Law of partnership


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Law of partnership

  2. 2. • Superseded the earlier law relating to partnership contained in the Indian Contract Act, 1872 • Governed by General principles of Contract Act. • Derived from English Partnership Act, 1890 Nature of Partnership Sec. 2 – definition 2(a) ‘act of firm’ – includes omission/commission, either by firm, a partner individually 2(b) business – trade, occupation, profession 2(c) prescribed – ‘prescribed under the Act’ 2(d) third party – any person other than partner
  3. 3. Why partnership – • Improvement over sole trade business • Alternate to company ventures Sec. 4 Partnership is the relation between person who have agreed to share the profit of business carried on by all or any of them acting for all. Persons who have entered into partnership with one another are called individually partners and collectively a firm and the name under which their business is carried on is called the firm name.
  4. 4. Section 4 of Partnership Act v. section 239 of Indian Contract Act (repealed) 239 – Talks about contributing property, skill, labour + sharing of profit 4 – restricted it to profit only. Thus treats contribution as subsidiary 239 did not talk about mutual agency whereas section 4 takes into consideration agency – ‘one acting for all’
  5. 5. 1. 2. 3. 4. 5. Essential features of partnership Partnership is the relation between the parties Arises out of agreement Aimed to carry on a business Members agree to share the profit Element of agency Relation between persons • Partnership does not arise out of status (Sec. 5) • requires two persons at least – natural or artificial • Parties should be competent (Refer section 11 of ICA)
  6. 6. Partnership firm is not a legal entity and hence not entitled to enter into a partnership. One person can be a partner at the same time in more than one firm. Agreement Partnership can only arise out of agreement – express/implied written/oral or may be inferred from the conduct of the parties. Lakshmibai v. Roshan Lal AIR 1972 Raj. 288 Partners in construction work/ by virtue of oral agreement
  7. 7. • Defendant contended that there is only debtor and creditor relationship • Plaintiff contended that he was entitled to profits and liable to contribute The Court held, Mere use of words ‘partner’ or ‘partnership’ in an agreement does not necessarily show that there is a partnership Decision Held that there is partnership on the basis of corroborative evidence
  8. 8. Carrying on of business • Includes trade, profession, occupation – all refers to joint operation for gain. • Continuity in the business v. partnership for a single transaction (Sec. 8) Present partnership for future transaction – R.R. Sarna v. Reuben AIR 1946 Oudh 68 • Money was deposited to obtain license for production of electricity. • After refusal plaintiff claimed the deposit amount whereas defendant contended existing partnership in the contract and hence the use of the amount for other works.
  9. 9. held, The partnership was not into existence. Partnership is the carrying on of a business not an agreement to carry it on. Sharing of profit Partnership – to part – to divide • Receiving profit is not a conclusive proof of partnership but not receiving profit is a conclusive proof of no partnership. • Act does not prescribe, degree, kind, manner of profit.
  10. 10. Losses • The Act is silent about sharing of losses – hence can be determined by contract as well. • Two partners may agree that only one will bear the losses. • Sharing of losses + sharing of profit = an important incident and hence existence of partnership almost always been inferred
  11. 11. Mutual Agency • “A business carried on by all or any of them acting for all” – existence of agency • Sleeping partner is also bound by agency. • Several persons on behalf of one individual. • Several individuals together in one transaction. Cox v. Hickman (1860) • Business handed over to creditors acting as trustees. Cox was one of the trustees who never acted. • Suit against the trustees for unpaid bill including Cox.
  12. 12. Lord Cranworth – The liability of one partner for the acts of his copartner is in truth the liability of a principal for the acts of his agent. Where two or more persons are engaged as partners in an ordinary trade each of them has an implied authority from the other to bind all by contracts entered into during the course of business. Every partner in trade is the agent of his co-partner; all are, therefore, liable for the ordinary trade contract of the other.
  13. 13. Consequences of the case – • Mere sharing of profit does not make one partner. It is only prima facie test • Work should have been done by him personally or on his behalf with his real or ostensible authority. • Should be in the capacity of partner. • In the present case there is no relation of partner. Hirabai v. Bhagirath & Co. AIR 1964 Bom 174 • Managing owner of an agency gave agency to defendant on temporary basis for 15 years but kept receiving the profits. • Held that there is no agency and mere sharing of profit does not make one partner.
  14. 14. Determination of partnership Sec. 6-Real intention to be taken into account while determining partnership Explanation 1- sharing or profit, holding joint/ common interest – not a conclusive proof. Explanation 2- receiving of profit contingent upon earning profit, varying with profit does not make one partner, specially in the following cases – • By a lender of money to persons • By a servant or agent as remuneration • By the widow or child of deceased partner • Payment to previous partner for goodwill
  15. 15. Profits or returns from joint ownership (Exp. 1) • Instances of partnership – Birdichand v. Harakchand AIR 1940 Nag 211 • Agreement to purchase cotton together for resale and division of profits or loss as the case might be, in circumstances in which neither party could resell his part independently of the other – constitutes partnership. • Two tenets in common of a house are dividing rent between them – no partnership • A,B,C contributes goods to be shipped together – no partnership • Two joint owners of a land agreed to raise a crop and for this borrowed money for the cultivation and took active steps in raising the crop – partnership constituted
  16. 16. Case laws to determine existence of partnership Mollow, March & Co. v Court of wards (1872) LR 4 PC 419 A Hindu raja advanced some loan to a British firm which later entered into a contract with the plaintiff. Raja was given the power to control the business and to get commission on profit till debt is discharged but raja never exercised control. The plaintiff sued the firm and raja together for failing to perform the contract as partners. Raja held not liable as – • • • • He remained creditor only There was no intention to treat him as partner He never acted as partner in the business Partnership requires community of interest and here the interest is conflicting.
