This article is written by Prateek Singh from Institute of Law, Nirma University, Ahmedabad. In this article, the author explains the relation of partners to third parties.
Table of Contents
Introduction
A partner is considered to be an agent of the firm as per Section 18 of the Indian Partnership Act, 1932, that partner is granted a real or apparent authority to act on behalf of the firm and hence he represents the firm through his actions. A partner is granted permission to make moves, conduct business as usual with certain limitations being put in some ordinary or extraordinary situations. This will be talked about later in the article.
Partners to be an agent of the firms
As mentioned in Section 18 of the Partnership Act, 1932, a partner will be an agent of the firm for the purpose of the business of the firm. A partnership in business means that it is a relationship in which all the partners have come together to share the profits of the business and the business can be carried out by all or by one who will act on behalf of all. Going by the meaning of the definition it can be deduced that a partner is also an agent of the firm.
Implied authority of partner as agent of the firm
Acts done by the partner of the firm in the usual course of business binds the firm but this implied authority ceases to exist when there is already a contrary agreement in existence. Section 19(2) of the Indian Partnership Act, 1932, puts forth a list of things which a partner cannot do on behalf of the firm:
- Submit a dispute relating to the business of the firm to arbitration,
- Open a bank account on behalf of the firm in his own name,
- Compromise or relinquish any claim or portion of a claim by the firm,
- Withdraw a suit or proceeding filed on behalf of the firm,
- Admit any liability in a suit or proceeding against the firm,
- Acquire immovable property on behalf of the firm,
- Enter into partnership on behalf of the firm,
- Transfer immovable property belonging to the firm.
Extension and restriction of partner’s implied authority
The extension and restriction of the authority of a partner depends on the existing contract between the parties in the firm. However, a partner can still carry out actions on his own authority if he has an express authority of a partner which is either by an agreement or if the usage or custom of the trade permits him to.
Partner’s authority in an emergency
In cases of emergency, a partner has to do all such acts to protect the firm from occurring any loss which a person of ordinary prudence will do under the similar circumstances and that action will be binding on the firm. The requirements of the section are:
- There was an emergency situation.
- The partner acted in light of that situation.
- The partner did that to protect the firm from losses.
- The act was reasonable under those circumstances.
Mode of doing the act to bind the firm
Mentioned in Section 22 of the Indian Partnership Act, 1932, the act is done or executed by the partner in the firm should be done in the name of the firm or should be done in a manner which expresses or implies an intention to bind the firm.
Effect of admissions by a partner
As talked about in Section 23 of the Indian Partnership Act, 1932, admissions made by a partner concerning the affairs of the firms if made in the ordinary course of the partnership business are evidence against the firm. Such admissions made by the partners will bind the firm. However, the thing that needs to be noticed here is that if the admission made by a person of the firm was before the time he became a partner then it cannot be considered to be evidence against the firm.
Effect of notice to acting partner
Notice to one partner relating to the business of the firm operates as a notice to the firm. The partners to whom such notice is given must be acting in the business at that time. So notice to a dormant or a sleeping partner would not operate as a notice to the firm. A dormant or sleeping partner is someone who takes his share of the profit and of losses but is not a party to the active share of the business or partnership.
Consider a situation where the firm has appointed a person to manage its work and the person does that. What will happen if a notice is sent to such a person? This is clarified under Section 24 of the Indian Partnership Act, 1932, Section 24 explains what is the effect of the notice sent to an acting partner. It first explains what an acting partner means. An acting partner is a person who habitually acts in the business of the firm of any matter relating to the affairs of the firm operates as notice to the firm. If a notice is sent to such a person, it will be considered as a notice sent to a firm.
The section also provides for an exception whereby a fraud is committed on the firm by or with the consent of that partner.
Liability of a partner for acts of the firm
The liability of all the partners of a firm jointly or together is mentioned under Section 25 of the Indian Partnership Act. It lays down the fact that every partner of the firm can be held liable jointly or severally for all acts done by the firm while he or she is a partner of the firm. Such acts must be made in the name of the firm and under an ordinary course of business of the firm. Partners can be held liable jointly or individually depending on the act that has been performed and the decision made by the third party. This means that even if a partner had no role to play while deciding the act on behalf of the firm, he or she can be held liable to the third party if such act causes damage to them and they wish to sue all partners for the same.
