Chapter 13: Relations of Partners to Third Parties-Theory

Question 1

Define “authority of a partner”.

Answer 1

Authority of a partner means the capacity of a partner to bind the firm by his act.

Question 2

List down types of authorities of partner.

Answer 2

1. Actual Authority (= Implied Authority + - Express Authority)
2. Authority in Emergency
3. Authority in Ostensible/Apparent Partnership

Question 3

According to Partnership Act 1932, a partner has implied authorities (Given by Law). List down all. Are such transactions are binding on firm?

Answer 3

Every partner has following implied authorities:
1. To buy and sell goods of ordinary course of business.
2. To borrow money on behalf of partnership (in trading business).
3. To receive cash and pay to persons dealing with firm.
4. Settling accounts with persons dealing with firm.
5. To employ servants.
6. To pledge movable property of firm.
7. To draw checks or endorse bills of exchange/promissory note in the name of firm.
8. To sue or defend suits in the name of the firm.
Such transactions are binding on firm if:
- The act must be done as partner/agent of the firm in the name of the firm, with an intention to bind the firm.
- The act must be done in the ordinary course of business of the firm and in usual way.

Question 4

According to Partnership Act 1932, a partner has implied authorities. List down all. Are such transactions are binding on firm? (Restriction on Implied Authority)

Answer 4

A partner does NOT has following implied authorities/powers:
1. Submit a dispute of the firm to arbitration.
2. Open a bank account on behalf of the firm in his own name.
3. Compromise or relinquish any complain or portion of a claim by the firm.
4. Withdraw as order proceedings filed on behalf of the firm.
5. Accept any liability in a suit or proceeding is the firm.
6. Acquisition of removable property on behalf of the firm.
7. Transfer immovable property belonging to the firm.
8. Enter into partnership on behalf of the firm.
- Such transactions are not binding on firm if made without first authority.

Question 5

Define “Express authority of a partner”.

Answer 5

Express authority means authority of a partner as specified in partnership deed.

Question 6

Case Study Tips-Authority of a Partner.(3 points)

Answer 6

1. Authorities (and restrictions) of a partner have been written in Partnership Act. Further authority can be given/restricted if agreed by partners.
2. Third parties are assumed to have knowledge of implied Authority, but not of Express Authority unless communicated.
3. If a partner acts without authority (= exceeds authority), he will be liable (firm will not suffer any loss). Third party can bind firm only if third party acted in good faith without negligence.

Question 7

Describe “Partner’s authority in emergency”.

Answer 7

In case of emergency, a partner has authority to do all such acts to protect the firm from loss as would be done by a person of ordinary prudence acting under similar circumstances, and such acts bind the firm.

Question 8

Legal position if a partner exceeds its authority. (2(2)

Answer 8

1. Partner is not liable if this is emergency or firm ratifies it. Transaction is binding on firm.
2. Otherwise, partner is liable:
   -To Firm (if third party acted in good faith without negligence i.e. it did not know partner’s actual authority) -> Transaction with third party is binding on firm.
   - Third Party (if third party did not act in good faith i.e. it knew Partner’s actual authority) -> Transaction with third party is not binding on firm.

Question 9

Describe “Liability of a partner for acts of the firm” (overall liability).

Answer 9

Every partner is liable jointly with all the other partners and also severely for all acts of the firm done while he is a partner.
However, if a partner pays more than his share, he can claim reimbursement from other partners.

Question 10

Describe “Liability of the firm for wrongful acts of a partner” (For specific transactions causing loss). (2)

Answer 10

• With respect to third parties:
  Firm is liable if a third party suffers a loss or injury due to wrongful act or omission of a partner in the ordinary course of business (provided third party acted in good faith without negligence).
• With respect to partners:
  Partner committing the wrongful act/fraud must bear the whole loss and must indemnify the firm. Such loss cannot be shared among all the partners.

Question 11

Describe “Liability of firm for misapplication of money or property by partners” (for fraudulent transactions). (3 Points)

Answer 11

A firm is liable to make good the loss of third parties if, in the ordinary course of business:
1. A partner receives money or property from a third party and misapplies it or
2. A firm receives money or property from a third party, and a partner misapplies it.

Question 12

What is the effect of notice received by a partner? (4 Points)

Answer 12

If a partner receives a notice from any third party, this will be considered notice to whole firm if:
1. Notice is given to an active/working partner, and not to sleeping partner.
2. Notice relates to affairs of the firm.
3. Notice does not relate to a fraud committed by the partner receiving the notice.