  17. 17. Pooley v Driver (1876) 5 Ch 458 C advanced 2500 pound to A and B. As per agreement between them, C was entitled to inspect and take copies of the partnership book and a part of annual profit. The agreement further provided for a final account and repayment at the end of the partnership unless it should appear that C has received more than the money C has given. D also advanced to A and B on the similar terms. Held that there exist a partnership and the money was not given as loan but towards capital contribution in the firm.
  18. 18. Walker v Hirsch (1884) 27 Ch D 460 The plaintiff, a clerk in the defendant’s firm entered into an agreement that for the part taken by him in the business, he should receive a fixed salary and 1/8th share of the net profit and also losses. He on the other hand agreed to advance pound 1,500 to the business. The agreement could be determined on 4 months notice. Plaintiff continued his work but was never introduced to the customers and did not have any voice in the conduct of business. Defendants being dissatisfied with his work gave him a notice. Plaintiff claimed dissolution of the firm and accounts. Held there exist no partnership as there was no intention to create partnership. The plaintiff never took part as partner and no authority of partnership was exercised on his behalf.
  19. 19. Abdul Latif v Gopeshwar AIR 1933 Cal 204 The plaintiff undertook a contract with a company and he appointed the defendant to manage the business who was also authorized to receive advances from the company and also to extend advances in favour of the company. Defendant was also liable for all the losses in case of negligence. The plaintiff sued the defendant for accounts in the capacity of agency whereas the defendant claimed that there exist partnership. Held, there is no partnership as the business was exclusively in the name of the plaintiff and the defendant was only managing the same on sharing of profit and loss basis.
  20. 20. Krishnamachariar v sankara sah AIR 1921 PC 91 Three persons joined to obtain contract of mending roads and supply material. Two of them to apply know how and the third one was to arrange capital. Later capitalist partner contended that there was no partnership rather he only availed the services of the other two persons. Held, The final words which provide for the division of share, the account remaining with the respondent and the common share of expenses are all proper partnership and have no application to a service contract.
  21. 21. Holme v Hammond (1872) 5 persons entered into partnership for 7 years and agreed to share the profits and losses equally. They further agreed that if any one of them died before the expiry of the said period the others would continue the business and pay the share of profits of the deceased to his executors. Accordingly the executors of the deceased were paid 1/5th share of the profit. The plaintiff sued the partners and executors as partners in the firm. Held, In order to constitute partnership there must be an agreement express or implied in the absence of it the executors can not be said to have become partners.
  22. 22. Pratt v. Strick (1932) A doctor sold the goodwill of medical practice and entered into an agreement with the buyer of the goodwill that he would help such buyer to introduce patient for 3 months and he would be entitled to half the share of profits and incur half the expenses. Held, doctor was not a partner.
  23. 23. Section 5 Partnership not created by status Ram Laxman Sugar Mills v CIT (1967) 66 ITR 6113 (SC) A partnership deed was executed between the manager of JHF and the second party. Later the JHF ceased to exist by reason of partition. The appellant firm applied for registration under the IT Act. The CIT refused to register on the ground that under the deed the JHF had become a partner and as soon as the JHF status was severed the partnership deed become inoperative. The court held, HUF is a person within the meaning of IT. It is however not a juristic person for all purposes and cannot enter into an agreement of partnership with either another HUF or individual. It is open to the manager of a JHF as representing the family to become a partner. The intention in the partnership deed was to make the manager of JHF a partner and hence the severance of JHF status would not affect the partnership agreement.
  24. 24. Bhagat Ram Mohanlal v Commissioner (AIR 1956 SC 374) It was held that when karta of a Hindu family becomes a partner in a partnership firm on behalf of the family and subsequently the other family members also join the partnership firm it requires amendment in the constitution of the firm. Partnership by karta does not make the other coparceners partner in the firm.
  25. 25. Duration of partnership Sec. 7 Partnership at will • Applicable in the absence of provisions relating to duration or determination of partnership. Test to determine partnership at will • Any partner should have power to bring the business to an end at any moment. • There should not be any direct/ indirect reference to the mode of retirement or dissolution in the partnership agreement. Partnership for a limited time period subsequently turning into partnership at will.
  26. 26. Consequences of partnership at will • partners can retire at any given time by giving notice to others (Sec. 32) • Can dissolve firm by giving notice to Co-partners (Sec. 43) • Also dissolves by mutual consent, insolvency or death of a partner. Cases – A and B agreed to enter into partnership which was subject to termination by mutual consent any time – whether partnership at will (Moss v Elphick (1910) 1 KB 486) – partnership at will
  27. 27. Agreement between father and 5 sons provided that the partnership would not come to an end with the death or retirement of any partner but if any partner does anything which gives a ground to the court to determine partnership that person shall be considered as retired. Held partnership was not at will (Abott v Abott (1936) 3 All ER 823) Nissar Ahmed v. Nasima bi (1970) 1 Mad LJ 512 Partnership agreement had a provision that if any partner was not willing to carry on the business, he would have to go out receiving a certain sum. The business would carry on with the remaining partners and the goodwill and trade mark would then be vested in them. Held that there was no partnership.
  28. 28. Suresh kumar v. Amrit Kumar (AIR 1982 Del 131) The terms of the partnership provided that any partner in case he desires to retire has to give 6 months notice expressing his intention and after expiry of 6 months he would cease to be a partner in the firm. In case of retirement or death of any partner the partnership was to continue. The court held that there was intention to carry on the business hence partnership was not at will.
