Chapter-3 the Indian Partnership Act, 1932

3 THE INDIAN PARTNERSHIP ACT, 1932

Question 1 What acts do not fall within the implied authority of a partner under the Indian Partnership Partnershi p Act, 1932? (Nov. 2002)

Answer Implied Authority of a partner : Section 19(1) and 22 of the Indian Partnership Act, 1932 deal with the implied authority. Accordingly, Accordingly, the act of a partner which is done on, in the usual way, business of the kind carried on by the firm binds the firm, provided that the act is done in the firm name or any manner expressing or implying an intention to bind the firm. Such an authority of a partner binds the firm is called his implied authority. When implied authority cannot be availed by a partner Section 19(2) of the Indian Partnership Act, 1932 lays down that, 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) subm ubmit a dis dispute ute rela relatting ing to the bus usin ines ess s of the firm irm to arbitration. (b) open a bank accou account nt on behalf behalf of the firm firm in his his own own name. name. (c) comprom compromise ise or relinq relinquish uish any claim claim or or portion portion of a claim claim by the the firm against a third party. (d) withdraw withdraw a suit suit or proce proceeding eding filed filed on behalf behalf of of the firm. firm. (e) admit admit any liquidity liquidity in a suit suit or procee proceeding ding agains againstt the firm. firm. (f) (f)

acqui acquire re immo immova vable ble prope property rty on on behalf behalf of of the firm firm;;

(g) transfer transfer immo immovabl vable e property property belong belonging ing to the the firm firm or (h) enter enter into into partner partnership ship on behalf behalf of the the firm. firm.

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Business and Corporate Laws

Some other instances of implied authority are also noteworthy. (i) a partne partnerr has no imp implie lied d author authority ity to to bind bind the firm firm by by giving giving a gu a r a n t e e w h i c h i s a p p a r e n t l y u n c o n n e c t e d w i t h t h e partnership trade. (j)

he canno cannott accept accept shar shares es of a comp company any agai agains nstt the debt debt due due to the firm.

(k) no right right of set off off his own own separat separate e debts debts agains againstt debt due due to the firm.

Question 2 Whether a minor may be admitted in the business of a partnership firm? Explain the rights of a minor in the partnership firm. (Nov. 2002)

Answer Minor as a partner : A minor is incompetent incompetent to do the contract and such contract is voidab-initio (Mohir (Mohiribi ibibi bi vs. vs. Dharam Dharam Das Ghos Ghose). e). Therefo Therefore, re, a minor minor cannot be admitted in the business of the partnership firm because the partnership partnership is formed formed on a contract. contract. Though a minor minor cannot be a partner in a firm, he can nevertheless be admitted to the benefits of partnership under section 30 of the Partnership Act, 1932. He may be validly have a share in the profit of the firm but this can be done with the consent of all the partners of the firm.

Rights of the minor in the firm : (i)

a minor minor has has a right right to his his agree agreed d share share of the the prof profits its and and of the the firm.

(ii) (ii) he can have have acce access ss to, inspe inspect ct and copy copy the accou account nts s of the firm. (iii (iii)) he can can su sue e the the part partne ners rs for acco accoun unts ts or for for paym paymen ents ts of his his share but only, only, when severing severing his connection connection with the the firm, and not otherwise. The amount of share shall be determined by a valuation made in accordance with the rules upon a dissolution. (iv) on attaining attaining majority majority he may may within within 6 months months elect to become become a partner partner or not to become become a partner. partner. If he elects elects to become 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

The Indian Partnership Act, 1932

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acts of the firm after the date of the public notice served to that effect.

Question 3 Is it possible for the partners in a firm having majority to expel a partner under the provisions of the Indian Partnership Act, 1932? Does the firm get dissolved if the expulsion of a partner is not valid? (May 2003)

Answer Expulsion of A Partner According to the provisions of the Indian Partnership Act, 1932 as contained contained in Section Section 33 33,, a partn partner er may may be expell expelled ed from from the the partnership subject to the following three conditions: 1.

The power power of expulsion of a partner should be conferred conferred by by the the contract between the partners.

2.

The power should be exercised by a majority of the partners.

3.

The The power shoul should d be exerc exercise ised d in good faith faith which which includes includes interest of partnership, notice to the partner to be expelled, and an opportun opportunity ity of being being heard. heard. Hence, Hence, mere majorit majority y is not enough.

Accordingly, it is possible for the majority of partners in a firm to expel a partner but it is subject to fulfillment fulfillment of other conditions conditions as stated above. It shoul hould d be not noted that hat the expu expuls lsio ion n of part partn ners ers does does not necessarily result in dissolution of the firm. The invalid expulsion of a partner also does not put an end to the partnership even if the partnership is at will and it will be deemed to continue as before. (Jiwan Singh v. Lakshmi Chand AiR (1935) Lh. 332. Dwaraka Das v. Chuni Lal (1907).

Question 4 What is the procedure of registration of a partnership firm under the Indian Partnership Act, 1932 ? What are the consequences of nonre gi str ati on ? ( May 2 00 3)

Answer Regist Regi stra rati tion on Registration

of a

Part Partn nersh ership ip

&

Cons Conseq eque uenc nces es

of NonNon-

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Procedure: (Section 58 & 59 Indian Partnership Act, 1932) The registration of a firm may be effected at any time by filing an appl applic icat atio ion n in the the form form of a stat statem emen ent, t, givi giving ng the the nece necess ssar ary y information, with the Registrar of Firms of the area. The application shall be accompanied by the prescribed fee. It shall also state: (a) the name of the firm; (b) the place or principal place of business of the firm; (c) the names of other places where the firm carries on business; (d) the date date when each partner partner joined the the firm (e) the names in full and permanent address of the partners; (t)

the duration of the firm.

