ICAI Notes 3.2 - Relation of Partners CA Foundation Notes | EduRev

Mercantile Law for CA CPT

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CA Foundation : ICAI Notes 3.2 - Relation of Partners CA Foundation Notes | EduRev

The document ICAI Notes 3.2 - Relation of Partners CA Foundation Notes | EduRev is a part of the CA Foundation Course Mercantile Law for CA CPT.
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Learning Objectives

  • Be familiar with the legal provisions regulating relation of partners’ interest as well as relations with the third parties.
  • Note the scope of implied authority of a partner to bind the partnership by his acts.
  • Be aware of the various situations in which the constitution of a firm may change and its effect on the rights and duties of the partners.
  • Learn how the share in a partnership is transferred and what shall be the rights and obligations of such transferee.

3.8 MUTUAL RIGHTS AND DUTIES OF PARTNERS

These are governed by the contract existing between them which may be express or implied by the course of dealing. The contract may be varied by the consent of all the partners; which may be express or implied by the course of dealings.

The contract may provide that a partner shall not carry on any business other than that of the firm while he is a partner (Section 11). Subject to a contract between the partners the mutual rights and liabilities are as follows :

Rights :

(1) Right to take part in the conduct of the Business : Every partner has the right to take part in the business of the firm. This is because partnership business is a business of the partners and their management powers are generally coextensive. Now suppose this management power of the particular partner is interfered with and he has been wrongfully precluded from participating therein. Can the Court interfere in these circumstances? The answer is in the affirmative. The Court can, and will, by injunction, restrain other partners from doing so. You should also note in this connection that a partner who has been wrongfully deprived of the right of participation in the management has also other remedies, e.g., a suit for dissolution, a suit for accounts without seeking dissolution, etc.

The above mentioned provisions of law will be applicable only if there is no contract to the contrary between the partners. It is quite common to find a term in partnership agreements, which gives only limited power of management to a partner or a term that the management of the partnership will remain with one or more of the partners to the exclusion of others. In such a case, the Court will normally be unwilling to interpose with the management with such partner or partners, unless it is clearly made out that something was done illegally or in breach of the trust reposed in such partners.

(2) Right to be consulted : Where any difference arises between the partners with regard to the business of the firm, it shall be determined by the views of the majority of them, and every partner shall have the right to express his opinion before the matter is decided. But no change in the nature of the business of the firm can be made without the consent of all the partners [Section 12 (c)]. This means that in routine matters, the opinion of the majority of the partners will prevail. Of course, the majority must act in good faith and every partner must be consulted as far as practicable.

You should note that the aforesaid majority rule will not apply where there is a change in the nature of the firm itself. In such a case, the unanimous consent of the partners is needed 

(3) Right of access to books : Every partner whether active or sleeping is entitled to have access to any of the books of the firm and to inspect and take out of copy thereof [Section 12 (d) ]. The right must, however, be exercised Bona fide.

(4) Right to remuneration : No partner is entitled to receive any remuneration in addition to his share in the profits of the firm for taking part in the business of the firm. But this rule can always be varied by an express agreement, or by a course of dealings, in which event the partner will be entitled to remuneration. Thus a partner can claim remuneration even in the absence of a contract, when such remuneration is payable under the continued usage of the firm. In other words, where it is customary to pay remuneration to a partner for conducting the business of the firm he can claim it even in the absence of a contract for the payment of the same. It is not uncommon for partners, in actual practice, to agree that a managing partner will receive over and above his share, salary or commission for the trouble that he will take while conducting the business of the firm.

(5) Right to share Profits : Partners are entitled to share equally in the profits earned and so contribute equally to the losses sustained by the firm [Section 13 (b)]. The amount of a partner’s share must be ascertained by enquiring whether there is any agreement in that behalf between the partners. If there is no agreement then you should make a presumption of equality and the burden of proving that the shares are unequal, will lie on the party alleging the same. There is no connection between the proportion in which the partners shall share the profits and the proportion in which they have contributed towards the capital of the firm.