  29. 29. Substitution and partnership at will Partnership agreement says that in case B, one of the partners in the firm dies his nephew would act in his place. Such is partnership at will. Sec. 8 Partnership for particular business venture A person may become a partner with another person in particular adventure or undertaking. Business under section 4 v. business under section 8
  30. 30. K. Jaggaiah v. K. Venkatasatyanarayana (AIR 1984 A.P. 149) The plaintiff and two defendants joined together and obtained a contract for the maintenance of the road. Regarding liability the court held, The definition of business as given in sec. 2 is not exhaustive. Any commercial activity or adventure amounts to business or any activity which if successful would result into profit….however the rights and liabilities of partners in these cases are limited, as compared to cases of general partnership.
  31. 31. Salaried partner • Section 6 talks about profit sharing without partnership e.g. agent and principal relationship. • The question arises whether there can be a partner without sharing of profit i.e. partner on salary basis or remuneration basis? • Being not a corporate entity the partners in the firm are not its employees.
  32. 32. Regional Director E.S.I.C. v Ramanuja Match Industries (AIR 1985 SC 278) The Apex Court observed, The position of a partner qua the firm is not that of a master and a servant or employer employee, which concept involves an element of subordination and not that of equality. The partnership business belongs to the partners and each one of them is an owner of the business. Ellice v Joseph Ellice & Co (1905) 1 KB 324 Held, a true partner who in addition is paid a fixed wage for doing specific work does not thereby become a workman for the purpose of Workmen’s Compensation Act, for he could not for that purpose be both master and servant.`
  33. 33. Ross v Parkyns (1875) The defendant Parkyns agreed with the plaintiff that accounts are to be carried in defendant’s name. subscription, policies are also to be signed by him or by the plaintiff as his agent. The plaintiff was supposed to maintain the account of the firm and in return he was to get a fixed sum as salary and 1/5th part of the profit. The loss was to be borne by the defendant. Further, in any year after division of profit if an unexpected claim is made, the plaintiff was supposed to pay his share of the same but that would not exceed in any circumstances from the money he has received as his share of profit. Held, there was no mutual agency hence no partnership.
  34. 34. R.N. Kothare v Hormasjee (AIR 1927 Bom 127) A and B entered into an agreement, which described them as ‘partners’. Towards profit B was to receive Rs. 500 p.m. and he was not responsible for any losses. Later when the dispute arose between the parties B contended that he was not the partner in the firm and was drawing only salary. Held, partners can agree to share the profit in any way they like. This also covers agreement to share fixed salary. Held that both A and B are partners in the firm.
  35. 35. Partnership firm not a separate legal entity Persons who have entered into partnership are individually called partners and collectively called firm. Thus firm is only a collective name and not a separate entity unlike company. A suit against firm means a suit against the partners. Dulichand Laxminarayan v. Commissioner of IT (1956) 29 ITR 535 Held, the general concept of partnership, firmly established in both systems of law, still is that a firm is not an entity or person in law but is merely an association of individuals who constitute the firm.
  36. 36. Partnership v. Joint Hindu Family (JHF) Basis of partnership is contract Relationship in JHF is on the basis of status Introduction of new partner No consent is needed. The fact of requires unanimous consent birth decides place in the family of all the partners Mutual agency among partners No mutual agency among family members. Karta can act on behalf of all the members in the family Liability is joint and severe The liability of coparceners are limited to the extent of their share in the property, assets of the family This does not happen in the case of JHF Partnership is dissolved by death or insolvency
  37. 37. Partnership v. Company Partners are individually called partners and collectively firm hence no separate identity Without partners firm does not exist Company has separate identity which is distinct from the members Company can exist even if members come and go Partners cannot transfer their profit or substitute themselves without permission of others In company shares can be transferred freely to strangers Requires minimum two members for partnership Banking business – max 10 no. Others – max 20 Liability is joint and several towards the third party For a private co. 2 members and max 50 For public co. 7 no. max – no limit Liability is limited to shares of members in the company
  38. 38. Partnership v. Co-ownership Partnership can arise only out of contract Co-ownership of property can arise otherwise also Purpose of partnership is carrying on business Purpose of co-ownership is not necessarily for business Mutual agency No mutual agency Partners cannot transfer their interest freely without consent of other partners Partition cannot be done Co-owner can transfer his part of share in favour of third party Partition is possible
  39. 39. RELATION OF PARTNERS TO ONE ANOTHER Chapter III- Section 9-17 Section 11. determination of rights and duties by contract. – Partnership as branch of agency – Partnership as branch of contract • Mutual rights and liabilities are to be decided by contract whether implied or expressed. • Consent may be expressed or implied by the course of dealing • Section 27 of the ICA v. right to restrict partners from doing any other business.
  40. 40. • Freedom to decide mutual rights and obligations are subject to Partnership Act. • Contradiction the contractual obligations and Law of Partnership – Partnership Act to prevail Duties of the Partners • Section 9-10 mandatory duties • Section 12-17 duties subject to contract between the parties
  41. 41. 1. Duty of absolute good faith (Sec.9) 2. Duty to carry on business to the greatest common advantage (Sec. 9) 3. Duty to render true accounts and full information of all things affecting the firm (Sec. 9) 4. Duty to indemnity for fraud (Sec. 10) 5. Duty to be diligent (Sec. 12(b) and 13 (f)) 6. Duty to properly use the firm’s property (Sec. 15) 7. Duty not to earn personal profits/ not to compete (Sec. 16)
  42. 42. Duty of absolute good faith Uberrima fidei Partners enter into partnership on the basis of mutual confidence and trust. This duty continues even after the partners have ceased to be partners. Duty to carry on business to greatest common advantage Partners are not to obtain personal advantage at the cost of firm.
  43. 43. Dunne v. English (1874) LR 18 Eq 524 The plaintiff and the defendant bought a mine jointly with a view to reselling it at a profit of pound 10,000. Defendant resold the same to a company in which he had interest at the much higher price. Whether plaintiff is entitled to half the profit amount or only of 10,000 pound. Court held that the defendant was duty bound to disclose the real facts to the plaintiff. The other partners are not deprived of their right to share the actual sale proceed.
