Test: Relations Of Partners- 1 - CA Foundation MCQ

• Third Party Dealing: When a third party deals with a firm without knowledge that Mr. X has been expelled, they are not aware of the change in the firm's composition.


• Liability to Third Parties: Mr. X is liable to third parties in such a situation because the third party entered into a contract with the firm based on the belief that Mr. X was still a part of the firm.


• Legal Responsibility: Despite Mr. X being expelled from the firm, he can still be held responsible for any obligations or liabilities that arise from the contract with the third party.

• Implied Authority Limitation: Implied authority is the authority that is not expressly granted by the principal to the agent but is necessary to carry out the express authority. However, this authority has its limitations.


• Third Party's Knowledge: In the case of a third party dealing with an agent, the third party is not affected by the limitation of implied authority unless they have actual notice of it.


• Actual Notice: Actual notice means that the third party has knowledge of the limitations placed on the agent's authority by the principal.


• Effect on Third Party: If the third party is aware of the limitation of the agent's authority, they cannot hold the principal liable for any actions taken by the agent that exceed the implied authority.


• Legal Implications: This rule helps protect principals from being held responsible for actions taken by their agents beyond the scope of their authority if the third party had knowledge of the limitation.

• Retiring partner's liability: A retiring partner continues to be liable for acts for the firm done up to the date of giving public notice of retirement. This means that any actions or obligations incurred by the firm before the retirement announcement are still the responsibility of the retiring partner.


• Public notice of retirement: Once the retiring partner gives public notice of retirement, their liability for the firm's actions ceases. This is the point at which the retiring partner is no longer responsible for any future obligations or debts of the firm.


• Financial year: The retiring partner's liability extends until the close of the financial year in which he retires. This ensures that the retiring partner remains accountable for any firm-related activities that occurred during the financial year of their retirement.


• Admission of a new partner: The retiring partner's liability does not extend to the date of admission of a new partner. Once a new partner is admitted to the firm, the retiring partner's responsibility for the firm's actions ends.

• With Consent of All Partners: One way a partner may retire from an existing firm is by obtaining the consent of all other partners. This typically involves a formal agreement and the approval of all parties involved.


• As per Express Agreement: Another option for a partner looking to retire is to follow the guidelines set forth in an express agreement. This could include specific conditions and procedures for retirement that all partners have previously agreed upon.


• By Written Notice in Partnership at Will: In a partnership at will, where there is no formal agreement in place, a partner may retire by providing a written notice to the other partners. This can serve as a formal notification of their intention to retire from the firm.


• All of the Above: Ultimately, a partner may retire from an existing firm through any of the aforementioned means or a combination of them. The specific method will depend on the terms of the partnership agreement and the consent of all parties involved.

• Definition: Partnership property refers to all assets and liabilities of the partnership business.


• Vesting in the firm: Partnership property is owned collectively by all partners of the firm.


• Equal ownership: Each partner has an undivided interest in the partnership property, regardless of their individual contributions.


• Management: The management and control of partnership property typically rest with all partners collectively.


• Liability: All partners are jointly and severally liable for the debts and obligations related to partnership property.

• A: C is liable for the subsequent debts incurred by A and B




• No, C is a sleeping partner and has limited liability. Therefore, C is not personally liable for the debts incurred by A and B after retirement.




• B: C is not liable for the subsequent debts incurred by A and B




• Correct, as a sleeping partner, C is not actively involved in the business operations and is not personally liable for debts incurred by the active partners (A and B).




• C: C’s retirement results in dissolution of partnership




• No, C's retirement does not necessarily lead to the dissolution of the partnership. The partnership can continue with A and B as active partners.




• D: None




• The correct answer is B, as C is not liable for the subsequent debts incurred by A and B after retirement.

• Right to reinstatement: The irregularly expelled partner has the right to be reinstated back into the partnership if they were unfairly or improperly removed from the firm.


• Right to get back his share of profit and property in the firm: The expelled partner is entitled to receive their share of the profits and property that they rightfully own in the partnership.

Correct Answer :- b

Explanation : A transfer by a partner of his interest in the firm, either absolute or by mortgage, or by the creation by him of a change 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.

Correct Answer :- c

Explanation : The partnership is not liable for the loan incurred by a partner upon his credit by giving his own promissory note where the partner uses the money in the partnership concern of his own free will and without any contract with the lender to do so. The fact that the partnership obtained the benefit of the loan is only a piece of evidence to show that he entered into the transaction by a member of the firm and not further because it is not the ultimate use by the firm of money borrowed as above that makes the firm liable.

• Consent required: The admission of a new partner in a firm usually requires the consent of the existing partners.


• Unanimous consent: In most cases, unanimous consent of all the partners is required for admitting a new partner.


• Majority consent: Sometimes, the consent of the majority of the partners may also be sufficient for admitting a new partner.


• Special majority: In some firms, a special majority of partners may be required to admit a new partner, depending on the partnership agreement.


• Decision-making: The decision on admitting a new partner is crucial as it involves sharing profits, liabilities, and decision-making responsibilities.

• Admitting a new partner is a significant decision that can impact the firm's operations and financials.


• Consent requirements vary based on the partnership agreement and the nature of the firm.


• Unanimous consent ensures that all partners are in agreement and willing to accept the new partner.


• Majority consent may be more flexible but still requires the support of most partners.


• Special majority may be needed for specific cases where the partnership agreement stipulates such requirements.

• By Sale: A partner can transfer his interest in the firm by selling it to another individual or entity. This transfer of interest includes the partner's share in the profits and losses of the firm as well as the rights to the firm's assets.



• By Charge: A partner can also transfer his interest by creating a charge on the same. This means that the partner can use his interest in the firm as security for a loan or any other obligation.



• By Mortgage: Similar to creating a charge, a partner can transfer his interest in the firm by mortgaging it. This allows the partner to use his interest in the firm as collateral for a debt.



• All of these: Section 29 of the Indian Partnership Act, 1932 allows a partner to transfer his interest in the firm by sale, charge, or mortgage. Therefore, a partner can choose any of these methods to transfer his interest in the firm.

It is important for partners to follow the procedures outlined in the Partnership Act when transferring their interest in the firm to ensure that the transfer is legally valid and binding. Additionally, partners should always consult with legal professionals to understand the implications of transferring their interest and to protect their rights and interests in the firm.

• Requirement for Change: A change in nature of business can only be effected with the unanimous consent of all partners.


• Unanimous Consent: This means that all partners, whether they are majority partners, working partners, or sleeping partners, must agree to the change.


• Importance of Unanimous Consent: It is crucial to have unanimous consent to ensure that all partners are on board with the decision and to prevent any conflicts or disagreements in the future.


• Legal Implications: Without unanimous consent, any change in nature of business may not be legally valid and could lead to disputes among partners.


• Decision Making Process: Partners should discuss and communicate openly to reach a consensus on the proposed change before moving forward with any decisions.


• Documentation: It is important to document the decision and the consent of all partners in writing to avoid any misunderstandings or disputes later on.

• Null & Void: Expulsion of a partner which is not in accordance with the provisions of Section 33 of the Indian Partnership Act, 1932 is considered null and void.


• Legal Consequences: Any expulsion not meeting the requirements of the law will have no legal standing and will not be enforceable.


• Protection of Partners: The law aims to protect the interests of all partners in a partnership and ensure fair treatment.


• Compliance: It is essential for partnerships to adhere to the provisions of the Indian Partnership Act, 1932 to avoid legal complications.

• Opening a Bank Account: A partner has the authority to open a bank account on behalf of the firm as it is essential for the day-to-day operations and financial transactions of the business.


• Engaging and Discharging Employees: Partners have the authority to engage and discharge employees as it is necessary for the smooth functioning of the firm and managing the workforce.


• Accepting Debts: Partners can accept debts due to the partnership firm as they are responsible for the financial obligations and liabilities of the business.


• Entering into Partnership: However, a partner does not have the authority to enter into a partnership on behalf of the firm without the consent and agreement of all existing partners. This decision requires mutual understanding and agreement among all partners.

Explanation:

• Notice Requirement: The first requirement for the test of good faith under Section 33(1) of the Indian Partnership Act, 1932 is that the partner to be expelled must be served with a notice. This notice should inform the partner about the intention to expel them from the partnership.


• Opportunity of being heard: The partner must also be given an opportunity to be heard. This means that they should have a chance to present their side of the story and any reasons why they should not be expelled from the partnership.


• Interest of the partnership: The expulsion of the partner must be in the interest of the partnership. This means that the decision to expel a partner should be made with the best interests of the partnership in mind, rather than for personal reasons or motives.


