Partnership Unit2
Partnership Unit2
Partnership Unit2
18 BUSINESS LAWS
LEARNING OUTCOMES
After studying this unit, you would be able to understand-
♦ Be familiar with the legal provisions regulating relation of partners’ interest as well as relations
with the third parties.
♦ Note the scope of implied authority of a partner to bind the partnership by his acts.
♦ Be aware of the various situations in which the constitution of a firm may change and its effect
on the rights and duties of the partners.
♦ Learn how the share in a partnership is transferred and what shall be the rights and obligations
of such transferee.
UNIT OVERVIEW
Section 11(2) clearly provides that, notwithstanding anything contained in section 27 of the Indian
Contract Act, the contract between the partners may provide that a partner shall not carry on any
business other than that of the firm while he is a partner.
Partnership is a relation eminently depending on the consent of the parties, not only for its existence,
but for the terms of the agreement in all things consistent with its essential nature and purpose; and an
agreement to become partners in the first instance, or to vary the terms at any time, need not be
manifested in any particular form.
4. THE CONDUCT OF THE BUSINESS (SECTION 12): Subject to contract between the partners-
(a) every partner has a right to take part in the conduct of the business;
(b) every partner is bound to attend diligently to his duties in the conduct of the business;
(c) any difference arising as to ordinary matters connected with the business may be decided by
majority of the partners, and every partner shall have the right to express his opinion before the
matter is decided, but no change may be made in the nature of the business without the consent
of all partners; and
(d) every partner has a right to have access to and to inspect and copy any of the books of the firm.
(e) in the event of the death of a partner, his heirs or legal representatives or their duly authorised
agents shall have a right of access to and to inspect and copy any of the books of the firm.
Analysis of section 12
(i) Right to take part in the conduct of the Business [Section 12(a)]: Every partner has the
right to take part in the business of the firm. This is because partnership business is a business
of the partners and their management powers are generally co-extensive.
Example 2: Now suppose this management power of the particular partner is interfered with
and he has been wrongfully precluded from participating therein. Can the Court interfere in
these circumstances? The answer is in the affirmative. The Court can, and will, by injunction,
restrain other partners from doing so. It may be noted in this connection that a partner who has
been wrongfully deprived of the right of participation in the management has also other
remedies, e.g., a suit for dissolution, a suit for accounts without seeking dissolution, etc.
The above mentioned provisions of law will be applicable only if there is no contract to the
contrary between the partners. It is quite common to find a term in partnership agreements,
which gives only limited power of management to a partner or a term that the management of
the partnership will remain with one or more of the partners to the exclusion of others. In such
a case, the Court will normally be unwilling to interpose with the management with such partner
or partners, unless it is clearly made out that something was done illegally or in breach of the
trust reposed in such partners.
(ii) Right to be consulted [section 12(c)]: Where any difference arises between the partners with
regard to the business of the firm, it shall be determined by the views of the majority of them,
and every partner shall have the right to express his opinion before the matter is decided. But
no change in the nature of the business of the firm can be made without the consent of all the
partners. This means that in routine matters, the opinion of the majority of the partners will
prevail. Of course, the majority must act in good faith and every partner must be consulted as
far as practicable.
It may be mentioned that the aforesaid majority rule will not apply where there is a change in
the nature of the firm itself. In such a case, the unanimous consent of the partners is needed.
(iii) Right of access to books [Section 12 (d)]: Every partner whether active or sleeping is entitled
to have access to any of the books of the firm and to inspect and take out of copy thereof. The
right must, however, be exercised bona fide.
(iv) Right of legal heirs/ representatives/ their duly authorised agents [Section 12(e)]: In the
event of the death of a partner, his heirs or legal representatives or their duly authorised agents
shall have a right of access to and to inspect and copy any of the books of the firm.
