This article is written by Sparsh Agrawal and further updated by Anwesha Pati. This article discusses the various types of partners and their characteristics in accordance with the Indian Partnership Act. Furthermore, the rights and duties of each of the partners in a partnership firm are discussed.

Introduction 

A partnership is basically a contract wherein two or more people agree to carry out a business together. A partnership can be considered as a joint venture as opposed to a “sole proprietorship” wherein a single person carries out his business with his individual resources, skills and efforts. The major disadvantage of being a sole proprietor is that since there is only a single person involved in the business, it is difficult for him to manage the huge resources and investments in the business. 

On the other hand, in a partnership, a number of persons are involved and they can pool their resources in order to form and manage a much larger business. Moreover, if there is a loss in the business, it can be divided amongst the partners of the partnership firm.

A partnership is an agreement between two or more people who wish to share profits and losses for the partnership firm. However, in a partnership, all the partners do not participate in all the activities of the firm for profits and losses equally. The nature of a partnership varies depending upon the extent of liability of the partners and their participation in the firm. The main purpose of this article is to discuss the various types of partners in a partnership.

Definition of partners

According to Section 4 of the Indian Partnership Act, 1932 (hereinafter mentioned as the Act), a partnership is defined as a relationship between two or more people who have entered into a mutual agreement between themselves to share the profits and losses in the business which is carried on by all or any of them acting for all the partners. Therefore, people who have entered into an agreement with one another are individually known as partners.

According to the definition in Black Law dictionary, a partner is a member of a firm or co-partnership who has united with others in order to form a partnership in business. 

Types of partners in the Partnership Act

The types of partners under the Act can be studied under the following heads:

• Active partner
• Incoming partner
• Outgoing partner
• Minor partner
• Partner by holding out 
• Dormant partner

Before we delve in detail about the types of partners, it will be apposite to mention certain other partners which are not explicitly mentioned under the Act. Yet they are often used in common parlance to denote their position in a partnership. They have been discussed in the later part of the article under the following heads :

• Nominal partner
• Limited partner
• Partner in profits only
• Secret partner 

Active partner

The term active partner is explicitly not mentioned in the Act but it denotes those partners who are carrying on the business of the partnership. An active partner is responsible for managing the affairs of the firm. While acting for the firm, he acts as an agent of the other partners too as partnership thrives on the mutual trust and confidence amongst the partners. He may take up different roles such as manager, advisor, organiser and controller of affairs of the firm. 

The main function of an active partner is to look after the overall functioning of the business. Hence, if he wishes to retire from the firm, he is required to give a public notice to the remaining partners. The purpose of this public notice is to absolve himself from liability and acts done by the other partners after his retirement. If he doesn’t issue a public notice declaring his retirement he would be held liable for the acts done by other partners post-retirement also. 

Rights of an active partner 

• Right to take part in business: The partners have the right to take part in the conduct of business of the firm under Section 12(a) of the Act. It is in the nature of a joint venture where every partner is given the opportunity to contribute towards the progress of the firm. The right to take part in the business is an important aspect of partnership which allows the partners to have a say in the way the business is carried and suggest measures to maximise profits.
• Right to have access to books: Section 12(d) of the Act allows every partner the right to have access to the books of accounts of the firm and also inspect and copy them. The books can be inspected by the partner himself or his agent but he can be restrained by the firm from utilising the information received if it can cause damage to the reputation of the firm or harm its business.
• Majority rights: Every partner has the right to be consulted in matters of business policy which may relate to an ordinary matter or fundamental matter. Ordinary matters relate to matters regarding execution of the business. Fundamental matters relate to questions regarding alteration or addition to the business or admission of a new partner. In the case of any difference of opinion with regard to ordinary matters, it has to be decided by the majority of partners. However, if there is a change in the nature of business, the consent of all partners are required.
• Right to profits: Section 13(b) states that the partners of a firm are entitled to share the profits earned between them equally unless an agreement has been signed that stipulates the share of their profits. Also in the case of contribution to be made by the partners for losses, it should be made equally. 
• Right to interest: Section 13(d) states that where a partner has advanced money, exceeding the amount agreed to be paid by him for the purpose of business of the firm, he is entitled to receive interest on the sum advanced at the rate of six percent. The interest has to be paid from the profits made by the firm.
• Right to remuneration: Under Section 13(a) of the Act, the partners are not entitled to receive any remuneration or salary for their contribution in business. Their position is not the same as a regular employee of the firm. However, the partnership agreement may contain provisions for remuneration to its partners.
• Right to indemnity: Section 13(e) of the Act provides that in case any payment is made or any liabilities are incurred by a partner, he is entitled to be indemnified by the firm. This right to indemnity can be claimed in two situations. Firstly if the partner has made payments in the ordinary course of conduct of business. Secondly, a partner is entitled to recover the expenses incurred by him in the case of an emergency, for doing any act which is necessary for protecting the firm from loss.