  44. 44. Duty to render true accounts and full information includes duty not the mix his money with the firm’s account, communication regarding a/c, duty not the misappropriate – gives right to damage/ repudiation Waiver of right to repudiate the contract in case of concealment of facts. Duty to indemnify for fraud Sec. 10 – Every partner shall indemnify the firm for any loss caused to it by his fraud in the conduct of the business of the firm. Considering Public Policy Waiver cannot apply in duty to indemnify for fraud i.e. there cannot be any contradictory contract or rectification of fraudulent act etc.
  45. 45. Duty to be diligent Sec 12(b)/ Duty to indemnity for willful neglect Sec. 13 (f) 12(b) “every partner is bound to attend diligently to his duties in the conduct of business.” 13(f) “a partner shall indemnify the firm for any loss caused to it by his willful neglect in the conduct of the business of the firm” Excludes mere inadvertent or an accident which is not deliberate or willful, intention or purposeful commission or omission of an act.
  46. 46. Cragg v Ford (1842) A partner was given the charge to wind up the firm. He delayed disposal of some bales of cotton even after suggestion of a fellow partner. Subsequently the price of bales of cotton fell considerably. Whether liable for willful neglect? Not a willful neglect only error of judgment. S.K. Bandopadhya v Man Gobinda AIR 1919 Pat 386 A partner failed to sue certain firms and consequently one claim became time barred and another lost due to debtor’s insolvency. The partner was held liable for the former but not for the latter as he learned very late about the insolvency. Waiver applies in duty to indemnify for willful neglect
  47. 47. Duty to properly use the firm’s property (Sec. 15) Subject to contract between the partners, the property of the firm shall be held and used by the partners exclusively for the purpose of the business. Duty not the earn personal profits/ not to compete (Sec. 16) Subject to contract between the partners – a. If 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 the firm name, he shall account for that profit and pay it to the firm.
  48. 48. 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. Ramnath Gagoi v. Pitambar Deb ILR (1915) 43 Cal 733 A took a lease from the government for the purpose of catching elephants. He took B as a partner in the venture and B was authorized to manage the business. If was agreed between them that the sale of elephants would take place in the presence of the representative of A. In one such sale in the presence of A’s representative B bought some elephants.
  49. 49. The court held, The duty is that of honest, fair and open dealing and not that to total restraint of buying partnership property. A partner is entitled to purchase partnership property provided there is full disclosure and the parties are at arm’s length. It is only where the real truth is concealed and the facts are not disclosed that one partner has a legitimate grievance against the other as provided in section 16(a)
  50. 50. Duty not the compete sec. 16(b) • A partner is supposed to devote himself completely to the partnership business and not to carry his own competing business. • In case competing business is carried the partner becomes liable to render the accounts to other partners in the firm. • In case profit is derived from any transaction of the firm or from the use of the property or business connection of the firm or the from the use of the property or business connection of the firm or the firm name, he shall account for that profit and pay it to the firm.
  51. 51. Read with section 215 and 216 of the ICA – A partner being an agent, a fiduciary character arises and if he, as agent, makes a profit out of the concern of the his principal, and while acting for him, he must disclose it to his principal, he cannot make a profit out of his principal’s business for himself. Pulin v. Mahindra (AIR 1921 Cal 722) Partnership for importing and selling of salt – one partner bought some quantity himself and sold on his personal account. Held liable for accounts towards the other partners.
  52. 52. The Court observed, It is a fundamental rule in the law of partnership that a partner cannot, without the consent of his co-partner lawfully carry on his own business (openly or secretly) competing with that of firm (16 (b)). The rule is not applicable on different business.
  53. 53. Section 14. Partnership Property Subject to contract between the partners, the property of the firm includes all property and rights and interest in the property originally brought into the stock of the firm or acquired, by purchase or otherwise, by or for the firm, or for the purpose and in the course of the business of the firm, and includes also the goodwill of the business. Lachhman Das v. Gulab Devi AIR 1936 All 270 Partition in the JHF-members agreed to continue business in the same assets as partners – one partner died – his heir instituted a suit for partition of the property treating the same as JHF property. Issue: whether partnership property or JHF property?
  54. 54. The court held, Mere use of property for partnership would not make is partnership property. The fact that the share in the property were not varied but the share in the business were itself is an evidence that the property was treated as JHF property and not as partnership property. Ganpat Rai v. Abnash Chander (AIR 1973 J&K 74) Whether tenancy rights of a partner in the premises where the business is carried on would become the property of the firm?
  55. 55. In this case the partners agreed to carry on the business in the rented premises of A and by agreement they decided that the tenancy would be kept within the right of partnership firm. The rent was also paid from the proceeds of partnership firm. Held, The facts constitute tenancy under the right of partnership firm by virtue of agreement between the partners.
  56. 56. Rights of the partners Rights of the partners are contained under section 12 and 13 which are subject to contract between the partners. Sec. 12 The Conduct of the Business Subject to the contract between the partners, (a) Every partner has a right to take part in the conduct of business (c) Any difference arising as to ordinary matters connected with the business may be decided by a majority of the partners, and every person 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 the partners; and
  57. 57. (d) Every partner has a right to have access to and to inspect and copy any of the books of the firm. Mutual rights and liabilities Sec. 13 Subject to contract A partner is not entitled to receive remuneration for taking part in the conduct of the business; rather shares profit The partners are entitled to share equally in the profits earned, and shall contribute equally to the firm’s losses; Where a partner is entitled to interest on the capital subscribed by him, such interest shall be payable only out of profit; A partner making, for the business purposes, any payment or advances beyond the amount of capital he has agreed to subscribe, is entitled to interest thereon at the rate of 6% per annum;
  58. 58. 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 protecting the firm from loss in some emergency, as would be done by a person of ordinary prudence in his own case and under similar circumstances.
