CHAPTER 4
LIABILITY OF A FIRM AND ITS PARTNERS TO A THIRD PARTY
Chapter IV (Section 18 to 30) of the Indian Partnership Act contains provisions concerning the ‘Relations of partners to third parties’. A partner is considered to be an agent of the firm as per Section 18 of the Indian Partnership Act, 1932, that partner is granted a real or apparent authority to act on behalf of the firm and hence he represents the firm through his actions. A partner is granted permission to make moves, conduct business as usual with certain limitations being put in some ordinary or extraordinary situations. These provisions have been classified and discussed under the following sub-heads:
❖ Nature and extent of liability of the Firm for the acts of a partner. (Sections 18-27)
❖ Doctrine of Holding Out, creating the liability of a ‘Non-partner’, (Section 28)
❖ Rights of transferee of a partner’s interest (Section 29) and
❖ Position of a ‘Minor’ admitted to the benefits of partnership (Section 30).
SECTION 18- THE AUTHORITY OF A PARTNER:
Partner to be agent of the firm:
“Subject to the provisions of this Act, a partner is the agent of the firm for the purposes of the business of the firm.”
As mentioned in Section 18 of the Partnership Act, 1932, a partner will be an agent of the firm for the purpose of the business of the firm. A partnership in business means that it is a relationship in which all the partners have come together to share the profits of the business and the business can be carried out by all or by one who will act on behalf of all.
IMPLIED AUTHORITY OF PARTNER AS AGENT OF THE FIRM
Acts done by the partner of the firm in the usual course of business binds the firm but this implied authority ceases to exist when there is already a contrary agreement in existence. Section 19(2) of the Indian Partnership Act, 1932, puts forth a list of things which a partner cannot do on behalf of the firm:
- Submit a dispute relating to the business of the firm to arbitration,
- Open a bank account on behalf of the firm in his own name,
- Compromise or relinquish any claim or portion of a claim by the firm,
- Withdraw a suit or proceeding filed on behalf of the firm,
- Admit any liability in a suit or proceeding against the firm,
- Acquire immovable property on behalf of the firm,
- Enter into partnership on behalf of the firm,
- Transfer immovable property belonging to the firm.
The extension and restriction of the authority of a partner depends on the existing contract between the parties in the firm. However, a partner can still carry out actions on his own authority if he has an express authority of a partner which is either by an agreement or if the usage or custom of the trade permits him to.
LIMITATIONS OF PARTNER’S IMPLIED AUTHORITY : SECTIONS 18, 19, 20 AND 22
In the absence 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 the firm.
ALTERATION OF AUTHORITY :
The partners in a firm may, by contract between the partners, extend or restrict the implied authority of any partner.
AUTHORITY IN AN EMERGENCY: SECTION 21
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 requirements of the section are:
- There was an emergency situation.
- The partner acted in light of that situation.
- The partner did that to protect the firm from losses.
- The act was reasonable under those circumstances.
MODE OF DOING THE ACT TO BIND THE FIRM
As per Section 22 of the Indian Partnership Act, 1932, the act is done or executed by the partner in the firm should be done in the name of the firm or should be done in a manner which expresses or implies an intention to bind the firm.
ADMISSION/REPRESENTATION BY A PARTNER : SECTION 23
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 of course of business. Such admissions made by the partners will bind the firm. However, the thing that needs to be noticed here is that if the admission made by a person of the firm was before the time he became a partner then it cannot be considered to be evidence against the firm.
NOTICE TO THE ACTING PARTNER : SECTION 24
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.
Notice to one partner relating to the business of the firm operates as a notice to the firm. The partners to whom such notice is given must be acting in the business at that time. So notice to a dormant or a sleeping partner would not operate as a notice to the firm. A dormant or sleeping partner is someone who takes his share of the profit and of losses but is not a party to the active share of the business or partnership. Section 24 explains what is the effect of the notice sent to an acting partner. It first explains what an acting partner means. An acting partner is a person 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. If a notice is sent to such a person, it will be considered as a notice sent to a firm.
The section also provides for an exception whereby a fraud is committed on the firm by or with the consent of that partner.
In Bignold v. Waterhousethe defendants, a firm of carriers, according to the rules, was accountable for parcels above the value of £ 5 only if such parcels had been specially entered and paid for. One of the working partners allowed to be carried one parcel of a personal friend without any consideration and he did not bring this fact to the notice of his other co-partners. In an action for the loss of the parcel against the firm, it was held that the firm was not liable as notice to one of the partners about the carrying of the parcel was not deemed to be notice to others because the particular partner who had the knowledge of the carrying of the parcel was a party to the fraud as no payment had been made for the transportation of the parcel.