Duties of an active partner

• Duty of good faith: Section 9 of the Act provides that the partners are bound to act in a truthful and just manner. They are to furnish true accounts and disclose full information about any matter that is likely to affect the firm. The business of the firm must also be carried out so that it is advantageous for all the partners. 
• Duty not to compete and account for personal profits: Section 16(b) of the Act states that a partner must not carry out any business that is competitive or similar to that of the firm. Also a partner is not allowed to derive any profit by carrying out a transaction which would not have been possible had it not been for his connection with the partnership firm. 

However, a partner is not precluded from carrying out any business or transaction which is independent of the business of the firm and does not have any bearing upon it. 

• Due diligence: Section 12(b) of the Act states that the partners of a firm must act in a diligent manner in respect of its affairs. Section 13(f) states that it is the duty of the partners to act in a responsible way so that the firm is able to function properly and earn substantial profits. 

In case of any loss that is caused to the firm by virtue of the negligent act of the partners in the conduct of business, he will be liable to indemnify the firm in respect of the losses. The term negligence here refers to wilful negligence which means to act irresponsibly without any proper regard for the welfare of the firm. 

• Duty to use property for firm purposes: Section 15 of the Act states that it is the duty of the partners that the property of the firm must be used only for the purposes of business of the firm. If any damage is caused to the property in the course of personal use, he has to indemnify the firm for the same.

Liabilities of an active partner

• An active partner has unlimited liability in respect of losses incurred by the firm for any act of its partners.
• An active partner must be honest in their dealings with their co-partners as well as third parties. If a partner acts fraudulently and causes any loss to the firm, he will be liable to the firm to make good the damages incurred under Section 10 of the Act.
• An active partner is liable to render any profits made by him, to the firm by making use of the property of the firm or the firm name.

Related case laws

Pulin Bihary Roy and Ors vs. Mahendra Chandraghosal and Ors (1921)

Facts 

In this case, the partnership named Joint Salt Bond Business was involved in the business of importing salt from foreign countries and reselling them in Chittagong. The partnership consisted of Krishnadas Sanatan Brojendra Kumar Ray, Krishna Kumar Ghosal, Ramkumar Radhaballabh Saha and Gangadas Seal and their respective shares in the firm were predetermined. 

The partners managed the business by taking turns, where the first quarter was managed by the Ghosals, the second quarter by the Seal, the third quarter by the Shas and the fourth by the Rays. The amount of salt sold and the price fixed by each of the partners in their respective quarters was kept in a record book. 

At the end of each quarter, there used to be an adjustment of accounts in order to pay off the amount due amongst the partners. The plaintiffs started a separate salt business but it was contended by them that the other partners were also carrying separate businesses and they cannot be held liable to render the profits.

Issues

Whether the plaintiff could be held liable to render the accounts to the defendants, for a separate salt business started by them.

Judgement

The Calcutta High Court held that if a partner carries on a business that is similar and competing to that of the firm, without the consent of the other partners, he is liable to render the profits to the firm and is also bound to pay compensation if any loss has been incurred. This is in consonance with Section 259 of the Indian Contract Act, 1872 and the rules of partnership. The evidence clearly shows that the partners were engaged in a business that was similar to that of the firm. They had breached their duty of not carrying a competing business and hence were liable to pay the profits to the firm. 

Sasthi Kenkar Bandopadhya and Ors. vs. Man Gobinda Chandra and Another (1919) 

Facts 

In this case, a suit for dissolution of partnership and accounts was filed. The defendants were the managing partners who were sued on the ground of negligence and contribution for losses were claimed against them. The contention of the plaintiffs were that the defendants had failed to claim the price of coals from certain firms as a result of which one of the claims had become time barred and the other could not be realised as the debtors had become insolvent. 

Issues

Whether the defendants could be held liable for contributing to the losses on the ground of gross negligence.

Judgement

The Patna High Court held that the defendants were liable for the claim which had become time barred because they were not diligent enough to pursue it within the time limit. As regards the insolvency of the other firm, the knowledge of their insolvency was received by the defendants much later and hence they had not acted negligently.

Incoming partner

An incoming partner refers to a partner who has been newly admitted into the partnership. Section 31 of the Act deals with the process of introduction of new partners. It states that a person cannot be introduced into the firm as a partner without obtaining the consent of all the existing partners.