  59. 59. Relations of partners to third party Chapter IV Section 18-30 • Nature and extent of liability of firm for the acts of a partner (Sec. 18-27) • Doctrine of Holding out, Creating liability of a nonpartner (Sec. 28) • Rights of transferee of a partner’s interest (Sec. 29) • Position of Minor admitted to the benefit of Partnership (Sec. 30)
  60. 60. Nature and extent of liability of firm for the acts of a partner (Sec. 18-27) Sec. 18 partners to be agent of the firm – subject to the provisions of this Act, a partner is the agent of the firm for the purpose of the business of the firm. • All the laws applicable to agent would apply on partners as well. • agency extended only to the business and does not cover works in the individual capacity. • The agency operates against sleeping or dormant partners as well, they too are liable for the acts of acting or ostensible partners.
  61. 61. Nature of liability Liability is joint and several (Refer Sec. 25) • All the partners are liable jointly and severally and the plea that they have limited their liability cannot be taken by any partner. Though in case a partner pays more than his share he can claim the same from others. • Liability subsists only till the time a partner remains in the firm. After retirement no liability arises. • Requirement of public notice
  62. 62. Sec. 19 Implied authority of the partners as agent of the firm Subject to the provisions of section 22 the act of a 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 as enumerated under section 19 is implied authority. – The firm will be bound by implied authority of the firm and the partners. Reason: third party may not always know or have excess to the scope of authority partners do exercise.
  63. 63. Test to determine the scope of implied authority 1. The act should be done in relation to the partnership business and, 2. The act should be done in usual way, in relation to the business of the kind carried on by the firm. - Nature of the business is thus a relevant factor Distinction between trading and non-trading firms as made by the Courts A firm would be a trading firm if the business consists in buying and selling of goods. There is an implied power to borrow in a trading firm. Whereas in businesses which are not commercial rather professional in nature, no partner can borrow or pledge the partnership property so as to bind the co-partners.
  64. 64. Case laws Mercantile Credit Co. Ltd. v Garrod (1962) 2 All ER 1103 Sale and purchase of second hand cars could be impliedly considered to be the business of the firm which deals with letting lock up garage repairing of cars. Higgins v Beauchamp (1914) 3 KB 1192 The partners were the proprietors of the business of cinematographic theatre. There was absolute prohibition on unilateral borrowing by one partner. One partner borrowed money and misappropriated it. Held that, Firm is not that of trading firm and hence no implied authority of borrowing hence the firm would not be bound by the transaction.
  65. 65. Mode of exercising authority Sec. 22 In order to bind the firm, an act or instrument done or executed by a partner of 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. Section 19 is subject to section 22 hence implied authority would be applicable only when1. Done in the name of the firm or, 2. In the manner expressing or implying an intention to bind the firm
  66. 66. Limitation of implied authority 19(2) in the absence of any usage or custom of trade to the contrary, the implied authority of a partner does not empower him to – 1. Submit a dispute relating to the business of the firm to arbitration; 2. Open a banking account on behalf of the firm in his own name; 3. Compromise or relinquish any claim or portion of a claim by the firm; 4. Withdraw a suit or proceeding filed on firm’s behalf; 5. Admit any liability in a suit or proceeding against the firm; 6. Acquire immovable property on firm’s behalf;
  67. 67. 7. Transfer immovable property belonging to the firm; 8. Enters into partnership on behalf of the firm. • The above acts can be done by the partner only after he has been expressly authorized or there is a custom. • Subsequent ratification is permissible. Sec. 20 extension and restriction of partner’s implied authority – The partners in a firm may, by contract between the partners, extend or restrict the implied authority of any partner. Notwithstanding 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.
  68. 68. Thus restriction under section 19 is statutory whereas restriction under section 20 is contractual. Sec. 21 partners right in emergency – Partners can take any action to mitigate the losses of the firm as would be taken up by a prudent person. The authority here is similar to section 189 of the ICA. Sec. 23 Admissions made by a partner – An admission or representation made by a partner concerning the affairs of the firm is an evidence against the firm if it is made in the ordinary course of business.
  69. 69. Sec. 24 effect of notice to an active partner Notice to a partner who habitually acts in the business of the firm of any matters 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. • Excludes sleeping or dormant partner. • Excludes fraudulent acts of a partner. • Excludes fraudulent acts with the consent of partner.
  70. 70. Doctrine of Holding out Sec. 28 Holding out – 1. Anyone who by words, spoken or written, or by conduct represent himself, or knowingly permits himself to be represented, to be a partner in a firm, is liable as a partner in that firm to any one 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 LRs of his estate liable for any act of the firm done after his death.
  71. 71. Holding out is a branch of law of estoppel. Waugh v. Carver (1793) “Now a case may be stated in which it is the clear sense of the parties that they shall not be partners, that A is to contribute neither labour nor money and not to receive any profits. But if he will lend his name as a partner, he becomes against all the rest of the world a partner, not upon the ground of real transaction between them, but upon principle of general policy, to prevent the frauds to which creditors would be liable.”
  72. 72. 1. Includes self representation or should have permitted representation by someone else. 2. Knowledge of representation and acting in good faith Snow White Food Products (P) Ltd. v. Sohan Lal Bagla AIR 1964 Cal 239 The clerk of the firm of carriers entered into transaction with the plaintiff company. Negotiations were carried out by him only. Later the goods were not delivered but were disposed off and converted to the use of Sohan Lal. In an action against the firm Sohan Lal denied his status of partner in the firm. Court held him liable on the basis of holding out.