Liability of the firm
For wrongful acts of a partner
Section 26 of the same act deals with the liability of the firm as a whole for an act or omission of a partner in the ordinary course of the business of the firm. Such an act may be passed with the authority of other partners and if such act causes loss or damage to the third party, then the firm shall be held liable to the same extent to which the partner is held liable. The reason is that such an act or omission is made in the name of the firm in due course of the ordinary nature of business. The firm is here to be assumed as a separate entity with powers and can be sued for the loss sustained by a third party. It establishes a relationship between the partner, the firm and the third party.
For misapplication by partners
Under Section 27 of the Act, a firm can also be responsible for any misapplication made by the partner. If any partner acts under relevant authority while receiving money or property from the third party and if such money or property is further misapplied by the partner, then the liability for the same can be put on the firm if the loss is sustained by the third party.
Moreover, if the firm receives such money or property and while having custody of the same a partner having authority misapplies it, then under this situation too the firm can be made liable for such misapplication by any other third party.
Holding out
Section 28 deals with the concept of holding out. The first part deals with anyone who (irrespective of whether he is a partner of the firm) conducts himself in a way as to represent himself as a partner of the firm and on the basis of such representation, the third party in good faith gives credit to such person, then such person shall be liable as if he were a partner of the firm under Section 25 of the Act for his conduct. It does not matter whether such a person is aware that the third party gave credit on the basis of having good faith in the representation made by him.
The second part of the section deals with a person who was a partner of the firm and after his death, his partnership has been automatically cancelled. In such a situation if the firm still continues under the old name consisting of the deceased partner’s name and if the business is done under such name, then this act of the firm does not make the legal representatives of the deceased partner liable to any third party which sustained losses due to such act of the firm on the grounds that the deceased partner is no longer holding any responsibility or liability to the firm after his death. Hence, all acts after his death shall not hold out his legal representatives or his estate to be liable to any extent either jointly or severally.
Minors admitted as partners
According to Section 30 of the Partnership Act, 1932, someone who is recognised as a minor by the law may not be a partner of the firm but the minor with the consent of all the partners in the firm can be given the benefits of the partnership. Minors are considered to be unfit to be able to make decisions for themselves by the law. Keeping that in mind, when a minor is admitted in a partnership setup, he is liable for his shares in the partnership but not liable for his actions.
After the minor has attained majority, at any time within six months or of his obtaining the knowledge that he has been admitted to the benefits of the partnership, whichever date is later, the minor has to issue a public notice announcing that he has elected to become a partner in the firm. Another option available to him is declaring that he has elected not to become a partner in the firm, in case if he fails to give that notice, he shall be admitted into the firm as a partner after the expiration of the said six-month term.
In cases when the minor decides to be a partner in the firm, as mentioned in Section 30 (7) of the said Act, the minor from then onwards personally becomes responsible towards the third parties in relation to all the acts done by the firm and his share in the profits and property remain the same as they were when he was a minor.
In cases when the minor chooses to not be a partner, this clause is talked about in Section 30(8) of the said Act, what changes is that he becomes eligible to sue the partners of the firm regarding his share of the property and the profit and his rights and liabilities continue the way they were when he was a minor and that is only subject to change the day he gives out the public notice.
Conclusion
This article talks about different aspects of a partnership firm by taking references from the Indian Partnership Act, 1932. This article discusses how partners are liable for the third parties, under what circumstances can partners be granted permission to act on behalf of the firm, what limitations are put forth by the said act while the partners act on behalf of the firm, what is implied authority in a partnership setup, what are the options available to the partners in case of emergency; the article also discusses the partners’ authority under emergency situations and how the partner is supposed to act in those situations. This article also talks about how minors can be included in a partnership setup and what stages they have to go through in order to avail their benefits and what happens when a minor accepts or rejects being a partner to the firm.
References
- https://studyduniya.com/app/study_post.php?course=CA%20CPT&subject =Mercantile%20Law&chapter=The%20Indian%2 0Partnership%20Act,1932&id=1653
- https://www.toppr.com/guides/business-laws/the-indian-partnership-act/relation-of-partners-to-third-parties/
- https://www.mca.gov.in/Ministry/actsbills/pdf/Partnership_Act_1932.pdf
LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join:
