent or even necessary for the particular occasion. The question is what is necessary for the usual conduct of the partnership business; that it is the limit of each partner’s general authority, he is the general agent of the firm, but he is no more.

2. Commissioner of Income-Tax, Patiala v. Hardit Singh, Pal Chand & Co., (1979) 120 ITR 189: The two persons who had secured licence in their names took eight other partners for carrying on the liquor business. The firm, applied for registration which was refused by the I.T.O. but granted by the tribunal on a reference.

Held: 

That by virtue of the conditions in the licence to the effect that the licence is granted subject to the provisions of the rules, there was a clear finding by the tribunal that names of the eight persons who were stranger to the licensee, were not endorsed on the licence in terms of the rules.

In order to bind the firm, for an act of a partner done within the scope of the implied authority, three conditions must exist—

(i) The act must be done in the conduct of the business of the kind carried on by the firm,

(ii) The act must be done in the way which is usual in such business,

(iii) Finally, the act must be done in the firm name, or in any other manner expressing or implying an intention to bind the firm.

Example     (a) A partner can buy on the credit of the firm, any goods of a kind used in its business. This power extends to both, a trading and a non-trading partnership.

(b) Similarly, a partner may hire on the credit of the firm any goods of a kind used in its business.

Case: 

A partner of a firm, whose business it was to trap wild elephants, hired an elephant to be used for trapping wild elephants and one of the terms of hire was that the hirer should pay Rs. 5000 if the elephant died during the period of hire. It was held that the other partners also were bound by this term. (Mathura Nath v. Shreejukta Bageshwari, (1927) 4 Cal LJ 362).

(c) A partner may engage servants or agents and he may also discharge such persons, although he can’t discharge them against the will of the
co-partners.

(d) A partner can constitute and defend suits in the name of the firm. It has been held in England that a partner, who attends to the affairs of the firm, has an implied authority to employ a solicitor to defend a suit filed against the firm.

Problem: 

A and B carry on business in partnership as bankers. A sum of money is received by A on behalf of the firm. B does not know of the receipt. A appropriates the money to his own use. The partnership is liable to make good the money. This is an act done by a partner in the usual course of business. Therefore, the firm is liable.

It must be clearly observed that the implied authority does not come into existence unless the act is done in the usual way, and in the conduct of the business of the kind carried on by the firm. Thus while a partner in a mercantile firm has an implied authority to draw, accept and endorse bill of exchange on behalf of the firm, a partner in a firm of solicitors has no such implied authority, for it is not part of the ordinary business of a solicitor to draw, accept or endorse bill of exchange; Krishnji v. Abdul, (1941) 43 Bom LR 888.

A partner in a trading firm has an implied authority to borrow money on the credit of the firm. A partner, having power to borrow on the credit of the firm, may give a valid, equitable security, by deposits or otherwise over any estate of the partnership. Therefore, the firm is liable to the bank.

A partner in a mercantile or other firm has no implied authority to execute deed on behalf of the firm, nor does the implied authority of a partner extends to acts not usually incidental to scope of the partnership business, for example, giving of guarantees by a member of the mercantile firm. A guarantee signed by one partner in the firm does not bind the other partners unless it is in the regular line business of the firm, or unless he has their explicit authority to give the guarantee and a continuing guarantee or cautionary obligation given either to a firm, or to the third person in respect of the transaction of the firm is, in absence of agreement to the contrary, revoked as to future transaction by any change in the constitution of the firm to which, or of which, the guarantee or obligation was given.

Sanganer Dal and Flour Mill v. F.C.I., AIR 1982 SC 481: 

One of the partners (Satya Narain) of the partnership firm, who had implied authority to enter the contract with the corporation to purchase the goods, entered into contract with the respondent-corporation to supply of Dal 1000 quintals at the contracted rate which was the usual course of the business of the appellant. The partner had power to do business on behalf of the firm and in exercise thereof he entered into the contract with the corporation during the usual contract of business to supply the Dal.

The agreement with the corporation included an arbitration clause and in terms thereof the dispute was to be referred to the arbitration. Therefore, the dispute having arisen, it was referred to arbitration by the Addl. District Judge under section 20 of the Arbitration Act. An appeal was filed in the High Court against the said order of the Addl. District Judge. The instant appeal is by special leave under Article 136 of the Constitution against the said order of the High Court.

Dismissing the appeal, the Supreme Court observed that section 18 of the Partnership Act postulates that “Subject to the provisions of the Act, a partner is the agent of the firm for the purpose of the business of the firm.” Section 19(1) adumbrates that. “Subject to the provisions of section 22, the act of the partners which is done to carry on in the usual way the business of the kind carried on by the firm.”

Devi Prasad Rai v. Kanahiyalal Mukharya, MANU/SC/0379/1986 : (1986) 4 SCC 5:

K who was the owner of certain vacant site entered into partnership with D and others. He agreed to allow his vacant land to be used by the firm for raising cinema exhibition hall with an undertaking that he will not alienate the property during the subsistence of the firm. The Supreme Court agreed with the finding of the High Court that, (i) K as the owner of the property had the right to sell his property, but, (ii) during the subsistence of the firm, the sale deed was not binding on the other partners who can continue to remain in possession.

Chainraj Ramchand v. V.S. Narayaswami, MANU/TN/0245/1982 : AIR 1982 Mad 326: 

It was held that “A partner has got no implied authority to compromise or relinquish any claim or part of the claim by the firm. Express power from other partners is needed to entitle a partner to compromise a claim whether in a legal proceeding or otherwise.

Rajnikant Hashmukhlal Galwala v. Natraj Theatre, MANU/GJ/0150/1999 : AIR 2000 Guj 80: 

It cannot be said that subsequent ratification is needed when the ratification was there at the inception itself. Therefore, the question of subsequent ratification does not arise.

B.V. Narasimhulu Chetty v. Ratakonda Krishna Murthy, MANU/AP/0100/1986 : AIR 1986 AP 177: 

A partner has authority to lend the money of the firm upon mortgage when such a transaction is part of the ordinary business of the firm, but a partner has, as a rule, no authority to take as security any property to which liability is attached.

In trading firms, every partner has implied power to bind the firm if there is no agreement to the contrary, but a non-trading firm is not bound centers the issue of negotiable instrument by one partner is shown to be necessary or usual in the particular business. For this purpose, brokers and commission agents are not traders, nor are cinematographic theatre owners. Firms of solicitors, quarry workers, auctioneers and engineering contractors are instance of non-trading partnership.

When a negotiable instrument is regularly drawn by a partner in a trading firm in a transaction incidental to the firm’s business, another partner is not less liable because his name does not appear on the face of the instrument. Where the partnership agreement contemplated raising of loan by the firm, the managing partner would have every right to borrow monies for the purpose of the firm. A firm will be bound under a negotiable instrument only if the partner acts in the name of the firm. It is necessary that the negotiable instrument must, have been executed in the name of the firm in order to bind the firm.

Every partner in a leading firm has implied authority to borrow money for the purpose of the business or credit of the firm. The sudden exigencies of commerce render it absolutely necessary that such power should exist in the partners of the trading firm. Every other implied power of a partner it only exists where the business is of such a kind that it cannot be carried on in the usual way without such a power.

Where the act of a partner is within the scope of his implied authority but it has been done by him, to the knowledge of the third party, not for the firm, but for his own purpose, the firm is not liable According to Cockburn, CJ. “If a creditor of one of two partners choose to take from his debtor what he knows to be partnership securities as partnership funds without ascertaining whether the debtor has the authority of his partners as to this application of the partnership funds, he does so at his own peril.

Section 22 of the Partnership Act provides—

“In order to bind a firm, an act or instrument done or executed by a partner or other person on behalf of the firm shall be done or executed in the firm name, or in any other manner expressing or implying an intention to bind the firm.”

(1) Punjab Bank v. Mauhammad, 15 Lah 625: ‘A’ one of the two partners in the Punjab Alliance Auction Rooms, executed a pronote in favour of the plaintiff. The note was signed by A describing himself as Proprietor, Punjab Alliance Auction Rooms. It was held that A’s description as a proprietor of the firm was not sufficient to justify the firm being held liable on the note.

(2) Devji v. Magan Lal, MANU/SC/0020/1964 : AIR 1965 SC 139: A partner had taken a sub-lease in his own name instead of taking it in the firm’s name. Besides this, there did not seem to be any intention to bind the partnership firm. The Supreme Court held that the firm was not bound by the lease as the parties did not intend to bind the firm by this transaction.

Similarly, in another case, two members of the joint Hindu family, which carried on partnership, executed a promissory note. There seemed to be no intention that the money was taken as loan for the partnership. The Court, therefore, held that other members were not bound by the promissory note.

Similarly, in another case a member of the partnership carrying on the business of petrol executed an instrument and after signature wrote “Agent of the Company”. The Court held that the “Agent of the Company” was only a description of the person signing and that it did not express his intention to bind the firm. Therefore, the firm was not bound by the instrument executed by the partner.

(3) Ghisulal v. Haji Mohd, MANU/RH/0014/1981 : AIR 1981 Raj 58: Where a partnership signed a pronote describing himself as proprietor of the firm, liability of the firm does not arise. Thus, the partner acting for the firm must expressly or impliedly let the other party know that he acts for the firm. The other party must know his representative character as an agent of the firm. Where the partner fails to do this he will incur personal liability on the contract and the firm may not be liable.

(4) Sitaram v. Chimandas, 1928 ILR 52 Bom.

(5) Pariambala Chettair v. M. Ghosh, (1945) 1 MLJ 279: It has been held that the test for making the firm liable for the acts of the partner is whether it was done as agent and not as principal. If the answer is in affirmative then the firm would be bound by the act of the agent.

In order to bind the firm from the act of a partner, that act must be done in the name of the firm. That is, the act done by a partner will bind the firm only when the act done by him is in the capacity of a partner of the firm and not on his own behalf. The partner has done the act in the course of agency and not in his personal capacity. This principal is similar to rule of land and that on which the liability of an undisclosed principal is based.

“The partners in a firm may, by contract between the partners extend or restrict the implied authority of any partner.

Notwithstanding any such restriction, any act done by a partner on behalf of the firm which falls within his implied authority binds the firm, unless the person with whom he is dealing knows of the restriction or does not know or believe that partner to be a partner.”

This section deals as to how the implied authority of the partner may be extended or restricted. It lays down that this can be done by contract between the partners.

This section deals with restriction on the implied authority of partner. It has been provided under first paragraph that partners in a firm may by contract between themselves extend or restrict the implied authority but such extension or restriction of partner’s authority. It is to be noted that it does not affect the third parties dealing with the firm who have no knowledge of such extension or restriction.

Example: 

Thus A and B are partners in a grocery business. The partnership deed provides that A shall not buy anything on behalf of the firm. But A nevertheless enters into contracts to buy groceries. What is the liability.

The implied authority may be restricted by an agreement between the partners. When a restriction has been imposed on the implied authority of a partner, such a restriction is not binding on the third party unless the third party has the knowledge of the restriction. There is a difference between the statutory restrictions which have been imposed by the section 19(2) on the implied authority of a partner and the restriction on the implied authority which may be imposed under section 20 by a contract between the partners.

“A partner has authority, in an emergency, to do all such acts for the purpose of protecting the firm from loss as would be done by a person of ordinary prudence, in his own case, acting under similar circumstances, and such acts bind the firm”.

The partner may agree to extend the implied authority of a partner, i.e., authorise him to do something for which he does not have implied authority. The firm will be bound by such an act of a partner.

