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Partnership

Act
Lecture 10

Mutual Relations of
Partners (Relations of
Partners with one another)
Principles governing Mutual
Relations of Partners
1.

2.

Mutual agreement between


partners
The principle of good faith

Rights of Partners towards


one another
1.

2.

3.

4.

5.

6.

To
To
To
To
To
To

take part in business


be consulted
have access to books
share profits
share interest
receive interest on advance

1.

a)

b)

1.

2.

3.

4.

5.

i)

ii)

To be indemnified
Expenses incurred in the ordinary course of
partnership business
Expenses incurred in an emergency to
protect the firm from loss
To use partnership property
To retire from the firm
To remain in the firm
To receive remuneration
Right of a retiring partner
To carry on competing business after
retirement.
To share the subsequent profits as may be
attributable to use of retired partners
property by the firm

Relations of Partners with


Third Parties
Third party refers to a person who is not a
partner in the firm.
According to Section 25, every partner is
liable jointly with all other partners and also
severally for all acts of the firm done while
he is a partner.

Fundamental Duties of
Partners
1.

2.

3.

4.

5.

Duty to act in good faith


Duty to render true accounts and give
full information
Duty to carry on firms business to the
greatest common advantage.
Duty to indemnify
Duty of diligence

1.

2.

3.

4.

5.

6.

7.

8.

Duty to share losses


To use firms property for firms business
To account for private profits
Duty to account for the profit of a
competing business
Duty not to claim remuneration
Duty to act within authority
Duty to be liable jointly and severally
Duty not to assign his rights

Authority of a Partner
a)

i)

ii)

a)

Actual authority
Express authority
Implied authority
Apparent or Ostensible Authority

Implied Authority of a Partner


The content and scope of implied
authority of a partner is contained in
Section 19 of the Partnership Act which
provides that : Subject to the provision 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.

Scope of Implied Authority


According to Section 22, In order to
bind the 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
firms name, or in any other manner
expressing or implying an intention
to bind the firm.

i)

ii)

The act
done in
firm
The act
done in
way

must be
the name the
should be
the usual

In Mathura Nath
Chaoudhary vs.
Bageshwari Rani, the
business of the firm
was to catch elephants
and for this purpose, it

Acts within the implied authority of a partner of a


trading partner
Sale or purchase of goods on behalf of the firm
Engaging or discharging employees
Borrowing money on the firms credit and to
pledge firms goods for that purpose
Drawing, accepting, making and issuing
negotiable instruments in the firms name
Receipt of payment of debts due to the firm
and giving valid discharge therefor.
Settling accounts with the persons dealing with
the firm.
Rendering accounts to the creditors.
Assigning debts due to the firm as a security for
a debt due by the firm to a third party.
Employing a solicitor to defend a suit brought
a)

b)

c)

d)

e)

f)

g)

h)

i)

Acts outside the scope of a partners implied


authority
Statutory restrictions
To submit a dispute relating to the business of
the firm to arbitration
To open a bank account on behalf of the firm
in his own name
To compromise or relinquish any claim or
portion of claim by the firm
To withdraw a suit or proceeding filed on
behalf of the firm
To admit any liability in a suit or proceeding
against the firm
To acquire any immovable property on behalf
of the firm
To transfer immovable property on behalf of
1.

a)

b)

c)

d)

e)

f)

g)

Partners Authority in an
Emergency
a)

b)

c)

There should be an emergency.


The act should be done to protect the
firm from the loss caused by such an
emergency
The act should be such as a person of
ordinary prudence will do in his own case
and under similar circumstances.

Implied authority and Third


Parties
1.

2.

a)

b)

c)

Effect of admission by a partner


Effect of notice to a partner
Notice should be given to a partner who
habitually acts in the business of the firm
Notice should relate to the affairs of the
firm
Notice should not have been withheld
from the firm either by partners own
fraud or in collusion with some other
person.

1.

2.

1.
.

Liability of a partner for acts of the firm


Liability of the firm for wrongful acts of a
partner
In Hamlyn vs. Houston & Co. the firm was
held liable for the illegitimate act of a partner
of paying bribe to the clerk of a rival firm to
secure some confidential information
Liability for misapplication by partners
In Rhodes vs. Moules, the client of a firm of
solicitors approached one of its partners to
raise a loan against the mortgage of his land.
The partner arranged the loan but asked for
some additional security. The client then
handed over some share warrants which were
misappropriated. The co-partners were held

Liability for Holding Out


Holding out means to represent. A stranger who
holds himself out to be a partner in a firm thereby
including others to give credit to the firm, shall
become liable as a partner by holding out. A person
will become liable as a partner by holding out if,
The person must represent himself to be a partner
in the firm
The party to whom representation has been made
must have acted on the faith of such representation
and given credit to the firm.
It is immaterial whether the person representing
1.

2.

3.

A carried on business under the name A,


B and company. B was a manager in
As business. C, a trader, believing B to
be a partner, supplied some goods to the
firm on credit. A failed to pay the price
of the goods. C sued both A and B for
the recovery of price. B was held to be
liable for the price. By permitting his
name to be used in the title of the firm,
B has made a representation that he is
partner in the firm. Therefore he
becomes liable as a partner by holding

Effect of holding out


The holding out partner becomes
personally liable for the acts of the firm.
But he does not become a partner in the
firm nor does he become entitled to claim
any rights on the firm. The person who
gives credit to the firm believing him to be
a partner can hold the partner by holding
out liable as if he were a partner in the
firm.