Rights and duties of an incoming partner

The rights and duties of an incoming partner are the same as that of an active partner. A partner who has been newly inducted into a firm must carry on the business diligently. He will be entitled to receive an equal share in the profits made by the firm. At the same time, an incoming partner has the duty to render true accounts of the business to the other partners. He must apply the property and capital of the firm for legal purposes only.

Liabilities of an incoming partner

Section 31(2) provides that a person who has been newly inducted into the partnership, will not become liable for acts done by the firm before he became a partner. An incoming partner becomes liable for any debts that incurred by the firm after the date of his admission. 

However, an agreement can be made between the new partner and the remaining partners that he will be liable for the debts incurred before his admission. But this agreement is binding between the partners only and third parties are not allowed to sue the new partner for acts of the firm before his admission. In order to make the new partner liable for past debts, two things must be satisfied. 

Firstly, the newly constituted firm must accept that the new partner is liable for the past debts. Secondly, the creditors of the firm must be notified about the change in the constitution of the firm, who have to accept the terms of the new arrangement expressly or impliedly. Whether a creditor has impliedly consented to the terms can be understood if he continues to deal with the firm after reconstitution or brings a suit against the new firm regarding any issue. 

Related case laws

B.M Devaiah vs. Canara Bank and Onr. (2002)

Facts

In this case, a partnership under the name of M/S Simon Enterprises was carried on by Mrs. Kitty Mandanna and Shri C.P Muthanna. It was involved in the hotel and restaurant business. The firm took a loan from the plaintiff bank by executing a promissory note and property was also mortgaged to secure the loan. 

The firm informed the bank after a few months, that a new partner Mr. B.M Devaiah has been inducted as a partner. When the firm failed to pay the outstanding dues in respect of the loan amount, the bank filed a suit for recovery against all the three partners. The new partner contended that he could not be made liable for the loan amount as Section 31 of the Act states that an incoming partner cannot be held liable for acts of the firm before he joined it.

Issues 

Whether the new partner could be held liable for the past debts of the firm?

Judgement

The Karnataka High Court held that the evidence adduced by the firm clearly shows that the reconstituted firm had taken over the liability for acts of the firm before the reconstitution. Mr. Devaiah had made efforts towards the discharge of the debt which confirms that he had accepted his liability in respect of the outstanding loan. His contention that Section 31 of the Act would be applicable to him is not maintainable. He further contended that the payments were made because he was threatened by the bank that in case of failure to pay off the loan, a suit for recovery would be instituted is also not tenable.

Outgoing partner

An outgoing partner is a partner who voluntarily retires without dissolving the firm. He leaves the existing firm, therefore he is called as an outgoing or retiring partner. Section 32 of the Act provides for the various modes of retirement of a partner. A partner can retire either by obtaining the consent of all the other partners or according to the terms of the agreement set out at the beginning of the partnership or in case of a partnership by will, by giving notice to the other partners in writing that he intends to retire.

Insolvency and death of a partner act as a cessation of being a partner in a firm, hence, they are also considered as outgoing partners. In case of insolvency, the estate of an insolvent partner no longer remains liable for acts of the firm done after he has been adjudicated as insolvent under Section 34 of the Act. Similarly, in the case of the death of a partner, his property cannot be held liable for acts done after his death under Section 35 of the Act.

Rights of outgoing partner

The rights of an outgoing partner are provided under Section 36 of the Act. It states that an outgoing partner is allowed to carry on a business that is competing in nature to that of the firm in which he was a partner. He may also advertise about his business, as all of this is necessary to set up a new venture and an important part of the right to freedom of trade. But he is prohibited from doing the following things:-

• He cannot use the name of the previous firm. 
• He cannot represent to his customers that he is still associated with the previous firm.
• He is not allowed to solicit the customers of the previous firm in which he was a partner. 

Section 36(2) also encompasses an important aspect of partnership law. It allows a partnership firm to enter into an agreement with a retiring partner, restraining him from carrying on a similar business to that of the firm for a specific period or within a specified local limit. 

Such an agreement falls within the exception to Section 27 of the Indian Contract Act,1872 which deals with agreements in restraint of trade. An agreement of this nature is valid under the Act as it allows a firm to protect its business. All that is necessary is that the agreement must be reasonable and specify the period of restraint or the geographical limits.

