Implied authority in indian partnership act

Indian Partnership Act 1932: Brief notes & Analysis

Questions Covered

In common parlance, a partnership is a business owned and managed by two or more people. To form a partnership, each partner normally contributes money, valuable property, or labor in exchange for a partnership share, which reflects the amount contributed. Section 4 of the Indian Partnership Act 1932 defines Partnership as follows –

Section 4 – Partnership is the relationship between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Persons who have entered into a partnership with one another are individually called partners and collectively called a firm and the name under which their business is carried on is called firm name.

Examples –

  1. A and B buy 100 bales of cotton to sell later on profit which they agree to share equally. A and B are partners in respect of such cotton.
  2. A and B buy 100 bales of cotton together for personal use. There is no partnership between A and B.
  3. A, a goldsmith, agrees with B to buy and provide gold to B to work on an ornament and to sell and that they shall share the profit. A and B are partners.
  4. A and B are carpenters working together. They agree that A will keep all the profits and will pay B a wage. They are not partners.
  5. A and B jointly own a ship. This circumstance does not make them partners.

Section 5 of IPA 1932 says that the relation of partnership arises from contract and not from status. Thus, if there is no specific contract, there can be no partnership. As per Section 6, to determine whether a partnership exists between a group of persons, we have to look at the real relation between them as shown by all relevant facts taken together. It further says that sharing of profits or of gross returns arising from a property owned jointly by them does not by itself make them partners.

Based on these definitions, in Helper Girdharbhai vs Saiyed M Kadri and others AIR 1987, J Sabyasachi of SC identified that the following elements must be there in order to establish a partnership – there must be an agreement entered into by all the parties concerned, the agreement must be to share profits of the business, and the business must be carried on by all or any of the person concerned for all. These three aspects can be discussed under four heads –

  1. Agreement – There has to be an agreement between two or more people to enter into a partnership. The agreement is the source of the partnership. It is not necessary that the agreement be formal or written. An agreement can be expressed or implied. Further, such an agreement must follow all the requirements of a valid contract given by the Indian Contract Act 1872. This includes the parties must be competent to contract and the object of the agreement should be legal.
  2. Business – They must intend to start or do a business. A business is a very wide term and includes any trade, occupation, or profession. The business may not be of long duration or permanent and even a single activity may be considered a business. Thus, if two persons are not partners, they can engage in a transaction with an intention to share profits and can become partners in respect of that transaction. For example, if two advocates are appointed to jointly plead a case and if they agree to divide the profits, they are partners in respect to that case. Section 8 also mentions that a person may become a partner with another in particular adventures of the undertaking.

It is however necessary that a business exists. If a business is simply contemplated and has not been started, the partnership is not considered to be in existence. In Ram Priya Saran vs Ghanshyam Das AIR 1981, two persons agreed that after their tender is passed they will construct the dam in partnership. In order to deposit earnest money, the plaintiff gave 2000 Rs. The tender was not accepted. It was held that since a business was only contemplated and not started, there was no partnership and so the plaintiff was entitled to get 2000 Rs from the defendant.

As we can see, a partnership requires all the above ingredients to have legal validity, and so a mere sharing of profits is not conclusive proof of a partnership. It must have the other three elements also. As mentioned in Section 6, merely sharing profits arising out of a jointly owned property does not necessarily create a partnership. For example, if two persons own a house and give it for rent, the sharing of the rent does not create a partnership.
Similarly, a payment to a person contingent upon profits also does not necessarily create a partnership until the element of mutual agency is not present. This is the case when profits are shared with the lender of money for the business.
In the case of Mollow March Co vs The Court of Wards 1872, a Hindu Raja loaned some money to Watson & Co. In return, he was to get a % of profit and was to exercise control on some aspects of the business. He was not empowered to direct the transactions of the company. It was held that although sharing of profits is a very strong test, whether a relation of partnership exists depends on the real intention and conduct of the parties.