The statement shall be signed by all the partners or by their agents speci sp eciall ally y author authorize ized d in this this behalf behalf Sectio Section n 58(i). 58(i). It sh shall all also also be verified by them in the prescribed manner (Section 58(2). When the Regis Registra trarr is satis satisfie fied d that that the above above provi provisio sions ns have have been been duly duly comp complie lied d with, with, he sh shall all record record an entry entry of the stateme statement nt in the the Register of Firms and file the statement (Section 59). He shall then issue under his hand a certificate of registration. The non-registration of the firm does not affect the following: 1.

The The right right of a firm or or partner partners s of a firm hav having ing no plac place e of business in India.

2.

The right right to file any suit or claim of set set off exceeding Rs. 100 in value.

3.

The right right of a partn partner er to sue for for the disso dissolutio lution n of the firm, firm, or or for for the account accounts s of the the dissolv dissolved ed firm, firm, or for sh share are of the property of the dissolved firm. This disability of a partner to sue disappears with the dissolution of the firm.

4.

The powers of an Official Official Receiver, Assignee, or Court Court to to realize realize the property of an insolvent partner of an unregistered firm.

5.

The right right of of a third third party party to proceed proceed again against st an unregis unregistere tered d firm or any of its partners.

6.

The The righ rightt of an unre unregi gist ster ered ed firm firm to enfo enforc rce e a rig right aris arising ing otherwise than out of a contract (Section 69(3) and (4).

Question 5


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State the modes by which a partner may transfer his interest in the firm in favour favour of another person, under the Indian Partnership Partnership Act, 1932. What are the rights of such a transferee? (November 2003)

Answer Modes by which a partne tner may entitlements & non entitlements:

tra transfer

his

int intere erest

According to Section 29 of the Indian Partnership Act, 1932 a partner may transfer his interest in the firm by sale, mortgage or charge. The transfer may be absolute or partial. The transfer does not entitle the transferee, during the continuance of the firm: (a) to interfer interfere e in the condu conduct ct of the the busines business s of the the firm, firm, or (ii) to require require accounts accounts of the firm, firm, or (iii) to inspect the books of the firm On transfer of interest by a partner, the transferee only becomes entitled to receive share of profit of the transferring partner. But in this case also the transferee has to accept the account of profits agreed to by the partners [Section 29(i)]. If the firm is dissolved or if the transferring partner ceases to be a part partne ner, r, the the tran transf sfer eree ee is enti entitl tled ed to rece receiv ive e the the tran transf sfer erri ring ng part partne ner’ r’s s sh shar are e in the the asse assets ts of the the firm firm.. For For the the purp purpos ose e of ascertaining that share, he is entitled to an account as from the date of the dissolution (Section 29(2)).

Question 6 What do you understand by “Implied Authority” of a partner? Is such authority subject to any condition? Which of the acts of a partner come within the implied authority under the Indian Partnership Act,. 1932? (November (November 2003)

Answer Implied Authority of a Partner: Meaning: Where there is no partnership agreement or where the agreement is silent, 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 (Section 19(1) Indian Partnership Act, 1932). This authority of a partner to bind the firm by his acts is called implied authority. It is subject to the following conditions:

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1.

The The act done done by the the partn partner er must must rela relate te to the the norma normall bus busine iness ss of the firm.

2.

The act must be such as is done within the scope of the business of the firm in the usual way.

The act must be done in the name of the firm, or in any other manner expressing or implying an intention to bind the firm (Section 22).

Acts falling within the Implied Authority of a partner: 1.

Purcha Purchasin sing g goods goods on beha behalf lf of the the firm firm,, in which which the the firm firm deal deals s or which are employed in the firm’s business.

2.

Selli elling ng good goods s of the the fir firm m.

3.

Recei eceiv ving ing pay payment ent of the the debt ebt due due to the firm irm and giv giving ing receipts for them.

4.

Settl Settlin ing g accou accounts nts with with the the perso persons ns deal dealing ing with with the the firm. firm.

5.

Engag Engagin ing g serv servant ants s for for the the partn partners ership hip busine business ss..

6.

Borr Borrow owin ing g mone money y on the the cre credi ditt of the the firm firm..

7.

Draw Drawiing, ng, acc accepti eptin ng, instruments name of the firm.

8.

Pled Pledgi ging ng any any good goods s of the the firm firm for for the the purp purpos ose e of borr borrow owin ing g money.

9.