• All of the above: Therefore, the correct answer is option D - All of the above. All three requirements must be met in order to test the good faith of the expulsion of a partner under Section 33(1) of the Indian Partnership Act, 1932.

• Indian Partnership Act, 1932: The Indian Partnership Act, 1932 governs the rules and regulations related to partnerships in India.


• Absence of Agreement: In the absence of a specific agreement among partners regarding the payment of salary, the Act provides guidelines.


• Partner's Salary: According to the Act, partners are not entitled to receive a salary, regardless of whether they are active or dormant partners.


• Active vs. Dormant Partners: The Act does not differentiate between active and dormant partners when it comes to the payment of salary.


• No Payment: Therefore, partners, including dormant partners, are not to be paid a salary unless there is a specific agreement stating otherwise.

• On admission of a new partner: When a new partner is admitted to a firm, the assets and liabilities of the firm are revalued to reflect the new partner's capital contribution and profit-sharing ratio.



• On retirement of a partner: When a partner retires from a firm, the assets and liabilities are revalued to determine the amount payable to the retiring partner and to adjust the capital accounts of the remaining partners.



• On death of a partner: In case of the death of a partner, the assets and liabilities of the firm are revalued to settle the deceased partner's share of the profits and to adjust the capital accounts of the remaining partners.



• In all the above: Revaluation of assets and liabilities occurs in all the above scenarios - admission of a new partner, retirement of a partner, and death of a partner. This revaluation ensures that the financial position of the firm is accurately reflected after any changes in the partnership structure.

• Admission of partner: When a new partner is added to the existing partnership firm, it leads to reconstitution of the firm.



• Retirement of partner: When a partner decides to leave the partnership firm, it results in reconstitution as the firm's structure and ownership need to be adjusted.



• Expulsion of partner: If a partner is expelled from the partnership for any reason, it also requires reconstitution of the firm to reflect the change in ownership and management.



• All of the above: Therefore, reconstitution of the firm can occur in any of these scenarios where there is a change in the partnership structure.

• Restricted by contract between partners: The implied authority of a partner can be restricted by the terms of the partnership agreement. This means that certain actions or decisions may require the consent of all partners, limiting the authority of an individual partner.



• Extended by contract between partners: Conversely, the implied authority of a partner can also be extended through the partnership agreement. Partners may agree to give certain partners additional authority to act on behalf of the partnership in specific situations.



• Either extended or restricted by contract between partners: The partnership agreement plays a crucial role in defining the scope of a partner's authority. It can either extend or restrict the implied authority of a partner based on the terms and conditions agreed upon by all partners.

Therefore, the implied authority of any partner is subject to the terms of the partnership agreement, which can either limit or expand their authority to act on behalf of the partnership.

• Partnership Agreement: In the absence of any agreement to share profits or losses of a firm's business, the profits or losses are shared equally among the partners.


• Equally: This means that each partner will receive an equal share of the profits or losses, regardless of their capital contributions or current account balances.


• Default Rule: When there is no specific agreement in place, the default rule is to distribute profits and losses equally among all partners.


• Fairness: Sharing profits and losses equally ensures fairness and promotes teamwork among partners in the business.

• Right to take part: Every partner in a partnership firm has the right to take part in the conduct of the business.


• Subject to Contract: This right is subject to any agreement or contract between the partners.


• Equal participation: Partners are generally considered equal in a partnership, and each partner has the right to participate in the decision-making process.


• Decision-making: Partners are typically involved in major decisions affecting the firm, such as financial matters, operations, and strategic planning.


• Sharing responsibility: All partners share the responsibility of running the business and have a say in the day-to-day operations.

• Express Contract: A partner may be expelled from the firm as per the conditions given in the express contract between the partners. The terms and conditions regarding expulsion should be clearly outlined in the partnership agreement.



• Good Faith: The power of expulsion should be exercised in good faith. This means that the decision to expel a partner should not be arbitrary or discriminatory. It should be based on valid reasons and with the best interests of the firm in mind.



• Majority of Partners: The power to expel a partner usually lies with the majority of partners in the firm. The decision to expel a partner should be taken collectively by the partners after careful consideration of the situation and in accordance with the partnership agreement.



• All of the Above: The conditions for expulsion of a partner from a firm should ideally include all of the above factors. By fulfilling these conditions, the expulsion process will be fair, transparent, and legally valid.