5. MUTUAL RIGHTS AND LIABILITIES (SECTION 13): Subject to contract between the partners-
(a) a partner is not entitled to receive remuneration for taking part in the conduct of the business;
(b) the partners are entitled to share equally in the profits earned, and shall contribute equally to
the losses sustained by the firm;
(c) where a partner is entitled to interest on the capital subscribed by him such interest shall be payable
only out of profits;
(d) a partner making, for the purposes of the business, any payment or advance beyond the amount
of capital he has agreed to subscribe, is entitled to interest thereon at the rate of six percent per
annum;
(e) the firm shall indemnify a partner in respect of payments made and liabilities incurred by him-
(i) in the ordinary and proper conduct of the business, and
(ii) in doing such act, in an emergency, for the purposes of protecting the firm from loss,
as would be done by a person of ordinary prudence, in his own case, under similar
circumstances;
(f) a partner shall indemnify the firm for any loss caused to it by his wilful neglect in the conduct of
business of the firm.
Analysis of section 13
(i) Right to remuneration [Section 13(a)]: No partner is entitled to receive any remuneration in
addition to his share in the profits of the firm for taking part in the business of the firm. But this
rule can always be varied by an express agreement, or by a course of dealings, in which event
the partner will be entitled to remuneration. Thus, a partner can claim remuneration even in the
absence of a contract, when such remuneration is payable under the continued usage of the
firm. In other words, where it is customary to pay remuneration to a partner for conducting the
business of the firm he can claim it even in the absence of a contract for the payment of the
same.
(ii) Right to share Profits [Section 13 (b)]: Partners are entitled to share equally in the profits
earned and so contribute equally to the losses sustained by the firm. The amount of a partner’s
share must be ascertained by enquiring whether there is any agreement in that behalf between
the partners. If there is no agreement then you should make a presumption of equality and the
burden of proving that the shares are unequal, will lie on the party alleging the same.
There is no connection between the proportion in which the partners shall share the profits and
the proportion in which they have contributed towards the capital of the firm.
(iii) Interest on Capital [Section 13 (c)]: The following elements must be there before a partner
can be entitled to interest on moneys brought by him in the partnership business: (i) an express
agreement to that effect, or practice of the particular partnership or (ii) any trade custom to that
effect; or (iii) a statutory provision which entitles him to such interest.
(iv) Interest on advances [Section 13 (d)]: Suppose a partner makes an advance to the firm in
addition to the amount of capital to be contributed by him, in such a case, the partner is entitled
to claim interest thereon @ 6% per annum. While interest on capital account ceases to run on
dissolution, the interest on advances keep running even after dissolution and up to the date of
payment.
(v) Right to be indemnified [Section 13 (e)]: Every partner has the right to be indemnified by the
firm in respect of payments made and liabilities incurred by him in the ordinary and proper
conduct of the business of the firm as well as in the performance of an act in an emergency for
protecting the firm from any loss, if the payments, liability and act are such as a prudent man
would make, incur or perform in his own case, under similar circumstances.
(vi) Right to indemnify the firm [Section 13 (f)]: A partner must indemnify the firm for any loss
caused to it by wilful neglect in the conduct of the business of the firm.
(b) If a partner carries on any business of the same nature as and competing with that of the firm, he shall
account for and pay to the firm all profits made by him in that business.
Analysis of section 16
Where a partner derives any profit for himself from any transaction of the firm or from the use of the property or
business connection of the firm or firm name, he must account for that profit and pay it to the firm.
Example 3: A, B, C & D established partnership business for refining sugar. A, who was himself a wholesale
grocer, was entrusted with the work of selection and purchase of sugar. As a wholesale grocer, A was well aware
of the variations in the sugar market and had the suitable sense of propriety as regards purchases of sugar. He
had already in stock sugar purchased at a low price which he sold to the firm when it was in need of some, without
informing the partners that the sugar sold had belonged to him. It was held that A was bound to account to the
firm for the profit so made by him. This rule, however, is subject to a contract between partners.
Where a partner carries on a competing business, he must account for and pay to the firm all profits made by
him in that business.
