Partnership ActLecture 10

Mutual Relations of Partners (Relations of Partners with one

another)

Principles governing Mutual Relations of Partners

1. Mutual agreement between partners2. The principle of good faith

Rights of Partners towards one another

1. To take part in business2. To be consulted3. To have access to books4. To share profits5. To share interest6. To receive interest on advance

1. To be indemnifieda) Expenses incurred in the ordinary course of

partnership businessb) Expenses incurred in an emergency to protect the

firm from loss1. To use partnership property2. To retire from the firm3. To remain in the firm4. To receive remuneration5. Right of a retiring partneri) To carry on competing business after retirement.ii) To share the subsequent profits as may be

attributable to use of retired partner’s property by the firm

Relations of Partners with Third Parties

Third party refers to a person who is not a partner in the firm. “According to Section 25, ‘every partner is liable jointly with all other partners and also severally for all acts of the firm done while he is a partner.’

Fundamental Duties of Partners

1. Duty to act in good faith2. Duty to render true accounts and give full

information3. Duty to carry on firm’s business to the greatest

common advantage.4. Duty to indemnify5. Duty of diligence

1. Duty to share losses2. To use firm’s property for firm’s business3. To account for private profits4. Duty to account for the profit of a competing

business5. Duty not to claim remuneration6. Duty to act within authority7. Duty to be liable jointly and severally8. Duty not to assign his rights

Authority of a Partner

a) Actual authorityi) Express authorityii) Implied authority

a) Apparent or Ostensible Authority

Implied Authority of a Partner

The content and scope of implied authority of a partner is contained in Section 19 of the Partnership Act which provides that : “Subject to the provision of Section 22, the act of a partner which is done to carry on, in the usual way, business of the kind carried on by the firm, binds the firm.

Scope of Implied Authority

According to Section 22, “In order to bind the 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’s name, or in any other manner expressing or implying an intention to bind the firm.

i) The act must be done in the name the firm

ii) The act should be done in the usual way

In Mathura Nath Chaoudhary vs. Bageshwari Rani, the business of the firm was to catch elephants and for this purpose, it used to hire elephants. A partner of the firm entered into a similar agreement to hire an elephant. His act was held to be connected with the business carried on by the firm.iii) The act must be done to

carry on the business of the kind carried on by the firm

A partner of trading firm has implied authority to borrow money for firm’s business on the credit of the firm. But the partner of a non-trading firm has no such implied authority.

Acts within the implied authority of a partner of a trading partnera) Sale or purchase of goods on behalf of the firmb) Engaging or discharging employeesc) Borrowing money on the firm’s credit and to pledge firm’s

goods for that purposed) Drawing, accepting, making and issuing negotiable

instruments in the firm’s namee) Receipt of payment of debts due to the firm and giving

valid discharge therefor.f) Settling accounts with the persons dealing with the firm.g) Rendering accounts to the creditors.h) Assigning debts due to the firm as a security for a debt due

by the firm to a third party.i) Employing a solicitor to defend a suit brought against the

firm.

Acts outside the scope of a partner’s implied authority1. Statutory restrictionsa) To submit a dispute relating to the business of the firm to

arbitrationb) To open a bank account on behalf of the firm in his own

namec) To compromise or relinquish any claim or portion of claim

by the firmd) To withdraw a suit or proceeding filed on behalf of the

firme) To admit any liability in a suit or proceeding against the

firmf) To acquire any immovable property on behalf of the firmg) To transfer immovable property on behalf of the firmh) To enter into partnership on behalf of the firm

1. Restrictions imposed by the partnership agreement

Partner’s Authority in an Emergency

a) There should be an emergency.b) The act should be done to protect the firm from

the loss caused by such an emergencyc) The act should be such as a person of ordinary

prudence will do in his own case and under similar circumstances.

Implied authority and Third Parties

1. Effect of admission by a partner2. Effect of notice to a partnera) Notice should be given to a partner who habitually

acts in the business of the firmb) Notice should relate to the affairs of the firmc) Notice should not have been withheld from the

firm either by partner’s own fraud or in collusion with some other person.

1. Liability of a partner for acts of the firm2. Liability of the firm for wrongful acts of a partner In Hamlyn vs. Houston & Co. the firm was held

liable for the illegitimate act of a partner of paying bribe to the clerk of a rival firm to secure some confidential information

1. Liability for misapplication by partners In Rhodes vs. Moules, the client of a firm of

solicitors approached one of its partners to raise a loan against the mortgage of his land. The partner arranged the loan but asked for some additional security. The client then handed over some share warrants which were misappropriated. The co-partners were held liable.

Liability for Holding Out

Holding out means ‘to represent’. A stranger who holds himself out to be a partner in a firm thereby including others to give credit to the firm, shall become liable as a ‘partner by holding out’. A person will become liable as a partner by holding out if,1. The person must represent himself to be a partner in the firm2. The party to whom representation has been made must have

acted on the faith of such representation and given credit to the firm.

3. It is immaterial whether the person representing himself to be a partner does or does not know that the representation has reached the third party giving the credit.

A carried on business under the name ‘A, B and company’. B was a manager in A’s business. C, a trader, believing B to be a partner, supplied some goods to the firm on credit. A failed to pay the price of the goods. C sued both A and B for the recovery of price. B was held to be liable for the price. By permitting his name to be used in the title of the firm, B has made a representation that he is partner in the firm. Therefore he becomes liable as a partner by holding out.