Exceptions to holding out


1.

2.

3.

4.

Deceased partner
Insolvent partner
Sleeping partner
Partners torts

Dissolution of
Firm
Under Section 39, dissolution of firm
means the dissolution of partnership
between all the partners of the firm. In
this case the business of the firm is closed
down and the relation of the partnership
subsisting between the partners is
terminated. The affairs of the firm are
wound up.

Dissolution of Partnership
A change in the relations of partners is called
dissolution of partnership. The partnership is
reconstituted. Dissolution of partnership may or
may not result in the dissolution of the firm. But
dissolution of the firm must necessarily cause
dissolution of partnership
A and B were partners in a firm. They admit C as a
new partner. It will cause dissolution of partnership
between A and B. A reconstituted firm as formed
by partnership between A, B and C comes into

Modes of Dissolution of firm


I.

II.

Dissolution without the


intervention of court
Dissolution by the court

Dissolution without the intervention of


court
1.

2.

i)

ii)

1.

i)

ii)

iii)

iv)

1.

By mutual agreement [Sec. 40]


Compulsory dissolution [Sec. 41]
Insolvency of all partners
Illegality of firms business
Dissolution on the happening of certain
contingencies [Sec. 42]
On the expiry of the term for which the firm
was constituted
On the completion of adventure or undertaking
for which the firm was constituted
On the death of a partner
On the adjudication of a partner as insolvent
Dissolution by notice of partnership at will [Sec.

Dissolution by the court [Sec. 44]


a)

b)

c)

d)

e)

f)

g)

Insanity [Sec. 44(a)]


Permanent incapacity [Sec. 44(b)]
Misconduct [Sec. 44(c)]
Persistent breach of agreement [Sec.
44(d)]
Transfer of interest [Sec. 44(e)]
Business working at a continuous loss
[Sec. 44(f)]
Just and equitable [Sec. 44(g)]

Rights of Partners after Dissolution


1.

a)

b)

1.

2.

Right to equitable lien [Sec. 46]


Payment of debts and liabilities of the
firm
Distribution of surplus among the
partners or their representatives
Right to have debts of the firm settled
out of property of the firm [Sec. 49]
Right to earn personal profits by using
firms name [Sec. 50]

1.

a)

b)

c)

d)

Right to return of premium on premature


dissolution of firm [Sec. 51]
Death of a partner
Misconduct of the partner who has paid
the premium
In pursuance of an agreement which
contains no provision for the refund of
premium
The firm is not for a fixed period (i.e.,
partnership is at will)

1.

a)

b)

c)

1.

a)

b)

1.

Right where partnership contract is rescinded


for fraud or misrepresentation [Sec. 52]
Retention of surplus
Right of subrogation
Right of indemnification
Right to restrain partners from use of firms
name or property [Sec. 53]
Where there is a contract to the contrary
between the partners
Where a partner has purchased the goodwill
of the firm
Right of partners to agree to a restraint to
carry on similar business as that of the

Liabilities of a partner after


Dissolution of the firm
1.

2.

3.

Liability for acts done after dissolution


[Sec. 45]
Continuing authority of partners for
purpose of winding up [Sec. 47]
Liability to account for personal profits
earned after dissolution [Sec. 50]

Modes of Settlement of
Accounts
1.

2.

a)

b)

c)

d)

Rule as to payment of losses


Application of Assets
Payment of debts of the firm to third parties
Payment to each partner rateably the amount
of loan advanced to the firm other than the
capital
Payment to each partner, notably what is due
to him on account of capital
Division of the residue among the partners in
proportion of their share in the profits of the
firm

1.

Contribution of cash towards capital


deficiency
A, B C contribute Rs. 2000, Rs. 4000 and
Rs. 500 and set up a firm. They agree to
share the profits and losses equally. On
dissolution, after satisfying all the outside
debts and liabilities, the firm had assets
worth Rs. 2000. There is deficiency in
capital equal to Rs. (6500 2000), i.e., Rs.
4500. Each partner must contribute Rs.
1500 each to make up the deficiency. In
actual, the partners need not pay Rs. 1500
each in cash. They need to make only a
notional adjustment. In this case C shall
pay Rs. 1000 so that his loss will come to

1.

a)

b)

Loss due to insolvency of partners


The solvent partners will contribute only their
share of
deficiency in cash.
The available assets should be distributed
among the solvent partners in proportion to
their capital.

In a partnership firm, A, B and C contribute Rs,


30,000, Rs. 10,000 and Rs. 5000 respectively.
The firms assets, after paying outside debts
and liabilities, are Rs. 15,000. C is insolvent.
The deficiency = Total capital of firm - Available
assets
i.e., Rs. 45,000 Rs 15,000 = Rs. 30,000
To make up this deficiency, A and B will bring
Rs. 10,000 each.
Total assets = Rs. 15,000 + 10,000 + 10,000 =
Rs. 35,000
This amount will be divided among A and B in
the ratio of their capital (3:1)
A gets Rs 26250, B gets Rs. 8,750
As loss, Rs 30,000+10,000 26,250 = Rs.
13,750