The object of this section is to enable the partner of a firm to exercise his powers in emergency for the protection of the firm from any loss and the firm is bound by that act. This English Partnership Act does not authorise a partner to do any unusual act in business transaction. It authorises a partner to do any usual act in emergency for the protection of the firm from loss.

Section 24(2) of the English Partnership Act provided that any partner should be indemnified by his co-partners for the act done by him in emergency for the preservation of the business or the property of the firm. If a partner makes some payments or incurs liability in doing an act, in an emergency, for the purpose of protecting the firm from loss and he has acted as a prudent man in like circumstances would have acted in his own case, the firm shall indemnify the partner for the same.

Hawtayne v. Bourne, 1841 7 M/W 595: A question sometimes arises as to whether a power to do what is casual includes a power to do what is unusual, however, urgent it may be. Answering the question in the negative, it has been held that an agent who has no authority to borrow money cannot do so even in an emergency to enable the business to be carried on.

When an agent does an act on behalf of a principal but without the principal’s prior authority the principal may grant subsequent approval to such an act i.e., ratify the same. If the principal ratifies the act, the same effect follows as if the act had been performed with his prior authority.

For instance: A partner ‘A’ without any authority borrows Rs. 10,000 from ‘B’. A’s act is ratified by the other partners. Thereafter they become bound to pay that sum to ‘B’.

“An admission or representation made by a partner concerning the affairs of the firm is evidence against the firm, if it is made in the ordinary course of business.”

An admission is a statement by which a person acknowledges the existence of a fact of his own interest. If a partner makes a statement in the ordinary course of business of the firm by which he admits a fact or liability, that is, an admission against the firm. Since in partnership business every partner is an agent of his co-partners for the same object so that if a partner admits any fact or liability in respect of the ordinary course of business of the firm the fact or representation will be binding on all the partners of the firm.

This section deals with the effects of admissions made by a partner, and provides than an admission or representation made by a partner is evidence against the firm if it is done in the ordinary course of business.

For the purpose of the application of this section, it is necessary that the admission or representation made by a partner must have been made concerning the affairs of the firm. Secondly, it must be made in the ordinary course of business. If any of the ingredients is absent in an admission or representation, the firm will not be bound by the admission or representation. To come within the scope of this section, the partner must have made the admission not beyond the scope of his authority, if the partner made an admission or representation beyond the scope of his authority the firm as co-partner’s would not be bound by that admission or representation. The firm will also be not bound by that admission or representation which is made before he joined the partnership. Similarly, admission made after the business stopped is also not an evidence against the firm.

If a partner admits the debt of a firm it is an admission to be taken on evidence against the firm because a partner has an implied authority to admit a debt.

Bengal National Bank Ltd. v. Jatindra Nath Mazumdar, (1929) 56 Cal 556: Admission by one partner regarding making of a contract, execution of a document, payment of money, supply of goods as financial condition of the
firm will be evidence against all the other partners. It is, of course, necessary that such admission or representation must have been made in the ordinary course of business. Similarly, representation made by a partner also has the same effect.

“Notice to a partner who habitually acts in the business of the firm of any matter relating to the affairs of the firm operates as notice to the firm, except in the case of a fraud on the firm committed by or with the consent of that partner.”

Section 24 is based on the principle that as a partner stands as an agent in relation to the firm, a notice to the agent is tantamount to the notice to the principal and vice versa. As a general rule, notice to a principal is notice to all his agents, and notice to an agent of matters connected with his agency is notice to his principal.

Essentials: 

The requirement of this section are as follows—

(a) the word ‘notice’ means actual notice and not constructive notice,

(b) the notice must be given to a partner who habitually acts in business and means to an acting partner and not to a dormant or sleeping partner,

(c) the notice must concern with the affairs of the firm,

(d) the partner, receiving the notice should not have committed fraud either himself or with the consent of other partners.

The above rule is based on the principle of agency that notice to an agent is equivalent to a notice to the principal. Since partnership is a form of agency, this rule applies to a partnership firm also.

A question arose in an English case as to whether notice given to a partner before he became a partner would operate as a notice to the firm. The court held that such knowledge of a partner would not operate as notice of the firm.

An exception is made by section 24 in cases of fraud. This is based on commonsense and when a partner is committing a fraud on his other partners, notice to him will not be notice to the firm. In Bignold v. Waterhouse, (1813) 105 ER 95, a partner of a firm of a carrier, acting in fraud against his co-partners agreed to transport valuable parcels free of charge. The partners (others) were held not liable for the loss of the parcels. The fact that some clerks in the firm were aware of the fraud was held not to affect the innocent partners.

Likewise, if a partner who is also a trustee of a trust, employs trust funds in the partnership business, his guilty knowledge can’t be imputed to the firm.

“Every partner is liable, jointly with all the other partners and also severally, for all acts of the firm done while he is partner.”

Section 25 provides that every partner is liable, jointly with all the other partners and also severally for all acts of the firm done while he is partner. A firm is not a legal entity. It is only a collective or compendious name for all the partners. In other words, a firm does not have any existence away from its partners. A decree in favour of or against a firm in the name of the firm has the same effect as a decree in favour of or against the partners. While the firm is incurring a liability it can be assumed that all the partners were incurring that liability and so the partners remain liable jointly and severally for all the acts of the firm done while he is a partner.

Sahu Rajeshwar Nath v. I.T.O., Meerut, MANU/SC/0233/1968 : AIR 1969 SC 667: Section 25 does not make a distinction between the continuing partner and an erstwhile partner and makes liable every partner for all acts of the firm done while he is partner.

Ashutosh v. State of Rajasthan, MANU/SC/0520/2005 : (2005) 7 SCC 308: It is open to a creditor of the firm to recover the debt from anyone or more of the partners. Each partner shall be liable as if the debt of the firm has been incurred on his personal liability.