Example 4: A, B, C and D started a business in partnership for importing salt from foreign ports and selling it at
Chittagong. A struck certain transactions in salt on his own account, which were found to be of the same nature
as the business carried on by the partnership. It was held that A was liable to account to the firm for profits of the
business so made by him. This rule is also subject to a contract between the partners.
they were before the expiry, so far as they may be consistent with the incidents of partnership at will;
and
(c) where additional undertakings are carried out: where a firm constituted to carry out one or more
adventures or undertakings carries out other adventures or undertakings are the same as those in
respect of the original adventures or undertakings.
(iv) he may draw, make, sign, endorse, transfer, negotiate and procure to be discounted, Promissory
notes, bills of exchange, cheques and other negotiable papers in the name and on account of
the partnership.
Section 19(2) contains the acts which are beyond the implied authority of the partners.
3. EXTENSION AND RESTRICTION OF PARTNERS’ IMPLIED AUTHORITY (SECTION 20):
According to Section 20, the partners in a firm may, by contract between the partners, extend or restrict
the implied authority of any partners.
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.
Analysis of section 20:
The implied authority of a partner may be extended or restricted by contract between the partners. Under
the following conditions, the restrictions imposed on the implied authority of a partner by agreement shall
be effective against a third party:
1. The third party knows about the restrictions, and
2. The third party does not know that he is dealing with a partner in a firm.
Example 6: A, a partner, borrows from B ` 1,000 in the name of the firm but in excess of his authority,
and utilizes the same in paying off the debts of the firm. Here, the fact that the firm has contracted debts
suggests that it is a trading firm, and as such it is within the implied authority of A to borrow money for
the business of the firm. This implied authority, as you have noticed, may be restricted by an agreement
between him and other partners. Now if B, the lender, is unaware of this restriction imposed on A, the
firm will be liable to repay the money to B. On the contrary, B’s awareness as to this restriction will
absolve the firm of its liability to repay the amount to B.
It may be noted that the above-mentioned extension or restriction is only possible with the consent of all
the partners. Any one partner, or even a majority of the partners, cannot restrict or extend the implied
authority.
4. PARTNER’S AUTHORITY IN AN EMERGENCY (SECTION 21)
According to 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.
firm if his authority on the point is limited and the other party knows of the restriction. The section speaks of
admissions and representations being evidenced against the firm. That is to say, they will affect the firm when
tendered by third parties; they may not have the same effect in case of disputes between the partners themselves.
Example 7: X and Y are partners in a firm dealing in spare parts of different brands of motorcycle bikes. Z
purchases a spare part for his Yamaha motorcycle after being told by X that the spare part is suitable for his
motorcycle. Y is ignorant about this transaction. The spare part proves to be unsuitable for the motorcycle and it
is damaged. X and Y both are responsible to Z for his loss.
He is only entitled to receive the share of the profits of the transferring partner and he is bound
to accept the profits as agreed to by the partners, i.e., he cannot challenge the accounts.
(II) On the dissolution of the firm or on the retirement of the transferring partner, the transferee will
be entitled, against the remaining partners:
(a) to receive the share of the assets of the firm to which the transferring partner was
entitled, and
(b) for the purpose of ascertaining the share,
he is entitled to an account as from the date of the dissolution.
By virtue of Section 31, which we will discuss hereinafter, no person can be introduced as a partner in a
firm without the consent of all the partners. A partner cannot by transferring his own interest, make
anybody else a partner in his place, unless the other partners agree to accept that person as a partner.
At the same time, a partner is not debarred from transferring his interest. A partner’s interest in the
partnership can be regarded as an existing interest and tangible property which can be assigned.
(c) Minor cannot be declared insolvent, but if the firm is declared insolvent his share in
the firm vests in the Official Receiver/Assignee.
(ii) After attaining majority:
Within 6 months of his attaining majority or on his obtaining knowledge that he had been
admitted to the benefits of partnership, whichever date is later, the minor partner has to decide
whether he shall remain a partner or leave the firm.
