Minors and partnership rights

Anonymous

Editor’s note:

This paper deals with the rights and liabilities of a minor with respect to a partnership, under S.30 of the Indian Contract Act. A minor, while not being a full-fledged partner in any case, can only avail the benefits of such partnership via consent of all partners, not all of which can be minors. The position of law stands – minor partners are not personally liable for the losses suffered by the firm. A guardian may contract on the minor’s behalf to enter the partnership – as long as it is not detriment to the minor’s interest. Furthermore, a minor’s income under a partnership cannot be brought under the head of earning income and hence cannot be considered for purposes of income tax. After attaining majority, the minor can choose to stay with the partnership and subsequently become liable for losses, or severe relations altogether.

Introduction

A bare reading of Section 30[i] makes it clear that the aforementioned section deals with the rights (including but not limited to, various protections) and liabilities of a minor who is entitled to the benefits of a partnership. That being said, sub-section (1)[ii] makes it very clear that the minor cannot in any case be a full-fledged partner in a partnership, but can only be admitted to the benefits of a partnership by consent of all the partners. Further, the section talks about the position of minor vis-à-vis the partnership post attainment of majority. Furthermore, the said section also deals with the extent to which a minor can be made liable with regard to “acts of the firm”. [iii]

A minor is someone who is yet to attain majority under the law of the land he is subject to. The law of the land to which an Indian minor would be subject to is the Indian Majority Act, 1875. Section 3 of the aforementioned act makes it clear that eighteen is the age at which a person domiciled in India is deemed to have attained majority.

Minor can be admitted only to the benefits of a partnership

The Special Committee consisting of Shri Brojender Lal Mitter, Sir Din Shaw Mulla, Sir Alladi Krishnaswami Iyer and Sir Arthur Eggar which drafted the bill which lead to the enactment of the present Act observed that they did not have any particularly satisfactory reason to depart from the general principle of Contract Law stated in both Section 11[iv] and the judgment of the Privy Council in Mahori Bibi’s case[v]. [vi] Moreover, they observed that it had been the general law in India ever since 1866 that minors could be entitled to the benefits of a partnership.[vii] Thus, in view of these observations the Committee decided not to allow minors to be a part of the partnership since the partnership is the result of a contract which a minor is incapable of being a party to. They, however, allowed a minor to enjoy the benefits of a partnership.

As has been observed in the Sanyasi Charan Mandal v. Krishnadhan case [viii] since a “firm” under Section 4 [ix] (or the now repealed Section 239, Indian Contract Act, 1872) means a group of persons who have entered into a contract of partnership. Since, under Section 11 [x] a minor is incapable of entering such a contract, he cannot be a part of this group of persons under Section 4.[xi]  Since a minor cannot form a firm, the minor can only be admitted to the benefits of a partnership that already exists independently. [xii] Consequently, there can be no partnership between only minors. [xiii] To put it more simply, there must be an existing partnership between two major partners before a minor can be admitted to its benefits. [xiv]

The High Court of Allahabad held in the Hardutt Ray Gajadhar Ram v. Commissioner of Income Tax [xv] that a deed which divided the rights and obligations equally amongst the three major and the lone minor partner was invalid as it was in contravention of Section 30 as it bestowed upon the minor not only the benefits of the partnership, but also the liabilities of personal nature (including but not limited to his interest/share in the partnership). Earlier there was some confusion in this regard as the Madras High Court in Jakka Devayya v. Commissioner of Income Tax [xvi] and Vincent and Ors. v. Commissioner of Income Tax[xvii], the Patna High Court in Sahai Bros. v. Commissioner of Income Tax  [xviii] and the Bombay High Court in Dwarakadas Khetan & Co. v. Commissioner of Income Tax [xix] was of the view even if the partnership deed did make minor a full-fledged partner like all other partners insofar as making him personally liable, the deed should be read liberally and his liabilities to be confined in accordance with Section 30. In the landmark Commissioner of Income-tax v. Dwarkadas Khetan and Co case, [xx] however, the Supreme Court of India overturned the Bombay High Court judgment and held that a partnership wherein a minor is made a partner to the extent that he was to be held personally liable for loses along with having the right to vote and take part in the business could not be registered by the Income Tax Department. Moreover, in case the Income Tax Authorities register the partnership as one being only between the adult partners, where in fact there are certain minor partners as well, a new contract is made which is substantially different from the one being executed and hence the original contract cannot say to have been validly registered by registration of this “new” contract. [xxi] Therefore, it is clear that the position of the law is that a partnership deed should clearly (or on a being read as a whole [xxii]) make it clear that the minor partners are not personally liable for the losses suffered by the firm.

