Relations of Partners to Third Parties under the Indian Partnership Act: An Analysis

-Pravesh Aggarwal, RGNUL

Editor’s Note: Case Briefs on the Relations of Parties to Third Parties under the Indian Partnership Act.

INDIAN CASES

1.1 Partners To Act As Agents Of Each Other

Case Prem Ballabh Khulbe v. Mathura Datt Bhatt[i]

FactsThe appellant, the respondent and two other persons carried on business in partnership under the name and style of Nayagaon Farm. The respondent was the managing partner and was in-charge of the partnership assets. The firm was dissolved and a suit was instituted by the appellant for the taking of the accounts of the dissolved firm, which turned in the favour of appellant in both District Court and High Court. The appellant applied for execution of the decree by arrest and detention of the respondent in prison. In this affidavit in support of the application, the appellant relied upon the grounds mentioned in clauses (a) and (b) of the proviso to s. 51 of the Code of Civil Procedure 1908. At the hearing of the application those grounds were not pressed but his counsel relied upon the ground mentioned in Clause (c) of the proviso. By Clause (c) of the proviso to s. 51, the court is empowered to order execution of a money decree by detention of the judgment debtor in prison if it is satisfied “that the decree is for a sum for which the judgment debtor was bound in a fiduciary capacity to account”.  The respondent filed an appeal to the Supreme Court of India stating the absence of fiduciary relationship between the parties.

Legal IssueThe matter which was to be decided was whether there arises any fiduciary relation between the parties on account of partnership existing between them.

Judgment– The Supreme Court of India held that there arises no fiduciary relation between the parties simply on the basis of contract between them. Justice Bachawat relied on the book ‘Halsbury’s Laws of England’, which further stated, “Partnership itself does not create a fiduciary relation between the partners or make one of them a trustee for the other or for his representatives. The relation may, however, arise on the death of one of them or be created by other special circumstances.”[ii] Further, in the case of Piddocke v. Burt.[iii], it was held that  a partner failing to pay moneys in his hands and received by him on account of the partnership was not liable to be imprisoned under s. 4(3) of the Debtors Act 1869 as a person “acting in a fiduciary capacity” within the meaning of that statute. Hence, the managing partner was not held liable on acting in the capacity of fiduciary relationship between one of the partner.

Analysis- In the above case, it can be drawn that as per Section 9 of the Indian Partnership Act, 1932, a partner must observe the utmost good faith in his dealings with the other partners. He is bound to render accounts of the partnership assets in his hands. But in the absence of special circumstances he cannot be regarded as a kind of trustee for the other partners or liable to render accounts to them in a fiduciary capacity. Further, Section 21 of the Act enumerates the fact that a partner must act in emergency as a normal prudent person would normally do for the benefit of the firm and such acts binds the firm.

1.2    Implied Authority of a Partner To Act For and Bind the Firm

Case– Purushottam Umedbhai & Co. v. Manilal and Sons[iv]

Facts- The plaint in Suit No. 1452 of 1951 was filed in the name of Manilal & Sons, a firm carrying on business at No. 11A, Malacca Street, Singapore. The defendant was the firm of Purushottam Umedbhai & Co. (now the appellant) – a firm registered under the Indian Partnership Act, 1932 – carrying on business at No. 55 Canning Street, Calcutta. In July, 1949, there was a contract between the plaintiff and the defendant under which the defendant was to sell to the former, subject to certain conditions, 950 bales of Heavy Cees gunny bags c.i.f. Singapore to be shipped from Calcutta in August, 1949. It was also agreed between the plaintiff and the defendant in July-August, 1949, that the latter would sell, subject to certain conditions, 600 bales of Heavy Cees gunny bags c.i.f. Hong Kong to be shipped from Calcutta in August, 1949. According to the plaintiff, the defendant did not perform the contract entered into by the parties and as a result of the default on the part of the defendant the plaintiff had suffered loss. The appellant filed a complaint against the respondent alleging that the complaint was not valid on the account of it being filed by an attorney employed by one of the partner and thus alleged that the complaint is null and void.

Legal Issue- The matter which was decided was whether the attorney employed by one of the partner was acting within the implied authority of all the partners of the firm.

Judgment- The Supreme Court of India held that the attorney is legally authorized to institute a complaint on the part of the firm, notwithstanding the fact that it was employed by one of the partner with or without the consent of the other partners. Justice Imam further reiterated the fact that since such attorney was acting for the benefit of the firm and thus is entitled as per law to file such complaint. In addition, such partner acting on the behalf of other partners was under an implied authority to employ such legal attorney to settle dispute. Hence, such complaint was allowed by the Court and finally turned in the favour of appellant.