Empl Employ oyin ing g a soli solici cito torr to defe defend nd an actio action n agai agains nstt the the firm firm for for goods supplied.

indo indors rsin ing g in

bills ills

and

oth other th e

nego egotiab iable

Question 7 “Mere sharing in the profits of a business is not a conclusive proof of existence of partnership.”- Comment. (May 2004)

Answer Sharing of Profit Accord Acco rdin ing g to Sect Sectio ion n 4 of the the Indi Indian an Part Partne ners rshi hip p Ac Act, t, 19 1932 32,, “Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them actin acting g for for all”. all”. This This clearly clearly reveals reveals that that sh shari aring ng of profit profits s of a business is an important important criterion of of partnership. But in determining whether it is conclusive evidence of partnership or not, the regard shall be had to the real relations between the parties, as shown by


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all relevant facts facts taken together. together. Section 6 of the the Indian Partnership Partnership Act, Ac t, 1932, 1932, catego categoric ricall ally y lays lays down down that that receip receiptt by a perso person n of a share of the profits of a business does not by itself make him a partne partnerr with with the perso persons ns carry carrying ing on the busin business ess as there there are number of cases where the persons sharing the profits do not have relationship of partners.

For instance, in the following cases partnership relation does not exist:1.

Joint oint owne owners rs of some some prope propert rty y in shar sharin ing g of prof profits its or gross gross returns arising from the property.

2.

A lead leader er of of the the firm firm who receiv receives es a share share of of prof profit. it.

3.

A widow widow or or child child of of a decea deceased sed par partne tnerr who receiv receives es a shar share e of profit.

4.

A serv servant ant or or agent agent who who rece receive ives s a share share of of profi profitt as part part of his his remuneration.

5.

A perso person n who rece receive ives s a share share of of profit profit in in consi consider derat ation ion of of sale sale of business or goodwill of the business.

Hence, mere participation participation in the profits of a trade is not a conclusive conclusive evidence of partnership.

Question 8 Ram, Shyam and and Gopal Gopal are partners in a firm. Ram retires. retires. Shyam and Gopal continue to carry on firm’s business in the same “firm name” ame”.. Do you agree gree that in this this situ ituatio ation n change nge in the rela elations ionshi hip p betwe etwee en part artners ners is invo nvolved lved,, but this is not not extingui extinguishm shment ent of the existence existence of the firm itself? itself? Give Give reasons. reasons. (May 2004)

Answer Effect of Retirement of Partner As per the provision of Section 39 of the Indian Partnership Act, 1932, “The dissolution of partnership between all the partners of a firm is called the dissolution dissolution of firm.” firm.” But when one or more partner partner cease to be a partner in a firm, but other continue the business of partnership, it is called dissolution of partnership. Thus in this case when Ram retires and Shyam and Gopal continue to carry on firm’s business in in the old firm’s firm’s name. The firm in such such a case is called called a

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reconstituted firm. Re-constitution Re-constituti on of a firm involves a change in the relation of partner and not the end of the firm.

Question 9 Explain the provisions of the Indian Partnership Act, 1932 relating to the creation of Partnership by holding out. Upto what extent such partner will be liable to the Partnership firm. (November 2004)

Answer Partnership by ‘Holding Out’ According to Section 28 of the Indian Partnership Act, 1932 “anyone who by words spoken or written or by conduct represents himself, himself, or knowingly permits himself to be represented, to be a partner in a firm, is liable as a partner”. The statement includes with its purview represent representatio ation n by ail possibl possible e means means enumerat enumerated ed in this section. section. Thus the person sought to be charged with liability by holding out must have done something which amounts to a representation that he was was a part partne nerr in the the busi busine ness ss.. This This is know known n as crea creati tion on of partnership by ‘holding out’.

Extent of liability of a partner by holding out: (i) (i)

A part partne nerr by hold holdin ing g out out is liab liable le as a part partne nerr in the the firm firm to anyone who has on the faith of, any such representation gives 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 [section 28(1)].

(ii) (ii) Provis Provision ions s of sect section ion 28 are also also applica applicable ble to a former former partne partnerr who has retire retired d from from the firm firm withou withoutt giving giving proper proper public public notice notice of his his retire retireme ment. nt. In su such ch case case a perso person, n, who, who, even even subsequent to the retirement, gives credit to the firm on behalf that he was a partner, will be entitled to hold him liable. (iii) (iii) Where Where after a partner’s partner’s death death the business business is contin continued ued in the old old firm firm nam name, the the cont contin inu ued us use e of that that name name or of the the deceased partner’s name as a part thereof shall not be itself make his legal representative or his estate liable for any act of the firm done after his death [Section 28(2)]. (iv) (iv) If a pers person on holds holds himse himself lf out to be the partn partner er of a firm firm,, he becomes personally liable. He does not become partner of the firm and is not entitled to any rights as against those who in


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fact are partners in the firm. By holding out he does not become an agent of the firm.

Question 10 Describe the provisions of Indian Partnership Act. 1932 regarding the admission of minor in the partnership firm. State the rights and liab liabil ilit itie ies s of su such ch mino minorr befo before re or afte afterr he atta attain ins s majo majori rity ty.. (November 2004)

Answer Acco cordi rding ng to Mino Minor’s r’s Admi Admiss ssion ion into into a Partn Partners ershi hip p Firm: Firm: Ac Section 11 of the Indian Contract Act, 1872 an agreement by or with a minor is void (Mohri Bibi Vs. Dharm Das Ghose). As such, a minor is incapable of entering into a contract of partnership. But with the cons consen entt of all all the the part partne ners rs for for the the time time bein being, g, a mino minorr may may be admi admitt tted ed to the the bene benefi fits ts of part partne ners rshi hip p [Sec [Secti tion on 30 30(1 (1)] )].. This This provision is based on the rule that a minor cannot be a promisor, but he can be a promisee or a beneficiary. beneficiary.