Further, in Banka Mal Lajja Ram & Co. v. Commissioner of Income Tax, Delhi, [xxiii] it was held that a minor (Satish Kumar) cannot legitimately become a full-fledged partner through his guardian (his mother Shrimati Shakuntala Devi) even if the other partners are consenting. In contrast, in the C.I.T., Mysore v.  Shah Mohandas Sadhuram, [xxiv] it was held that a contract of partnership which only bestows its benefits upon the minor cannot be held invalid on merely the ground that guardian purported to contract on the minor’s behalf until it is in contravention of the provisions of Section 30. The deed in Hardutt Ray’s case [xxv] was also invalid on the ground that the natural guardian had lost the right of being the (natural) guardian and consequently the right to enter into a contract on behalf of the minor due to adoption of the minor (Krishna Murari). The question as to whether the guardian is himself a partner or not is more or less insignificant. [xxvi] In C.I.T. v. Kedarmall Keshardeo, [xxvii] it was held that where the widowed mother (wife of deceased partner) entered into a partnership on her own behalf and as the natural guardian of minor son, the minor son did not automatically become a partner. Therefore, the clear position of law in this regard is that deed remains valid even in cases where the guardian contracts on behalf of the minor insofar as the minor is not made personally liable and the guardian still possessed the right of being the guardian when he contracted on the minor’s behalf.

Also, a minor’s income under a partnership cannot be brought under the head of earning income [xxviii] and hence cannot be considered for purposes of income tax. [xxix]

Rights and Liabilities of the minor

Under sub-section (2), a minor entitled to the benefits of a partnership is bestowed with the right to share the profits as well as the property, as may have been decided at the time of minor’s admission to the benefits of the partnership in question. [xxx] Further, the minor has the right to inspect any of the accounts of the firm. [xxxi] This access is however limited to only the accounts and the minor does not have the right to access other books such as those which may contain trade secrets. [xxxii] This limitation to the right of the minor, however seems commonsensical and equitable as the minor is not liable to the extent to which the full-fledged partners are liable, i.e., personally. The minor also has the right to sue for benefits of the partnership to which he is admitted. [xxxiii]

Under sub-section (3), the liability of a minor who is entitled to benefits arising out of a partnership is limited with respect to that of a full-fledged partner. According to the holding in the Sanyasi Charan Mandal v. Asutosh Ghose case, [xxxiv] the creditors of the firm can only proceed to the extent of minor’s interest in the firm but not personally against the minor. However, this protection is not enjoyed by the full-fledged partners of the firm who can be personally liable with respect to the creditors.  The position of a minor Hindu in a joint family trade is similar a minor admitted to the benefits of a partnership insofar as the former can also not be held personally liable for the debts of the family trade and only his share in the trade can be made liable. [xxxv] Thus, it can be concluded that the position of a minor Hindu in a joint family trade is analogous to that of a minor who is entitled to the benefits of a partnership. However, in cases where members of family carry on a business, there must be some positive conduct on part of major members to show that they intended to admit certain minors to the partnership. [xxxvi] If the major member by ignorance or error of law mistakenly assume that the minors were automatically entitled to the benefits of such a partnership, the minor would not be entitled to the benefits under Section 30 (erstwhile Section 247). [xxxvii] Also, as has been held in Shivgouda Rajiv Patil v. Chandrakant Neelkanth Sedalge [xxxviii] and Sanyasi Charan Mandal v. Ashutosh Ghose[xxxix] the minor who is entitled to the benefits of a partnership cannot be adjudged insolvent even in cases where the other partners are adjudged insolvent.