(6) Interest on Capital : Suppose interest on capital subscribed by the partner is payable to him under the partnership deed. In such a case, the interest will be payable only out of profits. As a general rule, interest on capital subscribed by partners is not allowed unless there is an agreement or usage to that effect. The principle underlying this provision of law is that regards the capital brought by a partner in the business, he is not a creditor of the firm but an adventurer. The following elements must be before a partner can be entitled to interest on moneys brought by him in the partnership business: (i) an express agreement to that effect, or practice of the particular partnership or (ii) any trade custom to that effect; or (iii) a statutory provision which entitles him to such interest. 

(7) Interest on advances : Suppose a partner makes an advance to the firm in addition to the amount of capital to be contributed by him. In such a case, the partner is entitled to claim interest thereon @6% per annum [Section 13 (d) ]. While interest on capital account ceases to run on dissolution, the interest on advances keep running even often dissolution and up to the date of payment. From the discussion so far, you will notice that the Partnership Act makes a distinction between the capital contribution of a partner and the advance made by him to the firm. The advances are regarded as loans which should bear interest while capital bears interest only when there is an agreement to this effect.

(8) Right to be indemnified : Every partner has the right to be indemnified by the firm in respect of payments made and liabilities incurred by him in the ordinary and proper conduct of the business of the firm as well as in the performance of an act in an emergency for protecting the firm from any loss, if the payments, liability and act are such as a prudent man would make, incur or perform in his own case, under similar circumstance [Section 13 (e) ].

(9) Right to stop admission of a new partner : Every partner has the right to prevent the introduction of a new partner in the firm without the consent of all the existing partners. Where a partner is introduced into the firm, he is not liable for any act of the firm done before he became a partner [Section 31].

(10) Right to retire : Every partner has the right to retire with the consent of all the other partners and in the case of a partnership being at will, by giving notice to that effect to all the other partners [Section 32 (1)].

(11) Right not to be expelled : Every partner has the right not to be expelled from the firm by any majority of the partners (Section 33).

(12) Right of outgoing partner to carry on competing business : An outgoing partner may carry on business competing with that of the firm and he may advertise such business, but without using the firm name or representing himself as carrying on the business of the firm or soliciting the custom of persons who were dealing with the firm before he ceased to be a partner [Section 36 (1)].

(13) Right of outgoing partner to share subsequent profits : Where any partner has died or 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, the outgoing partner or his estate has at his or his representative’s option, the right to such share of the profit 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 @ 6% per annum on the amount of his share in the property of the firm [Section 37].

(14) Right to dissolve the firm : A partner has the right to dissolve the partnership with the consent of all partners (Section 40). But where the partnership is at will the firm may be dissolved by any partner giving notice in writing to all other partners of his intention to dissolve the firm (Section 40).

DUTIES

(1) Partners are bound to carry on the business of the firm (i) to the greatest common advantage, (ii) to be just and faithful to each other and (iii) to render to any partner or his legal representative a true account and full information of all things affecting the firm (Section 9).

(2) Every partner is liable to indemnify the firm for any damage caused to it by reason of his fraud in the conduct of the business of the firm (Section 10).

(3) Every partner is bound to attend diligently to his duties relating to the conduct of the firm’s business [Section 12 (b)]. A partner is not, however, normally entitled to remuneration for participating in the conduct of the business [Section 13 (a)]. He is also bound to let his partners have the advantage of his knowledge and skill.

(4) All the partners are liable to contribute equally to the loss sustained by the firm.

(5) A partner must indemnify the firm for any loss caused to it by willful neglect in the conduct of the business of the firm [Section 13 (f)].  

(6) If a partner derives any profit for himself from any transaction of the firm or from the use of the property or business connection of the firm or firm’s name then he is bound to account for that profit and refund it to the firm [Section 16 (a)].

(7) If a partner carries on business of the same nature as and competing with that of the firm, then he must account for and pay to firm all profits made by him in the business [Section 16 (b)]. The firm will not be liable for any loss. We shall discuss Sections 16 and 17 in more detail later on.

3.9 PARTNERSHIP PROPERTY (SECTION 14)

The expression ‘property of the firm’, also referred to as ‘partnership property’, ‘partnership assets’, ‘joint stock’, ‘common stock’ or ‘joint estate’, denotes all property, rights and interests to which the firm, that is, all partners collectively, may be entitled. The property which is deemed as belonging to the firm, in the absence of any agreement between the partners showing contrary intention, is comprised of the following items :
(i) all property, rights and interests which partners may have brought into the common stock as their contribution to the common business;
(ii) all the property, rights and interest acquired or purchased by or for the firm, or for the purposes and in the course of the business of the firm; and
(iii) goodwill of the business.