Gurram Subbarayudu v. Motapothula Narasimham, MANU/AP/0065/1974 : AIR 1974 AP 307: An endorsee of a promissory note executed by a managing partner of the firm has a right to hold all the partners liable as the makers of the promissory note.

Bhagwanji Devraj v. Union of India, 16 Guj LR 357: Where a subscriber had two telephonic connections, one in his own name and the other in the name of his partnership firm, and the firm defaulted in paying the dues of the telephone department, the action of the department in disconnecting both the telephone lines was upheld on the ground that liability of the partner was joint and several.

Section 2(a) of the Indian Partnership Act defines the term “acts of the firm”. This section provides that act of firm means act done by all the partners of the firm, anyone or some of the partners of the firm and act done by an agent of the firm. A partner is jointly and severally liable with his other co-partners for the acts of the firm. A partner may be held liable for the act done by any other partner of the firm, which is not binding on the firm but later on that act has been ratified by all the partners of that firm.

Where a partner as an agent for his personal profit, has done any act fraudulently or wrongfully, the firm will not be liable for that fraudulent and wrongful act.

When a firm is deemed to be a person and thus a legal entity for a particular purpose, such an assessment for tax liability, the principle enunciated in section 25 regarding personal liability of partners for acts of the firm, would not be applicable. Unless there is a statutory provision which specifically provides that the partners would be personally liable for lapses of the firm.

Sahu Rajeshwar Nath v. I.T.O., Meerut, MANU/SC/0233/1968 : AIR 1969 SC 667: As the liability of the partners is joint and several, it is open to a creditor of the firm to recover the debt from anyone or more of the partners.

“Where by the wrongful act or omission of partner acting in the ordinary course of the business of a firm or with the authority of his partners, loss or injury is caused the firm is liable therefor to the same extent as the partner.”

The principle of this section is a branch of the universal rule that everyone must answer for the acts and default of his servants or agents in the course of their employment. All the members of a firm of solicitors will be liable for the negligent advice given by one of them to the client of the firm or for negligent conduct of their clients’ claim. The firm being a legal entity, it is being managed by its partners. The firm itself cannot transact its business. Contravention of any law by anyone of the partner of the firm would be a contravention by the firm itself. If one partner in ordinary course of business of the firm commits breach of revenue laws, all the partners will become liable for the consequent penalties.

A firm may also be liable for money which has come into its funds by the irregular or fraudulent act of either a partner or an agent who is not a partner and this whether the act was in the ordinary course of business, at all events if the partners knew or might have known of the payment and its source.

Where, by the wrongful act or omission of a partner acting in the ordinary course of the business of a firm or with the authority of his partners loss or injury is caused to any third party, or any penalty incurred, the firm is liable therefore to the same extent as the partner.

The word ‘injury’ in section 26 implies a tort. The liability of a firm for the torts of a partner rests on precisely the same principles as the liability of a master for the torts of his servant, inasmuch as both are merely branches of the law of principal and agent.

Venkat v. Natesa, (1939) I MLJ 905: 

In this case, N and K entered into partnership to supply goods to jails. K provided finances for the partnership business and N did the work. K paid bribes to officials and entered the amounts in the account books of the partnership as items of expenditure. N, in his term, also spent partnership funds in paying bribes. In a suit filed by N against K for the dissolution of partnership and taking of accounts, K objected to the amount spent in bribery by N being taken in account. N objected to the amounts spent in bribery by K. The Court held that neither N nor K was entitled to debit the partnership with money spent for an illegal purpose.

Problem: 

A customer of a banking firm deposits with the firm, a box containing securities. He afterwards authorises one of the partners to take out some of these and replace them by certain others. The partner not only makes the changes he is authorised to make in the contents of the box, but makes other changes without authority, and converts the customer’s securities to his own use. Discuss the liability of the firm for the loss.

Ans: 

Here, it is evident that the firm is not liable to make good the loss. As the separate authority given to one partner by the customer shows that he elected to deal with that partner personally and not as agent of the firm.

Section 27 of the Act proceeds to deal with the liability of the firm for misapplication by a partner of money or property of a third person received for or lying in the custody of the firm. This section lays down that where—

(a) a partner acting within his apparent authority, receives money or property from a third party and misapplies it, or

(b) the firm in the course of its business receives money or the property from a third party, and the money or property is misapplied by any of the partners, while it is in the custody of the firm, the firm is liable to make good the loss.

Problems:

 X, Y, Z were partners in a firm of bankers of whom Z was not an active partner ‘C’, a customer of the firm deposited his ornaments with the bank for safe custody. X and Y sold the ornaments without authority from ‘C’ what are the rights of ‘C’ against the Bank. What is the liability of Z?

Ans.: 

In this case, it will be seen that the ornaments of ‘C’ were received by the firm of bankers in the course of its business for safe custody. X and Y active partners of the firm, had sold ornaments without any authority from C, the owner. Hence, the firm is liable to make good the loss. C can recover the amount from the firm under section 27. Though Z is a dormant partner, he is also liable along with X and Y to make good the loss: section 25. But Z is entitled to be indemnified by X and Y.

Where—

(a) a partner acting within his apparent authority receives money or property from a third party and misapplies it, or

(b) a firm in the course of its business receives money or property from a third party, and the money or property is misapplied by one of the partners while it is in the custody of the firm, the firm is liable to make good the loss.

Clause (a) of section 27 varies from clause (b), under clause (a) to hold the firm liable it is necessary to prove that a partner while acting in an apparent authority has received money or property from the third party. The property so received shall be deemed as property received by the firm. It is immaterial whether the co-partners have any knowledge of receiving that property. Because a partner receives that money or property as an agent of the firm.

