CHAPTER - IV

Relations Of Partners To Third Parties

18. Partner to be agent of the firm:

Subject to the provisions of this Act, a partner is the agent of the firm for the
purposes of the business of the firm.

Comments

Section-18 lays down that a partner is the agent of the firm for the purpose of
the business of the firm.

A Partner Principal as well as an Agent.- This is one of the most important

tests of partnership as agency is the essence of the relationship of partnership.
Therefore, a partner is both a principal and an agent. While the relation between
partners interse is that of principals, they are agents of the firm and of one
another in relation to third parties for the purposes of the business of the firm.
Thus, each partner is regarded as an agent of the other partners, and as such, a
partner, acting in the course of the business of the firm, can bind his co-partners.
But, in order to bind his co-partners, it is necessary for the partner acting on
behalf of the firm to contract in the firms name or in any other manner
expressing or implying an intention to bind his co-partners. A partner
contracting in his own name incurs only a personal liability, and not the
collective liability of the firm. The mere fact that money borrowed by a partner
in his own name on security belonging to him personally has been used for the
purpose of the firm with the knowledge of partners, does not render them liable.

19. Implied authority of partner as agent of the firm:

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

The authority of a partner to bind the firm conferred by this section is called his
"implied authority".

(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 -

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

(b) open a banking account on behalf of the firm in his own name,
(c) compromise or relinquish any claim or portion of a claim by the firm,
(d) withdraw a suit or proceeding filed on behalf of the firm,
(e) admit any liability in a suit or proceeding against the firm,
(f) acquire immoveable property on behalf of the firm,
(g) transfer immoveable property belonging to the firm, or
(h) enter into partnership on behalf of the firm.

Comments

S.19, which is one of the most important sections of the Act, lays down that
subject to the provisions of section-22 (which deals with the mode of doing an
act to bind the firm) 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 is called his "implied authority".

This implied authority of a partner is often referred to as his ordinary or his

apparent or ostensible authority. Lindley (the learned English author on
partnership) prefers the term implied authority and the same has been accepted
by the Indian Act also.

In Bank of Australia V Breillet (1847) 6 MPC 193, the Privy Council adopted a
passage from story on Agency, in which the general powers of partners as
Agents of the firm have been well summed up in the following words.

"Every partner is, in contemplation of law, the general and accredited agent of
the partnership, or as it is sometimes expressed, each partner is praepositus
negotils societatis, and may consequently bind all the other partners by his acts,
in all matter which are within the scope and object of the partnership.

Hence, if the partnership be of a general commercial nature-he may buy goods

on account of the partnership, he may borrow money, contract debts and pay
debts on account of the partnership, he may draw, make, sign, indorse, accept
transfer, negotiate and procure to be discounted, promissory notes, bills of
exchange, cheques and other negotiable paper, in the name and on account of
the partnership."

In order to bind the firm an act of a partner done within the scope of his implied
authority, there conditions must exist-

1. The act must be done in the conduct of the business of the kind carried on by
the firm.
2. The act must be done in the way which is usual in such business.
3. Finally, the act must be done in the firm name or in any other manner
expressing or implying an intention to bind the firm.

The question whether a given act can or cannot be said to be done in carrying on
a business in the way in which it is usually carried on must evidently be
determined (a) by the nature of the business, and (b) by the practice of persons
engaged in it. Evidence on both of these points is necessarily admissible.
(Lindley on partnership).

Thus, it may be usual for a partner of a banker's firm to draw or accept a bill of
Exchange on behalf of the firm. However, it would not be usual for a partner in
a solicitor's firm to do so.

Examples of Implied authority of a partner.-

1. A partner can buy on the credit of the firm any goods of a kind used in its
business.

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

Case.- A partner of firm, whose business it was to trap wild elephants, hired an
elephant to be used for trapping wild elephants, and one of the terms of hire was
that the hirer should pay Rs. 5,000/- if the elephant died during the period of
hire. It was held that other partners also were bound by this term. (Mathura Nath
V Sreejukta Bageshwari - 1927 4 Cal. L.J.362).

3. A partner may engage servants or agents, and he may also discharge such
persons, although he can not discharge them against the will of his co-partners.