Where he has elected not to become partner he may give public notice that he has elected not
to become partner and such notice shall determine his position as regards the firm. If he fails to
give such notice he shall become a partner in the firm on the expiry of the said six months.
(a) When he becomes partner: If the minor becomes a partner on his own willingness
or by his failure to give the public notice within specified time, his rights and liabilities
as given in Section 30(7) are as follows:
(i) He becomes personally liable to third parties for all acts of the firm done
since he was admitted to the benefits of partnership.
(ii) His share in the property and the profits of the firm remains the same to
which he was entitled as a minor.
(b) When he elects not to become a partner:
(i) His rights and liabilities continue to be those of a minor up to the date of
giving public notice.
(ii) His share shall not be liable for any acts of the firm done after the date of
the notice.
(iii) He shall be entitled to sue the partners for his share of the property and
profits. It may be noted that such minor shall give notice to the Registrar that
he has or has not become a partner.
and the firm is not liable for any act of the insolvent, done after the date on which the order of
adjudication is made.
Analysis of section 34:
When a partner in a firm is adjudicated an insolvent, he ceases to be a partner on the date of the order
of adjudication whether or not the firm is thereby dissolved. His estate (which thereupon vests in the
official assignee) ceases to be liable for any act of the firm done after the date of the order, and the firm
also is not liable for any act of such a partner after such date (whether or not under a contract between
the partners the firm is dissolved by such adjudication).
(v) LIABILITY OF ESTATE OF DECEASED PARTNER (SECTION 35): Where under a contract between
the partners, the firm is not dissolved by the death of a partner, the estate of a deceased partner is not
liable for any act of the firm done after his death.
Analysis of section 35:
Ordinarily, the effect of the death of a partner is the dissolution of the partnership, but the rule in regard
to the dissolution of the partnership, by death of partner is subject to a contract between the parties and
the partners are competent to agree that the death of one will not have the effect of dissolving the
partnership as regards the surviving partners unless the firm consists of only two partners. In order that
the estate of the deceased partner may be absolved from liability for the future obligations of the firm, it
is not necessary to give any notice either to the public or the persons having dealings with the firm.
Example 15: X was a partner in a firm. The firm ordered goods in X’s lifetime; but the delivery of the
goods was made after X’s death. In such a case, X’s estate would not be liable for the debt; a creditor
can have only a personal decree against the surviving partners and a decree against the partnership
assets in the hands of those partners. A suit for goods sold and delivered would not lie against the
representatives of the deceased partner. This is because there was no debt due in respect of the goods
in X’s lifetime.
Although the principle applicable to such cases is clear but at times some complicated questions arise when
disputes are raised between the outgoing partner or his estate on the one hand and the continuing or surviving
partners on the other in respect of subsequent business. Such disputes are to be resolved keeping in view the
facts of each case having regard to section 37.
Example 16: A, B and C are partners in a manufacture of machinery. A is entitled to three-eighths of the
partnership property and profits. A becomes bankrupt whereas B and C continue the business without paying out
A’s share of the partnership assets or settling accounts with his estate. A’s estate is entitled to three-eighths of
the profits made in the business, from the date of his bankruptcy until the final liquidation of the partnership
affairs.
Example 17: A, B and C are partners. C retires after selling his share in the partnership firm. A and B fail to pay
the value of the share to C as agreed to. The value of the share of C on the date of his retirement from the firm
would be pure debt from the date on which he ceased to be a partner as per the agreement entered between the
parties. C is entitled to recover the same with interest.
SUMMARY
The mutual rights and duties of partners are regulated by the contract between them. Such contract need not
always be expressed, it may be implied from the course of dealing between the partners (Section 11). Section
12 gives rules regulating the conduct of the business by the partners and Section 13 lay down rules of mutual
rights and liabilities. Sections 14 to 17 also contain particular rules which become useful and important while
determining the relations of partners to one - another. What is essential to note, however, is that all these rules
are subject to contract between the parties.
