Rights Of A Minor In A Partnership

June 29, 2016

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In this blog post, Pramit Bhattacharya, a student of Damodaram Sanjivayya National Law University writes about how a minor can become a part of a partnership. The post also highlights the rights and liabilities of a minor after being admitted into a partnership, and also discusses the position of a minor after he attains majority.

A minor is a person who hasn’t yet attained the age of majority according to the Indian Majority Act of 1875.[1] Section 3[2] of the Indian Majority Act states that a person who is domiciled in India will attain majority at the age of eighteen.

Section 30 of the Indian Partnership Act[3] governs the admittance of a minor into a partnership. This section deals with the rights and liabilities of a minor who is admitted into a partnership and is entitled to the benefits of a partnership. A deeper reading of the provision, specifically sub-section (1)[4] Of the provision makes it very clear that a minor can’t be a full-fledged partner in a partnership. But with the consent of all the partners, a minor can be admitted to the benefits of a partnership.

Minors – Admitted only to benefits

The general principle which has been laid down in Section 11[5] of the Indian Contract Act, 1872, states that a person has to attain the age of majority and should be of sound mind and not disqualified to enter into a contract to be a competent party. The Indian Partnership Act, 1932 was drafted by a Special Committee. Before the enactment of this statute, the provisions relating to partnerships was enshrined in the Indian Contract Act itself. While drafting the Act, the Special Committee felt that no major changes were required in the Partnership Act, and they believed that there was no reason to deviate from the principle of incapability of a minor to enter into a contract as provided by Section 11 of the Contract Act. Following this, the Committee did not allow minors to become a partner in a partnership, although they allowed a minor to be admitted to the benefits of a partnership.[6] In the judicial pronouncement of S.C. Mandal v. Krishnadhan,[7] It was observed that under Section 4 of the Indian Partnership Act, a firm means a group of person who has entered into a contract of partnership among themselves and reading it with Section 11 of the Indian Contract Act, it can be interpreted that a minor cannot be a part of the contract of partnership. A minor can only be admitted to the benefits of a partnership, and that partnership has to exist independently. Also, there cannot be a contract between two minors. In simple words, there should be a partnership between two major partners before a minor can be admitted to its benefits.

In the case of H.R.G Ram v. Commissioner of Income Tax,[8] It was held by the High Court of Allahabad that any partnership deed which divides the obligations and rights between the major and minor partners equally will be invalid as it will be in contravention of Section 30 of the Partnership Act because in such a case not only the benefits are given to the minor, but liabilities are also being imposed upon the minor. There was some confusion regarding this proposition of law as in some cases, different high Courts of the country opined that even if a minor is made a full-fledged partner in a partnership firm, the partnership deed is to be interpreted in a liberal manner, and the obligations of the minor will be limited to the extent provided in Section 30 of the Partnership Act.

But in the landmark case of Commissioner of Income Tax v. D Khetan and Co.[9]The Apex Court made the legal stand clear on this issue by stating that where a minor is made a full-fledged partner in the firm, the firm could not be registered by the Income Tax Department. In case the Income Tax Department do register such a partnership firm, a new contract is to be made where the minor is admitted only to the benefits of the firm, and the original contract will be rendered invalid by registration of the new contract. Therefore, the proposition of the law is very clear. The partnership deed has to make it specifically clear that the minor is admitted only to the benefits of the firm and is not personally liable for the losses. In the judicial pronounce of Banka Mal Lajja Ram & Co. v. Commissioner of Income Tax, Delhi,[10] It was held by the Court that even if the other partners consent, a minor still can’t become a full-fledged partner in a firm through his or her guardian. In the case of CIT v. Kedarmall v Keshardeo,[11] it was held by the Court that a contract deed is valid when a guardian enters into a partnership on behalf of the minor, provided the minor is not made liable for the losses of the partnership, and the Guardian still had the right of being the guardian of the minor when the contract was entered into. Also, the income of a minor from a partnership will not be considered for the purpose of income tax.

Rights and liabilities of a minor

Sub-section (2)[12] of section 30 of the Partnership Act states that a minor is entitled to share of profits and the property of the firm which may have decided at the time the minor was admitted to the benefits of the partnership. Under this provision, a minor also has the right to access and inspects the accounts of the firm. But this right is limited to the access and inspection only of the accounts of the firm and not any other document of the firm. Under sub-section (3) of the provision, it is stated that the minor is liable to the extent of his share in the partnership and cannot be made personally liable for the losses of the firm. In the case of S.C Mandal v. Asutosh Ghose,[13] It was held by the Court that the creditors of the firm can only recover the amount from a minor to the extent of his share in the firm, but they can’t sue the minor personally. The full-fledged partners do not enjoy this benefit as they can be made personally liable. In the case of S.R Patil v. C.N. Sedalge,[14] It was opined by the Court that a minor who has been admitted to the benefits of a partnership can’t be declared insolvent even if the other partners are declared as insolvent.

Sub-section (4) of the provision states that the minor can sue other partners to get the benefits of the partnership, but this right to sue is limited by the provision. The minor gets the right to sue other partners to recover the benefits only if the minor sever all ties with partnership firm. This provision further states that in the case the minor sever all ties with the firm, valuation of his share is to be done by section 48[15] of the Act, as far as possible.

Position of minor on attaining majority

Under sub-section (5) of the provision, the minor has two options on attaining majority. Either he can sever the connection with the firm or become a full-fledged member. The minor has to make the decision within six months of attaining majority. If he chooses to become a full-fledged partner of the firm or sever the ties with the firm, he will have to give a public notice specified under section 72[16] of the Act. In the case that no public notice is given by the partner, he will be considered as a member of the partnership. The minor also continues to enjoy the rights which he enjoyed as a minor till he reaches a decision. Sub-section (6) of the provision states that burden of proving that the minor had no knowledge about the fact that he was entitled to enjoy the benefits of the firm lies on the party who alleges such facts. Clause (a) of sub-section (7) states that when a minor becomes a full-fledged partner, such minor will now be held liable not only for the future liabilities of the firm, but will be liable for those obligations also which were incurred by the firm from the date the minor was admitted to the benefits of the partnership. Clause (b) states that the share of the minor after he attains majority will be the same which was given to him when he was a minor. This is because, when the minor chooses to become a full-fledged member of the partnership, there is no break in the partnership and it continues as it is.

Sub-section (8) of the provision states that when the minor decides that he’ll not become a full-fledged member of the partnership, he will be liable for the obligations and liabilities of the firm until the time he gave a public notice stating that he wouldn’t continue as a partner in the partnership. After severing the ties with the firm, the minor may file a suit to recover the benefits he was entitled to. Sub-section (9) of the provision states that nothing is given in sub-section (7) and (8) will affect Section 28 of the Act which states that if a party has misrepresented some fact, he’ll be liable for holding out. Therefore, if a minor even after leaving the partnership represents himself as a partner, he’ll be estopped from denying it later.