Position before and on his attaining the age of majority Position before attaining majority:

Rights: 1.

He has has a right right to to such such sha share re of the the prope property rty and of of prof profits its of the the firm as may have been agreed upon.

2.

He has has a righ rightt to have have acc acces ess s to and and inspe inspect ct and and copy copy any any of the accounts of the firm but not books. (Section 30(2).

3.

When When he he is not not given given his his due due share share of pro profi fit, t, he he has a rig right ht to to file a suit for his share of the property of the firm. But he can do so only only if he want wants s to seve severr his his conn connec ecti tion on with with the the firm firm.. [Section 30(4)].

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Liabilities: 1.

The The liabi liabilit lity y of the the minor minor part partner ner is confi confined ned only only to to the ext extent ent of his share in the profits and property of the firm. Over and above above this, this, he is neithe neitherr perso personal nally ly liable liable nor is his his priva private te estate liable [Section 30(3)].

2.

He cann cannot ot be decl declar ared ed insol insolve vent nt,, but if the the firm firm is decla declare red d insolvent his share in the firm vests in the Official Receiver or Official Assignee.

Position on attaining majority: On attaining majority such a minor has to decide within 6 months whether he shall continue in the firm or leave it. These six months run from the date of his attaining majority or from the date when he first comes to know that he had been admitted to the benefits of partnership whichever date is later. Within this period he should give a public notice of his choice: (a) to become, or (b) not to become, a partner in the firm. If he fails to give a public notice, he is deemed to have become a partner in the firm on the expiry of the said six months. [Section 30(5)].

When such a minor elects to become a partner: 1.

He beco become mes s perso personal nally ly liab liable le to thir third d partie parties s for all all acts acts of the the firm done since he was admitted to the benefits of partnership.

2.

His His share share in in the prop propert erty y and prof profits its of of the firm firm is is the the share share to which he was entitled as a minor partner [Section 30(7)].

When such a minor elects not to become a partner: 1.

His His right rights s and liab liabil ilit itie ies s conti continu nue e to be those those of a mino minorr up to the date of the notice.

2.

His shar share e is not not liabl liable e for any any acts acts of the the firm firm done done afte afterr the date of the public notice.

3.

He is enti entitl tled ed to sue sue the part partne ners rs for for his shar share e or the prop proper erty ty and profits in the firm [Section 30(8)].

Question 11 Descr Describe ibe the proced procedure ure of regist registra ratio tion n of firm firm under under the India Indian n Partnership Act. Act. What is the rule rule of evidence with with regard to entries entries in the Register of firms? (May 2005)

Answer


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The Indian Partnership Act, 1932 provides that registration of firms may be effected at any time by filing an application in the form of a statement, giving the necessary information, with the Registrar of Firm Firms s of the area. area. Sect Sectio ion n 57 of the the Ac Actt empo empowe wers rs the State State Government to appoint Registrar of Firms for the purposes of the Part Partne ners rshi hip p Ac Actt and and defi define nes s the the area areas s with within in whic which h they they sh shal alll exercise their powers and perform their duties. Application for registration of a firm shall be accompanied by the prescribed fee. It shall state: (a) (a) the the name name of the the firm firm;; (b) place or principal place of business of the firm; (c) names of of other places where the firm carries carries on business; (d) date when when each each partner partner joined joined the firm; firm; (e) names in full and permanent permanent addresses addresses of of the partners; partners; (f) (f) dura durati tion on of of the the firm firm.. The application application shall be signed by all the partners or by their agents specially authorized in this behalf. It shall also be certified by them in the prescribed manner. When the Registrar is satisfied that the above provisions have been complied, he shall record an entry in the Registrar of Firms and issue a certificat certification ion of registrati registration. on. Registra Registration tion takes effec effectt from the date on which the Registrar makes entries in the Register of Firms. Any statement, notice or intimation recorded with the Registrar by any person person sh shall all be a conc conclus lusive ive proof against against him of any fact therein stated. stated. The third parties can, can, however, challenge challenge the fact of statement and prove that it is false and is based on misrepresentation representation or fraud (Section 68).

Question 12 Ram & Co., a firm consists of three partners A, B and C having one third share each each in the firm. According to A and and B, the activities activities of C are not in the interest of the partnership and thus want to expel C from the firm. firm. Advise A and B whether they can can do so quoting quoting the relevant provisions of the Indian Partnership Act. (May 2005)

Answer Normally it is not possible for the majority of partners to expel a partner from the firm without satisfying the conditions as laid down

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in Section Section 33 of the Indian Indian Partners Partnership hip Act, Act, 1932. conditions before expulsion can be done are:

The essenti essential al

(i) power of expulsion should exist in the partnership partnershi p deed (contract between the partners. (ii) (ii) powe powerr has has been been exer exerci cise sed d by the the majo majori rity ty of the the part partne ners rs in good faith. The test of good faith includes: (a) that the the expulsion must be in the interest interest of the the partnership; partnership; (b) that the the partner to be expelled is served with with a notice; notice; and (c) that the the partner has been been given an opportunity opportunity of of being heard. Thus, in the given case A and B the majority partners can expel the partner only if the above conditions are satisfied and procedure as stated above has been followed. Further the invalid expulsion of a partner does not put an end to the partnership and it will be deemed to continue as before.