Section 37 of the Act lays down the rights of an outgoing partner in case where the firm is continued by the remaining partners. If a partner leaves the firm or dies and the partnership business is carried forward by the surviving partners, without there being a final settlement of accounts between the outgoing partner and the other partners, he is entitled to receive a share of the profits made by the firm by making use of his share of the firm property. However, if the surviving partners purchase the share of the deceased or outgoing partner, then he will not be able to claim a share in the profits.

Duties of an outgoing partner

• An outgoing partner must pay off his share of debts before leaving the firm.
• An outgoing partner must give public notice of his retirement to third parties so as to absolve himself of the acts of the firm done after his retirement.
• It is the duty of an outgoing partner to give full account of his dealings with third parties to the other partners and return the assets of the firm which were in his possession.

Liabilities of an outgoing partner

Section 32(2) states that a retiring partner can be released from his existing debts incurred for the acts done by the firm before his retirement by entering into an agreement with the other partners and the creditors. In such a case, the remaining partners must agree amongst themselves that the retiring partner shall be released from his liabilities. At the same time, the creditors must also be informed about the retirement of the partner and they have to agree to the reconstituted firm as its debtor. Only then the retiring partner is absolved from his liability. 

Section 32(3) states that a retiring partner is liable to third parties for all his debts and obligations incurred before his retirement. However, he can be held liable for his future obligations, if at all he fails to give a public notice stating his retirement from the partnership firm. A retired partner cannot be held liable to any third party if that person enters into business with the firm without knowing that the retired partner was a partner.

Minor partner

A minor is a person who has not attained the age of majority in the law of the land. Section 3 of the Indian Majority Act,1875 states that a person who has attained the age of 18 years is considered to be a major. It is pertinent to note that, Section 11 of the Indian Contract Act,1872 prohibits a minor from entering into an agreement, as the agreement entered by a minor is considered void ab initio. 

Thus a minor cannot be regarded as a partner in a firm because a partnership essentially stems from a contract, and a minor is incompetent and cannot enter into a contract. 

Rights of a minor partner

• Section 30 of the Act allows a minor to enjoy the benefits of partnership when a set of rules and procedures are complied with in accordance with the law. Section 30(1) states that a minor can be admitted to the benefits of a partnership after obtaining the consent of all the partners. 
• Section 30(2) states that a minor is entitled to the shares of property and profits of the firm, which has to be stipulated through an agreement. He will also be entitled to have access to and inspect and copy any accounts of the firm. 
• Section 30(4) states that a minor is not entitled to sue the partners for accounts or payment of shares of his property or profit unless he is severing his connection with the firm. In such cases, the valuation of the amount of his share shall be made in accordance with the rules contained in Section 48 of the Act. 

Duties of a minor partner

• Section 30(5) states that a minor, on attaining majority or on obtaining the knowledge about his admittance into the benefits of partnership, should give a notice within six months as to whether he has decided to become a partner of the firm or not and the notice will determine his position in the firm. However, if he fails to give the notice before the expiry of the six months, he will be inducted into the firm as a partner. 
• Section 30(6) stipulates that if a person who has been admitted to the benefits of a partnership during his minority claims that he did not have the knowledge of such admission even after the expiry of six months from the date of attaining majority, the burden of proving such a fact on the person who is claiming it. 
• The provisions, if he chooses not to continue into the firm as a partner, have been provided under Section 30(8). In such a case, his rights and liabilities as a minor continue up to the date on which he gives public notice and his shares shall not be liable for acts of the firm after such date. He will also be entitled to institute a suit against the firm for his share of property and profits.

Liabilities of a minor partner

• Section 30(3) sets out the liability of a minor partner when he has not attained majority. It states that only the shares of the minor will be liable for any act of the firm and he will never be personally liable. 
• Section 30(7) provides that the rights and liabilities of a person who is inducted as a partner after the cessation of his minority. He is subjected to the same rights and liabilities as that of a regular partner. He becomes personally liable for the acts of the firm since the date of his admittance into the firm. His share in the property and profits continue to remain the same unless it is altered by agreement. 

Related case laws

Commissioner of Income-Tax, Bombay vs. M/S Dwarkadas Khetan and Co. (1960)

Facts

In this case, a partnership was entered between four people out of which one of them was a minor. But he was admitted as a full-time partner, subjected to all the rights and liabilities as applicable to all partners. The Registrar of Firms granted a certificate indicating that the minor was a full-time partner and not one who was admitted to the benefits of partnership. However, the Income Tax officer refused to register the firm under the Income Tax Act, 1961 and his decision was upheld by the Income Tax Appellate Tribunal. The High Court reversed the decision of the Tribunal. An appeal was preferred by the Commissioner of Tax before the Supreme Court.

Issues

Whether a partnership deed which mentions a minor as a full-time partner in a firm can be registered under the Income Tax Act? 