Under sub-section (4), minor’s aforementioned right to sue for benefits of a partnership to which he is entitled is limited. The minor is entitled to sue for his share only while severing all connections from the firm. [xl] The sub-section further lays down that the resolution is to be made in accordance with Section 48 as far as possible. [xli] The proviso to this sub-section safeguards the full-fledged partners by allowing them to convert a suit by the minor for his share in the partnership into one of dissolution of the firm. [xlii] The same may be done by all partners acting together or one partner who is entitled to dissolve the firm doing so after giving notice to the other partners. [xliii] Regardless of the mode, the share of the minor in such a suit is to be decided upon along with those of the other partners. [xliv] In cases where the dispute is referred to arbitration, the minor is as much a party to the dispute as the partners.[xlv] In cases where the arbitration agreement has not been signed by the guardian of the minor on his behalf, the agreement and (consequently) the arbitration award are not binding on the minor. [xlvi]

Position of a minor on attaining majority

Under sub-section (5), the minor has an option to either become a full-fledged partner of the firm or severe his connections with the same. He may, within six months of attaining eighteen years of age, choose to become or not, become a partner and signify the same by way of a public notice as described under Section 72. Failing to do the same, results in his ispo facto becoming a partner in the firm. [xlvii] The minor need not issue a public notice in case he wants to continue being a partner because he would anyway, by default, become a partner on the expiry of six months. [xlviii] The minor does continue to enjoy the rights, which he had enjoyed as a minor, after he turns into a major till he decides to either continue or repudiate the partnership or the expiry of the period six months, whichever is earlier. [xlix] If the minor did not have the knowledge that he was entitled to benefits of the partnership, he may signify his will to repudiate the said contract within six months of his attaining knowledge of the fact that of he was entitled to benefits of the partnership in question.

Under sub-section (6), the burden of proving that the minor did not have knowledge that he was in fact entitled to the benefits of partnership rests with the party asserting the same. If the person asserting so is the minor himself, then he would have the onus to prove the same in accordance with Section 106 [l] and if it is someone else then Section 101 [li] and Section 103 [lii] will throw the onus on him. [liii]

Under sub-section (7), clause (a), the minor, who has either chosen to continue as a full-fledged partner post attainment of majority or fails to signify his will to repudiate under sub-section (5), becomes a full-fledged partner and such a minor can be held liable for not only the debts incurred by the partnership after his becoming a partner, but also the ones which had been incurred ever since he was entitled to benefits of the partnership. Thus, the minor in a way becomes retrospectively liable. This is a major departure from English Law, wherein the creditors are in a less favourable position. [liv] In English Law, the minor would be liable only for debts incurred by the firm since he attained majority. [lv]

A minor’s share in the profits, on his joining the firm as a full-fledged partner post attainment of majority, remains the same as was set out in the deed. [lvi] This is in line with the view taken in Bhogilal v. Commissioner of Income-tax [lvii] (sub-section (7), clause (b)) that there is no break in the continuity of a partnership in the case where the minor elects to become a partner and hence a new partnership does not come into existence.

In Shivgouda Rajiv Patil v. Chandrakant Neelkanth Sedalge [lviii] the question arose as to whether the minor partner (Chandrakant) who had attained majority subsequent to commitment of acts of insolvency by the other partners could be held to be personally liable for the debts of the firm. The Supreme Court held that it was legally impossible for the Court to hold the Chandrakant liable for the debts of a partnership that had already been dissolved before he attained majority. [lix] This establishes that a minor who was entitled to benefits of a partnership cannot be held personally liable for the debts of the firm when it had already been dissolved before he attained majority, i.e., attained the capacity to be a party to losses of the firm along with profits.

Under sub-section (8), the minor who elects not to be a partner his share in the firm will be liable to the extent of losses and debts incurred until he gave public notice about his intention to sever his connections with the firm.[lx] He might thereafter bring a suit to enforce this quasi-contract like contract to receive his share.[lxi] Sub-section (9) states that the two sub-sections which immediately precede sub-section (9) do not in any way affect the rights of the party to whom the minor after attaining majority might have misrepresented himself as a partner. He will be liable for “holding out”. [lxii]

Edited by Neerja Gurnani

[i] The Indian Partnership Act, § 30.

[ii] The Indian Partnership Act, § 30, §§ 1.

[iii] The Indian Partnership Act, § 30, §§ 3.

[iv] The Indian Contract Act, § 11.