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

Problem.- A and B carry on business in partnership as bankers. A sum of

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

It must be clearly observed that the implied authority does not come into
existence unless the act is done in the usual way, and in the conduct of business
of the kind carried on by the firm. Thus while a partner in a mercantile firm has
an implied authority to draw, accept, & endorse bill of exchange on behalf of
the firm, a partner in a firm of a solicitors has no such implied authority for it is
not part of the ordinary business of a solicitor to draw, accept or endorse bills of
exchange. (Karishanji V Abdul, (1941) 43 Bom. L.R. 888).
A, a partner in a trading firm consisting of A, B, and C deposits title deeds of
firm's property by way of security with a bank without B's and C's authority.
The question as whether the firm is liable to the bank.- A partner in a trading
firm has an implied authority to borrow money on the credit of the firm. A
partner having power to borrow on the credit of the firm, may give a valid,
equitable security, by deposit or otherwise over any estate of the partnership.
Therefore the firm, is liable to the bank.

In March 1988 A and B entered in to a partnership for carrying on business of

buying and selling copper. On 23rd May 1988 A borrowed Rs 6,000/- from C
on a promissory note passed by him in the name of the firm. The partnership
business came to an end on 31st May 1988. In October 1988. C sued A and B
on the promissory note. B contended that the loan was not utilised by the firm.
Is B liable? Answer- As a partner of a trading firm has an implied authority to
borrow, B is bound by the promissory note of A. B is therefor, liable.

FRAUDULENT ACT OF A PARTNER.- An interesting question that arises

in this connections whether a firm would be liable for the act of its partner,
which though within his authority, has in fact been done in fraud upon his other
partners. Now, it is a well established rule of law that a principal is answerable
for the acts of his agent, including the agent's fraudulent acts, provided that they
fall within the scope of his authority. The same principle approves to partners,
and for the same reason, a firm can not escape liability sharing that a partners
act (which falls within the scope of his authority) was actually a fraud on the
firm. However, this rule does not apply to a case where there is collusion
between such a partner and the third party. The rule presumes that the third
party is acting bona fide, and has no knowledge of the fraud.

19(2) Acts which fall outside the implied authority of a partner.- Sub-
section 19(2) enumerates eight acts of a partner which will not bind the firm.
These are acts which do not fall within his authority.

Thus, 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 arbitrations.

2. open a banking account on behalf of the firm in his name.
3. compromise or relinquish any claim or portion of a claim by the firm.
4. withdraw a suit or proceeding filed on behalf of the firm.
5. admit any liability in a suit or proceeding against the firm.
6. acquire immovable property on behalf of the firm.
7. transfer immovable property belonging to the firm.
8. enter into partnership on behalf of the firm.
It has been held that though in the absence of a specific agreement, usage or
custom, a partner has no authority to refer a dispute to arbitration, nevertheless
an award in such an arbitration will be binding on such partner though it may
not bind the other partner of the firm.

It may also be noted that the above enumeration of acts which falls outside the
scope of a partners implied authority is not exhaustive but merely exclusive. To
these may be added the following four to be found in the case law on this point.

(a) A partner has no implied authority to bind the firm by giving a guarantee in
respect of debts of third parties.
(b) A partner has no Implied authority to set off his own personal debts against
debts due to the firm.
(c) A partner has no implied authority to set off a decree obtained by the firm
for less than the decretal amount.
(d) A partner has no implied authority to accept fully paid up shares in a
company in satisfaction of a debts due to the firm.

S. 19(2)- Authority of partner to make reference to arbitration can be challenged

only by other partners and not by strangers. (Premier Insurance Co. (Pak) Ltd. V
Ejaz Ahmed Khawaja 1981 CLC 311).

S.19(2)- Implied authority of partner:-Authority of one of partners to make a

reference to arbitration on behalf of other partners, held need not be in writing
or in express terms, such authority may be implied and can be inferred by
conduct of other partners before and after making such reference. (1981 CLC
311).

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

Comments

Restriction of authority.- A third party is not affected by a secret limitation of

a partner's implied authority, unless he has actual notice of it. The reason for
this rule is that a third party is entitled to assume that all the partners have full
implied authority.

Thus, A and B are partners in a grocery business. The partnership deed provides
that A shall not buy any thing on behalf of the firm. But A nevertheless enters
into contracts to buy groceries. What is the liability of B? Following the
provisions of S.20, it will be seen that B will be liable only if the person or
persons with whom A had entered into such contracts had no notice of the
articles of partnership which provides that A shall not buy any thing on behalf
of the firm, or if the third party did not know or believe A to be B's partner.

21. Partner's authority in an emergency:

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

Comments

Under s.21 a partner has authority in an emergency, to do all such acts for
purpose of protecting the firm from loss. A similar authority to act in an
emergency is given to an agent by S.189 of the contract Act. It is submitted that
even in the absence of S.21 a partner would be able to claim protection of said
S. 189, in view of the fact that the Act expressly declares a partner to be agent
of the firm.