1.3 Liability Of The Firm To The Third Part Despite The Restriction To The Implied Authority

Case- Motilal v. Unnao Commercial Bank[v]

Facts- In a partnership firm, one of the partners borrowed a sum of money by accepting a bill of exchange from the defendant. This was contrary to the partnership agreement signed between the partners which disabled any of its members from borrowing money by accepting bill of exchange from any third party. As a result, other partners filed a suit against that partner on the ground that they would not be liable for the loss suffered to the third party on account of non-payment of such amount.

Legal Issue- It was argued whether a contract to the contrary contained in the partnership deed prevented other partners from incurring any liability on account of such act committed by one of the partner.

Judgment- The trading firm was held liable by the Bombay High Court, when one of the partners borrowed money by accepting a bill of exchange despite restrictions on borrowing contained in the partnership deed, the other party knowing nothing of the restriction. The Court further held that section 20 of the Indian Partnership Act, 1932 clearly specifies that notwithstanding any restriction on the express and implied authority of a partner, any act done a partner on the behalf of the firm which falls within his implied authority binds the firm, unless the person with whom you are dealing with knows the restriction or does know or believe the partner to be a partner. In the present case, it was found out and held that the third party was unaware of such restriction on the partner and hence was allowed to compensate from all the partners, as per section 25 of the Act.

Analysis- There arise a difference between the statutory restrictions contained in section 19(2) and those imposed by the partnership deed is that while the former are binding upon every person contracting with the firm, whether he has knowledge of them or not, the latter are not effective against a party who has no knowledge of them.

1.4 Liability Of Firm For Wrongful Act Of A Partner

Case- Hurruck Chand v. Gobind Lal Khetry[vi]

Facts- The plaintiff and the defendant were firms of merchants dealing in piece goods. One Baij Nath was the active partner of the defendant firm. The plaintiffs sent a cartload of dhoties and shirtings to the Howrah railway station to be consigned to their customers, but were stolen enroute to the station. The goods were subsequently recovered from the possession of Baij Nath who was dealing with them in the name of the firm. The other partner knew nothing whatever about the theft.

Legal Issue- It is argued whether the wrongful act committed by a partner despite the knowledge of the same to the other partner binds the firm.

Judgment- It was held by Justice Harrington in the Calcutta High Court that the firm is liable for the wrongful act committed by one of the partner in the firm. It was within the implied authority of Baij Nath to sell piece goods for the firm. The goods that he sold belonged to the plaintiff. That was the conversion of the plaintiff’s property for which the firm was liable.

1.5   Implied Authority Of The Partner And Liability Of A Firm For Misapplication By Partners

Case- Kaicker Typewriter Exchange v. Ram Narain Mehra[vii]

Facts- A firm was dealing in the sale of typewriters with the plaintiff-respondent. One of the partners issued a promissory estoppel with the plaintiff-respondent wherein the partners were entitled to pay a sum of Rs. 3,400.00 to the other party. When plaintiff-respondent claimed for the money which one of the partners had borrowed, acting during the course of business of the firm, the partner who had borrowed the said amount misapplied it and other five partners of the partnership firm claimed that all the partners did not have the authority in law to raise loans during the course of business of the partnership firm and hence they are not entitled to pay the amount, since it was not within the implied authority of the partner to raise loan.

Legal Issue- The matter which was to be decided was whether the partner who raised the loan was entitled within its implied authority to do so and whether such act entitles the plaintiff-respondent to recover the abovementioned amount from all the partners of the firm

Judgment- The matter was decided in Delhi High Court wherein Justice B.C. Misra held the fact that the firm was dealing in the sale of typewriters and it was thus a trading firm and so all the partners had authority in law to raise loans and the petition was dismissed. It was further reinstated that where the firm is a trading firm, a partner has implied authority to borrow money and the firm would constitute a trading firm if its business consists in buying and selling. Where defendants (as in the instant case) constituted a partnership and one of the partners executed a promissory note for and on behalf of the firm, the court would be entitled to presume that such a partner had authority on behalf of the other partners to execute the promissory note. The Court further relied on Lindley on Partnership,  which has observed that one of the most important of the implied powers of a partner is that of borrowing money on the credit of the firm.[viii] The sudden exigencies of commerce render it absolutely necessary that such power should exist in the members of a trading partnership, and accordingly is a comparatively early case this power was clearly recognised. It has been already seen that one partner can bind the firm by a bill or note, upon which money may be obtained, by the everyday process of discounting; and the power of one partner to pledge partnership goods for advances is equally well established. Thus, the misapplication of money borrowed by the partner acting within his apparent authority binds the firm as per Section 27(1) of the Indian Partnership Act, 1932.