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Question 13 State the acts which are considered beyond the implied authority of a partner under the provisions of the Indian Partnership Act, 1932. (November 2005)

Answer According to Section 19 of the Indian Partnership Act, 1932, unless there is usage or custom of trade to the contrary, the following acts of a partner are considered beyond his implied authority. authority. (1) Subm ubmit a disp ispute rela relatting ing to the the busines iness s of the firm irm to arbitration. (2) Open a bank bank account account on behalf of the firm firm in his own name. (3) Comprom Compromise ise or relinquish relinquish any claim claim or portion of a claim by the firm against a third party (i.e. an outsider). (4) Withdraw a suit or proceedings proceedings filed on behalf behalf of the the firm. (5) Admit any any liability in a suit a proceedings proceedings against the firm. (6) Acquire immovable immovable property on behalf behalf of the the firm. (7) Transfer immovable immovable property belonging to the firm. (8) Enter into into partnership partnership on behalf of the firm.

Question 14 When does dissolution of a partnership firm take place under the provisions of the Indian Partnership Act, 1932? Explain. (November2005)

Answer Diss Dissol olut utio ion n of Firm Firm:: The Dissolution of Firm means the discontinuation discontinuation of the jural relation existing between all the partners of the Firm. But when only one of the partners retires or becomes in capacitated from acting as a partner due to death, insolvency or insani ins anity ty,, the partn partners ershi hip, p, i.e., i.e., the the relati relations onship hip betwee between n su such ch a partner and other is dissolved, but the rest may decide to continue. In such cases, there is in practice, no dissolution of the firm. The particular partner goes out, but the remaining partners carry on the business of of the Firm. Firm. In the case case of dissolution dissolution of the firm, firm, on the other hand, the whole firm is dissolved. The partnership terminates as between each and every partner of the firm. Dissolution of a Firm may take place (Section 39 - 44)

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(a) (a) as a resu result lt of any any agre agreem emen entt betw betwee een n all all the the part partne ners rs (i.e (i.e., ., dissolution by agreement); (b) by the adjudica adjudication tion of all the partners partners,, or of all the partners partners but one, as insolvent (i.e., compulsory dissolution); (c) by the business business of the Firm becoming becoming unlawful unlawful (i.e., compul compulsory sory dissolution); (d) subject subject to agreement agreement between between the parties, parties, on the happenin happening g of cert certai ain n cont contin inge genc ncie ies s, su such ch as: as: (i) (i) eff effluen luence ce of tim time; (ii) (ii) comp complet letion ion of the ventu venture re for for which which it was entered entered into; into; (iii) (iii) death of a partner; (iv) insolvency of a partner. In case of death, it is to be noted that the part partne nerrs may make a contr ntrary ary agreement only if their number exceeds two. If there are only two partners the only result of either’s death will necessarily be the dissolution dissolution of the firm. This was made clear clear by the Supreme Court in Commissioner of Income-tax vs. G.S. Mills. (e) by a partner giving giving notice notice of his intention intention to dissolve dissolve the firm, in in case of partnership at will and the firm being dissolved as from the date mentioned in the notice, or if no date is mentioned, as from the date of the communication of the notice; and (f) (f) by interv intervent ention ion of court court in case of: (i) a partner partner becom becoming ing the unsound mind; (ii) permanent incapacity of a partner to perform his duties as such; (iii) Misconduct of a partner affecting the business; (iv) willful or persistent branches of agreement by a partner; (v) transfer or sale of the whole interest of a partner; (vi) improbability improbability of the business being carried on save at a loss; (vii) the court being satisfied on other equitable grounds that the firm should be dissolved.

Question 15 Ram, Mohan and Gopal were were partners in a firm. During the course course of partnership, the firm ordered Sunrise Ltd. to supply a machine to the firm. firm. Before Before the the machi machine ne was was delivered, delivered, Ram expired. expired. The machine, however, however, was later later delivered to the the firm. Thereafter, the remaining partners became insolvent and the firm failed to pay the price of machine to Sunrise Ltd. Explain with reasons: (i) (i) Whet Whethe herr Ram Ram’s priv privat ate e esta estate te is liab liable le for for the the pric price e of the the machine purchased by the firm? (ii) Against Against whom whom can the creditor creditor obtain obtain a decree for the the recovery recovery of the price?(May 2006)


3.15

Answer Partnership Partnership Liability: Liability: The problem in question is based on the provisions of the Indian Partnership Act, 1932 contained in Section 35. The Section provides that where under a contract contract between 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 after his death. death. Therefore, considering the above above provisions, provisions, the problem may be answered as follows: (i) Ram’ Ram’s s estate estate in this this case case will not be liable liable for for the price price of the Machinery purchased. [Bagel Vs. Willer] (ii) (ii) The The cred credit itor ors s in this this case case can can have have only only a pers person onal al decr decree ee again ainst the surviv rvivin ing g part artners ners and and dec decree agai again nst the partners partnership hip assets assets in the hands of those those partners partners.. However, However, since the surviving partners are already insolvent, no suit for recovery recovery of the the debt would lie lie against against them. A suit for goods goods sold and delivered would not lie against the representative of the deceased partner. partner. This is because because there was not debt debt due in respect of the goods in Ram’s life time. [Bagel vs. Willer].