Judgement

The Supreme Court held that a minor cannot be considered as a full-time partner by virtue of Section 30 of the Act. A minor can be allowed to sign the registration application as all partners are required to sign it during the process of registration. But he cannot be treated as a full-time and competent partner. A partnership deed which goes beyond this interpretation is incorrect and would be invalid for the purposes of registration under Section 26A of the Income Tax Rules, 1962.

State of Kerala vs. Laxmi Vasanth (2022)

Facts 

In the case, the respondents, Lakshmi Vasanth and J. Raj Mohan Pillau were minors when they were inducted into the partnership firm named M/s. Malabar Cashew Nuts and Allied Products. After reconstitution of the partnership firm in 1976, they were removed as partners. The Sales Tax Department was aware that they have been removed from the firm. Both the respondents attained majority in the years 1987 and 1984 respectively. 

The concerned department made a demand for sales tax against the partnership firm as well as both the respondents for the period between 1970-71 to 1995-96. The learned Single Judge set aside the demand made against the respondents. An appeal was filed against the judgement which was dismissed by the Division Bench of the High Court. Aggrieved by the order, the state filed an appeal before the Supreme Court.

It was contended on behalf of the state that the respondents on attaining majority had not given any notice as required under Section 30(5) of the Act. Hence they were still considered as partners of the firm and as such liable to pay the dues. The respondents contended that since they had been removed from the firm in 1976 which was within the knowledge of the department, they were no longer a part of the firm on the date of attaining majority. Therefore, Section 30(5) was not applicable to them.

Issues

Whether the respondents could still be considered as part of the firm and held liable for its debts?

Judgement 

It was held that Section 30(5) becomes applicable only when a person is inducted into a partnership during his minority and continues till he becomes a major. On attaining majority, he is required to give notice within six months, as to whether he intends to continue in the firm or not. On failure to give notice, he is considered to be a partner of the firm and the provisions of liability under Section 30(7) will be applicable. Where the minor ceases to be a partner at the time of attaining majority, Section 30(5) will not be applicable and cannot be held liable for dues of the firm when he was a minor partner.

Partner by holding out

Apart from the aforementioned partners, a person can also become a partner by holding out under Section 28 of the Act. It refers to a person who has made a representation by words, actions or conduct to third parties that he is a partner in the firm and on the basis of that representation, the other person has given credit to the firm. 

Thus, he has become a partner by holding out even though he is actually not a partner. It is pertinent to note that, though he does not contribute to the capital or management of the firm but on the basis of his representation in the firm he is liable for the credits and loans obtained by the firm. 

There are two essential conditions for establishing the doctrine of holding out – 

1.  Firstly, the person must have made a representation by words, actions or conduct that he is a partner in the firm. An express representation may be made when a person allows the firm to use his name in its title or signboard as can be seen in the case of Bevan vs. National Bank Ltd.(1906) 23 T.L.R. 65. In this case, a person named Malcolm Wade used to manage the business of another person B. 

The business was carried out in the name of Malcolm Wade & Co. It was held that since Mr. Wade had permitted the firm to use his name in its title, a representation was made to the third parties that he was a partner in the firm and was liable to every person who would act on that representation and give credit. 

2. Secondly, the other party must substantially prove that he had knowledge of such representation and he acted on it. Thus, in order to hold a person liable under this doctrine, it is necessary that the representation must have reached the plaintiff and he must have acted upon it. The fact that the defendant did not know that the representation made by him had come to the knowledge of the plaintiff is immaterial. 

Rights of a partner by holding out

A partner by holding out is not subjected to the same rights as those enjoyed by the other partners. He merely allows his name to be used in the name of the firm or makes a representation to third parties that signifies that he is a partner in the firm. He is not involved in the day to day conduct of business of the firm.

Duties of a partner by holding out 

If a partner is aware that his name is being used by a firm to which he has not consented, he must give public notice to its customers in order to absolve himself from being held liable by holding out.

Liabilities of a partner by holding out

A partner by holding out will be liable like the other partners to third parties, if they have given credit to the firm on the basis of his representation. However, if the third party, despite knowing of the representation does not act upon it or does not believe it to be true or gives credit to the firm irrespective of the representation made, the case of holding out is not made out. In such cases, he cannot be held liable for any loss incurred.