1.6 Minor Admitted To The Benefits Of The Firm

Case- Commissioner of Gift Tax, Delhi-II v. Harinder Singh and Virender Singh (L. Rs. of Late Bhagwan Dass Katyal)[ix]

Facts- The facts of the case are that there is a partnership, M/s. Bhagwan Dass & Co., Kashmere Gate, Delhi, in which the partners were as per partnership deed dated April 1, 1959, Shri Bhagwan Dass Katyal and his son, Shri Harinder Katyal. According to this deed, the shares in the profits and losses in the firm were equal between the partners. By another partnership dated April 1, 1962, another son of Shri Bhagwan Dass, namely, Shri Virender Kumar Katyal, minor, was admitted to the benefits of the partnership. According to this deed, Shri Virender Kumar, minor, had been admitted to the benefits of the partnership to the extent of 40% in the profits only. The two partners to the deed, Shri Bhagwan Dass and Shri Harinder Katyal, had to receive 20% and 40% of the profits, respectively, but their share in the loss was 50% each. Later, Shri Bhagwan Dass had parted with his portion of the right to get profit to the extent of 30% in favor of his son, Virender Kumar Katyal, without adequate consideration. Gift Tax officer levelled a charge.

Legal Issue- The matter which was to be decided was whether the Tribunal was right in holding that there was no transfer of goodwill by the assessed when his minor son, Virender Kumar, had been admitted to the benefits of partnership and that there could be no deemed gift as there had been no transfer of goodwill.

Judgment- In the particular case, Delhi High Court held that it was relevant to see that Mr. Virender Kumar Katyal (minor) who has been admitted to the benefits of the partnership will receive 40% share out of the profits only. There is no question of the minor getting any share in the property of the firm. The Gift-tax Officer held that Shri Bhagwan Dass had parted with his portion of the right to get profit to the extent of 30% in favor of his son, Virender Kumar Katyal, without adequate consideration and hence there was an implied gift in the accounting year relevant to the assessment year. The conclusion was that there was a gift within the meaning of section 2(xii) read with section 2(xxiv)(d) of the Act. The gift was computed as being a transfer of 30% of the goodwill. Thus, at the time when the agreement was signed between the partners as to admit the minor to the benefits of the firm, there was no mention to the transfer of interest of property to the minor and hence the tax was levied on the gift. As per the Gift-tax Act, is section 2(xii) defines “gift” to mean the transfer by one person to another of any existing movable or immovable property made voluntarily and without consideration. As seen above, this partnership by which the minor was admitted to the partnership does not include any transfer of movable or immovable property to that minor.

The relevant portion of this definition of “transfer of property” in section 2(xxiv) is to grant or create any partnership or interest in property. It could well be argued that by making a partnership deed, there has been a disposition, conveyance or assignment of an interest in the firm’s property. As already analyzed, a minor does not become a partner. He can become a partner after he attains majority under the provisions of section 30 of the Partnership Act. But, he may refuse to become a partner as he has an option. So, it cannot be said that any interest in the property of the firm has been transferred by his mere admission to the benefits of the partnership which are restricted in this case to the enjoyment of 40% of the profits. It would be quite another case if some benefit in the property of the firm had also been transferred to the minor under section 30(2) of the Act. Thus, the High Court upheld the decision of the Tribunal regarding imposition of tax on the gift given by one of the partner to the minor.

Edited by Hariharan Kumar

[i]      Prem Ballabh Khulbe v. Mathura Datt Bhatt, AIR 1967 SC 1342.

[ii]     Halsbury, Hardinge  Stanley Giffard, Sanagan and Gerald D., Halsbury’s Laws of England 822 (3d ed. 1954).

[iii]     Piddocke v. Burt, (1894) 1 Ch. 343.

[iv]     Purushottam Umedbhai & Co. v. Manilal and Sons, AIR 1961 SC 325.

[v]     Motilal v. Unnao Commercial Bank, (1930) 32 Bom LR 1571.

[vi]     Hurruck Chand v. Gobind Lal Khetry, (1906) 12 CWN 1053.

[vii]    Kaicker Typewriter Exchange v. Ram Narain Mehra, (1970) ILR Delhi 384.

[viii]   Ernest H. Scamell,  Ernest H. Scamell 77 (12d ed. 1962).

[ix]     Commissioner of Gift Tax, Delhi-II v. Harinder Singh and Virender Singh (L. Rs. of Late Bhagwan Dass Katyal), (1986) 157 ITR 292 (Delhi).

2 Replies to “Relations of Partners to Third Parties under the Indian Partnership Act: An Analysis”

  1. whether one of the partner of a Partnership Firm can execute Regd. Power of Attorney in favour of her husband to act on execute registered documents on behalf her behalf along with other partners?

  2. whether one of the partner of a Partnership Firm can execute Regd. Power of Attorney in favour of her husband to act on her behalf to execute registered documents on her behalf along with other partners? Whether the document is valid?

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