Duty/Liabilities of the partners

  1. General Duties – According to section 9, every partner is liable to carry on the business in the best interest of the firm, to be just and faithful to each other, and to render true accounts and full information affecting the firm to any partner or his legal representative. During the course of business, no partner can do any act which may be against his duty to work to the greatest common advantage.
    In Bentley vs Craven 1853, it was held that if a partner was authorized to purchase goods for the firm and if he supplies the goods from his own stock and makes a profit, he is liable to give the profit to the firm. This matter is further clarified in section 16 which says that subject to the contract between the partners, if a partner derives any profit for himself from any transaction of the firm or from the use of the property or business connection of the firm, he shall pay that profit to the firm. Further, if a partner carries on any business of the same nature as and competes with that of the firm, he shall pay all such profit to the firm. Subject to contract means, partners can choose to modify this rule while entering into a partnership. For example, the partnership contract may specify that a partner may be allowed to use the firm’s property for personal use.
  2. Duty to indemnify for loss caused by fraud – According to section 10, every partner shall indemnify the firm for any loss caused to it by his fraud in the conduct of the business of the firm. For example, a firm of A and B enter into a contract with the government. Later on, due to B’s conduct, the govt. cancels the contract and gives it to B. Here, the contract obtained by B in his own name will be for the benefit of the partnership. Further, if the second contract is of a lesser value, B is personally liable to the firm for the difference.
  3. Duties imposed by contract – As per Section 11, any special rights and duties may be given or imposed by the contract between the partners.
  4. Duty relating to the conduct of business – According to section 12, every partner is bound to attend to his duties diligently. Thus, if a partner is assigned some task, he must do it to the best of his abilities. Further, if any difference arises in respect of the ordinary business matter, it may be decided by the majority. However, no change in the nature of the business can be made without the consent of all the partners.

Rights of the partners
The partners of the firm have the following rights –

  1. Rights are givenby contract – As per Section 11, any special rights, such as the right to remuneration may be given by the contract between the partners.
  2. Right to take part in the conduct of business – As per section 12(a), subject to the contract between them, a partner has a right to take part in the conduct of business. Only way to restrain a partner from getting involved in the business is to specify it in the contract of partnership. Even courts cannot, through an injunction, restrain a partner.
  3. Right to have access to and inspect and copy books of the firm – As per section 12, every partner has a right to inspect the books and make a copy if he wants.
  4. Right to share in profit – As per section 13, subject to contract, a partner is entitled to an equal share of the profit.
  5. Right to receive interest on the capital subscribed – As per section 13, subject to contract, where a partner is entitled to interest on the capital subscribed by him, such interest shall be payable only out of profits. Further, if a partner pays any money to the firm, beyond the amount of capital, he is entitled to 6% interest.
  6. Right to indemnity in respect of payments made and liabilities incurred – According to section 13, the firm shall indemnify a partner in respect of payments made and liabilities incurred by him in the ordinary and proper conduct of business or in doing such act, in an emergency, for the purposes of protecting firm from loss as would be done by a person of ordinary prudence in his own case under similar circumstance.

Implied authority of a partner
As held in Cox vs Hickman 1860, if two or more agree to carry on a business, each of them is a principal and each is an agent for the other. Further, each is bound by the other’s contract in carrying on the trade as much as a single principal would be bound by the act of an agent. This principle has been incorporated in section 18 of IPA 1932. It says that a partner is the agent of the firm for the purposes of the firm. Its complementary principle is incorporated in section 25 which says that every partner is liable jointly with all other partners and also severally for all acts of the firm done while he is a partner.

This brings us to the implied authority of the partners. Since, a partner is an agent of the firm, his act binds every other partner and the firm. For example, if a partner A gives a check in the firm’s name to a creditor and if the check is unpaid, partner B is equally liable even though B’s signature does not appear on the check. This authority to bind the firm is called “implied authority“. It has been incorporated in section 19 of IPA 1932, which says that the act of the partner which is done to carry on, in the usual way, business of the kind carried on by the firm, binds the firm.

The following essential conditions are required for the exercise of Implied Authority to bind the firm –

  1. The usualway – The act must be done to carry on the business in the usual way. Any drastic action, which is out of ordinary, requires the consent of all the partners. For example, if a firm deals in coal, a partner has the implied authority to enter into a contract to buy and sell coal, but not gold. The implied authority of partners is limited to only those acts which are done in the usual way and related to the business of the kind carried on by the firm.
  2. Mode of doing the act to bind firm – Section 22 specifies that in order to bind the firm, the act must be done in the firm’s name or in any manner expressing or implying the intention to bind the firm. For example, if partner A obtains a loan in his name without mentioning anything about the firm, it will not bind the firm. It must be clear from the action that it is intended as being done by the firm.

The power of implied authority also has the following restrictions –
There are two kinds of restrictions – Statutory restrictions, as imposed by section 19 (2) and Restrictions imposed by the partnership deed and those imposed by the agreement between the partners. Statutory restrictions are binding upon all the partners whether they know them or not, while the second type of restrictions are applicable only when the partners have knowledge about them.

Statutory restrictions – In the absence of any usage or custom of trade to the contrary, a partner is not allowed to –

  1. Refer a dispute to arbitration.
  2. open a banking account on behalf of the firm in his own name.
  3. compromise or relinquish any claim or portion of the claim by the firm.
  4. withdraw a suit or proceeding filed on behalf of the firm.
  5. admit any liability in a suit or proceeding against the firm.
  6. acquire immovable property on behalf of the firm.
  7. transfer immovable property belonging to the firm.
  8. enter into partnership on behalf of the firm.