22. Mode of doing act to bind firm:

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

Comments

Act binding firm.- A firm can only be bound by what is done on behalf of the
firm, even if the firm has the use of money borrowed by a partner in his own
name, this is at most an evidence, but not conclusive, to show that the
borrowing was in fact on account of the firm. Where a partner took some
premises on lease in his own name, it was held that he did not intend to act on
behalf of the firm nor to act as its benamider nor did he intend to bind the firm.

A, one of the two partners in the Punjab Alliance Auction rooms, executed a
promote in favour of the Plaintiff. The note was Signed by A describing himself
as proprietor, Punjab Alliance Auction Rooms. It was held That A's description
as a proprietor of the firm was not sufficient to justify the finn being held liable
on the note - (Punjab Bank V Muhammad, m 15 Lah 625)

23. Effect of admissions by a partner:

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

Comments

The rule contained in s. 23 is based on the corresponding provision of S.15 of

the English Partnership Act.

If a partner makes an admission regarding the partnership affairs, and such

admission is made in the ordinary course of business, it will be evidence against
the firm. But the rule will not apply where such representation refers to The
extent of the partner's authority to bind The firm. (Ex parte Agace, 1792, 30
E.R. 145).

It may also be noted that such an admission, though relevant is not conclusive
against the firm, unless it operates by way of an estoppel. (In Re Coasters Ltd.
1911 1 ch. 86).

24. Effect of notice to acting partner:

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

Comments

This rule is based on the principle of agency, that notice to an agent is

equivalent to a notice to the principal. Since partnership is form of agency, this
rule applies to a partnership firm also.

A question arose in a English case as to whether notice acquired by a partner

before he became a partner would operate as a notice to the firm. The Court
held that such knowledge of a partner would not operate as notice to the firm.
(Williamson V Barbour 1877 9ch. 535).

An exception is made by S.24 in cases of fraud. This is based on common sense,

and when a partner is committing a fraud on his other partners, notice to him
will not be notice to the firm. In Biguold v Waterhouse (1813 105 E.R.; 95), a
partner of a firm of a carrier, acting in fraud of his co-partners, agreed to
transport valuable parcels free of charge. The other partners were held not liable
for the loss of the parcels. The fact that some clerks in the firm were aware of
the fraud was not to affect the innocent partners.

Likewise, if a partner who is also a trustee of a trust, employs trust funds in the
partnership business his guilty knowledge can not be imputed to the firm. (Mare
V Browne 1896 1ch. 199)

25. Liability of a partner for acts of the firm:

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

Comments

Sec. 25 of the Act lays down that all the partners of a firm, jointly and severally,
share liabilities of the firm therefore, even where a partner has signed in his own
name a promissory note for the benefit of the firm, all partners are liable on it as
members of the partnership. (AIR-1930 Mad 168 (BE).

26. Liability of the firm for wrongful acts of a partner:

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

Comments

Torts of Partner. The word injury in Sec. 26 implies a Tort The liability of a
firm for the torts of a partner rests on precisely the, same principles as the
liability of a master for the tort of his servant, in as much as both are merely
branches of the law of principal and agent.

Both under English and Indian law of Courts, partners are liable jointly and
severally for wrongful act committed by a partner acting in the ordinary course
of the partnership business. The principle underlying this is that the other
members hold him out to the world as a person for whom they are responsible.

Thus in Hamlyn V Houston & Co., (1903) I K B. 81) one of two partners
without the knowledge of his co-partner, bribed a clerk of the plaintiff, a
competitor in trade, and induced him, in broach of his duly to his employer, to
divulge confidential information in regard to the plaintiff's business. It was in
the ordinary course of business of the firm to obtain such information by
legitimate methods, and the partner acted in the interest of the firm. Both
partners, were, held liable to the plaintiff.
But a wrongful act or default of a partner when not acting in the ordinary course
of business of the firm, does not render the other partners responsible for the
same.

Venkat v Nafesa (1939) 1. M.L.J. 905,. In This case, N and K entered into a
partnership to supply goods to jails. K provided finance for the partnership
business and N did the work. K. paid bribes to officials and entered the amounts
in the account books of the partnership as items of expenditure. N. in his turn
also spent partnership funds in paying bribes. In a suit filed by N against K for
the dissolution of partnership and taking of account objected to the amounts
spent in bribery by K. The Court held that neither N nor K was entitled to debit
the partnership with moneys spent for an illegal purpose.