The determination of the question whether a particular property is or is not ‘property’ of the firm ultimately depends on the real intention or agreement of the partners. Thus, the mere fact that the property of a partner is being used for the purposes of the firm shall not by itself make it partnership property, unless it is intended to be treated as such. Partners may, by an agreement at any time, convert the property of any partner or partners (and such conversion, if made in good faith, would be effectual between the partners and against the creditors of the firm) or the separate property of any partner into a partnership property.

Goodwill : Section 14 specifically lays down that the goodwill of a business is subject to a contract between the partners, to be regarded as ‘property’ of the ‘firm’. But this Section does not define the term. ‘Goodwill’ is a concept very easy to understand but difficult to define. Goodwill may be defined as the value of the reputation of a business house in respect of profits expected in future over and above the normal level of profits earned by undertaking belonging to the same class of business.

When a partnership firm is dissolved every partner has a right, in the absence of any agreement to the contrary, to have the goodwill of business sold for the benefit of all the partners.

A goodwill is a part of the property of the firm, it can be sold separately or along with the other properties of the firm. Any partner may upon the sale of the goodwill of a firm, make an agreement with the buyer that such partner will not carry on any business similar to that of the firm within a specified period or within specified local limits and notwithstanding any thing contained in Section 27 of the Indian Contract Act, 1872 such agreement shall be valid if the restrictions imposed are reasonable.

3.10 PERSONAL PROFIT EARNED BY PARTNERS (SECTION 16) 

Where a partner derives any profit for himself from any transaction of the firm or from the use of the property or business connection of the firm or firm name, he must account for that profit and pay it to the firm. For example, A, B, C & D established partnership business for refining sugar. A, who was himself a wholesale grocer, was entrusted with the work of selection and purchase of sugar. As wholesale grocer, A was well aware of the variations in the sugar market and had the suitable sense of propriety as regards purchases of sugar. He had already in stock sugar purchased at a low price which he sold to the firm when it was in need of some without informing the partners that the sugar sold had belonged to him. It was held that A was bound to account to the firm for the profit so made him. This rule, is however, subject to a contract between partners.

Where a partner carries on a competing business, he must account for and pay to the firm all profits made by him in the business. For example, A, B, C and D started a business in partnership for importing salt from foreign ports and selling it at Chittagong. A struck certain transactions in salt on his own account, which were found to be of the same nature as the business carried on by the partnership. It was held that A was liable to account to the firm for profits of the business so made by him. This rule is also subject to a contract between the partners.He is under no obligation whatever to account for the profits of a non competing business, even though his connection with the firm may enable him to push his private trade better.

You should, however, note that a deed of partnership may contain a clause that some or all the partners are not to carry any business other than that of the firm during the continuance of partnership [Section 11(2)]. A breach of such a provision may entitle the other partner to recover damages from the defaulting partner, but it will not give rise to any occasion for accounting to his copartners for the profits earned unless the business is shown to be in rivalry with the business of the firm.

3.11 RIGHTS AND DUTIES OF PARTNERS AFTER A CHANGE IN THE CONSTITUTION OF THE FIRM (SECTION 17)

Before going into rights and duties, we should first know how a change may take place in the constitution of the firm. It may occur in one of the four ways, namely, (i) where a new partner or partners come in, (ii) where some partner or partners go out, i.e., by death or retirement, (iii) where the partnership concerned carries on business other than the business for which it was originally formed, (iv) where the partnership business is carried on after the expiry of the term fixed for the purpose.

Section 17 lays down the rule : 

(a) Where a change occurs in the constitution of the firm in any of the first three ways mentioned above, the mutual rights and duties of the partners in the reconstituted firm remain the same as they were before the change as may be.

 (b) where a firm constituted for a fixed term continues to carry on the business after the expiry of the term, the mutual rights and duties of the partners remain the same as they were before the expiry, so far as they may be consistent with the incidents of partnership at will. Some provisions have been held to be inconsistent with the incidents of partnership at will, e.g., the provision in the deed that a partner desiring to retire shall give notice of his intention of the same at a certain time before hand.