LIABILITIES OF A PARTNER TO THIRD PARTIES
Categories in which the liability of partners to the third parties are divided are as follows:
❖ Liability of a partner for acts of the firm.
❖ Liability of the firm for wrongful acts of a partner.
❖ Liability of the firm for misapplication by partners
LIABILITY OF A PARTNER FOR ACTS OF THE FIRM (SECTION 25):
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. Further, the liability of all the partners is unlimited. By virtue of joint and several liabilities, a creditor of the firm has several causes of action. He can sue all partners together, or can sue them separately (in successive actions if necessary). As between the partners themselves, the partner paying for more than his share of the liability may claim contribution from the others according to the terms of the partnership agreement.
LIABILITY OF THE FIRM FOR WRONGFUL ACTS OF A PARTNER (SECTION 26):
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 is incurred, the firm is liable therefore to the same extent as the partner. The wrongful act may be tort, fraud or negligence. It is important to note that although the firm is liable to the third party for loss caused to him by fraud committed by a partner, but, as between the partners, as per Section 10, the same must be borne by the partner committing the fraud and cannot be shared among all the partners. Of course, in the case of loss caused by tort or negligence of any partner all partners are liable inter-se in their profit sharing ratio and the firm is liable to the third party as it is liable in the case of fraud.
Every partner is jointly and severally liable for all acts of the firm done while he is a partner. Because of this liability, the creditor of the firm can sue all the partners jointly or individually.
In Hamlyn v. John Houston & Cofor the tort committed by one partner the other partner was also held liable. There, one of the two partners of the defendant’s firm acting within the general scope of his authority as a partner bribed the plaintiff’s clerk and induced him to make a breach of contract with his employer, that is, the plaintiff, by divulging some secrets relating to his employer’s business. It was held that although the wrong of inducing breach of contract had been committed by only one of the partners and the other partner had no notice of the same yet since the wrong was done in the scope of the authority of the wrongdoing partner, the other partner was also held liable.
LIABILITY OF THE FIRM FOR MISAPPLICATION BY PARTNERS (SECTION 27):
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 same 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.
Under this Section it has been recognised that the firm must be treated as receiving what any partner receives in the ordinary course of the business of the firm. Accordingly, if any partner misappropriates any money or property which he might have received either in repayment of a debt or as a loan on account of the firm; the third party can make the firm or any of the partners liable for the same.
DOCTRINE OF HOLDING OUT
The concept of ‘Holding Out’ is merely an application of the principle of estoppel, which in itself is a rule of evidence wherein a person is prevented or estopped from denying a statement he made or existence of facts that he makes another person believe. In simple terms, if a person represents or knowingly permits others that he is a partner of a particular firm, and some other person carried on some transaction believing him to be a partner of the firm, then he is estopped from denying this representation later on. The concept of holding out has been provided under section 28 of the Indian Partnership Act, 1932 and section 29 of Limited Liability Partnership Act, 2008. These sections state that a person is held liable as a partner by holding out if the given conditions are fulfilled.
ESSENTIALS OF THE DOCTRINE OF HOLDING OUT
There are two essentials of this doctrine, as under:-
REPRESENTATION –
The person voluntary represents himself, either by words, written or spoken, or by conduct, to be a partner of the firm, it is called partner by estoppel. The holding out concept is applicable when a person knowingly permits other to represent himself as a partner of the firm and does not repudiate it at the relevant time. When other represents a person as partner of a firm and he allows the same to be happened, he cannot deny the same afterwards. Therefore, either the person himself represents or causes others to represent himself as a partner of the firm, may be held liable for losses incurred by the third party who acted in good faith on such representation.
Example- Mr. A had given loan to a person establishing a cattle farm. He took such deep interest in the business that he used his personal influence to obtain lease of premises for the farm and was constantly present there receiving parties and their demands. Mr. B supplied building material to the firm under the impression that Mr. A was a partner. Mr. A is liable as a partner by holding out by way of his conduct and not by his words.
In case of Bevan v. National Bank Ltd., where Mr. MW was the manager of one Mr. B’s business. The business was carried on in the name and style of MW and Co. The Plaintiff who had supplied the goods sued MW to recover his money as one of the partners of the firm, but B contended that he should not be held liable because the style of the firm carried the name only of MW. Court held that he was liable and laid down that where a person carries a business in the name of an individual with the addition of the words “and Co.” and employ that individual as manager of the business to whom the entire management of the business is left, that doesn’t amount to holding out that person as sole owner of the business, it may amount to holding out that he is partner in the business. MW was also liable because by permitting his name to be used in the title of the firm he made a representation that he was a partner and responsible to those who had given credit to the firm on the faith of that representation.