Problem.- A customer of a banking firm deposits with the firm a box

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

Ans.- Here it is evident; that the firm is not liable to make good the loss, as the
separate authority given to one partner by the customer shows that he elected to
deal with that partner personally, and not as agent of the firm. (Exparte Eyre,
(1842) 1 ph 227.).

27. Liability of firm for misapplication by partners:

Where --

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

Comments

Problems.- (1) X, Y and Z were partners in a firm of Bankers, of whom Z was

not an active Partner. C, a customer of the firm deposited his ornaments with the
Bank for safe custody, X and y sold the ornaments without authority from C
what are the rights of C against the Bank? What is the liability of Z.?

Ans.- In this case, it will be seen that the ornaments of C were received by the
firm of Bankers in there Course of business for safe custody. X and Y active
partners of the firm, had sold ornaments without any authority form C, the
owner. Hence the firm is liable to make good the loss, C can recover the amount
from the firm (S.27). Though Z is a dormant partner, he is also liable along with
X and Y to make good the loss (S25). But Z is entitled to be indemnified by X
and Y under Sec. 10 of the Act. (Deraynes V Noble (1816) 1 Mer 572).

(2) X end Y, solicitors, carry on their business in partnership. Z. a client of the

arm, hands over some of money to X to be invested in a specific security. X
does not Invest this money, but applies it to his own use. Y does not receive any
part of the money, and does not even know of this transaction can Y be made
liable to make good this loss? would it make any difference if Z had given the
money to X with general directions to invest the same?

Ans.- In the former case, Y would be liable to make good the loss because it is
part of the ordinary course of business of solicitors (in England) to receive
money from clients for investing the same in specific securities (Blair V
Bromley, 1837 2 P2. 534).

If, however, Z had given the money to X with general instructions to invest the
same. Y would not be liable, as it is no part of the ordinary business of solicitors
to receive money to be invested at their discretion. (Harman V Johnson, 1853 Z
E & B.61).

28. Holding out:

(1) Any one who by words spoken or written or by conduct represents himself,
or knowingly permits himself to be represented, to be a partner in a firm, is
liable as a partner in that firm to 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 legal representative or his estate liable for
any act of the firm done after his death.

Comments

Liability by Holding out. S.28 of the Act deals with what is known as liability
by "holding out". Where a person represents himself or knowingly permits
himself to be represented as a partner in a firm, he will be liable as a partner in
that firm, to any one who, on the faith of any such representation, has given
credit to the firm. The person so representing himself, or permitting himself to
be so re-presented is known as a partner by holding out or a partner by estoppel.
Even want of knowledge on his part of the effects of his acts and conduct would
not absolve him from liability.

In otherwords where a man holds himself out as a partner, or a allows others to

do it, he is then estopped from denying the character he has assumed upon the
faith of which creditors may be presumed to have acted. A man so acting may
be rightly held liable as a partner by estoppel. In other words, the doctrine of
"holding out" is a part of the principle of estoppel, which lays down that where
one person, by words or conduct induces another to believe him and act upon
the existence of a particular state or facts, he can not afterwards, as regards that
person, deny the existence of such facts.

Thus A is in the habit of representing himself to be a partner of a particular

firm. B on the strength of such representation, and without giving any notice to
A supplies goods on credit to the firm. A would be liable as a partner to B for
the price of the goods.

It will thus be seen that liability by holding out is merely a special application of
the principle of estoppel enunciated by S-154 of the Indian Evidence Act, 1872.

ESSENTIALS OF S. 28.- In order to estop a person from denying that he is a

partner on the doctrine of "Holding out", the following two important elements
must co-exist.

1. A person must represent himself to be a partner in a firm, or knowingly

permit himself to be represented and

2. Another person must have given credit to the firm on the faith of such
representation.

The following seven additional points may also be noted in connection with the
doctrine of holding outs.

(i) The representation may be express or implied it need not necessarily be by

words spoken or written, it need not be made by the person himself, but may be
made by others.
(ii) There will be no representation by conduct if the acts relied upon are
ambiguous.
(iii) A general representation to the, world at large is not sufficient, unless the
person who gives credit can satisfy the court that he was aware of, and acted
upon it to his prejudice.
(iv) To establish liability, it is not essential to show that the party making the
representation (or permitting it to be made) has acted fraudulently or
negligently. Even want of knowledge on his part, of the effects of his acts and
conduct, would not absolve him from liability, if his acts and conduct were such
as would induce a reasonable man to believe that he was a partner, and to act
upon such belief. The main thing is whether the representation has caused the
person to whom it was made to act on the faith of it so as to alter his position.
(v) A former owner does not become a partner by estoppel merely because the
firm has continued to use its old name of which his own name forms a
component part. The rule of estoppel is binding on a former partner who has
retired without giving proper notice of his retirement.
(vi) There is no liability in tort on the ground of holding out, because the injured
person can not claim that he was led to suffer the injury by his belief in any
representation. Thus, B allowed his name to appear on a traction engine. A hired
the engine, and through his negligence, injured C C sued B on the ground of
"holding out". It was hold that B was not liable.
(vii) There can be no holding out to a person who is aware of the actual facts
e.g. a person who has Inspected the register of a firm which has been registered
under the Act.