(c) Where the firm constituted to carry out one or more ventures or undertakings, carries out other ventures or undertakings, the mutual rights and duties of the partners in respect of the other adventures of the undertaking are the same as of those in respect of the original adventures. You should note that the above-mentioned rules are subject to contract between the partners.

3.12 RELATION OF PARTNERS TO THIRD PARTIES (SECTIONS 18 TO 30) 

Partners as agents of the firm : You may recall that a partnership is the relationship between the partners who have agreed to share the profits of the business carried on by all or any of them acting for all (Section 4). This definition suggests that any one of the partners can be the agent of the others. Section 18 clarifies this position by providing that, subject to the provisions of the Act, a partner is the agent of the firm for the purpose of the business of the firm. The partner indeed virtually embraces the character of both a principal and an agent. So for as he acts for himself and in his own interest in the common concern of the partnership, he may properly be deemed a principal : and so far as he acts for his partners, he may properly be deemed an agent. The principal distinction between him, and a mere agent is that he has a community of interest with other partners in the whole property and business and liabilities of partnership, whereas an agent as such has no interest in either.

The rule that a partner is the agent of the firm for the purpose of the business of the firm, cannot be applied to all transactions and dealings between the partners themselves. It is applicable only to the act done by partners for the purpose of the business of the firm.

3.13 IMPLIED AUTHORITY OF A PARTNER OF THE FIRM 

At the very outset, you should understand what is meant by “implied authority”. You have just read that every partner is an agent of the firm for the purpose of the business thereof. Consequently, as between the partners and the outside world (whatever may be their private arrangements between themselves), each partner is agent of every other in every matter connected with the partnership business; his acts bind the firm.

Sections 19 (1) and 22 deal with the implied authority of a partner. The impact of these Sections is that 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 to bind the firm is called his implied authority.

You should specially note the phrase “in the usual way”. It has been included to indicate that if a usual act is done in an unusual way the outsider may well be put on an enquiry into unusual circumstances under which he is being called upon to give credit. It is not unreasonable to expect him to ask whether the partner has authority to act as he is doing. If the outsider chooses to neglect what is unusual, he must not seek to charge persons other than the one with whom he is actually dealing. If the act is “outside the usual course of the business of the firm” it will not bind the firm even if it is prudent or has benefited the firm unless it is ratified and approved by all the partners. Power to do the usual does not include power to do the unusual.

Thus, a partner has implied authority to bind the firm by all acts done by him in all matters connected with the partnership business and which are done in the usual way and are not in their nature beyond the scope of partnership. You must remember that an implied authority of a partner may differ in different kinds of business. For example, it may be usual for one partner of firm of bankers to draw, accept or endorse a bill of exchange on behalf of the firm, but the same may be unusual, for one of a firm of solicitors to do so, for it is no part of the ordinary business of a solicitor to draw, accept or endorse bills of exchange.

If partnership be of a general commercial nature, he may pledge or sell the partnership property; 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, endorse, transfer, negotiate and procure to be discounted, Promissory notes, bills of exchange, cheques and other negotiable papers in the name and on account of the partnership.

3.14 ACTS BEYOND IMPLIED AUTHORITY (SECTION 19) 

If there is no usage or custom of trade to the contrary, the implied authority of the partner does not empower him to:
(a) submit a dispute relating to the business of the firm to arbitration as it is not the ordinary business of partnership firm to enter into a submission for arbitration : (b) open a bank account on behalf of the firm in his own name;
(c) compromise or relinquish any claim or portion of a claim by the firm against a third party (i.e., an outsider).
(d) withdraw a suit or proceedings filed on behalf of the firm;
(e) admit any liability in a suit or proceedings against the firm;
(f) acquire immovable property on behalf of the firm;
(g) transfer immovable property belonging to the firm; and (h) enter into partnership on behalf of the firm.

