Relations of Partners (Part - 6) CA Foundation Notes | EduRev

Business Laws for CA Foundation

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CA Foundation : Relations of Partners (Part - 6) CA Foundation Notes | EduRev

The document Relations of Partners (Part - 6) CA Foundation Notes | EduRev is a part of the CA Foundation Course Business Laws for CA Foundation.
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RIGHTS OF OUTGOING PARTNER TO CARRY ON COMPETING BUSINESS (SECTION 36):

(1) 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 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.

Agreement in restraint of trade- (2) A partner may make an agreement with his partners that on ceasing to be a partner he will not carry on any business similar to that of the firm within a specified period or within specified local limits and, notwithstanding anything contained in section 27 of the Indian Contract Act, 1872, such agreement shall be valid if the restrictions imposed are reasonable.

Analysis of section 36:

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)].


RIGHT OF OUTGOING PARTNER IN CERTAIN CASES TO SHARE SUBSEQUENT PROFITS (SECTION 37):

According to section 37, Where any member of a firm has died or otherwise ceased to be 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 whereby 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.

Analysis of section 37:

Section 37 deals with rights of outgoing partners. It lays down a substantial law relating to a liability of the surviving or continuing partner, who without a settlement of accounts with legal representatives of the deceased partner utilizes the assets of partnership for continuing the business.

Although the principle applicable to such cases is clear but at times some complicated questions arise when disputes are raised between the outgoing partner or his estate on the one hand and the continuing or surviving partners on the other in respect of subsequent business. Such disputes are to be resolved keeping in view the facts of each case having regard to section 37.

Example 1: A, B and C are partners in a manufacture of machinery. A is entitled to three-eighths of the partnership property and profits. A becomes bankrupt whereas B and C continue the business without paying out A’s share of the partnership assets or settling accounts with his estate. A’s estate is entitled to three-eighths of the profits made in the business, from the date of his bankruptcy until the final liquidation of the partnership affairs.

Example 2: A, B and C are partners. C retires after selling his share in the partnership firm. A and B fail to pay the value of the share to C as agreed to. The value of the share of C on the date of his retirement from the firm would be pure debt from the date on which he ceased to be a partner as per the agreement entered between the parties. C is entitled to recover the same with interest.


REVOCATION OF CONTINUING GUARANTEE BY CHANGE IN FIRM (SECTION 38):

According to section 38, 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.

Analysis of section 38: Mere changes in the constitution of the firm operates to revoke the guarantee as to all future transactions. Such change may occur by the death, or retirement of a partner, or by introduction of a new partner.


SUMMARY:

The mutual rights and duties of partners are regulated by the contract between them. Such contract need not always be expressed, 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 co-partner in doing acts in excess of his authority, real or implied. He may also become liable for an unauthorized act of his co-partner on the ground of estoppel.


TEST YOUR KNOWLEDGE

Multiple Choice Questions

1. A partner can be expelled if:

(a) Such expulsion is in good faith

(b) The majority of the partner does not agree on such expulsion

(c) The expelled partner is given an opportunity to start a business competing with that of the firm

(d) Compensation is paid

2. Which of the following is not the right of partner i.e., which he cannot claim as a matter of right?

(a) Right to take part in business

(b) Right to have access to account books

(c) Right to share profits

(d) Right to receive remuneration.

3. Which of the following acts are not included in the implied authority of a partner?

(a) To buy or sell goods on accounts of partners

(b) To borrow money for the purpose of firm

(c) To enter into partnership on behalf of firm

(d) To engage a lawyer to defend actions against firm

4. The reconstitution of the firm takes place in case

(a) Admission of a partner

(b) Retirement of a partner

(c) Expulsion or death of a partner

(d) All of the above

5. A new partner can be admitted in the firm with the consent of

(a) All the partners

(b) Simple majority of partners

(c) Special majority of partners

(d) New partner only

6. A partner may be expelled from the firm on the fulfillment of the conditions that the expulsion power is exercised.

(a) As given by express contract

(b) By majority of partners

(c) In absolute good faith

(d) All of the above

7. A minor is:

(a) A partner of a firm

(b) Representative of the firm

(c) Entitled to carry on the business of the firm

(d) Entitled to the benefits of the firm

8. If a partner commits fraud in the conduct of the business of the firm:

(a) He shall indemnify the firm for any loss caused to it by his fraud

(b) He is not liable to the firm

(c) He is liable to the partners

(d) He is liable to the third parties

9. Partners are bound to carry on the business of the firm-

(a) To the greatest common advantage

(b) For the welfare of the society

(c) For the advantage of the family members

(d) For earning personal profits

10. The liability of a minor partner is limited to the extent of:

(a) His share in the firm

(b) His personal assets

(c) His share in the firm as well as his personal assets

(d) He is not liable

11. The authority of a partner to bind the firm for his acts as contained in section 19 of the Partnership Act is known as:

(a) Express authority

(b) Legal authority

(c) Implied authority

(d) Managerial authority

Answers to MCQs

1 (a)
2 (d)
3 (c)
4 (d)
5 (a)
6 (d)
7 (d)

8 (a)

9. (a)

10. (a)

11. (c)


Theoretical Questions

Question 1: What do you mean by “implied authority” of the partners in a firm?

Question 2: State the modes by which a partner may transfer his interest in the firm in favour of another person under the Indian Partnership Act, 1932. What are the rights of such a transferee?

Question 3: Whether a minor may be admitted in the business of a partnership firm? Explain the rights of a minor in the partnership firm.

Answers to the Theoretical Questions

1. Implied Authority Of Partner As Agent Of The Firm (Section 19): Subject to the provisions 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. The authority of a partner to bind the firm conferred by this section is called his “implied authority”.

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 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.

Mode Of Doing Act To Bind Firm (Section 22): 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.

2. Section 29 of the Indian Partnership Act, 1932 provides that 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 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, 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 place, 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.

3. A minor cannot be bound by a contract because a minor’s contract is void and not merely voidable. Therefore, a minor cannot become a partner in a firm because partnership is founded on a contract. Though a minor cannot be a partner in a firm, he can nonetheless be admitted to the benefits of partnership under Section 30 of the Act. In other words, he can be validly given a share in the partnership profits. When this has been done and it can be done with the consent of all the partners then the rights and liabilities of such a partner will be governed under Section 30 as follows:

Rights:

(i) A minor partner has a right to his agreed share of the profits and of the firm.

(ii) He can have access to, inspect and copy the accounts of the firm.

(iii) He can sue the partners for accounts or for payment of his share but only when severing his connection with the firm, and not otherwise.

(iv) On attaining majority he may within 6 months elect to become a partner or not to become a partner. If he elects to become a partner, then he is entitled to the share to which he was entitled as a minor. If he does not, then his share is not liable for any acts of the firm after the date of the public notice served to that effect.

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