Contractual Restrictions – As per section 20, Partners may, by contract, put additional restrictions or give additional powers to the partners. However, any act which falls under the implied authority but is restricted by the contract will bind the firm unless certain conditions are satisfied. A firm can avoid its liability in such a case if the person dealing with the partner knows the restriction or the person dealing with the partner does not know or does not believe that the partner is a partner in the firm.

In Sanganer Dal & Flour Mill vs FCI AIR 1982, a partner of the firm, who had the implied authority to enter the contract with FCI to purchase goods, entered into a contract with FCI to purchase Dal. The contract had an arbitration clause. In this case, the question was whether the partner had the power to enter into such a contract? It was held by SC that the partner was within his implied authority to enter into a contract to purchase goods from the corporation because it was normal for their business and the contract was done in the usual way. Thus, the contract was valid even if it contained an arbitration clause.

Admission of Partners (Section 23)
Since a partner is an agent of the firm and can bind the firm by his acts, an admission or representation by him concerning the affairs of the firm, is evidence against the firm. This is incorporated in section 23, which says that an admission or representation made by a partner concerning the affairs of the firm is evidence against the firm if it is made in the ordinary course of business.

The key factor in this is that the admission or representation must be made in the ordinary course of business. This will also not include the representation by which a partner increases his scope of authority. For example, if a partner executes a bill of exchange for payment of his personal debts and on inquiry he makes a false statement that the other partners have authorized him, the said bill of exchange will not bind the firm.

Incoming partners
The mutual relations of the partners is based on the principle that they have to be just and fair to each other and are bound to carry on the business of the firm to the greatest common advantage. Thus, it is important for each partner to have trust in each other. Therefore, section 31 lays down a general principle that a partner cannot be introduced into a firm without the consent of all the existing partners. However, the existing partners may, by contract, authorize a partner to introduce a new partner. A contract may also be made that upon death of a partner, a new partner may be nominated in his place. If there are only two partners and one of them dies, there is no question of nominating a new partner because the partnership ends as soon as the partner dies.
Also, a new partner is not liable for any act of the firm done before he became a partner.

Outgoing partners
In many situations, a partner may have to leave the partnership. A partner may leave in the following ways

  1. With the consent of all other partners – According to section 32(1) (a), a partner may retire with the consent of all the other partners.
  2. With an express agreement by partners – Section 32 (1)(b) provides that a partner may retire with an express agreement by partners. This means that if there is a provision in the contract deed of partnership that allows a partner to retire, a partner can retire using that agreement.
    In Vishnu Chandra vs Chandrika Prasad Agarwal AIR 1983, the question before SC was whether a partner was entitled to retire on the basis of partnership deed. The deed provided that a partner may retire by giving one month’s notice and that a partner cannot retire within one year of commencement of business and if he does so, his capital will not be returned. SC held that it is consistent with the provisions of section 31(1)(b) and the partner can retire according to the deed.
  3. By giving notice to all other partners in case of partnership at will – According to section 32(1)(c), a partner may retire where the partnership is at will, by giving notice in writing to all the other partners of his intention to retire.
  4. By Expulsion (Can a partner be removed? How?) – According to section 33 (1) a partner may not be expelled by any majority of the partners, save in exercise of good faith of powers conferred by contract between the partners. Thus, to expel a partner by majority of the partners, the following two conditions must be satisfied –
    1. Such a power must be conferred by contract between the partners. This means, the contract of partnership must clearly give this power to the partners otherwise, a partner cannot be expelled.
    2. The power to expel a partner conferred under the contract must be exercised in good faith. Thus, if majority of the partners try to expel a partner with evil intention and without any reasonable cause, it is not possible.

    Liability of a Retired Partner
    The liability of a retired partner may be of two types – For acts done before retirement and for acts done after retirement.

    1. Acts before retirement – The general rule is that a partner is liable for all acts done before retirement even after he is retired. However, a retiring partner may be discharged of his liabilities for act before retirement by an agreement between the retiring partner and the remaining partners. The agreement should specify that all such liabilities will be borne by the remaining partners. A notice to this effect must also be given to the creditors.
    2. Acts after retirement – The general principle is that a retired partner is not liable for the acts of the firm done after his retirement. However, he must give public notice of his retirement to escape liabilities.