3.15 EXTENSION AND RESTRICTION OF PARTNERS’ IMPLIED AUTHORITY (SECTION 20) 

The partners may, by contract between them, either extend or restrict the implied authority of any partner. In spite of any such restriction if a partner does, on firm’s behalf, any act which falls within his implied authority, the firm will be bound unless the person with whom he is dealing is aware of the restriction or does not know or believe the partner to be a partner. Thus a third party is not affected by a secret limitation of a partner’s implied authority unless he had actual notice of it. For example, A, a partner, borrows from B Rs. 1,000 in the name of the firm but in excess of his authority, and utilises the same in paying off the debts of the firm. Here, the fact that the firm has contracted debts suggests that it is a trading firm, and as such it is within the implied authority of A to borrow money for the business of the firm. This implied authority, as you have noticed, may be restricted by an agreement between him and other partners. Now if B, the lender, is unaware of this restriction imposed on A, the firm will be liable to repay the money to B. On the contrary B’s awareness as to this restriction will absolve the firm of its liability to repay the amount to B.

You should further note that the above-mentioned extension or restriction is only possible with the consent of all the partners. Any one partner, or even a majority of the partners, cannot restrict or extend the implied authority.

3.16 ACTS IN EMERGENCY (SECTION 21)

Over and above the implied authority which every partner wields subject to the provision of Section 20, the Act further recognises that each partner can bind the firm by all of his acts done in an emergency, with a view to protecting the firm from any loss, provided he has acted in the same manner as a man of ordinary prudence would have acted in the like circumstances.

Admission by partner - its effects (Section 23) : Partners, as agents of each other can make binding admissions but only in relation to partnership transaction and in the ordinary course of business; an admission or representation by a partner will not however, bind the firm if his authority on the point is limited and the other party knows of the restriction. The section speaks of admissions and representations being evidenced against the firm. That is to say, they will affect the firm when tendered by third parties; they may not have the same effect in case of disputes between the partners themselves.

3.17 NOTICE TO AN ACTING PARTNER - ITS EFFECT (SECTION 24)

The notice to a partner, who habitually acts in business of the firm, on matters relating to the affairs of the firm, operates as a notice to the firm except in the case of a fraud on the firm committed by or with the connivance of that partner. Thus, the notice to one is equivalent to the notice to the rest of the partners of the firm, just as a notice to an agent is notice to his principal. This notice must be actual and not constructive. It must be received by a working partner and not by a sleeping partner. It must further relate to the firm’s business. Only then it would constitute a notice to the firm.

The only exception would lie in the case of fraud, whether active or tacit. For example, A, a partner who actively participates in the management of the business of the firm, bought for his firm, certain goods, while he knew of a particular defect in the goods. His knowledge as regards the defect, ordinarily, would be construed as the knowledge of the firm, though the other partners in fact were not aware of the defect. But because A had, in league with his seller, conspired to conceal the defect from the other partners, the rule would be inoperative and the other partners would be entitled to reject the goods, upon detection by them of the defect.

3.18 LIABILITY TO THIRD PARTIES (SECTIONS 25 TO 27) 

The question of liability of partners to third parties may be considered under different heads. These are as follows:

(i) Contractual liability : Every partner is liable jointly with other partners also severally for the acts of the firm done while he is a partner. The expression ‘act of firm’ connotes any act or omission by all the partners or by any partner or agent of the firm, which gives rise to a right enforceable by or against the firm. Again in order to bring a case under Section 25, it is necessary that the act of the firm, in respect of which liability is bought to be enforced against a party, must have been done while he was a partner. Thus, where certain persons were found to have been partners in a firm when the acts constituting an infringement of a trade mark by the firm took place, it was held that they were liable for damages arising out of the alleged infringement, it being immaterial that the damages arose after the dissolution of the firm.

(ii) Liability for tort or wrongful act : The firm is liable to the same extent as the partner for any loss or injury caused to a third party by the wrongful acts of a partner, if they are done by the partner while acting (a) in the ordinary course of the business of the firm (b) with the authority of the partners.

If the act in question can be regarded as authorised and as falling within either of the categories mentioned in Section 26, the fact that the method employed by the partner in doing it was unauthorised or wrongful would not affect the question. Furthermore, all the partners in a firm are liable to a third party for loss or injury caused to him by the negligent act of a partner acting in the ordinary course of the business. For example, one of the two partners in coal mine acted as a manager was guilty of personal negligence in omitting to have the shaft of the mine properly fenced. As a result thereof, an injury was caused to a workman. The other partner was held responsible for the same.