  73. 73. Effect of Holding out • No partnership with other members • No agency with other members • No right against the firm or its members • Real partners are not liable unless the holding out has been done by them or with their connivance. No holding out in certain cases • Deceased partner • Insolvent partner • Sleeping or dormant partner
  74. 74. Rights of transferee of partner’s interest (Sec. 29) • Introduction of a new partner-resulting into change in the nature of firm hence consent of all is mandatory. • Failure to obtain consent – ground for demand of dissolution • Interest in partnership firm may be transferred. Interest includes profit, assets of the firm. Ways of transferring interest Creation of charge, mortgage, benefit transfer etc.
  75. 75. Rights of transferee 29(1) • Only receives the shares as per the profit declared by the partners. • No right to conduct business, accounts, inspection of books etc. Sec. 29(2) in case of dissolution of the firm transferee is entitled to the assets of the original partner and for that also to the accounts. • 29(1) deals with business in continuation • 29(2) deals with the business when it comes to an end
  76. 76. Sub partnership When partner of a firm agrees with another to share his part of profit of the business. Minor Admitted to the Benefit of Partnership (Sec. 30) • Minor’s contract – not valid • Minor not competent to contract – partnership is a contract Pre-requisites of admission Sec. 30(1) A minor may not be a partner in a firm, but with consent of all the partners for the time being, he may be admitted to the benefits of partnership.
  77. 77. • Existence of partnership firm • Consent of the partners to admit minor in the firm Dharam Vir v. Jagan Nath (AIR 1968 Punj 84) At the time of execution of partnership deed plaintiff was minor. After dissolution he brought a suit for rendition of account like any other partner. There was no difference made in his status and other partners and he was also entitled to receive profit and share the losses. Held, A deed which makes a minor at par with competent partners would not be workable and the document cannot be enforced even vis-à-vis other partners.
  78. 78. CIT v Shah Mohandas AIR 1966 SC 15 Partnership deed was executed by two persons one of them also signed on behalf of two minors. All were entitled to equal share and capital contribution to the firm. Commissioner of IT refused to treat the same as valid. Held, Agreement entered into with incompetent persons are not necessarily void. Where the minor has been admitted only to the benefit of the partnership the question of invalidity does not arise.
  79. 79. Minor’s position during minority Sec. 30(2) right to profit and access to any of the firm’s accounts and inspection of copies thereof. Limitation • Cannot inspect other papers, books etc. • Before suing the firm for accounts or to recover his share of property or profit, minor must sever his connection with the firm (Sec. 30(4)) Option on attaining majority Sec. 30(5) with Public notice within 6 months of attaining majority or, Within 6 moths of acquiring knowledge Minor can decide to continue or discontinue in partnership.
  80. 80. • Failure to give notice would result into full fledged. • Up to six months grace period liability and entitlements remain the same as during minority. Shivagouda v. Chandrakant AIR 1965 SC 212 A partnership firm in which minor was admitted to the benefits, was dealing with the appellants and became indebted to them. Afterwards the partnership firm dissolved. Minor attained majority subsequently but did not exercise option available under section 30(5). Appellants raised a claim against him too on the presumption that by not exercising the right under 30(5) the minor became partner in the firm.
  81. 81. Held, post dissolution no such requirement is there and hence there is no need to exercise option under sec. 30(5) Burden of proof – lies on the minor. Rights and liabilities of Minor if he becomes partner/ Sec. 30(7) • Liabilities are retrospective and there is automatic ratification. • Consent of all the partners for admitting such minor is not required.
  82. 82. Rights and liabilities of a Minor if he does not become partner/ Sec. 30(8) • Liable for the acts carried on till the date public notice was given; • Entitled to sue the partners for his share of the property and profits. Holding out on attaining majority Sec. 30(9) provides that, sub sections (7) and (8) of section 30 shall not affect section 28. Thus in spite of notice if minor acts he would be liable.
  83. 83. Liability of firm for wrongful acts of a partner Sec. 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 of injury is caused to any third party, or any penalty is incurred, the firm is liable therefore to the same extent as the partner. Wrongful acts includeTort, fraud, negligence, misrepresentation, misappropriation, defamation or crime.
  84. 84. Llyod v Grace, Smith & Co. (1912) AC 716 Plaintiff hired the services of defendant solicitor’s firm for seeking advice on increasing the profit on two cottages. The managing clerk of the company advised her to sell the cottage and asked her to sign two documents said to be sale deeds. Thus managing clerk got the documents as gift and disposed it off and misappropriated the money. The firm was held liable as the act was done within implied authority.
  85. 85. Liability of firm for misapplication by partners Sec. 27 (a) A partner receives money within his apparent authority and misapplies it (b) Firm receives money and property is misapplied by any of the partners while it is in custody of the firm. • Apparent authority • Misapplication by the receiving Partner • Misapplication by any partner in the Firm
  86. 86. Incoming and outgoing of partners Sec. 31-38 Changes are done without resorting to dissolution of the firm. 31 (1) subject to contract and section 30 without unanimous consent no person shall be introduced as partner. 31(2) subject to provision of section 30 no person is to become liable for any act done before his partnership in the firm.
  87. 87. Though nothing prevents him to take up liability if he wants to take for previous actions. • Admission with unanimous consent • Admission through nomination – depends on the contract between the parties – nomination can be done by majority as well. • Admission of minor to the benefit of partnership with the option to become a full fledged partner at a later stage.
  88. 88. Outgoing partners 1. Retirement (Sec. 32) 2. Insolvency (Sec. 34) 3. Expulsion (Sec. 33) 4. Death (Sec. 35) The firm is not necessarily dissolved and partnership may continue with the existing partners.