EFFECTS OF HOLDING OUT.- If a person holds himself out to be a partner

of a firm, he becomes personally liable, he does not thereby become a partner in
the firm and he is also not entitled to any rights as against those who are in fact
partners in the firm. By holding out to be a partner, he does not become an agent
of the firm. He merely makes himself personally liable for the credit given to
the firm on the faith of his representation.

29. Rights of transferee of a partner's Interest:

(1) A transfer by a partner of his interest in the firm, either absolute or by

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

(2) If the firm is dissolved or if the transferring partner ceases to be n partner,

the transferee is entitled as against the remaining partners to receive the share of
the assets of the firm to which the transferring partner is entitled, and, for the
purpose of ascertaining that share, to an account as from the date of the
dissolution.

Comments
Can a partner transfer his interest in the firm?- The wording of S. 29 clearly
suggests that he can. A transfer by a partner of his interest in the firm may be
either absolute, or by mortgage, or by creation by him of a change on such
interest. However the fundamental principle underlying the law of partnership is
that a stranger can not be foisted upon the remaining partners against their will.
Consequently, even when a partner transfers his interest in firm, the transferor
does not cease to be a partner; nor does the transferee become one S. 29 of the
act deals with such transferee's rights, both during continuance of partnership,
and after its dissolution.

S29 (1) can be analysed Thus-

During the continuance of the partnership, the transferee of a partner's interest is

not entitled to.

(1) interfere in the conduct; or

(2) inspect accounts; or
(3) inspect the books of the firm.

Rights of a transferee of partner's Interest.- S.29(2) lays down that if the

firm is dissolved or if the transferring partner ceases to be a partner, the
transferee is entitled to receive the transferring partner's share of the assets of
the firm, and for this purpose, is also entitled to an account as from the date of
dissolution.- (1980 CLC 1283 = LLJ 1980 Lah 603).

30. Minors admitted to the benefits of partnership:

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

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

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

(4) Such minor may not sue the partners for an account or payment of his share
of the property or profits of the firm, save when severing his connection with
the firm, and in such case the amount of his share shall be determined by a
valuation made as far as possible in accordance with the rules contained in
section 48.
Provided that all the partners acting together or any partner entitled to dissolve
the firm upon notice to other partners may elect in such suit to dissolve the firm,
and thereupon the Court shall proceed with the suit as one for dissolution and
for settling accounts between the partners, and the amount of the share of the
minor shall be determined along with the shares of the partners.

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

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

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

(7) Where such person becomes a partner,-

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

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

(a) his rights and liabilities shall continue to be those of a minor under this
section up to the date on which he gives public notice.
(b) his share shall not be liable for any acts of the firm done after the date of the
notice, and
(c) he shall be entitled to sue the partners for his share of the property and
profits in accordance with sub-section (4).

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

Comments

S.30 of the Act deals with the right liabilities and disabilities of a minor in a
partnership.
At the very outset S.30 lays down that a minor can not be a partner in a firm but,
with the consent of all the partners, he may be admitted to the benefits of
partnership.

Minor Cannot be a partner. A minor is not a partner but is only entitled to the
benefits of partnership therefore the respondents who are shown as minors in
the plaint are not entitled to declaration that they are partners but only to a
declaration that they are entitled to the benefits of partnership under S.30 of the
Partnership Act - (Muhammad Ishaque V Erose Theatre-PLD-1973 kar. 522)

A minor not Competent to Contract. Since a minor is not competent to

contract (S. 11 of contract Act), and, therefore cannot be a partner of a firm.
(Sanyasi Charan Mandal V Krishnadhan Banerji, 1922 LR.49) Needless to say,
there cannot be a partnership wholly of minors (Shivaram V Gaurishankar NR
1961 Bom 136). The Punjab High Court has laid down that if a minor is made
full fledged partner, the entire partnership deed is invalid not only Vis-a-Vis the
minor, but also with respect to the other partners who are not minors.

The Act does not lay down as to which are the acts which would amount to
admitting a minor to the benefits of a partnership No doubt there must be some
definite act on the part of the partners, such as the allotment of a sham or a
distribution of a part of the profits, or any other similar act.

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

Rights of a minor. The following seven fights of a minor are to be deduced

from S.30 viz.

1. He may be admitted to the benefit of a partnership.

2. He may have access and inspect and copy of the accounts of the firm.
3. He has right to share the property and profits of the firm.
4. He may sue for accounts on severing the connection with the firm.
5. On attaining majority, he has the option of becoming a partner in the firm in
which case he will be entitled to the share to which he was entitled as a minor.
6. On attaining majority, he also has the option of severing his connection with
the firm, in which case his share is not liable for any act of the firm done after
the date of public notice that he has elected not to become a partner. He is also
entitled to sue the partners for his share of the property and profits.
7. Lastly, he is not personally liable for any acts of the firm during his minority,
he cannot be adjudged insolvent if the debts of the firm cannot be satisfied out
of the property of the firm.
S.30(3) Liabilities of a Minor. The following are three liabilities of a minor
admitted to benefits of a partnership-

1. His share is liable for the acts of the firm, but he has an option of severing his
connection with the firm within six months of his attaining majority or of his
obtaining knowledge that he had been admitted to the benefit of partnership,
whichever date is later.
2. If, on attaining majority, he elects to become a partner, he becomes
personally liable to third parties for all acts of the firm done since he was
admitted to the benefits of the partnership.
3. After attaining majority and before giving public notice, he may be liable for
holding himself out as a partner.

S.30(5)- In view of sub-section (5) of S.30 of the Act a minor can not become a
partner of a firm automatically on attaining majority, he can become a partner
only by electing to join the firm with manner prescribed in the sub-section.
(PLD-1973 Kar 522).

In case such person, on attaining majority, fails to give public notice within six
months of majority, that he has elected to become or that he has elected not to
become a partner in the firm, than he becomes a partner in the firm on the
expiry of the period of six months.

Where such person elects not to become a partner.

(a) his rights and liabilities continue to be those of minor under this section upto
the date on which he gives public notice.
(b) his share is not liable for any acts of the firm done after the date of the
notice, and
(c) he is entitled to sue the partners for his share of the property and profits.

CHAPTER - V
Incoming And Outgoing Partners

31. Introduction of a partner:

(1) Subject to contract between the partners and to the provisions of section 30,
no person shall be introduced as a partner into a firm without the consent of all
the existing partners.

(2) Subject to the provisions of section 30, a person who is introduced as a

partner into a firm does not thereby become liable for any act of the firm done
before he became a partner.
Comments

S.31 provides that no person can be introduced as a partner into a firm without
the consent of
all the existing partners. Where one of the partners of a firm transfers his share
in the firm without the consent of the other partners the transferee does not get
the status of a partner in view of S. 31, Partnership Act. He has only limited
rights and can claim only a share of the profits to which the transferor partner
was entitled. (AIR-1963 Pat. 149 (DB).

It may be noted that there is nothing to prevent an incoming partner agreeing

with his co-partners to make himself liable for the debts incurred by the firm
prior to his admission therein. But, even where he has so agreed the agreement
does not confer any right on creditors of the old firm to impose the old debts on
the new partner. They can acquire such a right only by entering into an
agreement between themselves and the new partner, either expressly or by
implication.

The only way in which a new partner can be made liable to the creditors of the
firm in respect; of past debts is by proving:-

(1) That the re-constituted firm has assumed the liability to pay the debt, and
(2) That the creditor concerned has agreed to accept the re-constituted firm as
his debtors, and discharge the old firm from its liability.

32. Retirement of a partner:

(1) A partner may retire --

(a) with the consent of all the other partners,

(b) in accordance with an express agreement by the partners, or
(c) where the partnership is at will, by giving notice in writing to all the other
partners of his intention to retire.

(2) A retiring partner may be discharged from any liability to any third party for
acts of the firm done before his retirement by an agreement made by him with
such third party and the partners of the reconstituted firm, and such agreement
may be implied by a course of dealing between such third party and the
reconstituted firm after he had knowledge of the retirement.

(3) Notwithstanding the retirement of a partner from a firm, he and the partners
Continue to be liable as partners to third parties for any act done by any of them
which would have been an act of the firm if done before the retirement, until
public notice is given of the retirement:
Provided that a retired partner is not liable to any third party who deals with the
firm without knowing that he was a partner.

(4) Notices under sub-section (3) may be given by the retired partner or by any
partner of the reconstituted firm.

Comments

S.32(1)- Lays down three rules as to how a partner can retire. It says that a
partner may retire-
(1) with the consent of all the other partners, or
(2) in accordance with an express agreement by the partners, or
(3) where the partnership at will, by giving notice in writing to all the other
partners of his intention to retire.

S.32(2)- Thus A, B and C are partners. A retires, and a new partner X is

introduced into the firm. X agrees to take over the liability of A. D, the creditor
agrees with A and the reconstituted firm of B, C and X that he will look only to
the new firm for the payment of debt A, the retiring partner, is discharged from
liability to D.

Problem- A, B and C are partners in a firm X & Co., C retires from the
partnership, and all the assets and liabilities are taken over by the two partners,
A & B who carry on the firm after the retirement of C. A creditor of the firm
before the retirement of C files a suit against A, B and C for the recovery of his
debt after the retirement of C. Is C liable?

Ans- Yes he is liable u/s 32(2).

Moreover, notwithstanding the retirement of a partner from a firm, such a

person and the remaining partners continue to be liable as partners to third
parties for any act done by any of them which would have been an act of the
firm if done before the retirement, until public notice is given of the retirement.

However, a retired partner is not liable to any third party who deals with the
firm without knowing that he was a partner. S.32(3). The notice may be given
by the retired partner or by any partner of the reconstituted firm S.32(4).

Thus A, B and C are partners, C, who is an active partner retires without giving
public notice of retirement. A and B in carrying on the old business incur a
liability towards X. C is also liable to X.
Liability of partners to third parties. Public notice of dissolution of firm not
given. Actual and individual notice given by a partner to parties concerned held,
on a better footing and affords higher protection to such partner. (Tariq Mohsin
Siddiqui V Province of Sind: PLD 1976 Kar 728).

Mode of Public Notice- S.72 of the Act lays down the rules relating to giving
of public notice.

33. Expulsion of a partner:

(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
partners.

(2) The provisions of sub-sections (2), (3) and (4) of section 32 shall apply to an
expelled partner as if he were a retired partner.

Comments

S.33 deals with expulsion of a partner. It lays down that a partner cannot be
expelled from a firm by any majority of the partners, save in the exercise, in
good faith of partners conferred by contract between the parties.

All the provisions which apply to a retired partner also apply to an expelled
partner.

Power of Expulsion how exercised. A power to expell a partner can only be

conferred by an express agreement between the partners. Even where such a
power is conferred by the terms of the partnership agreement, it can only be
exercised by a majority of the partners and it must be exercised in utmost good
faith. Reasonable warning and opportunity of explanation must be given. An
irregular expulsion, being wholly in-operative, the parson against whom it is
directed does not cease to be a partner, he may claim reinstatement in his rights
as a partner, but he cannot recover damages for wrongful expulsion. (It is
indeed difficult to understand as to why a partner who has been infact
wrongfully expelled and demnified should not have the right of action of
damages).

Short note on Expulsion of a partner. As stated above, S.33 provides that all
the rules which govern the liability of a retired partner to third parties will apply
in the case of an expelled partner. It places an expelled partner on precisely the
same footing as a retired partner, as regards his liabilities for existing and future
debts of the firm. S.33 regard expulsion in the same way as sec-32 regards
retirement, that is, it makes the assumption that the firm continues after
expulsion without a dissolution of partnership as between the remaining
partners.

34. Insolvency of a partner:

(1) Where a partner in a firm is adjudicated an insolvent he ceases to be a
partner on the date on which the order of adjudication is made, whether or not
the firm is thereby dissolved.

(2) Where under a contract between the partners the firm is not dissolved by the
adjudication of a partner as an insolvent, the estate of a partner so adjudicated is
not liable for any act of the firm and the firm is not liable for any act of the
insolvent, done alter the date on which the order of adjudication is made.

Comments

Effects of Insolvency of a Partner- The insolvency of a partner does not

invariably result in dissolution of the firm, for it is open to the partners to agree
that the adjudication of a partner as an insolvent will not dissolve the firm as
regards the continuing partners. Sec.34, 41 (a), 42 (d) and 47 may conveniently
be read together when dealing with the effect of insolvency of one or more
partners in a firm.

The effects of the insolvency may be summed up as follows:

(i) The partner adjudicated an insolvent ceases to be a partner on the date on

which the order of adjudication is made.
(ii) The firm is dissolved on the date of the order of adjudication, unless there is
a contract to the contrary. (S.42).
(iii) If all the partners, or all the partners but one are adjudicated insolvent, the
firm is automatically dissolved. S.41(a).
(iv) The estate of the insolvent is not liable for any act of the firm after the date
of the order of adjudication. Adjudication as an insolvent is a notorious event,
and no further notice thereof is required to old or new customers of the firm.
S.34.