However, the firm will not be liable for the property misapplied by a partner when—

(a) the partner or agent has received that property not in the course of business,

(b) such property received by him not under the authority of an agent but for his personal use.

Clause (b) of section 27 lays down that where a firm receives money or property from the third party in the ordinary course of business, and any partner of that firm, misapplied that property while the property is in the custody of the firm, the firm is liable to make the good the loss. Under this section to hold the firm liable, the following conditions must be satisfied—

(a) the firm has received that property in the ordinary course of business, and

(b) at the time of misapplication such property must be in the custody of the firm.

Essentials.—

To make the firm liable under this section the following requirement must be fulfilled—

(a) that the partner has acted in his apparent authority,

(b) that the partner received money or property from a third party

(c) that the partner has misapplied such property;

The firm will be liable when—

(a) it receives money or property in the ordinary course of business; and

(b) such property was applied by its partners while in its custody.

Rhodes v. Moules, (1895) 1 Ch 236 one of the partners of a firm of solicitor was requested by a client to obtain loan for the client on the mortgage of some property. The said partner told the client that the mortgagees wanted some additional security and thus obtained from the client some share warrants payable to bearer. He subsequently misappropriated the share warrants and absconded. The other partners had no knowledge of the deposits of the warrants and subsequent appropriation thereof. It was found that on some earlier occasion such share warrants had been received through the same partner from the same client by this firm. It was, therefore, held that it was within the apparent authority of the partners to receive the share warrants, the partners were liable for the misappropriation of the warrants made in the case.

To make the firm liable for the acts of a partner, it is necessary that such a partner while receiving money or property from a third party acted within his apparent authority. If the act done is outside such authority, the firm cannot be made liable for the same.

Cleather v. Twisden, 28 Ch D 340: One of the partners of a firm of solicitors received some bonds payable to the bearer and misappropriated the same. It was found that the receipt of such securities for safe custody was not a part of the business of the solicitors and therefore it was held that the other partners could not be held liable for the same. The position would have been different if receipts of such bonds had been within the implied authority of the partner concerned.

Where a party trusts or deals with a partner and not within the firm, the firm may not be liable. A customer of a banking firm deposited with the firm a box containing securities. Afterwards, he authorised one of the partners only to take out some of the securities and to replace them by some others. The firm was held not liable when that partner misappropriated some of the securities.

(1) “Anyone who by words spoken or written, or by conduct represents himself or knowingly permits himself to be represented, to be a partner in a firm, is liable as a partner in that firm to anyone who has on the faith of any such representation given credit to the firm, whether the person representing himself or represented to be a partner does or does not know that the representation has reached the person so giving credit.

(2) Where after a partner’s death the business is continued in the old firm name, the continued use of that name or of the deceased partner’s name as a part thereof shall not of itself make his legal representative or his estate liable for any acts of the firm done after his death.”

A liability of a third person may accrue in a case where he is not a partner of a firm. He may be held liable, though he is not a partner of the firm, by holding himself out as a partner in the firm.

Section 28 of the Indian Partnership Act enunciates the principle of holding out. According to this section where a person either orally or in writing or by his conduct represents himself as a partner in a firm or voluntarily induces some other person to be a partner in a firm, he will be liable as a partner of a firm, when on his inducement any person delivers a credit to the firm.

The principle of holding out is a branch of doctrine of estoppel. Section 115 also lays down the doctrine of estoppel. The doctrine has been laid down by the Privy Council.

Illustration—

“A is in the habit of representating himself to be a partner of a particular firm. B on the strength of such representation, and, without giving any notice to A, supplies goods on credit to the firm. A would be liable as a partner to B for the price of the goods. It will thus be seen that liability by holding out is merely a special application of the principle of estoppel enunciated by section 114.

This is the rule of liability commonly called ‘Holding Out’. Representation of this kind can only conclude the defendants with respect to those who have altered this condition on the faith of its being true.

Porter v. Incell, it was observed that no evidence of intention or knowledge of the consequences of his acts and conduct is necessary to make the apparent parties liable.

There can, of course, be no holding out to a person who already knows the real facts, as for example by inspection of the register in the case of a firm registered under Chapter VII of the present Act.

A minor does not incur liability by holding himself out as a partner. If a minor admitted to the benefits of partnership holds himself out as a partner on his attaining majority, he will incur liability under this provision. His option to elect to become or not to become a partner by giving a public notice as provided in section 30(5) will not affect any liability which he may incur by projecting himself to be a partner within the period of six months of his attaining majority. A person who merely holds himself out as willing to become a partner does not incur any liability under this provision. The partners, in a suit for recovery were found to be holding out when they did not enter the witness box to explain letters and account books showing them as partners thereby prompting the Court to return a finding of existence of a partnership firm.

Fox v. Clifton, (1830): The holding one’s self out to the world as a partner as contradistinguished from the relation of partnership, imparts at least voluntary act of the party so holding himself out. It implies the lending of his name to the partnership, and is altogether incompatible with the want of knowledge that his name has been so used.

1. Representation: 

The person sought to be charged with liability for holding out must have represented himself to be a partner in the firm. Representation may be made either by words, written or spoken or by conduct. An express representation takes place when a person allows his name to be used in the affairs of the firm. For example in the name, title or signboard of the firm.

Beaven v. National Bank Ltd., (1906) 2 TLR 65: One MW was the manager of one B’s business. The business was carried on under the name MW & Co.

It was held that by permitting his name to be used in the title of the firm, he had made a representation that he was a partner and therefore, he was liable to those who gave credit to the firm on the faith of that representation.

The representation may not only be oral or written but it may also be implied from the conduct of the parties. Under section 28(1) a person may make representation through his conduct that he is a partner. The same will apply if he knowingly permits himself to be represented.