As regards third parties, a partner is the agent of the firm for all purposes within the scope of the partnership
concern. His rights, powers, duties and obligations are in many respects governed by the same rules and
principles which apply to the agent. Generally, he may pledge or sell the partnership property; he may buy goods
on account of the firm; he may borrow money, contract debt and pay debts on account of the firm; he may draw,
make, sign, endorse, accept, transfer, negotiate and get discounted promissory notes, bills of exchange, cheques
and other negotiable papers in the name and account of the firm. The implied authority of the partner to bind the
firm is restricted to acts usually done in the business of the kind carried on by the firm. He is also empowered
under the Act to do certain acts in an emergency so as to bind the firm. The firm, however, is bound only by those
acts of a partner which were done by him in his capacity as a partner.
A partner may in some circumstances become liable on equitable grounds for obligations incurred by a co-partner
in doing acts in excess of his authority, real or implied. He may also become liable for an unauthorized act of his
co-partner on the ground of estoppel.
7. A minor is:
(a) A partner of a firm (b) Representative of the firm
(c) Entitled to carry on the business of the firm(d) Entitled to the benefits of the firm
8. If a partner commits fraud in the conduct of the business of the firm:
(a) He shall indemnify the firm for any loss caused to it by his fraud
(b) He is not liable to the firm.
(c) He is liable to the partners
(d) He is liable to the third parties
9. Partners are bound to carry on the business of the firm-
(a) To the greatest common advantage (b) For the welfare of the society
(c) For the advantage of the family members (d) For earning personal profits
10. The liability of a minor partner is limited to the extent of:
(a) His share in the firm
(b) His personal assets
(c) His share in the firm as well as his personal assets
(d) He is not liable
11. The authority of a partner to bind the firm for his acts as contained in section 19 of the Partnership Act
is known as:
(a) Express authority (b) Legal authority
(c) Implied authority (d) Managerial authority
12. Which are the matters that require unanimous consent of all the partners:
(a) Admission of a partner
(b) Transfer by a partner of his interest in the firm
(c) Fundamental change in the nature of the business
(d) All of the above
13. For admitting a minor into the benefits of the partnership, which of the following is required?
(a) Consent of the minor’s guardian (b) Consent of the Registrar of firms
(c) Consent of all the partners of the firm (d) All of the above
14. The implied authority of a partner of the firm does empower him to:
(a) Open a bank account on behalf of the firm in his own name.
(b) Enter into partnership on behalf of the firm.
Answers to MCQs
11. (c) 12. (d) 13. (c) 14. (d) 15. (c)
Descriptive Questions
1. State the modes by which a partner may transfer his interest in the firm in favour of another person under
the Indian Partnership Act, 1932. What are the rights of such a transferee?
2. Whether a minor may be admitted in the business of a partnership firm? Explain the rights of a minor in
the partnership firm.
3. M/s XYZ & Associates, a partnership firm with X, Y, Z as senior partners were engaged in the business
of carpet manufacturing and exporting to foreign countries. On 25th August, 2018, they inducted Mr. G,
an expert in the field of carpet manufacturing as their partner. On 10th January 2020, Mr. G was blamed
for unauthorized activities and thus expelled from the partnership by united approval of rest of the
partners.
(i) Examine whether action by the partners was justified or not?
(ii) What should have the factors to be kept in mind prior expelling a partner from the firm by other
partners according to the provisions of the Indian Partnership Act, 1932?
4. A, B and C are partners in a firm. As per terms of the partnership deed, A is entitled to 20 percent of the
partnership property and profits. A retires from the firm and dies after 15 days. B and C continue
business of the firm without settling accounts. Explain the rights of A’s legal representatives against the
firm under the Indian Partnership Act, 1932?