(iii) Liability for misappropriation by a partner : Section 27 provides that (a) when a partner, acting within his apparent authority, receives money or other property from a third person and misapplies it or (b) where a firm, in the course of its business, received money or property from a third person and the same is misapplied by a partner, while it is in the custody of the firm, is liable to make good the loss.

It may be observed that the workings of the two clauses of Section 27 are designed to bring out clearly an important point of distinction between the two categories of cases of misapplication of money by partners. Clause (a) covers the misapplication of money or property belonging to a third party made by the partner receiving the same. For this provision to be attracted, it is not necessary that the money should have actually come into the custody of the firm. On the other hand, the provision of clause (b) would be attracted when such money or property has come into the custody of the firm and it is misapplied by any of the partners. The firm would be liable in both the cases.

If receipt of money by one partner is not within the scope of his apparent authority, his receipt cannot be regarded as a receipt by the firm and the other partners will not be liable, unless the money received comes into their possession or under their control.  

3.19 RIGHTS OF TRANSFEREE OF A PARTNER’S SHARE (SECTION 29) 

A share in a partnership is transferable like any other property, but as the partnership relationship is based on mutual confidence, the assignee of a partner’s interest by sale, mortgage or otherwise cannot enjoy the same rights and privileges as the original partner. The Supreme Court has held that the assignee will enjoy only the rights to receive the share of the profits of the assignor and account of profits agreed to by other partners.

The rights of such a transferee are as follows :

(1) During the continuance of partnership, such transferee is not entitled (a) to interfere with the conduct of the business, (b) to require accounts, or (c) to inspect books of the firm. He is only entitled to receive the share of the profits of the transferring partner and he is bound to accept the profits as agreed to by the partners, i.e., he cannot challenge the accounts.

(2) On the dissolution of the firm or on the retirement of the transferring partner, the transferee will be entitled, against the remaining partners: (a) to receive the share of the assets of the firm to which the transferring partner was entitled, and (b) for the purpose of ascertaining the share, he is entitled to an account as from the date of the dissolution.

By virtue of Section 31, which we will discuss hereinafter, no person can be introduced as a partner in a firm without the consent of all the partners. A partner cannot by transferring his own interest, make anybody else a partner in his stead, unless the other partners agree to accept that person as a partner. At the same time, a partner is not debarred from transferring his interest. A partner’s interest in the partnership can be regarded as an existing interest and tangible property which can be assigned.

As a general rule, the partners are at liberty to determine their rights and obligation per se. (as between themselves) by means of a contract between them. It follows that an agreement between partners which enables one either to introduce a new partner in the firm (over and above the existing partners) or to substitute another partner in his place by novation, transfer or otherwise, could bind all the partners. If a partner has an unconditional right to transfer his share so as to substitute another person in his stead, then he will not be liable for any acts of the firm subsequent to a valid transfer of his share and serving notice of it on his copartners. This would, in effect, by tantamount to his retirement from the firm and hence his rights and liabilities would be governed by Section 32 of the Act.

3.20 LEGAL CONSEQUENCES OF PARTNER COMING IN AND GOING OUT (SECTIONS 31-38)

Introduction of new partner (Section 31) : As we have studied earlier, subject to a contract between partners and to the provisions regarding minors in a firm, no new partners can be introduced into a firm without the consent of all the existing partners. The liabilities of the new partner ordinarily commence from the date when he is admitted as a partner, unless he agrees to be liable for obligations incurred by the firm prior to the date. The new firm, including the new partner who joins it, may agree to assume liability for the existing debts of the old firm, and creditors may agree to accept the new firm as their debtor and discharge the old partners. The creditor’s consent is necessary in every case to make the transaction operative. Novation is the technical term in a contract for substituted liability, of course, not confined only to case of partnership. But a mere agreement amongst partners cannot operate as Novation. Thus an agreement between the partners and the incoming partner that he shall be liable for existing debts will not ipso facto give creditors of the firm any right against him.

Retirement of a partner (Section 32) : A partner may retire : (i) with the consent of all the other partners; (ii) by virtue of an express agreement between the partners; or (iii) in the case of a partnership at will, by giving notice in writing to all other partners of his intention to retire.