Tower Cabinet Co. Ltd. v. Ingram, (1949) 1 All ER 1033: A and B commenced business in partnership as household furnishers under the name of ‘C’. This partnership was dissolved by agreement in 1947. A notice of dissolution was given by ‘A’ to the firm’s banker and he arranged with ‘C’ to notify those dealing with the firm and he had ceased connection with the firm. The Court held that ‘A’ had not knowingly suffered himself to be represented as a partner and that was ‘A’ was not known to the plaintiff as having been a partner was not liable.

Martyer v. Gray, (1863) 14 CB: Where ‘A’ introduced ‘B’ to ‘C’ as his partner, when in fact he was not so and ‘B’ silently stood by, he was held liable by holding out.

Bare knowledge that his name is being used may not make a person liable by holding out. But is he under no duty to ratify the world that he is not a partner? Knowledge may in time become evidence of consent by acquiescence. Prudent men will rather use a little abundant caution in due reason that run the risk of much more trouble at a latter time.

2. Knowledge of representation: 

The person seeking to hold another liable by holding out or estoppel must show that the he had knowledge of the representation and acted on it. It must be proved:

“That the defendant had held himself out to be a partner not ‘to the world’…. for that is a loose expression, but to the plaintiff himself or under such circumstances or publicity as satisfy a jury that the plaintiff knew of it and believed him to be a partner. He would then be liable to the plaintiff in all transactions in which he engaged and gave credit to the defendant or the firm upon the faith of his being such partner.

If the plaintiff has acted on the faith of the representation liability is incurred to him and it is immaterial that the defendant did not know that his representation had reached the plaintiff. But if the plaintiff has not heard of the representation or having heard, did not believe it or know the real truth or would have been given credit to the firm in any case, no liability by holding out arises, because he has not been mislead by the representation. While on the one hand, it is necessary to prove that the person giving credit or supplying goods to the firm had knowledge of the representation, on the other hand it is not necessary to prove that the person who represented himself as a partner had the knowledge that his representation reached the person giving credit or goods to the firm. According to section 28(1), liability for holding out depends on two essential elements—

(i) the representation by a person that he is a partner in the firm and, (ii) any other person on the faith of this representation gives credit or supplies goods to the firm. If these two elements are present, it is immaterial whether the person representing himself to be a partner in the firm knows or does not know that the representation has reached the person giving credit or supplying goods to the firm.

When a partner retires from the firm or leaves the firm, ordinarily his liability also ends for the acts of the firm after the death or his retirement. But this is not practical because the fact of his retirement must be known to the third parties. Therefore, section 32(3) provides “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 those 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.

Scarf v. Jardine, (1882) 7 App Cas 345: 

Scarf and Rodgers were the two partners in a firm, R and Co. Scarf retired but he did not give public notice regarding his retirement. Rodgers continued the business with the name of the old firm. A man named Jardine used to supply goods on credit to the firm before the retirement of Scarf. He had no notice of retirement of Scarf from the firm. On the order of the firm for the goods he sent the goods on credit as in the past. The price of the goods having not been paid he made an enquiry and found that Scarf retired from the firm. Therefore, he sued the new firm (without Scarf) for the recovery of price for goods but he failed to recover the price because the firm had become bankrupt. Thereafter he sued Scarf who had retired from the firm. The House of Lords held that Scarf was not liable. If Jardine had not sued the new firm Scarf would have been liable on the basis of the principle of holding out. He had the right to elect whether he would sue the new or the old firm. He elected to sue the new firm. Thus, he accepted the change in the constitution of the firm. Having accepted it once, he lost the right to hold Scarf liable on the basis of principle of holding out.

Thus when a partner retires from the firm he should give a public notice in this respect otherwise he may be held liable on the basis of the principle of holding out but this principle does not apply in respect of a sleeping partner.

The principle of holding out on retirement without giving public notice does not apply to the following cases:

(1) Deceased Partner: The estate of a deceased partner is not liable for any act of the firm done after his death even if the business is continued by the surviving partners in the same style and place and even if his name appears in the name and affairs of the firm. Death is notice by itself.

(2) Insolvent Partner: Insolvency of partner also terminates his liability forthwith. A person ceases to be a partner from the date of his insolvency and his estate is no more liable for any act of the firm done after his insolvency whether notice has been given or not.

(3) Dormant Partner: A dormant or sleeping partner means a partner whose existence as partner is not reflected by the name of the firm or otherwise. He has never taken part in the conduct of business as, partner and, therefore, he is not known to the customers of the firm. As long as he remains a partner his liability for the acts of the firm is the same as that of any acting, apparent or ostensible partner. But when retires, public notice is not requisite to terminate his liability. His presence in the firm was not known to the public and his exit need not be publically announced.

Jwaladutt R. Pillani v. Bansilal Motilal, AIR 1929 PC 132; Juggilal Kamlapat v. Sew Chand Bagree, MANU/WB/0124/1960 : AIR 1960 Cal 463.

Where his presence in the firm was known to some customers notice of his retirement must be given at least to them.

“(1) A transfer by a partner of his interest in the firm, either absolute or by mortgage, or by the creation by him of a charge on such interest, does not entitle the transferee, during the continuance of the firm to interfere in the conduct of the business or to require accounts, or to inspect the books of the firm, but entitles the transferee only to receive the share of profits of the transferring partner, and the transferee shall accept the account of profits agreed to by the partners.

(2) If the firm is dissolved or if the transferring partner ceases to be a partner, the transferee is entitled against the remaining partners to receive the share of the asset of the firm to which the transferring partner is entitled and, for the purpose of ascertaining that share, to an account as from the date of the dissolution.”

Principle: 

Section 29 of Indian Partnership Act dealt with the rights of transferee of a partner’s interest in a firm. Generally a third person or party could not become a partner in a firm without the consent of acting partners. It is clear that a partner could not transfer his interest in a firm to a third person to become a partner without the consent of his co-partners. However, in Indian Partnership Act, a partner can transfer his interest in the firm to a third person. This transfer may be absolute or by mortgage. This transfer of interest does not put the transferee in the same position as the transferor. In such transfer of interest a partner does not cease to be a partner nor a transferee becomes a partner. Such transferee may be termed as sub-partner.