(v) After the dissolution of the firm, the firm is not bound by the acts of a
partner who has been adjudicated insolvent. However, this would not affect the
liability of any person who has, after such adjudication, represented himself or
knowingly permitted himself to be represented, as a partner of the insolvent.
(S.47)

35. Liability of estate of deceased partner:

Where under a contract between the partners the farm 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.

Comments

Death of a partner. S.35 deals with the liability of the estate of a deceased
partner. It provides that where by virtue of contract, a farm is not dissolved on
the death of a partner, the estate of the deceased partner is not liable for any act
of a firm after his death.

36. Rights of outgoing partner to carry on competing business:

(1) An outgoing partner may carry on a business competing with that of the firm
and he may advertise such business, but, subject to contract to the contrary, he
may not--

(a) use the firm name,

(b) represent himself as carrying on the business of the firm, or
(c) solicit the custom of persons who were dealing with the firm before he
ceased to be a partner.

(2) Agreements in restraint of trade: A partner may make an agreement with

his partners that on ceasing to be a partner he will not carry on any business
similar o that of the firm within a specified period or within specified local
limits; and, notwithstanding anything contained in section 27 of the Contract
Act, 1872, IX of 1872 such agreement shall be valid if the restrictions imposed
are reasonable.

37. Right of outgoing partner in certain cases to share subsequent profits:

Where any member of a firm has died or otherwise ceased to be a partner, and
the surviving or continuing partners carry on the business of the firm with the
property of the firm without any final settlement of accounts as between them
and the outgoing partner or his estate, then, in the absence of a contract to the
contrary, the outgoing partner or his estate is entitled at the option of himself or
his representatives to such share of the profits made since he ceased to be a
partner as may be attributable to the use of his share of the property of the firm
or to interest at the rate of six per cent. per annum on the amount of his share in
the property of the firm:

Provided that where by contract between the partners an option is given to

surviving or continuing partners to purchase the interest of a deceased or
outgoing partner, and that option is duly exercised, the estate of the deceased
partner, or the outgoing partner or his estate, as the case may be, is not entitled
to any further or other share of profits; but if any partner assuming to act in
exercise of the option does not in all material respects comply with the terms
thereof, he is liable to account under the foregoing provisions of this section.

Comments

The provisions of S.37 comes into play only in the absence of a contract to the
contrary. Where the agreement of partnership leads to the conclusion that the
heirs and legal representatives of a deceased partner were to become partners of
the firm, and the accounts of the deceased partner shall be made up only if those
heirs were not willing to continue as partners, this section does not apply (PLJ-
1977 SC 104 = PLD-1977 SC 109).

"Contract to the Contrary"- Words "contract to the contrary" as they occur in

this section relate only to the option of the alternatives prescribed in the section
and not to the entitlement of outgoing partner to the profits. Statutory right
created by provisions of this section can be waived by agreement between
parties. (Shamshuddin v Inamuddin, PLD-1982 KAR 327).

Right of outgoing partner.- A and B are partners. The partnership is dissolved

by consent, and it is agreed that the assets and business of the firm would be
sold in auction. A, nevertheless, continues to carry on the business on the
partnership premises, and with partnership property and capital, and on his own
account. What are B's rights? A must account to B for the profits thus made,
alternately, B may claim 6% interest on his share.

Rights of minor heir and purchaser of interest of outgoing partner- A firm

consisted of four partners A, B, C and D. A died leaving a minor son X. B sold
his interest in the firm to Y. The remaining partners thereupon continued the
firm as they were entitled to do. What are the rights of X and Y? Can they insist
on being admitted as partners? X and Y cannot insist on being admitted as
partners, for a partnership can only arise as a result of a voluntary agreement,
express or implied between two or more persons. But each of them can claim a
share in subsequent profits under S.37.

38. Revocation of continuing guarantee by change in firm:

A continuing guarantee given to a firm, or to a third party in respect of the
transactions of a firm, is, in the absence of agreement to the contrary, revoked
as to future transactions from the date of any change in the constitution of the
firm.

Comments
Thus A becomes a surely to the firm of "N.C Mookerji" for B's conduct as
cashier to the firm. The constitution of the firm is subsequently changed and its
name is altered to "N Mookerji & Sons". A is not liable for B's defalcation
subsequent to the change. (Neel Comul Mookerjee V Bipro Das Mookerjee-
1901 28 Cal. 597).

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