KNOWLEDGE OF REPRESENTATION –
The second requirement of liability for holding out is that a person seeking to charge another with liability has to show that he had knowledge of the representation and did act under the belief that the facts represented were true. Where there is no representation to the plaintiff or, there is no representation to his knowledge, his right to sue the person making such representation does not arise.
Bevan vs. National Bank Ltd.
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.
Kirkwood vs. Cheetham and Smith, (1862)
A partner cannot transfer his share to any other person. He may however do so on the consent of other partners.
7. Limitation on the Transferability of Share
A partner cannot transfer his share to any other person. He may however do so on the consent of other partners.
7. Limitation on the Transferability of Share
where a butter dealer appointed Smith as his servant to take a warehouse and start business under the name of Smith & Co. and the goods were supplied to the firm, it was held that though not partners, the defendants were jointly liable; Smith holding himself out a partner, and Cheetham as the real principal.
In M/s. Glorious Plastics Ltd. v. Laghate Enterprises
a partner had retired from the firm on 1.4.1982, and the question arose whether he could be liable towards a third party for an act of the firm done on 1.3.1985. It was found that such a partner had neither represented nor permitted himself to be represented that he was a partner on 1.3.1985. It was held that he could not be held liable for such act as the third party had not given credit to the firm on the representation that he was a partner in the firm.
CASES WHERE DOCTRINE OF HOLDING OUT NOT APPLY –
The Doctrine of holding out is not applicable under the following cases -
(a) DECEASED PARTNER –
The death itself constitutes sufficient notice to all, therefore, doctrine of holding out is not applicable. It was held in Venkata subbamma Vs. subba Rao, A.I.R. 1964 AR 462, that death is a notice by itself hence 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.
(b) INSOLVENT PARTNER –
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. However, insolvency of a partner is also sufficient notice to all.
(c) DORMANT PARTNER –
A dormant or sleeping partner means a partner who has never taken part in the conduct of business as partner and neither the customers nor the clients know of his participation in the firm. So 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 he retires, public notice is not necessary to terminate his liability. It must, however, be noted that where his presence in the f
RIGHTS OF TRANSFEREE OF PARTNER’SINTEREST- SECTION 29
Section 29(1) deals with the position during the continuance of the firm whereas the position on the dissolution of the firm or the transferring partner ceasing to be a partner is contained in Section 29(2). As per this Section:-
1) It allows a partner to transfer his interest in the firm, either absolutely or by mortgage or by the creation of a charge on such interest during the continuance of the firm.
2) The transferee who receives such interest in the firm, does not entitled to
a) Interfere in the conduct of the business; or
b) To require accounts; or
c) To inspect the books of the firm
3) Rights of the transferee –
a) Transferee is entitled to receive the share of profits of the transferring partners;
b) If the firm is dissolved or the transferring partner ceases to be a partner, the transferee is entitled to receive the share of the assets of the firm to which the transferring partner is entitled
POSITION OF A MINOR
Indian Partnership Act, 1932 defines persons as a partner who have agreed to share profits of the business carried on by all are any of them acting for all. A minor is a person who hasn’t yet attainted the age of majority according to the Indian Majority Act, 1875. It is stated that a person who is domiciled in India will attain majority at the age of eighteen. Indian Partnership Act governs the admittance of a minor into the partnership in Section 30. This section deals with the rights and liabilities of a minor who is admitted in the partnership. Section 30(1) makes it very clear that a minor cannot be admitted in the partnership as a full-fledged partner, but with the consent of the other partners, a minor can be admitted in the partnership to the benefits of the partnership.
MINORS ADMITTED ONLY FOR BENEFITS
The general principle has been laid down by Section 11 of The Indian Contract Act, 1872, where it is discussed that who is competent to a contract and thereby stating that a minor doesn’t have the ability to contract.
ELIGIBILITY FOR MINOR TO BECOME A PARTNER
The eligibility criteria are such as:
1. A person should have Indian nationality.
2. A person should not attain the age of majority.
3. He or she should be of sound mind at the time of making a contract.
4. He or she should not be disqualified to make a contract by any law.
5. He or she should fulfill the requirements to be a partner.
ESSENTIALS FOR A MINOR TO BECOME A PARTNER IN A FIRM
Here are the essentials such as:
1. CONSENT OF ALL THE PARTNERS:
A minor can become a partner after gaining the consent of all the existing partners of the firm.
2. THERE MUST BE A SPECIFIC BUSINESS:
There should be an existing business where there is a vacancy of the partner. A minor cannot form a business by himself or by herself.