Question 16 When When is the the regi regis strat tratio ion n of a Part Partne ners rshi hip p firm firm deem deemed ed to be complete complete under under the Indian Indian Partners Partnership hip Act, 1932? 1932? What are are the consequences when a partnership firm is not registered? (May 2006)

Answer Registration of a partnership firm is affected Registration of firm: Registration by delivering to the Registrar of Firms, a statement statement in the prescribed form accompanied by the prescribed fee (Section 58 of the Indian Partners Partnership hip Act). Act). The act of the party party by way of present presentatio ation n of Statement under Section 58 makes registration effective; whereas the Act of the Registrar in recording an entry of the statement in the Registrar of the Firms is only a clerical act (Jayalakshmi R&O M vs. Income Tax commissioner). The effects of non-registration of a firm as contained in section 69 are as follows: 1. Suits Suits betw between een Partn Partners ers & Firm Firm [Sect [Section ion 69 (1)] (1)] A partner partner of an unregistered firm cannot sue the firm or any partner of the firm to enforce a right arising from a contract or conferred by the Partnership Act. Act. He can do so if (i) the the firm is registered registered and (ii)

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the person suing is or has been shown in the Registrar of Firms as a partner in the firm. 2.

S u i t s b e t w e e n F i r m a n d t hi r d p a r t i e s [ S e c t i o n 6 9 ( 2 ) ] A n unregistered firm cannot sue a third party to enforce a right arising from a contract.

3. Clai Claim m of setset-of offf [Sect [Sectio ion n 69(3) 69(3)]: ]: An unre unregi gist ster ered ed firm firm or any any partner thereof cannot claim a set-off in a proceeding instituted against the firm by a third party to enforce a right arising from a contract until the registration of the firm is effected. This right of set-off, however, is not affected if the claim of set-off is less than Rs. 100 in value [Section 69(4)(b)].

Question 17 A, B and C are partners in a firm. A introduces D to X as a partner in business. business. D, infact, infact, was not a partner in the firm’s firm’s business. business. D did not deny this this statement. statement. X advanced a loan of Rs. Rs. 20 lakhs to the firm. Firm’s failure failure to repay the loan loan X want to hold D responsible for the repayment repayment of the above above loan. Referring to the the provisions of the Indian Partnership Act, 1932 decide whether X would succeed in recovering the loan from D. (November 2006)

Answer Yes, X can hold D responsible for the repayment of loan as he is the part partne nerr by Estop Estoppl ple e or by holdi holding ng out. out. Sect Sectio ion n 28 28(1 (1)) Indi Indian an Partnership Act, 1932 lays down this principle as follows: “Anyone who by words spoken or written or by conduct represents himself, himself, or knowingly permits himself to be represented, to be a partner in a firm, is liable as a partner in that firm to anyone who has on the faith of any such representation given credit to the firm, whether the person represented to be a partner does or does not know that represent representatio ation n has reached reached the person so giving giving credit.” credit.” Hence Hence D becomes a partner by holding out as he did not deny the statement given by A. Hence D is liable to make repayment of loan.

Question 18 “Sharing of profits is only a prima facie not a conclusive conclusive evidence of the existence of partnership.” Examine the validity of the statement in the light of the provisions of the Indian Partnership Act, 1932 and state as to how would you determine whether a group of persons does or does not constitute partnership. (November 2006)

Answer


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It is true that sharing of profits of business is an essential element to constitu constitute te a partnership. partnership. But it is only a prima facie facie evidence evidence but not a conclusive conclusive evidence of of the existence existence of partnership. partnership. It is also true that the partners agree to share the profits of a business which is carried carried on by all or by one one of them acting acting for for all. However, However, the the sharing of profits would not by itself make such person partner with the the pers person ons s carr carryi ying ng on a busi busine ness ss.. Shar Sharin ing g of profi profits ts by the the following person will not make them partners in the partnership firm: (i) by a lender lender of money money to to persons persons engage engaged d or about about to engage engage in any business; (ii) by a servant servant or or agent as remunerat remuneration. ion. (iii) by widow or child or a deceased deceased partner as annuity, annuity, or (iv) by a previ evious owner or part owner of the business consideration for the sale of goodwill or share thereof.

as

To determine whether a group of persons running a business does or does not constitute partnership, Section 6 of the India Partnership Act, 1932 has to be referred. referred. According to Section Section 6 “In determining determining whether a group of persons is or is not firm, regard shall be had to the real relation between the parties as shown by all relevant facts take taken n toge togeth ther er.. It is very very clear clear from from this this that that in dete determ rmin inin ing g relat relation ionsh ship ip betwee between n partie parties s and ascer ascerta taini ining ng the exist existenc ence e of partnership all relevant facts such as follows are to be considered – (i) There There must must be an agreem agreement ent betwee between n two or or more perso persons ns (ii) There There must be be a business business of of partners partnership hip (iii) The partners must have agreed to share share the profits of business (iv) The business must must be carried on by all or any one of them acting for all. In other words there must be mutual agency between the partn partners ers.. Exis Existen tence ce of mutua mutuall agenc agency y which which is the the cardi cardina nall principle of partnership law, is very much helpful in reaching a conclusi conclusion on in this regard. regard. In this situati situation on each partner partner is the principal as well as agent of the other partners. Hence, Hence, in order to determin determine e whether whether the relation relation of partners partnership hip exists between two or more persons or not, one should examine all the facts and circumstances as cited above.