  89. 89. Retirement 32(1) 1. With the consent of all the partners 2. As per agreement 3. By giving notice in partnership at will Liability for acts done before retirement • Liable for all the acts done before retirement. Thus a partner can retire from the firm but not from the subsisting liability. • Even if he has been discharged by the partners the liability subsists towards the third person.
  90. 90. Sec. 32(2) A retiring partner may be discharged from the liability to any third party for firm’s acts done before his retirement by any agreement made by him with such third party and the partners of the reconstituted firm, and such agreements may be implied by a course of dealing between such third party and the reconstituted firm after he had knowledge of the retirement. This procedure is more in the nature of novation.
  91. 91. Liability for acts done after retirement Sec. 32 (3) – • Retiring partner continues to be liable for the acts done after retirement as well till the time public notice has been given. • retiring partner is not liable to any third party who deals with the firm without knowing that he was a partner. • Notice may be given by the retiring partner or any other partner of the reconstituted firm. 32(4) • In case of registered firm – official gazette, vernacular newspapers at the place of business. (Sec. 72)
  92. 92. • Holding out applies in case of retiring partner as well. • Continuation of liability would not include liability for wrongful acts or insolvency committed by the continuing partners, after his retirement. When public notice is not necessary Not necessary in the cases where partner is – Dead Insolvent Dormant
  93. 93. Public notice is not required in all the cases where third party was not aware of the partner at the very first place. Expulsion of the partner (Sec. 33) 33(1) a partner may not be expelled from a firm by any majority of the partners, save in the exercise in good faith of powers conferred by contract between the parties. 33 (2) the provisions of sub sections (2)(3) and (4) of section 32 shall apply to an expelled partner as well if he were a retired partner.
  94. 94. Expulsion is possible only when provided under the agreement between the partners. Partnership Act does not provide for Expulsion. Other elements of expulsion • Good faith • Rarely used due to strict nature • Construed strictly Instances of expulsion • Expulsion against appointment of son of a partner as manager along with father; • Misapplication of client’s money; • Professional misconduct; • Adultery, dishonesty, fraud etc.
  95. 95. Insolvency of a partner (Sec. 34) 34(1) a partner ceases to be a partner on the date on which the order of adjudication is made. whether or not the firm has been dissolved. 34(2) where the firm has not been dissolved the estate of the insolvent partner is not liable for any act of the firm and the firm is not liable for any act of the insolvent done after the date on which the order of adjudication is made. No public notice is required in case of insolvency
  96. 96. Death of a partner (Sec. 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. Rights of outgoing partners Sec. 36 right to carry on competing business subject to – • Use of the firm’s name • Representing himself as carrying on the business of firm or; • Solicit the customers of the firm
  97. 97. Sec. 36 (2) Restriction on competing business Restriction on carrying the business within specified limits up to sometime can be included in the agreement. Same is not violation of section 27 of the ICA. Sec. 37 right to share subsequent profit Subject to contract – 1. Claim over profit proportionate to the share, or; 2. Interest @ 6% per annum.
  98. 98. Dissolution of firm Sec. 39 Dissolution of partnership between all the partners of the firm is called as dissolution of the firm. Changes in the constitution of firm v. dissolution of the firm Modes of dissolution (Sec. 40-44) Dissolution by agreement (Sec. 40) Compulsory Dissolution (Sec. 41) Contingent Dissolution or dissolution by operation of law (Sec. 42) Dissolution by notice (Sec. 43) Dissolution by Court (Sec. 44)
  99. 99. Dissolution by agreement Sec. 40 A firm may be dissolved with the consent of all the partners or in accordance with a contract between the partners. • Depends on the contract • Dissolution can be inferred also from the circumstances such as – o Closure of the business o Final accounts Sec. 41 Compulsory dissolution • All the partners have been adjudged insolvent but one • Happening of event – making partnership business unlawful or partnership unlawful.
  100. 100. Subsequent unlawfulness in part – doctrine of severance. Sec. 42 Subject to contract between the partners a firm is dissolved – • If constituted for a term by expiry of the term; • If constituted for one or more adventure by the completion of that adventure; • By the death of partner; unless contrary contract • By the adjudication of a partner as an insolvent. Unless contrary contract Section 42 deals with the contingent situations. • Expiry of term and continued business • Pending venture and death of a partner
  101. 101. Sec. 43 Dissolution by notice in partnership at will 43(1) Any partner can communicate his intention for dissolution of the firm 43(2) The effective date of dissolution is the date which is mentioned and if no date is given the effective date would be the date of communication. Read with section 7 of the Partnership Act. Requirements for notice under section 43
  102. 102. a. It must clearly state the intention of the partner giving the notice to dissolve the firm; b. It must be given in writing to all the other partners in the firm. c. A notice given for dissolution cannot be withdrawn unless agreed by all other partners. d. Filing of suit for final account in partnership at will is sufficient notice for dissolution of the firm. e. Insolvency is yet another fact of notice for dissolution of partnership at will.
  103. 103. Dissolution by retirement of all but one This contingency is not provided under any provision yet such situation would make dissolution inevitable. Abbasbhai v. R.G. Shah AIR 1988 Bom 187 In this case the agreement between the partners provided that in case of retirement of all the partners the remaining one partner may continue the business by taking new partners in the firm. Critical view.
  104. 104. Dissolution by the Court (Sec. 44) • Partner becomes of unsound mind, 44(a) • Permanent incapacity, 44(b) • Guilty of conduct which affects carrying on the business, 44(c) • Willfully or persistently commits breach of agreements, 44(d) • Transfer of whole of his interest in the firm to the third party, 44(e) • Loss in the business 44(f) • Any other ground which makes dissolution just and equitable. 44(g)
  105. 105. Sec. 44 • Not subject to contract • Court may decide dissolution and hence there is no mandatory obligation. Case Laws Whitwell v. Arthur (1865) Dissolution sought on the ground of paralytic attack suffered by one partner making him permanently disable. Abbott v Crump (1870) Adultery by one with another partner’s wife.