Effect of the doctrine of holding out in certain cases

• Retirement of a partner: The doctrine of holding out continues to apply in case of a partner who has retired without giving public notice. In such a case, he continues to be liable to its customers because they have given credit to the firm without knowledge of his retirement. The customers can choose to sue the old firm or the new firm constituted after his retirement, but he is not allowed to sue both. 
• Death of a partner: Section 28 does not apply in case of a partner who is no longer alive because in case of his death, his estates cannot be held liable for the acts of the firm done after his death under Section 35 of the Act. Therefore, even if the firm continues to use his name in the affairs and title of the firm, the doctrine is not applicable.
• Insolvency of a partner: When a partner becomes insolvent, he ceases to be a partner from the date of his insolvency and his liability also comes to an end. His estates cannot be held liable for any act done by the firm after his insolvency under Section 34 of the Act, hence the doctrine of holding out does not apply even if he has not given notice.
• Dormant partner: A dormant partner is one who does not take an active part in the business of the firm hence his existence is not known to the customers. Although his liabilities are the same as that of the other partners, in case of his retirement he is not required to give public notice and the doctrine of holding out will not be applicable.

Difference between partner by holding out and partner by estoppel

There is a fine line of distinction between a partner by holding out and partner by estoppel. In the case of the former, a person who is actually not a partner allows his name to be used in the name of the partnership business or makes a representation to its customers that he is a partner in the firm. Here the firm along with the person who held himself out are liable to the customers who advanced capital based on the representation. 

Whereas, in case of partner by estoppel, a person himself represents to third parties that he is a partner of the firm where he is actually not so. In this case, the rule of estoppel becomes applicable and he is not allowed to go back on his word and say that he is not a partner. He alone will be held liable to those persons who gave credit on the basis of his representation.

Related case laws

K. Venkatasubbamma and Ors vs. K. Subba Rao Nuna Venkatarami Setti and Ors (1964)

Facts 

In the case, a pronote was executed in favour of a partnership firm for the purpose of business which was attested by the managing partner and two other partners. Few payments were made by the partners in order to pay off the money. In the meantime, one of the attesting partners died and the partnership was considered as dissolved in the eyes of law. But the business was carried on by the managing partner. He also made payments towards the pronote. 

A suit was instituted against the firm for payment of the money advanced through the pronote, in which the legal representatives of the dead partner were held liable. They contested the suit on the ground that by virtue of Section 45 of the Act, the estates of a deceased partner cannot be held liable for acts of the firm done after his death. It was also contended that Section 28(2) of the Act makes it amply clear that if the partnership business is continued in the old name, after the death of a partner, his legal representatives and estates cannot be held liable for acts done after his death

Issues 

Whether the legal representatives of the deceased partner could be held liable for acts of the firm after the death of the partner.

Judgement

The court held that the legal representatives of the deceased partner are not bound by the payments or acknowledgments made by the managing partner. The proviso to Section 47 clearly states that a deceased partner, similar to a partner who has been adjudicated as an insolvent or a dormant partner, stands on a different footing as he cannot be held liable for acts done after his death, in case of dissolution of the firm. Further, Section 45 of the Act which deals with the implied authority of a partner to bind the other partners for acts of the firm, even after dissolution cannot be invoked in such a case.

Juggilal Kamlapat vs. Sew Chand Bagri and Ors (1963)

Facts 

In the case, the question of liability under Section 45 of the Act arose. Sew Chand Bagi had three sons Moti Chand, Manik Chand and Janki Das. All of them were part of a Hindu joint family and carried on a partnership business. After the death of their father, the partnership was carried out jointly by the brothers which was dissolved during Diwali, 1945. 

A deed of dissolution was made on the basis of which it was decided that they were at liberty to start their own business and would not use the name and style of the old partnership. It was agreed between them that Manik Chand would carry on the business under the name of “Manik Chand Bagree”, Moti Chand under the name of “Sew Chand Moti Chand” and Janki Das was allowed to carry on the business under the old name of “Sew Chand Bagree”.

The appellant placed an order for a number of jute bags with the firm of Sew Chand Bagree in September, 1948. When the goods were not delivered, he claimed the damages and referred the case to the Bengal Chamber of Commerce for arbitration. The award was passed in his favour and accordingly an execution application was filed by him under Order 21 Rule 50 CPC, against the respondents Manik Chand, Moti Chand and Janki Das on the ground that they were partners to the firm. This was contested by Manik Chand and Moti Chand.

Issues

Whether Manik Chank and Moti Chand could be held liable under the Doctrine of holding out, for debts incurred by the firm of Sew Chand Bagree?

Judgement

The court held that in the present case, the dissolution of the firm took place in 1945 but the business was carried on by one of the partners under the same name. The appellant entered into a contract after the dissolution took place. 