Such a partner, however, continues to be liable to the third party for acts of the firm after his retirement until public notice of his retirement has been given either by himself or by other partners. But the retired partner will not be liable to any third party if the latter deals with the firm without knowing that the former was partner [Sub-Sections (3) and (4)].

Right of outgoing partners : 

(i) An outgoing partner may carry on business competing with that of the firm and he may advertise such business, but subject to contract to the contrary, he cannot use the name of the firm or represent himself as carrying on the business of the firm or solicit customers of the firm he has left [Section 36(1)]. Although this provision has imposed some restrictions on an outgoing partner, it effectively permits him to carry on a business competing with that of the firm. However, the partner may agree with his partners that on his ceasing to be so, he will not carry on a business similar to that of the firm within a specified period or within specified local limits. Such an agreement will not be in restraint of trade if the restraint is reasonable [Section 36(2)]. A similar rule applies to such an agreement of sale of the firm’s goodwill [Section 53(3)].

(ii) (a) On the retirement of a partner, he has the right to receive his share of the property of the firm, including goodwill. It has been held that in the absence of evidence of any uniform usage to the contrary, the assets (property) should be taken at their fair value to the firm at the date of the account and not at their value as appearing in the partnership.

(b) An outgoing partner, where the continuing partners carry on business of the firm with the property of the firm without any final settlement of accounts with him, is entitled to claim from the firm such share of the profits made by the firm, since he ceased to a partner, as attributable to the use of his share of the property of the firm. In the alternative, he can claim interest at the rate of 6% per annum on the amount of his share in firm’s property (Section 37).

(c) However, if by a contract between the partners, an option has been given to the surviving or continuing partners to purchase the interest of the outgoing partner and the option is duly exercised, the outgoing partner or his estate will not be entitled to any further share of the profits. If on the other hand, any partner who assumes to act in exercise of the option, does not in all material respects comply with the terms thereof, then he would be liable to account under the provisions contained in Para (a) above (Proviso to Section 37).

Liabilities of an outgoing partner : As we have already stated earlier, a retiring partner continues to be liable to third party for acts of the firm after his retirement until public notice of his retirement has been given either by himself or by any other partner. But the retired partner will not be liable to any third party if the latter deals with the firm without knowing that the former was partner [Sections 32 (3) and (4)].

The liability of a retired partner to the third parties continues until a public notice of his retirement has been given. As regards the liability for acts of the firm done before his retirement, the retiring partner remains liable for the same, unless there is an agreement made by him with the third party concerned and the partners of the reconstituted firm. Such an agreement may be implied by a course of dealings between the third party and the reconstituted firm after he had knowledge of the retirement [Section 32 (2)].

Expulsion of a partner (Section 33) : A partner may not be expelled from a firm by a majority of partners except in exercise, in good faith, of powers conferred by contract between the partners. It is, thus, essential that: (i) the power of expulsion must have existed in a contract between the partners; (ii) the power has been exercised by a majority of the partners; and (iii) it has been exercised in good faith. If all these conditions are not present, the expulsion is not deemed to be in bonafide interest of the business of the firm.

The test of good faith as required under Section 33 (1) includes three things :

(a) that the expulsion must be in the interest of the partnership.
(b) that the partner to be expelled is served with a notice.
(c) that he is given an opportunity of being heard.

If a partner is otherwise expelled, the expulsion is null and void. The only remedy, when a partner misconduct in the business of the firm, is to seek judicial dissolution.

You should also note that under the Act, the expulsion of partners does not necessarily result in dissolution of the firm. The invalid expulsion of a partner does not put an end to the partnership even if the partnership is at will and it will be deemed to continue as before.

Example : A, B and C are partners in a Partnership firm. They were carrying their business successfully for the past several years. Spouses of A and B fought in ladies club on their personal issue and A’s wife was hurt badly. A got angry on the incident and he convinced C to expel B from their partnership firm. B was expelled from partnership without any notice from A and C. Considering the provisions of Indian Partnership Act, 1932 state whether they can expel a partner from the firm.