    Partnership with a minor
    By virtue of section 10 and 11 of Indian Contract Act 1872, a minor is not considered capable of giving consent and thus any contract with a minor is void ab initio. Therefore, a contract of partnership with a minor is also void. In other words, a partnership cannot be done with a minor and a minor cannot become a partner of a firm. However, a minor can be admitted to the benefits of the partnership as per section 30 (1), by the consent of all the partners. In Venkatarama Iyer vs Balayya AIR 1936, it was held that there must be some positive act of the partners so that the court may infer that the minors have been admitted to the benefits of the partnership. Merely assuming that the minors were admitted would be an error in law and is not sufficient.
    Further, in Addl Commr. of Income Tax vs Uttam Kumar Pramod Kumar 1975, a partnership deed was not signed by minor or anybody on his behalf. It was held that to admit the minor to the benefits of partnership it is necessary to have an agreement between the partners and the minor. Since the property and money of the minor can be used for the firm, an agreement is necessary between the partners and someone on behalf of the minor.

    Rights and Liabilities of a minor
    He has the following rights –

    1. to such share of the property and of the profits of the the firm as may be agreed upon.
    2. to access, copy, and inspect the records of the firm.
    3. his share is liable for the acts of the firm but he is not personally liable for them.
    4. may sue the partners for his share of profits of the firms when severing his connection with the firm.
    5. As per Section 30(5), he has a right of election to become or not to become the partner of the firm after becoming a major. Upon attaining the age of majority, the minor can, within six months , give public notice that he has elected to become or not to become a partner of the firm. If he fails to give such notice, he will become a partner of the firm at the expiry of six months.

    Registration of a firm
    Chapter 7 of IPA 1932 deals with the registration of firms. Under this act, the registration of firms is not compulsory. There is no penalty for not registering. However, the effects of non-registration are so severe that usually firms opt to register.
    Consequences of not registering

    1. Suits between partners and Firm – A per Section 69 (1) unless a firm is registered and the party is shown as a partner, no suit can be filed by or on behalf of any partner against the firm. In Loonkaran Sethia vs Mr Ivan E John AIR 1977, the firm was not registered and the plaintiff filed the suit to enforce an agreement entered into by a partner of the firm. The suit was filed on behalf of the firm and was for its benefit. SC observed that a partner of an unregistered firm cannot bring a suit to enforce a right arising out of a contract falling within the ambit of section 69. It held that the suit was unmaintainable.
    2. Suit between the firm and third parties – Until the firm is registered, no suit can be filed by the firm against third parties. In Ram Adhar vs Rama Kirat Tiwary AIR 1981, the plaintiff sold bricks to the defendant. The defendant did not pay the price to the partnership firm and so the firm filed the suit. It was held that since the firm was not registered the suit was unmaintainable.
    3. Bar to claim set off and other proceedings – According to section 69(3), suit cannot be filed for claim of set off or other proceedings to enforce a right arising from a contract.

    Exception
    According to section 69(3)(a), the provisions of section 61(1) and (2) shall not affect the enforcement of any right to sue for the dissolution of the firm, or for accounts of the dissolved firm or any right or power to realize the property of the dissolved firm. Thus, a partner of a dissolved firm can sue the third party for releasing the property of the firm.

    Procedure for registration
    As per section 58, registration of a firm can be done any time by sending a statement in prescribed form by post or delivering to the registrar of the area in which any place of business of the firm is situated or proposed to be situated. The form should also be accompanied by the prescribed fee. The form must contain –

    1. the firm name
    2. place or principal place of the business of the firm.
    3. the names of any places where the firm carries on business.
    4. the date when each partner joined the firm.
    5. the names in full and permanent address of the partners.
    6. the duration of the firm.

    The statement must be signed by all of the partners or by their agents specially authorized on this behalf. Each person signing the statement shall also verify it in the manner prescribed. There is a restriction on the name of the firm that it cannot contain certain words such as Crown, Emperor, Empress, King, etc. that give an impression that the firm is associated with the govt.

    When the registrar is satisfied that the provisions of section 58 have been fulfilled, he shall record an entry in the Register of Firms and shall file the statement.

    Dissolution of the firm
    As per section 39, the dissolution of the partnership between all the partners of a firm is called the dissolution of the firm. The firm is dissolved when all the partners stop carrying on the partnership business. It is possible that some partners may decide to disassociate from the firm while others carry on the business. In this case the partnership is not dissolved.
    After the dissolution of the firm, the partnership between the partners does not completely end. It continues for the purpose of realization of assets or properties of the firm. Also, after the dissolution, the right and power of the partners of the firm to bind the firm exists as is necessary to wind up the operation and for the acts that started before the dissolution but have not yet ended.