Question 19 A and and B ente entere red d into into an agre agreem emen entt to carr carry y on a busi busine ness ss of manufacturing manufacturing and selling selling toys. toys. Each one of them contributed contributed Rs. 35 lacs as their their capital with a conditio condition n that that A and B will share the

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pro profi fits ts equa equall lly, y, but but the the loss loss,, if any any is to be born borne e by A alon alone. e. Referr Referring ing to the provis provision ions s of the the Indian Indian Partne Partners rship hip Ac Act, t, 1932 1932 decide whether there exists a partnership between A and B. (May 2007)

Answer Yes, it is a case of partnership between A and B as sharing losses is not an essential essential condition to to create a partnership. partnership. Section 13(b) 13(b) of the Indian Partners Partnership hip act 1932 provides provides Subject to the contract contract between the partners, the partners are entitled to share equally in the the prof profit its s earn earned ed,, and and sh shal alll cont contri ribu bute te equa equall lly y to the the loss losses es sust su stai aine ned d by the the firm firm.” .” In the the give given n case case the the part partne ners rs make make a contract contrary to this provision where A agrees to bear all the losses of the business.

Question 20 A, A, B and and C are are part partne ners rs in a firm firm call called ed ABC Firm Firm.. A, with with the intention of deceiving D, a supplier of office stationery, buys certain stationery on on behalf of the ABC Firm. Firm. The stationery stationery is of use in the ordi ordina nary ry cour course se of the the firm firm’s ’s bus usin ines ess. s. A does does not not giv give the the stationery to the firm, instead brings brings it to his own own use. The supplier D, who is unaware of the private use of stationery by A, claims the price price from the the firm. The firm refus refuses es to pay for the price, price, on the ground that the stationery was never received by it (firm). Referring to the provisions of the Indian Partnership Act, 1932 decide: (i) Whether Whether the the Firm’s Firm’s contentio contention n shall shall be tenabl tenable e? (ii) (ii) What What woul would d be your your answ answer er if a part part of the the stat statio ione nery ry so purchased by A was delivered to the firm by him, and the rest of the stationery was used by him for private use, about which neither the firm nor the supplier D was aware? (May 2007)

Answer The problem in the question is based on the ‘Implied Authority’ of a partner provided in Section 19 of the Indian Partnership Act 1932. The section provides that subject to the provisions of Section 22 of the Act, 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 of a partner to bind the firm conferred by this section is call called ed his his ‘Imp ‘Impli lied ed Au Auth thor orit ity’ y’ [Sub [Sub-S -Sec ecti tion on (i) (i) of sect sectio ion n 19 19]. ]. Furthermore, every partner is in contemplation of law the general and accredited agent of the partnership and may consequently bind all the other partners by his acts in all matters which are within the scope and object of the partnership Hence, if the partnership is of a


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general commercial nature, he may buy goods on account of the partnership. Considering the above provisions and explanation, the questions as asked in the problem may be answered as under: (i) (i) The The firm firm’s ’s cont conten enti tion on is not not tena tenabl ble, e, for for the the reas reason on that that the the partner, in the usual course of the business on behalf of the firm has an implied authority authority to bind the firm. The firm is, therefore, therefore, liable for the price of the goods, (ii) (ii)

In the the seco second nd cas case e also also the the answer answer wou would ld be the the same same as as above, i.e. the implied authority of the partner binds the firm.

In both the cases, however, the firm ABC can take action against A, the partner but it has to pay the price of stationery to the supplier D.

Question 21 Abhinav buys certain goods worth Rs. 50,000 from an unregistered firm Ram & Sons. Ram & Sons has to pay Rs. 60,000 to Abhinav for the goods purchased by the firm in the past. Referring to the provisions of the Indian Indian Partne Partnersh rship ip Act, Act, 1932 1932 decide decide whethe whetherr Ram & Sons Sons can compel Abhinav to accept Rs. 10,000 i.e. the difference between Rs. 60,000 and 50,000 as the final settlement? (November 2007)

Answer Sectio Section n 69 of the the India Indian n Partn Partners ership hip Act, Act, 1932 1932 provid provides es that that an unregistered firm can not claim a set off exceeding Rs. 100 in value. In the given case the difference between Rs. 60,000 and 50,000 is of Rs. 10,000 for which the right of set off is not available. Therefore, Ram & Sons can not compel Abhinav to accept Rs. 10,000 as the final settlement.

Question 22 "Implied authority of a partner can be extended or restricted”. Discuss the the abov above e stat statem ement ent in the the light light of the the prov provis isio ions ns of the the Indi Indian an Part Partne ners rshi hip p Ac Act, t, 19 1932 32.. How How far, far, are are thir third d part partie ies s aff affecte ected d by rest estrict ictions pl placed on su such im implied authority ity? (November 20 200 0 7)

Answer Section 19 (2) of the Indian Partnership Act, 1932, provides that the act of a partner which is done to carry on the usual way, business of the kind carried on by the firm bind the firm, provided the act is done in the firm's name or in any manner expressing or implying an intention to bind the firm. The implied authority of a partner extends only to such acts which are common in the type of business carried

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on by the firm and are done by him in usual way of carrying on the firm's business. Thus, if it is usual to give credit to customers, in a particular business, the giving of credit by a partner to a customer will bind the firm. However, if a usual act is done in an unusual manner, this must raise a suspicion as to the authority of a partner and the protection on the ground of implied authority may not the available.