5. Master X was introduced to the benefits of partnership of M/s ABC & Co. with the consent of all partners.
After attaining majority, more than six months elapsed and he failed to give a public notice as to whether
he elected to become or not to become a partner in the firm. Later on, Mr. L, a supplier of material to
M/s ABC & Co., filed a suit against M/s ABC & Co. for recovery of the debt due.
Rights:
(i) A minor partner has a right to his agreed share of the profits and of the firm.
(ii) He can have access to, inspect and copy the accounts of the firm.
(iii) He can sue the partners for accounts or for payment of his share but only when severing his
connection with the firm, and not otherwise.
(iv) On attaining majority he may within 6 months elect to become a partner or not to become a
partner. If he elects to become a partner, then he is entitled to the share to which he was entitled
as a minor. If he does not, then his share is not liable for any acts of the firm after the date of
the public notice served to that effect.
3. Expulsion of a Partner (Section 33 of the Indian Partnership Act, 1932):
A partner may not be expelled from a firm by a majority of partners except in exercise, in good faith, of
powers conferred by contract between the partners.
The test of good faith as required under Section 33(1) includes three things:
• The expulsion must be in the interest of the partnership.
• The partner to be expelled is served with a notice.
• He is given an opportunity of being heard.
If a partner is otherwise expelled, the expulsion is null and void.
(i) Action by the partners of M/s XYZ & Associates, a partnership firm to expel Mr. G from the
partnership was justified as he was expelled by united approval of the partners exercised in
good faith to protect the interest of the partnership against the unauthorized activities charged
against Mr. G. A proper notice and opportunity of being heard has to be given to Mr. G.
(ii) The following are the factors to be kept in mind prior expelling a partner from the firm by other
partners:
(a) the power of expulsion must have existed in a contract between the partners;
(b) the power has been exercised by a majority of the partners; and
(c) it has been exercised in good faith.
4. Section 37 of the Indian Partnership Act, 1932 provides that where a partner dies or otherwise ceases
to be a partner and there is no final settlement of account between the legal representatives of the
deceased partner or the firms with the property of the firm, then, in the absence of a contract to the
contrary, the legal representatives of the deceased partner or the retired partner are entitled to claim
either.
(1) Such shares of the profits earned after the death or retirement of the partner which is attributable
to the use of his share in the property of the firm; or
(2) Interest at the rate of 6 per cent annum on the amount of his share in the property.
Based on the aforesaid provisions of Section 37 of the Indian Partnership Act, 1932, in the given problem,
A’s Legal representatives shall be entitled, at their option to:
(a) the 20% shares of profits (as per the partnership deed); or
(b) interest at the rate of 6 per cent per annum on the amount of A’s share in the property.
5. As per the provisions of Section 30(5) of the Indian Partnership Act, 1932, 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.
However, if he fails to give such notice, he shall become a partner in the firm on the expiry of the said
six months.
If the minor becomes a partner by his failure to give the public notice within specified time, his rights and
liabilities as given in Section 30(7) are as follows:
(A) He becomes personally liable to third parties for all acts of the firm done since he was admitted
to the benefits of partnership.
(B) His share in the property and the profits of the firm remains the same to which he was entitled
as a minor.
(i) In the instant case, since, X has failed to give a public notice, he shall become a
partner in the M/s ABC & Co. and becomes personally liable to Mr. L, a third party.
(ii) In the light of the provisions of Section 30(7) read with Section 30(5) of the Indian
Partnership Act, 1932, since X has failed to give public notice that he has not elected
to not to become a partner within six months, he will be deemed to be a partner after
the period of the above six months and therefore, Mr. L can recover his debt from
him also in the same way as he can recover from any other partner.
6. As per Section 29 of Indian Partnership Act, 1932, 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 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.
In the given case during the continuance of partnership, such transferee Mr. B is not entitled:
• to interfere with the conduct of the business.
• to require accounts.
• to inspect books of the firm.
However, Mr. B is only entitled to receive the share of the profits of the transferring partner and he is
bound to accept the profits as agreed to by the partners, i.e. he cannot challenge the accounts.