    Modes of dissolution

    1. Dissolution by agreement – According to section 40, a firm may be dissolved either with the consent of all the partners or in accordance with a contract between the partners.
    2. Compulsory Dissolution – According to section 41, a firm will be compulsorily dissolved if
      1. all the partners or all but one of the partners become insolvent – This happens because if a partner becomes insolvent, he becomes incompetent to contract and so he ceases to be a partner as per section 34(1). Thus, if all or all but one partners become insolvent the firm will compulsorily dissolve because, for a partnership, at least two partners are required.
      2. If the business of the firm becomes unlawful – It is possible that due to legislation, the business may become unlawful. For example, liquor sales may become unlawful in a particular state. In such a case, a partnership that sells liquor will be dissolved.
      1. By Expiry of fixed-term – A firm is dissolved, if it is constituted for a fixed term, which that term expires.
      2. On completion of adventures or undertakings – In many cases, a partnership is started with a specific goal to accomplish or for a particular task. Upon completion of such task, the partnership gets dissolved.
      3. By the death of a partner – Subject to the contract between the partners,a partnership gets dissolved if a partner dies.
      4. By the adjudication of a partner as an insolvent – If a partner becomes insolvent and if there is no provision in the contract to keep the partnership alive in such case between the solvent partners, the partnership is dissolved.
      1. a partner becomes of unsound mind – In such a case, the next friend of the person with unsound mind may request the court to dissolve the firm.
      2. a partner becomes permanently incapable – At the suit of a partner, the court may dissolve the firm on the ground that a partner other than the one suing has become permanently incapable of performing the duties of partnership.
      3. a partner is guilty of conduct likely to affect prejudicially the carrying on of business – At the suit of a partner the court may dissolve a firm on the ground that a partner other than the one suing, is guilty of conduct which is likely to affect the business prejudicially. For example, in partnership of doctors, if one doctor is guilty of immorality towards some patients, it is possible for the court to dissolve the partnership upon suit of other partners.
        In Carmichael vs Evans 1856, a partner was convicted of traveling without ticket and the court dissolved the firm on this ground.
      4. willful or persistent breach of agreements relating to the business or management of the affairs of the firm – If a partner willfully or persistently commits breach of the agreements related to the firm, or the conduct of its business, or conducts such that it is not reasonably practical for other partners to carry on the business, the court may dissolve the firm upon suit by other partners.
      5. transfer of the whole interest in the firm by a partner to a third party – At the suit of a partner the court may dissolve a firm on the ground that a partner other than the one suing, has in any way transferred the whole of his interest in the firm to a third party.
      6. perpetual loss – At the suit of a partner, the court may dissolve the firm on the ground that the business of a firm cannot be carried on without incurring loss. It is indeed impractical to run a business that is continuously going in the loss. Thus, if a partner of such a business desires, he can request the court to dissolve the firm.
      7. Just and Equitable cause – As per section 44(g), the court may dissolve the firm on any just and equitable ground upon request by a partner. This gives very wide powers to the court because the court has to decide whether there is a just and equitable ground for dissolving a firm.

      Consequences of Dissolution

      1. Liabilities of the partners for acts done after dissolution – As per section 45, until public notice is given of the dissolution, partners remain liable for their acts as they were before dissolution. It is therefore essential to give notice of dissolution if the partners want to escape liability for the acts of the firm.
      2. Right of partners to have business wound up after dissolutions – Upon dissolution of the firm, every partner is entitled, as against other partners, to have the property of the firm applied in payments of debts and other liabilities of the firm and to have the surplus distributed to the partners as per the contract.
      3. Continuing authority of partners for purpose of winding – Each partner continues to enjoy implied authority but for the acts done in the process of winding up of the business.
      4. Settlement of accounts – Upon dissolution, the accounts of the firm will be settled as per the agreement of the partners.
      5. Payment of debts – where there are any joint debts, the property of the firm will be first applied to clear those debts and then it will be applied to any separate debts due to a partner.
      6. Restrain the use of name of the firm – Every partner has a right to restrain another from using the name of the firm, subject to any contract between them. However, if the goodwill of the firm is sold, the buyer may use the name of the firm for his business.
      7. Restrain in trade – Subject to contract, the partners of the firm may be restrained from doing the same business as the firm after the dissolution as long as the conditions of the restrain do not violate section 27 of ICA 1872.

      Keywords: Indian Partnership Act 1932, Partnership Act, Partnership, Indian Partnership Act 1932: Notes, Partnership in India, Indian Partnership Act 1932: Review & Analysis, Partnership Firm, Rights and responsibilities of partnership in India.

      Click here to read Bare Act of Indian Partnership Act 1932

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