A partner may not be expelled from a firm by a majority of partners except in exercise, in good faith, of powers conferred by contract between the partners. It is, thus, essential that : (i) the power of expulsion must have existed in a contract between the partners; (ii) the power has been exercised by a majority of the partners; and (iii) it has been exercised in good faith. If all these conditions are not present, the expulsion is not deemed to be in bonafide interest of the business of the firm.

The test of good faith as required under Section 33 (1), Indian Partnership Act, 1932 includes three things :
(a) that the expulsion must be in the interest of the partnership.
(b) that the partner to be expelled is served with a notice.
(c) that he is given an opportunity of being heard.

If a partner is otherwise expelled, the expulsion is null and void. Therefore, expulsion of Partner B is not valid.

In this context, you should also remember that provisions of Sections 32 (2), (3) and (4) which we have just discussed, will be equally applicable to an expelled partner as if he was a retired partner.

Insolvency of a partner (Section 34) : When a partner in a firm is adjudicated an insolvent, he ceases to be a partner on the date of the order of adjudication whether or not the firm is thereby dissolved. His estate (which thereupon vests in the official assignee) ceases to be liable for any act of the firm done after the date of the order, and the firm also is not liable for any act of such a partner after such date (whether or not under a contract between the partners the firm is dissolved by such adjudication). You must also note that ordinarily but not invariably, the insolvency of a partner results in dissolution of a firm; but the partners are competent to agree among themselves that the adjudication of a partner as an insolvent will not give rise to dissolution of the firm.

Death of a partner (Section 35) : Where under the contract a firm is not dissolved by the death of a partner, the estate of the deceased partner is not liable for act of the firm after his death.

Ordinarily, the effect of the death of a partner is the dissolution of the partnership, but the rule in regard to the dissolution of the partnership, by death of partner is subject to a contract between the parties and the partners are competent to agree that the death of one will not have the effect of dissolving the partnership as regards the surviving partners unless the firm consists of only two partners. In order that the estate of the deceased partner may be absolved from liability for the future obligations of the firm, it is not necessary to give any notice either to the public or the persons having dealings with the firm.

In relation to Section 35, let us consider a concrete case. X was a partner in a firm. The firm ordered goods in X’s lifetime; but the delivery of the goods was made after X’s death. In such a case, X’s estate would not be liable for the debt; a creditor can have only a personal decree against the surviving partners and a decree against the partnership assets in the hands of those partners. A suit for goods sold and delivered would not lie against the representatives of the deceased partner. This because there was no debt due in respect of the goods in X’s lifetime.

Revocation of continuing guarantee by change in the firm (Section 38) : Section 38 of the Indian Partnership Act provides that a continuing guarantee given to a firm or to third party in respect of the transaction of a firm is, in the absence of an agreement to the contrary, revoked as to future transactions from the date of any change in the constitution of the firm. You should note that the above rule is subject to an agreement to the contrary. The agreement, if any, to the contrary required to displace the effect of Section 38, must be clear.

3.21 SUMMARY

The mutual rights and duties of partners are regulated by the contract between them. Such contract need not always be express, it may be implied from the course of dealing between the partners. (Section 11). Section 12 gives rules regulating the conduct of the business by the partners and Section 13 lay down rules of mutual rights and liabilities. Sections 14 to 17 also contain particular rules which become useful and important while determining the relations of partners to one-another. What is essential to note, however, is that all these rules are subject to contract between the parties.

As regards third parties, a partner is the agent of the firm for all purposes within the scope of the partnership concern. His rights, powers, duties and obligations are in many respects governed by the same rules and principles which apply to the agent. Generally, he may pledge or sell the partnership property; he may buy goods on account of the firm; he may borrow money, contract debt and pay debts on account of the firm; he may draw, make, sign, endorse, accept, transfer, negotiate and get discounted promissory notes, bills of exchange, cheques and other negotiable papers in the name and account of the firm. The implied authority of the partner to bind the firm is restricted to acts usually done in the business of the kind carried on by the firm. He is also empowered under the Act to do certain acts in an emergency so as to bind the firm. The firm, however, is bound only by those acts of a partner which were done by him in his capacity as a partner.

A partner may in some circumstances become liable on equitable grounds for obligations incurred by a copartner in doing acts in excess of his authority, real or implied. He may also become liable for an unauthorised acts of his copartner on the ground of estopple. 

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