Hence, he had no knowledge about Manik Chand and Moti Chand being partners of the firm and had not dealt with it on that basis. Section 45 of the Act states that in case of dissolution of partnership, a retired partner cannot escape liability for debts incurred by the firm after his retirement, until public notice is given. However, if the person dealing with the firm had no knowledge that the retired partner was a partner of the firm, he cannot be held liable. 

Thus, Manik Chand and Moti Chand, both being partners of the old firm could not be held liable as the appellant did not know whether they were partners or not at the time of entering into the contract with the firm of Sew Chand Bargee.

Dormant partner/ Sleeping partner

A “dormant partner” is one who does not take an active part in the management of the partnership firm. A person may not be able to act as a full-time partner, but he might be keenly interested in investing in the business and sharing the profits. In such a case he can act as a dormant partner in the firm. A dormant partner like any other partner brings share capital to the firm and has to make a contribution in order to pay off its debts. As opposed to an active partner, the role of a dormant partner is restricted as he is not actively associated with the decision making process of the firm.

Rights of a dormant partner

• A dormant partner is entitled to receive his share of profits made by the firm.
• A dormant partner does not have a say in the management of the firm business.
• A dormant partner is not allowed to withdraw remunerations from the firm as he is not participating in the daily operations of the business. If at all the partnership deed is providing remuneration to dormant partners, it is not deductible under Section 40 of the Income Tax Act, 1961. 

Duties of a dormant partner

Since the dormant partner is not known to the creditors of the firm, it is not necessary for him to give public notice in case of his retirement. However, if his name was known to some of the creditors, notice of his retirement must be given to them in order to preclude him from being held liable by holding out. 

Liability of a dormant partner

A dormant partner will be subjected to the same liabilities as the other partners. He can be held liable for acts of the firm but his liability is limited to the extent of contribution made by him in the capital of the firm.

Sub-partner

A sub-partner is a person who has been assigned a share of profits in a partnership firm by a partner of that firm. He gives a part of his share to the sub-partner. In this case, the relationship is not between the sub-partner and the partnership firm but is between him and the partner. Therefore, a sub-partner is a non-entity of the firm and he does not hold any liability towards the firm. A sub-partner usually agrees to share profits which are derived from the third party. Such a partner cannot represent himself as a partner in the original firm. 

Rights and duties of a sub-partner 

A sub-partner doesn’t reserve any right in the original firm. He can only claim his agreed share of profits from the partner who has contracted him to be a sub-partner. Similarly, a sub-partner is not subjected to any duties like the other partners of the firm as there is no agency between him and the firm. His position is that of a stranger with whom the profits of the firm are shared by its partner.

Liability of a sub-partner

A sub-partner is not considered as a part of the partnership firm. Hence, he is not liable for acts done or any losses incurred by partners of the firm.

Related case laws

Commissioner of Income-Tax, Punjab vs M/S. Chander Bhan Harbhajan Lal (1966)

Facts

In this case, a partnership firm named Chander Bhan & Co. was registered in Ferozpur in December, 1948. The firm which initially consisted of five partners was reconstituted to include eight partners among which Gosain Chander Bhan was a major shareholder. Another firm named Messrs Chander Bhan Harbhajan Lal, consisting of 14 partners, was constituted by a deed of partnership at Rupar in December, 1952. 

An application for its registration was made under Section 26A of the Income Tax Act, 1961. Gosain Chander Bhan was also a major shareholder of the firm at Rupar. It was admitted by Harbhajan Lal that Gosain Chander Bhan was not a partner of the firm at Rupar in his individual capacity but had joined it on behalf of the Ferozpur firm and the amount invested in the firm came from the Ferozpur firm. 

The application was rejected by the Income Tax officer on the ground that the deed of partnership did not disclose the details of the 14 partners properly and that all the partners of the Ferozpur firm were partners in the Rupar firm which exceeded the limit of total number of partners allowed in a firm. The Commissioner of Income Tax filed a petition by special leave before the Supreme Court for the purpose of deciding certain questions of law.

Issues 

• Whether the Ferozpur firm could be considered as a sub partner of the firm at Rupar.
• Whether the Rupar firm was eligible for registration under Section 26A of the Income Tax Act. 

Judgement 

The Supreme Court was of the opinion that a sub partnership comes into existence only when there is already a partnership subsisting. It is in the nature of a partnership within a partnership. In the present case, the Rupar firm had come into existence after Ferozpur firm had been constituted. Hence, it is not a sub partner of the firm at Rupar. The clause in the partnership deed of the Ferozpur firm which stipulated that the profits and losses would be shared between the partners laid down the liabilities amongst them in respect of Gosain Chander Bhan’s share in the Rupar firm. Additionally, the statements made by Harbhajan Lal wherein he had admitted that the Rupar firm consisted of fourteen partners proves the fact that the partners of the Ferozpur firm were not part of the Rupar firm.