RIGHTS OF THE MINOR IN THE FIRM:
The rights of a minor are as follows:
1. Right to be a partner:
A minor partner on attaining the majority has the right to become a partner of the firm. A minor after gaining the age of the majority then after six months he or she has the right to execute his or her partnership in a firm or not to continue his or her partnership.
2. Right to share the profits:
When a firm gets the profit then there is an equal division of all the profits to the partners.
3. Right to access to books of account:
A minor has the right to inspect the books of account under the Partnership Act.
4. Not liable for any loss:
A minor partner will have the rights to his or her share of profits of the firm, but the minor partner is not liable for any losses beyond his or her interest in the firm. So a minor partner’s assets cannot be liquidated to pay the firms liabilities.
LIABILITIES OF THE MINOR AS A PARTNER
The liabilities of the minor as a partner are the followings:
1. When minor elects not to become a partner:
After turning 18, the minor partner can choose to become the partner of the firm or not to become the partner of the firm. If minor chooses not to become the partner then the minor has to give the notice
2. Insolvency of the minor’s share:
When their insolvency of the minor’s share then the minor will not be liable for any loss.
3. Liable to the third party:
The Minor partner can choose to be a partner where he or she will be liable to all third parties for the acts done by any the partners since he or she admit to the benefits of the partnership deed.
4. Liabilities will be same when the minor attains majority:
If he or she becomes a full-time partner, he or she will be treated as a regular partner and have all liabilities of the one. His or her share in the profits and the property of the firm will remain the same as it was when he or she was a minor partner.
POSITION OF MINOR ATTAINING MAJORITY
At any time within six months of his or her obtaining knowledge that he or she had been admitting to the benefits of the partnership whichever the date is. Such a person may give public notice that he or she has elected to become or he or she has elected not to become a partner in the firm. Such notice shall determine his or her position as regards to the firm which also provided that if he or she fails to give such notice then he or she shall become a partner in the firm on the expiry of the six months.
Where any person has been admitted as a minor to the benefits of partnership in a firm, the burden of providing the fact that such person had no knowledge of such admission until a particular date after the expiry of the six months of his or her attains the age of majority that shall lie on the person asserting that fact.
WHEN A MINOR BECOMES A PARTNER:
His or her rights and liabilities as a minor continue up to the date on which he or she becomes a partner but he or she also becomes personally liable to the third party. The minor’s share in the property and the profits shall be the share to which he or she was entitled to be minor.
WHEN A MINOR ELECTS TO BECOME A PARTNER:
Then his or her rights and liabilities continue to a minor up to the date on which he gives public notice. His or her share shall not be liable for any acts of the firms. He or she shall be entitled to sue the partners for his or her share of the property and the profits.
In Lachhmi Narain v. Beni Ram, two persons entered into partnership in 1900 under the style Beni Ram Hotilal. Hotilal died in 1920 and thereafter Beni Ram continued the business under the old name and style with the partnership funds. Hotilal’s minor son (the plaintiff) 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 Hotilal. 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 benefits on behalf of minor.“ Admission of a minor to the benefits of partnership can be done only with the consent of all the partners.
S.C. Mandal vs. Krishnadhan: –
Section 30 of the Indian Partnership Act 1932 contains legal provisions regarding a minor in a partnership. We now know that the Indian Contract Act 1857 clearly states that no person is under 18 years of age, that is, minors may be parties to a contract. And a partnership is a contract between partners. Therefore, a minor cannot be a partner in any partnership firm. However, according to the Partnership Act, a minor can be admitted for partnership benefits. So, if a minor cannot become a partner but he can enjoy all the benefits of the partner. All the partners of the firm must be in agreement for giving the benefits to the minor in the partnership.
CIT vs. Dwarkadas & Co: –
The Supreme Court held that a minor cannot become a full partner in an existing firm. Section 30 only allows the minor to get benefits from the firm. The Honorable Judge then continued to observe: – “Section 30 of the Indian Partnership Act clearly states that a minor cannot become a partner, however, with the consent of the adult partners, he/she can be admitted for partnership benefits. Any document that goes beyond this section cannot be considered valid for the purpose of registration.”
CONCLUSION:
The minor as a partner can enjoy all the benefits of the partnership by fulfilling all the requirements of an agreement. This article discusses how partners are liable for the third parties, under what circumstances can partners be granted permission to act on behalf of the firm, what limitations are put forth by the said act while the partners act on behalf of the firm, what is implied authority in a partnership setup, what are the options available to the partners in case of emergency; the article also discusses the partners’ authority under emergency situations and how the partner is supposed to act in those situations. This article also talks about how minors can be included in a partnership setup and what stages they have to go through in order to avail their benefits and what happens when a minor accepts or rejects being a partner to the firm.