Effect of holding out

The holding out partner becomes personally liable for the acts of the firm. But he does not become a partner in the firm nor does he become entitled to claim any rights on the firm. The person who gives credit to the firm believing him to be a partner can hold the ‘partner by holding out’ liable as if he were a partner in the firm.

Exceptions to holding out

1. Deceased partner2. Insolvent partner3. Sleeping partner4. Partners’ torts

Dissolution of FirmUnder Section 39, dissolution of firm means “the dissolution of partnership between all the partners of the firm.” In this case the business of the firm is closed down and the relation of the partnership subsisting between the partners is terminated. The affairs of the firm are wound up.

Dissolution of Partnership

A change in the relations of partners is called dissolution of partnership. The partnership is reconstituted. Dissolution of partnership may or may not result in the dissolution of the firm. But dissolution of the firm must necessarily cause dissolution of partnership

A and B were partners in a firm. They admit C as a new partner. It will cause dissolution of partnership between A and B. A reconstituted firm as formed by partnership between A, B and C comes into existence

Modes of Dissolution of firm

I. Dissolution without the intervention of court

II. Dissolution by the court

Dissolution without the intervention of court1. By mutual agreement [Sec. 40]2. Compulsory dissolution [Sec. 41]i) Insolvency of all partnersii) Illegality of firm’s business1. Dissolution on the happening of certain contingencies [Sec.

42]i) On the expiry of the term for which the firm was

constitutedii) On the completion of adventure or undertaking for which

the firm was constitutediii) On the death of a partneriv) On the adjudication of a partner as insolvent1. Dissolution by notice of partnership at will [Sec. 43]

Dissolution by the court [Sec. 44]

a) Insanity [Sec. 44(a)]b) Permanent incapacity [Sec. 44(b)]c) Misconduct [Sec. 44(c)]d) Persistent breach of agreement [Sec. 44(d)]e) Transfer of interest [Sec. 44(e)]f) Business working at a continuous loss [Sec. 44(f)]g) Just and equitable [Sec. 44(g)]

Rights of Partners after Dissolution

1. Right to equitable lien [Sec. 46]a) Payment of debts and liabilities of the firmb) Distribution of surplus among the partners or their

representatives

1. Right to have debts of the firm settled out of property of the firm [Sec. 49]

2. Right to earn personal profits by using firm’s name [Sec. 50]

1. Right to return of premium on premature dissolution of firm [Sec. 51]

a) Death of a partnerb) Misconduct of the partner who has paid the

premiumc) In pursuance of an agreement which contains no

provision for the refund of premiumd) The firm is not for a fixed period (i.e., partnership

is at will)

1. Right where partnership contract is rescinded for fraud or misrepresentation [Sec. 52]

a) Retention of surplusb) Right of subrogationc) Right of indemnification

1. Right to restrain partners from use of firm’s name or property [Sec. 53]

a) Where there is a contract to the contrary between the partners

b) Where a partner has purchased the goodwill of the firm

1. Right of partners to agree to a restraint to carry on similar business as that of the dissolved firm [Sec. 54]

Liabilities of a partner after Dissolution of the firm

1. Liability for acts done after dissolution [Sec. 45]2. Continuing authority of partners for purpose of

winding up [Sec. 47]3. Liability to account for personal profits earned

after dissolution [Sec. 50]

Modes of Settlement of Accounts

1. Rule as to payment of losses2. Application of Assetsa) Payment of debts of the firm to third partiesb) Payment to each partner rateably the amount of loan

advanced to the firm other than the capitalc) Payment to each partner, notably what is due to him on

account of capitald) Division of the residue among the partners in proportion of

their share in the profits of the firm

1. Contribution of cash towards capital deficiency A, B C contribute Rs. 2000, Rs. 4000 and Rs. 500

and set up a firm. They agree to share the profits and losses equally. On dissolution, after satisfying all the outside debts and liabilities, the firm had assets worth Rs. 2000. There is deficiency in capital equal to Rs. (6500 – 2000), i.e., Rs. 4500. Each partner must contribute Rs. 1500 each to make up the deficiency. In actual, the partners need not pay Rs. 1500 each in cash. They need to make only a notional adjustment. In this case C shall pay Rs. 1000 so that his loss will come to Rs. 1500. Now out of Rs. 3000 (i.e., C’s Rs 1000 and firm’s assets of Rs. 2000), A and B will get Rs. 500 and Rs. 2000 respectively. In this way the total loss suffered by each partner will be Rs. 1500 each

1. Loss due to insolvency of partners

a) The solvent partners will contribute only their share of deficiency in cash.

b) The available assets should be distributed among the solvent partners in proportion to their capital.

In a partnership firm, A, B and C contribute Rs, 30,000, Rs. 10,000 and Rs. 5000 respectively. The firm’s assets, after paying outside debts and liabilities, are Rs. 15,000. C is insolvent.

The deficiency = Total capital of firm - Available assetsi.e., Rs. 45,000 – Rs 15,000 = Rs. 30,000

To make up this deficiency, A and B will bring Rs. 10,000 each.

Total assets = Rs. 15,000 + 10,000 + 10,000 = Rs. 35,000 This amount will be divided among A and B in the ratio of

their capital (3:1) A gets Rs 26250, B gets Rs. 8,750 A’s loss, Rs 30,000+10,000 – 26,250 = Rs. 13,750 B’s loss, Rs 10,000+10,000 – 8750 = Rs. 11,250