As to the question, whether the firm is registrable under Section 26A, the court has held that the Income Tax officer must take into consideration whether the partner joined the firm in their individual capacity or as representing a group of persons. In the present case, Gosain Chander Bham had joined the firm at Rupar in representative capacity. A partner can join a firm in representative capacity, but that cannot be the ground for refusal of registration. 

A partner can act as a Karta of a joint Hindu family or as a trustee or become a benamdar. In such cases, he fulfils two positions. In respect of the partnership, he acts in his personal capacity and in respect of the third parties, he acts in his representative capacity. The fact that one of the partners of a firm seeking registration has brought capital from another firm in which he is a partner and also shared the profits obtained from the former firm does not imply that the partnership is not genuine.

Other partners

Now that the major types of partners have been discussed in detail, let us have a look at the other types of partners briefly.

Nominal partner

A nominal partner, as the name suggests, is one who allows a partnership firm to use his name for the purpose of attracting creditors and does not contribute to the capital. He is only lending his name to the firm and does not have a voice in the management of the firm. Thus a nominal partner’s contribution to the firm is only in terms of his reputation and fame, which allows the firm to secure credit and also showcase its efficiency. For example, if a firm enters into a partnership with a celebrity or a business tycoon, it will help in increasing its brand value, as the creditors will associate the goodwill of the celebrity with that of the firm, thus increasing the likelihood of investment.

This partner does not share any profit and losses in the firm because he does not contribute any capital to the firm. However, it is pertinent to note that a nominal partner is liable to outsiders and third parties for the acts done by other partners.

Limited partner

A limited partner is a partner whose liability is only up to the extent of his contributions for the capital of the partnership firm. For example, if a limited partner has invested in 30% shares of the firm, he can be held liable only to the extent of 30% of the loss incurred by the firm. Thus, if the firm incurs a loss of Rs. 50 lakhs, his liability will be Rs. 15 lakhs.

Partner in profits only

This type of partner only shares the profits of the firm and cannot be held liable for the losses incurred by it. Moreover, in case of any dealing with third parties or outsiders by partners in profits, he will be liable for the acts of profit only and not any of the liability. He is not allowed to take part in the management of the firm. Such kinds of partners are associated with the firm for their goodwill and money.

Secret partner

In a partnership, the position of secret partner lies between the active and sleeping partner. The membership of a secret partner in the firm is kept secret from outsiders and third parties. His liability is unlimited since he holds a share in profit and shares liabilities for losses in the business. He can even participate in the business’s operations. 

Conclusion

The Indian Partnership Act, 1932 contains the general provision relating to the nature, formation of a partnership and also the rights and liabilities of each partner. However, the general form of partnership is often disfavoured because of certain shortcomings. The unlimited liability of all the partners in a firm for debts incurred by any one of the partners acts as a major deterrent for people to refrain from entering into a partnership. Moreover, the general partners are held jointly and severally liable for the acts committed by the other partners.

Therefore, we can see that there is a shift towards Limited Liability Partnership, which provides more flexibility to the partners. Even the Indian government has recognised the disadvantages of general partnership and stated that there was a need to introduce LLP in India. 

Frequently Asked Questions (FAQs) 

What is the meaning of partner by holding out?

When a person makes a representation by spoken words or conduct to others that he is a partner of the firm and the other person, believing the representation to be true, acts upon it and gives credit to the firm, the person so representing can be held liable for holding out. The person, although he is not a partner but holds himself out to third parties as a partner of the firm and misleads them, he becomes liable under Section 28 of the Act.

What is the meaning of a dormant partner?

A dormant or sleeping partner is one who does not take an active part in the business of the firm and his name is not known to the customers. The rights and liabilities of a dormant partner are similar to that of the other partners. However, a sleeping partner is not required to give public notice of his retirement. If his name is known to some customers of the firm, notice should be given at least to them.

What is the meaning of partnership at will?

A partnership at will means a partnership which has been entered into without specifying the duration or the time of its determination. In this kind of partnership, the contract does not mention the circumstances in which the partnership will be dissolved and its existence depends totally upon the will of the partners, who may dissolve it at their convenience.

References 

• Introduction to the Law of Partnership, Dr Avatar Singh, Eastern Book Company(10th Edition)2011. 
• The Indian Partnership Act, Universal Law Series(10th Edition)2011.

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