Thus if a partner transfers his interest in the firm to a third party, under section 29(1) the transferee can get the share of profits of that partner. But so long as the firm exists and carries on business, he cannot interfere in the business of the firm nor can he inspect the accounts of the firm. It may be noted here that section 29(2) applies only after the partner has transferred his interest in the firm to a third party. Partition is not a transfer.

V.P.R. Prabhu v. S.P.S. Prabhu, AIR 1985 Ker 285: 

In the words of Padmanabhan, J. that what is required under section 29(1) that the partition is not transfer. It is only renouncement of existing rights in common properties in consideration of getting exclusive rights and possession over the specific plots. Partition is only a process of mutual renunciation by which common unspecified rights in larger extents are located into exclusive rights over specific plots. Under section 29(1), the transferee can claim the share of the profits of the transferor partner so long as the firm continues. But he cannot challenge the accounts prepared by the existing partners. He has to accept the accounts prepared by the existing partners and cannot also inspect the accounts.

Commissioner of Income-Tax v. Sunil J. Kinariwala, MANU/SC/1120/2002 : AIR 2003 SC 668: 

The Supreme Court observed that there is a clear distinction between a case where a partner of a firm assigns his share in favour of a third person and a case where a partner constitutes a sub-partnership with his share in the main partnership.

Where a partner permitted to himself a salary thereby reducing profits, the mortgagee of a partner’s share was not allowed to object. This section is subject to the rights in favour of transferee which—

• His first right is that during the continuance of the firm he is entitled to receive the share of profits of the transferring partner. But he has to accept the accounts of profits as given by the partners. He cannot inspect the account.

• His second right is that on the dissolution of the firm or when the transferring partner’s share in the assets of the firm and for the purpose of ascertaining that share he is entitled to an account as from the date of the dissolution.

Mangilal v. Bhanwarlal, MANU/RH/0051/1963 : AIR 1963 Raj 153; Watts v. Driscall, (1901) 1 Ch 294.

Where the transferring partner sold his interest to the other partner at lesser value than the mortgage amount, the transferee was held to be bound by the sale.

(1) “A person who is a minor according to the law to which he is subject may not be a partner in a firm, but with the consent of all the partners for the time being he may be admitted to the benefits of partnership.

(2) Such minor has a right to such share of the property and of the profits of the firm as may be agreed upon, and he may have access to and inspect and copy any of the accounts of the firm.

(3) Such minor’s share is liable for the acts of the firm, but the minor is not personally liable for any such act.

(4) Such minor may not sue the partners for an account or payment of his share of the property or profits of the firm, save when severing his connection with the firm, and in such case the amount of his share shall be determined by a valuation made as far as possible in accordance with the rules contained in section 48:

Provided that all the partners acting together or any partner entitled to dissolve the firm upon notice to other partners may elect in such suit to dissolve the firm, and thereupon the Court shall proceed with the suit as one for dissolution and for settling accounts between the partners, and the amount of the share of the minor shall be determined along with the shares of the partners.

(5) At any time within six months of his attaining majority, or of his obtaining knowledge that he had been admitted to the benefits of partnership, whichever date is later, such person may give public notice that he has elected to become or that he has elected not to become a partner in the firm, and such notice shall determine his position as regards the firm:

Provided that, if he fails to give such notice, he shall become a partner in the firm on the expiry of the said six months.

(6) Where any person has been admitted as a minor to the benefits of partnership in a firm, the burden of proving the fact that such person had no knowledge of such admission until a particular date after the expiry of six months of his attaining majority shall lie on the persons asserting that fact.

(7) Where such person becomes a partner—

(a) his rights and liabilities as a minor continue up to the date on which he becomes a partner, but he also becomes personally liable to third parties for all acts of the firm done since he was admitted to the benefits of partnership, and

(b) his share in the property and profits of the firm shall be the share to which he was entitled as a minor.

(8) Where such person elects not to become a partner—

(a) his rights and liabilities continue to be those of a minor under this section up to the date on which he gives public notice,

(b) his share shall not be liable for any acts of the firm done after the date of the notice, and

(c) he shall be entitled to sue the partners for his share of the property and profits in accordance with sub-section 4.

(9) Nothing in sub-sections (7) and (8) shall affect the provisions of
section 28.”

At the very outset section 30 lays down that a minor cannot be a partner in a firm but with the consent of all the partners, he may be admitted to the benefits of partnership.

In India, minor is not competent to contract at all (section 11 of Indian Contract Act) and therefore cannot be a partner of a firm.

Sanyasi Charan Mandal v. Krishnadhan Banerji, 1922 LR 49: 

Needless to say, there cannot be partnership wholly of minors.

Shivaram v. Gaurishankar, MANU/MH/0035/1961 : AIR 1961 Bom 136: The Punjab High Court has held down that if a minor is made a full-fledged partner, the entire partnership deed is invalid, not only vis-à-vis the minor, but also with respect to the other partners who are not minors.

Lachmi Narayan v. Beniram, (1931) 53 All 479: 

The Allahabad High Court has held that if a partnership consists of two partners and one of them dies, and the other admits a minor to the benefits of the business, the minor cannot enforce his rights under section 30. That section does not apply in such a case, because there was no subsisting partnership to the benefit of which the minor could be said to be admitted.

Section 30 lays down that where any person has been admitted as a minor to the benefits of partnership in a firm, the burden of proving the fact that such person had no knowledge of such admission until a particular date after the expiry of six months of his attaining majority lies on the person asserting that fact.