  106. 106. Suraj Bahadur v. Mahadeo AIR 1963 Raj 241 Partnership firm formed for 20 years was continuously suffering losses. One partner withdrew after sometime other two continued. Subsequently one partner filed a suit for dissolution. Held, Continuous loss can be a ground for dissolution.
  107. 107. V. Venkataswami v. Venkataswami AIR 1954 Mad 9 Refusal to render account as ground for dissolution Watney v Wells (1861) Refusal to meet on matters of business, continued quarrelling with no hope of mutual co-operation. Reconstitution after dissolution CIT v M/s Pigot Champan & Co. AIR 1982 SC 1085 Partnership was for 6 years after that the same was stated to have dissolved by mutual consent and thereafter the said business with its assets and goodwill shall belong to and carried by the continuing partners.
  108. 108. Whether there has been a dissolution of the firm or only reconstitution of the same? Held, Dissolution and reconstitution are two different legal terms. A dissolution brings the partnership to an end while the reconstitution means the continuation of the partnership under altered circumstances. Held in the present case the firm was dissolved after expiry of 6 years. Also the firm was dissolved by mutual consent. The old firm stood dissolved and was taken over by the two continuing partners. Thus the new firm succeeded to the business of the old firm and, therefore, it was entitled to relief under IT Act.
  109. 109. Liability for acts done after dissolution (Sec. 45) (1) Until public notice for dissolution has been given the partners and the firm continues to be liable towards the third party. Provides – estate of a deceased partner, partner not known, partner retired etc. would not be liable. (1) Notice is given by any partner. Right to have business wound up after dissolution (Sec. 46) Right to clear of the debts and appropriate the surplus among partners or their representatives.
  110. 110. Continuing authority of partners for the purpose of winding up (Sec. 47) N.B. Singh v. C.I. of Stamps (AIR 1972 All 1) Held, A mere dissolution does not bring about a complete extinction of the firm, which continues and till the liability of the firm are not paid, no partner can claim any particular property or his share in assets. Mode of settlement of accounts between partners (Sec. 48)
  111. 111. 48 (a) • Payment first by profit • Capital • Personal assets in proportion to share 48(b) • Third party entitlement • Partner entitlement apart from share contribution • Towards entitlement as per capital of the partners • The residue is to be divided among the partners.
  112. 112. Payment of firm debts and of separate debts – sec. 49 Property of the firm – firm debt Surplus – share of each partner Separate debt of partner – separate property Surplus – firm debt Personal profits earned after dissolution sec. 50 Obligation to account for profit after dissolution but before winding up Return of premium on premature dissolution Sec. 51
  113. 113. Rights when partnership firm is dissolved for fraud or misrepresentation Sec. 52 Person entitled to dissolve the firm is also entitled to • Right to lien • Treated as creditor • Right to be indemnified by the partner guilty of fraud Sec. 53 right to restrain from use of firm name or firm property Sec. 54 agreement in restraint of trade Sec. 55 Sale of goodwill after dissolution
  114. 114. Registration of Firm (Sec. 55-71) Statement (Sec. 58) Content of the statement (58(1)) • Firm name • Place of business • Name of place where business carried on • Date when partners joined the firm • Full name + address • Duration of partnership
  115. 115. Firm name not to include (58 (3)) Crown, emperor, empress, empire, imperial, king, queen, royal or any other word referring to sanction, approval or patronage of the Government. South India Textile v. Govt. of A.P. (AIR 1988 AP 55) Whether the name ‘South India’ is covered under sec. 58 (3). Period of limitation for firms
  116. 116. Substantial Compliance v. Mistakes Rectification (sec. 64) Rectification application to be signed by all. Registration when complete Compliance [58] Recording of statement in register [59] Certificate of registration
  117. 117. CIT v. Jayalakshmi Rice & Oil Mills (AIR 1971 SC 1015) Registration is complete only when the requirements under section 59 has complied with. Subsequent changes and alteration (Sec. 60-65) Notice to the registrar – in the absence of notice liability continues as per the original registration. Register of firms is a public document and hence open for inspection (sec. 66) Register of firms is a conclusive proof (sec. 68)
  118. 118. Effect of Non Registration No right to sue the partner or firm (69(1)) No right to sue the third party (69(2)) Also applicable to claim up to 100 Rs. Does not affect right regarding final accounts, dissolution of the firm. S. Ahmed Khan v. Turup Mohd. Hayat (AIR 1953 Mys. 4) Partnership was constituted to plying a car. Defendant returned the car to the seller. Hence present suit for recovery of the capital contribution by the plaintiff.
  119. 119. Held, Plaintiff can sue as the claim is not based on partnership between the parties. Registration immediately before filing of the suit Permissible Practical difficulties Suit between firm and third party Non registration excludes only contractual matters.
  120. 120. M/s Virendra Dresses v. M/s Virendra Garments (AIR 1982 Del 486) Suit for passing off was held maintainable. M/s Shankar Housing Corp. v. Mohan Devi (AIR 1978 Del 255) Firm was registered in the name of original partners who were subsequently replaced by their sons. Whether non recording would render the firm disable? Held, non recording of the partners would render the suit incompetent. Shreeram Finance Corp. v. Yasin Khan AIR 1989 SC 1769 (similar facts and decision as above)
  121. 121. Subsequent registration after filing of the suit CIT v. Jayalakshmi Rice & Oil Mills (AIR 1971 SC 1015) Subsequent registration after filing of the suit cannot be done. In such cases the option is to file a suit a fresh after registration. Thus res judicata does not apply.
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