Question 23 What do you mean by “implied authority” of the partners in a firm? Poin Pointt out out the ext extent ent of part partne ner’ r’s s impl implie ied d autho uthori rity ty in case ase of emergency, referring to the provisions of the Indian Partnership Act, 1 93 2 . (May 2008)

Answer Implied authority of partner As per Section 19 of the Indian Partnership Act, 1932 “Subject to the provisions of Section 22, the act of a partner which is done to carry on, in the usual way, the business of the kind carried on by the firm bind binds s the the firm firms” s”.. The The auth author orit ity y of a part partne nerr to bind bind the the firm firm conferred by this this section is called his ‘implied ‘implied authority’. authority’. Section 21 of the Act provides that a partner has authority in an emergency to do all such act for the purpose of protecting the firm from the loss as would be done by a person of ordinary prudence, in his own case, acting acting under under similar similar circumstanc circumstances, es, and such acts bind the firm. Conditions for the authority of a partner in an emergency: (i) The act should be be done by by the partner in an emergency emergency (ii) The act of the partner should should be for the purpose of protecting protecting the firm from loss. (iii) (iii) The act act shoul should d be, be, as as a pers person on of of ordi ordinar nary y prude prudenc nce e would would do in his own case. (iv) (iv)

Such Such an act act sho shoul uld d bin bind d the the firm firm..

To protect the firm, a partner has an authority to do all such acts in emergenc emergency y to save the firm from from loss. loss. It may be noticed noticed that the the powers of a partner to act in an emergency are similar to those of an agent agent in simil similar ar circu circums mstan tances ces under under Sectio Section n 139 of the the Indian Indian Contract Act, 1872.

Question 24 A, B and C are partners partners in a firm. firm. As per terms terms of the partners partnership hip deed, A is entitled to 20 percent of the partnership property and profit profits. s. A retires retires from from the the firm firm and and dies after after 15 days. days. B and C


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continue business business of of the firm without settling settling accounts. accounts. What are the rights of A’s legal representatives against the firm under the Indian Partnership Act, 1932? ( May 2 00 8)

Answer Retirement / Death of Partner 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 settle settleme ment nt of accou account nt betwee between n the the legal legal repres represent entati atives ves 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. (i) Such shares of the profits profits earned earned after the the death or retirement retirement of the partner which is attributable to the use of his share in the property of the firm; or (ii) (ii) Intere Interest st at the the rate rate of 6 per cent annum annum on the amoun amountt of his share in the property. Base Based d on the the afor afores esai aid d prov provis isio ions ns of Sect Sectio ion n 37 of the the Indi Indian an Partnership Act, 1932 A, in the given problem, A shall be entitled, at his option to: (i) the 20% shares shares of profits profits (as (as per the the partnership partnership deed); or or (ii) interest at the rate of 6 per cent cent per annum on the amount amount of A’s share in the property.

Question 25 Mahesh, Suresh and Dinesh are partners in a trading firm. Mahesh, without the knowledge or consent of Suresh and Dinesh borrows himse himself lf Rs. Rs. 50,000 50,000 from Ramesh Ramesh,, a cust custom omer er of the the firm firm,, in the name of the firm. Mahesh, then buys some goods for his personal use with that borrowed money. Can Mr. Ramesh hold Mr. Suresh & Mr. Dinesh liable liable for the loan? Explain Explain the relevant provisions provisions of the the Indian Partnership Act,1932. (November 2008)

Answer Implied authority of a partner Yes, as per sections 19 and 22 of the Indian Partnership Act,1932 unless unless otherwise otherwise provided provided in the partners partnership hip deed, every every partner partner has an implied authority to bind every other partner for acts done in the name of the firm, provided the same falls within the ordinary

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course course of business business and and is done in a usual usual manner. manner. Mahesh Mahesh has a right to borrow the money of Rs. 50,000/- from Ramesh on behalf of his firm in the usual manner. manner. Since, Ramesh Ramesh has no knowledge knowledge that the amount was borrowed by Mahesh without the consent of the other two partners, Mr. Suresh and Mr. Dinesh, he can hold both of them (Suresh and Dinesh) liable for the re-payment of the loan.

Question 26 Anil and Sunil purchased a lorry to ply it in partnership. They plied the lorry for about two years when Anil, without the consent of Sunil, disposed of the lorry. Sunil brought an action to recover his share in the sale proceeds. Anil resisted Sunil’s claim on the plea that the firm was not registered. Will Sunil succeed in his claim? Decide with refere referenc nce e to the provis provision ions s of the the India Indian n Partn Partners ership hip Ac Act, t, 1932. 1932. (November 2008) 2008)

Answer Effect of non-registration The problem is based on the provisions of Section 69 of the Indian Partners Partnership hip Act. As per this sectio section n a partner of an unregiste unregistered red firm is excluded from bringing legal action against the firm or any person alleged to be or to have been a partner in the firm. But such a person may sue for dissolution of the firm or for accounts and realis realisat ation ion of his share share in the the firm’ firm’s s proper property ty where where the the firm firm is dissolved. Applying these provisions, Sunil will succeed in his claim as the business had been closed on the sale of the lorry, and the action now was for the realisation of the assets of a dissolved firm.

Chapter-3 the Indian Partnership Act, 1932

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