Sections 4 and 5 of the Indian Partnership Act, 1932, partnership arises out of contract since a minor is incompetent to contract, he cannot be a partner. A minor can, however, be admitted to the benefits of partnership. Section 30(1) of the Partnership Act provides. “A person who is minor according to the law to which he is subject may not be a partner in a firm, but with the consent of all the partners for the time being, he may be admitted to the benefits of partnership”.

Venkatarama Iyer v. Balayya, MANU/TN/0360/1936 : AIR 1936 Mad 595. Madras High Court held that where members of a family carry on the business and some of the members are minors, there must be some positive act on the part of the regular members so that the Court may infer that the minors have been admitted to the benefits of partnership.

Addl. Commr. of Income-

Tax v. Uttam Kumar Pramod Kumar, MANU/UP/0361/1973 : 97 ITR 730: (1975) Tax LR 339 (All): The Court clarified the legal position and held that section 30(2) makes it clear that even to admit the minor to the benefits of partnership, it is necessary to have an agreement between the minor which can be used for the uses of the firm. It is necessary that there must be an agreement between the existing partners and someone on behalf of the minor.

The agreement by a minor is void but he is capable of accepting benefits. In consonance with this position of law, section 30(1) provides that a minor may not be a partner in a firm but with the consent of all the partners for the time being he may be admitted to the benefits of partnership. The introduction of a minor to the benefits of partnership presupposes existence of valid partnership between persons competent to contract. There can be no partnership of all minors, but a partnership between persons competent to contract must exist before a minor can be admitted to its benefits.

1. Commissioner of Income-Tax, Bombay v. Dwarkadas Khetan & Co., AIR 1961 SC 680.

2. Dharam Vir v. Jagan Nath, AIR 1968 Punj 84.

3. Shriram v. Gaurishankar, MANU/MH/0035/1961 : AIR 1961 Bom 136.

4. Lachhmi Narain v. Beniram, MANU/UP/0342/1930 : AIR 1931 All 327.

5. Haji Hedayatullah v. Mahomed Kaneil, AIR 1924 PC 93.

Two persons entered into partnership in 1900 under the style Beni Ram Hatilal. Hatilal died in 1920 and thereafter Beni Ram continued the business under the old name and style with the partnership funds. Hatilal’s minor son alleged that after his father’s death he was admitted to the benefits of partnership.

Held that the plaintiff (minor) could not be admitted to the benefits of partnership as no partnership existed after the death of Hatilal. Moreover, the plaintiff being a minor could not enter into a contract with Beni Ram to form Partnership.

It is possible that the major members decide to constitute partnership and admit the minor to the benefits of the said partnership. A guardian is capable of accepting benefit on behalf of minor.

The Commissioner of Income-

Tax, Mysore v. Shah Mohandas, MANU/SC/0168/1965 : AIR 1966 SC 15: Admission of a minor to the benefits of partnership can be done only with the consent of all the partners.

The minors thus admitted has a right to such share of the property and of the profits of the firm as may be agreed upon. He however, cannot go to the Court of law to enforce his rights in respect of such share so long as he continues to be admitted to the benefits of partnership. This disability is removed when he is severing his connection with the firm. He can also have access to any of the accounts of the firm and can inspect them and copy them.

According to section 30(5), “At any time within the six months of his attaining majority or of his obtaining knowledge that he has been admitted to the benefits of partnership, whichever the date is later, such person may give public notice that he has elected to become, or that he has elected not to become, a partner in the firm, and such notice shall determine his position as regards the firm:

Provided that, if he fails to give such notice, he shall become a partner in the firm on the expiry of the said six months.

Where any person has been admitted as a minor to the benefits of partnership in a firm the burden of proving the fact, that such person had no knowledge of such admission, until a particular date after the expiry of six months of his attaining majority shall lie on the person asserting that fact.

Illustration—

‘C’ a minor, was admitted to the benefits of a partnership. There were two firms of the name of “M.B. Sadalge” and “C.N. Sadalge” who were carrying on the business of commission agent and manufacturing and selling. The partnership had become indebted and was dissolved. ‘C’, became major subsequently. He, however did not exercise the option to which he was entitled. The creditors demanded their dues but the partners were not able to pay. Thereupon, the creditors started insolvency proceedings against the partners in the Court. They impleaded ‘C’ also in the insolvency proceedings.

A minor admitted to the benefits of partnership cannot be impleaded in insolvency proceeding against the firm on the ground that he had become a major after the dissolution of the firm but had not exercised his option to become or not to become a partner. A minor cannot be held liable on the mere ground that he had not exercised his rights of election under section 30(5).

Shivganda Ravji Patil v. Chandrakant Neelkanth Sadalge, MANU/SC/0010/1964 : AIR 1965 SC 212.

Where the facts were that under the partnership deed in question the minors were to share losses as well in Addl. C.I.T. v. Uttam Kumar Pramod Kumar, MANU/UP/0092/1978 : AIR 1978 All 397; it has been held that under general law of partnership a minor cannot be a full partner liable to share in the losses. He can only be admitted to the benefits of the partnership.

In Addl. Commr. of Income-Tax v. Uttam Kumar Pramod Kumar, it has been held that when no one acting as the minor’s guardian signed the document, no agreement with the minors came into existence. The deed purporting to be a partnership with the minors was wholly invalid and can’t be registered.

Every partner is jointly and severally liable for all acts of the firm. Moreover, his liability is unlimited and can extend to his personal property. A minor, on the other hand, is not personally liable for any such act. It is only his share which is liable for the acts of the firm. Sometimes without the knowledge of a minor, his guardian may have accepted his admission to the benefits of a partnership and the minor may have remained ignorant of his admission to the benefits of partnership even after he has attained majority.

According to section 30(9), if after attaining majority, he represents or knowingly permits himself to be represented as a partner in the firm, his liability on the ground of holding out can still be there.