Correct Answer :- a

Explanation : Rights of an outgoing partner to carry on competing business - 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 may not

1. Use the firm name,

2. Represents himself as carrying on the business of the firm,

3 Solicit the custom of persons who were dealing with the firm before he ceased to be a partner.

• Partner does not cease to be a partner: When a partner transfers their interest in the firm for a share, they do not automatically cease to be a partner. They still hold ownership in the firm and are entitled to certain rights and responsibilities.



• Partner has the right to share the profits: Even after transferring their interest, the partner still has the right to share in the profits of the firm. This is because they continue to be a part owner of the business.



• Partner has right to defend suit against the firm: In case of any legal issues or disputes involving the firm, the partner who transferred their interest still has the right to defend the firm. They may be called upon to participate in legal proceedings on behalf of the business.

• All Partners: Share in Partnership can be transferred by the consent of all partners. This means that all partners must agree to the transfer of the share.



• Majority: It is not sufficient for just a majority of partners to consent to the transfer of share in partnership. Unanimous agreement is required.



• No Consent Required: In some cases, the partnership agreement may specify that certain transfers do not require the consent of all partners. However, this is not common and usually, all partners' consent is required.



• None of these: This option is incorrect as the correct answer is that the consent of all partners is required for transferring share in partnership.

It is important for partners to communicate and collaborate effectively when it comes to making decisions about the partnership, including the transfer of shares. Clear communication and agreement among all partners can help maintain a harmonious and successful partnership.

Correct Answer :- a

Explanation : ‘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 called his ‘Implied Authority’ [Sub-Section(1) of section 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.

• Definition: Express authority refers to the explicit permission given by one partner to another to act on behalf of the firm in a specific matter.



• Legal Basis: Section 19 of the Indian Partnership Act, 1932, deals with the authority of a partner to bind the firm. It states that every partner is an agent of the firm and can act on behalf of the firm in the ordinary course of business.



• Acquisition of Immovable Property: When a partner acquires an immovable property on behalf of the firm, it falls under the purview of express authority. This means that the partner has been expressly authorized by the other partners to carry out such transactions.



• Importance: Express authority is crucial in ensuring that partners act within the scope of their powers and do not exceed their mandate. It helps in preventing disputes and legal issues within the partnership.



• Documentation: It is advisable for partnerships to have clear agreements and documents outlining the extent of each partner's express authority. This can help in avoiding misunderstandings and conflicts in the future.

• Date of order of adjudication: According to the Indian Partnership Act, 1932, when a partner in a firm is adjudicated as insolvent, he ceases to be a partner on the date of the order of adjudication.


• Date of dissolution of the firm: The partner ceases to be a partner immediately on the date of adjudication, not on the date of dissolution of the firm.


• Date of intimation of the insolvency of the firm: The partner's status as a partner is affected by the date of order of adjudication, not by the date of intimation of insolvency.


• Date decided by the partnership firm: The date of ceasing to be a partner is determined by the legal process of adjudication, not by the partnership firm's decision.

• Joint Life Policy: A Joint Life Policy is a life insurance policy that covers two or more individuals under one policy.


• Premium Payment: The premium paid for a Joint Life Policy of partners is considered as a business expense.


• Accounting Treatment: The premium paid on the Joint Life Policy of partners is debited to the Profit and Loss account of the firm.


• Debit to Profit and Loss Account: Debiting the premium to the Profit and Loss account reduces the net income of the firm, reflecting the expense incurred on the policy.


• Impact on Partners: The partners do not directly bear the cost of the premium from their capital accounts.

• Consent of surviving partners: The heirs of the deceased partner can only become a partner in the firm if the surviving partners agree to it. This is important because partnership agreements usually require the consent of all partners for a new partner to join the firm.


• No automatic right: In general, the heirs do not have an automatic right to become a partner in the firm of the deceased partner. The decision ultimately lies with the surviving partners.


• Importance of consent: The consent of the surviving partners is crucial as it ensures that all parties involved are in agreement with the new partnership arrangement. It also helps maintain the harmony and smooth functioning of the firm.


• Legal implications: If the heirs try to become partners without the consent of the surviving partners, it can lead to legal disputes and complications. It is always advisable to follow the proper procedures and seek consent before making any changes to the partnership structure.