[v] [(1903) 30 IA 114].

[vi] P C Markanda (‘Markanda’), The Law of Partnership in India 326 (2010).

[vii] Id.

[viii] (1922) 49 Cal 560,570 as cited in S.D. Singh & J.P. Gupta (‘Singh’), Law of Partnership in India 456 (V.P. Singh ed., 2000).

[ix]  The Indian Partnership Act, § 4.

[x] Supra note 4.

[xi] Supra note 9.

[xii] Lachmi Narain v. Beni Ram, AIR 1931 All 327 as cited in Singh 456.

[xiii] Markanda 328.

[xiv] Shriram Sardarmal Didwani v. Gourishankar alias Rameshwar Joharmal, AIR 1961 Bom 136 as cited in Markanda 329.

[xv] [1950] 18 ITR 106 (All)

[xvi] [1952] 22 ITR 264 (Mad).

[xvii] [1952] 22 ITR 285 (Mad).

[xviii] [1958] 33 ITR 40 (Patna).

[xix] [1956] 29 ITR 903 (Bom).

[xx] AIR 1961 SC 680.

[xxi] Id. as cited in Markanda 334.

[xxii] Narayan vs Commissioner of Income-Tax, 1976 102 ITR 748 Cal.

[xxiii] AIR 1953 Punj 270 (DB).

[xxiv] AIR 1966 SC 15.

[xxv] Supra note 8.

[xxvi] Adddepally v. Commissioner of Income-Tax, (1971) 79 ITR 396 as cited in ST Desai (‘Desai’), The Law of Partnership in India Vol II, 224 (S Desai ed., 2009).

[xxvii] AIR 1968 Assam 68 as cited in Singh 462.

[xxviii] A.R. Visweswar Rao v. C.I.T., A.P., Hyd., AIR 1965 Andh Pra 1 as cited in Singh 462.

[xxix] P.S. Narayana (‘Narayana’), The Law of Partnership, 194 (2001).

[xxx] Singh 457.

[xxxi] Desai 228.

[xxxii] A Singh, Introduction to Law of Partnership 93 (2011).

[xxxiii] Tulsidas v. Ganga Ram AIR 1925 Sind 272 as cited in Supra note 24.

[xxxiv] AIR 1915 Cal 482.

[xxxv] Sanka Krishna v. The Bank of Burma,ILR (1912) 35 Mad 692 as cited in Singh 457.

[xxxvi] Venkatrama Iyer v. Balayya 97 ITR 730 referred in AIR 1985 Ker 265 at 273 as cited in S Adhikari, Commentery on The Indian Partnership Act, 1932 469 (2008)

[xxxvii] Id.

[xxxviii] AIR 1965 SC 212.

[xxxix] Supra note 33.

[xl]  Singh 457.

[xli] Id.

[xlii] Desai 230.

[xliii] Id.

[xliv] Singh 458.

[xlv] Desai 230.

[xlvi] Id.

[xlvii] Desai 231.

[xlviii] Singh 458.

[xlix] HK Saharay (‘Saharay’), Indian Partnership and Sales of Goods Acts 97 (2000).

[l] The Indian Evidence Act, § 106.

[li] The Indian Evidence Act, § 101.

[lii] The Indian Evidence Act, § 103.

[liii] Singh 458.

[liv] Harmohan v. Sudarshan (1920) 25 CWN 847 as cited in Desai 232.

[lv] Godde v. Harrison (1821) 5 B & Ald. 147, p. 157 as cited in Desai 232.

[lvi] Imadadali Tayabali v. C.I.T., Poona 1972 Mah LJ 285.

[lvii] AIR 1956 Bom 411 as cited in Desai 231.

[lviii] Supra note 38.

[lix] Id.

[lx] S.D. Singh 459

[lxi] Id.

[lxii] Desai 233.

3 Replies to “Minors and partnership rights”

  1. The first line — “This ….under section 30 of Indian Contract Act,1872”.. is wrong because the Act is Indaian Partnership act,1932 not Indian Contract Act.
    The rest of the post is excellent.

  2. A, husband and B, wife are partners… On death of A, as per deed legal heir can be made a partner. Two minor children are legal heir of deceased. Kindly suggest can B (mother) and minor son be partners and run the firm

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