Question 13

What is principle of estoppel/holding out partner? (4)

Answer 13

A person become liable as a partner in the firm to anyone who gave credit to firm if:
- The person represents himself or (allows others to represent himself) as a partner in a firm and
- On the basis of such representation, a third party gives credit to firm.
Representation may be made directly or indirectly, to the person giving credit.

Question 13

What is the effect of representation/statement by a partner? (3)

Answer 13

If a partner gives a representation (or admits something), it can be used as evidence against the firm if:
1. Such representation or admission relates to affairs of the firm.
2. Such representation or admission must be made in the ordinary course of business.

Question 14

Under principle of estoppel or holding out partner, list down it’s applications/examples (when a non-partner is liable for debts) and it’s exceptions (partner or his estate will not be held liable for debts of firm).

Answer 14

Examples:
1. Minor attaining age of majority.
2. Retirement of active partner.
Exceptions:
1. Death of a partner.
2. Insolvency of a partner.

Question 15

Under examples/applications of principle of estoppel or holding out partner, describe,
1. Minor attaining age of majority.

Answer 15

If a minor, who is admitted to the benefits of partnership, attains age of majority but does not give notice to general public for 6 months, he will be liable to third parties as partner.

Question 16

Under examples/applications of principle of estoppel or holding out partner, describe,
2. Retirement of active partner.

Answer 16

If an active partner retires but does not give notice to general public of his retirement and continuing partners still use his name as a partner, retiring partner will be liable to third parties.

Question 17

Under exceptions of examples/applications of principle of estoppel or holding out partner, describe,
1. Death of a partner.

Answer 17

If a partner dies and business is continued using old name of firm or partners, the estate of a deceased partner is not liable for any act of the firm done after his death even if no public notice of death is given.

Question 18

Under exceptions of examples/applications of principle of estoppel or holding out partner, describe,
2. Insolvency of a partner.

Answer 18

If a partner is declared insolvent, he ceases to be a partner on date of order. He is not liable for any act of the firm and firm is not liable for any act of the insolvent, done after the date of insolvency.

Question 19

Define “transfer (transferee) of a partner’s interest”

Answer 19

A partner can assign or transfer his interest in profits and property of firm by sale, mortgage or charge either fully or partially, with the consent of all partners.

Question 20

What are the rights of transferee? (4 points)

Answer 20

1. Transferee is entitled to receive the share of profits of the transferring partner.
2. On dissolution of the firm (or retirement of partner), transferee is entitled to receive:
   (a) The share of the assets of the firm to which the transferring partner is entitled, and
   (b) An account from the date of dissolution for the purpose of ascertaining the share.

Question 21

What are the restrictions, disabilities, limitations of transferee? (2+5 points)

Answer 21

Transferee will not be treated as a partner in the firm.
He shall not be entitled to:
1. Interfere in the conduct of the business.
2. Inspect the books of the firm.
3. Require accounts.
4. Challenge the account of profits agreed by partners.
5. Sue for dissolution of the firm.

Question 22

Describe “Admission of minor into partnership”.

Answer 22

Partnership is formed by contract.
As minor is incompetent to make a contract, therefore he cannot become a partner.
However, he can be admitted to benefits of an existing partnership, with the consent of all the partners.

Question 23

What are the rights of minor admitted to partnership? (3)

Answer 23

1. Minor can share profits and property of the firm as agreed with the partners.
2. Minor can have access and can get copy of accounts of the firm, (but not to secret books).
3. Minor cannot be declared insolvent.

Question 24

What are the liabilities of minor admitted to partnership?

Answer 24

Minor’s share is liable for the acts of the firm, but the minor is not personally liable for any such act i.e. his is liability is limited.

Question 25

What are the restrictions/disabilities of minor admitted to partnership? (3)

Answer 25

1. He will not be considered as a partner.
2. He cannot file suit against partners for profit and property unless he disconnects himself from the firm.
3. He is not entitled to have access to books other than accounts.

Question 26

What is the legal status of a minor on attaining age of majority?

Answer 26

Within six months of attaining majority (or becoming aware that he was admitted to the benefits of partnership whichever is later), such person shall give public notice that:
1. He has elected to become a partner in the firm.
2. He has elected not to become a partner in the firm.
If no public notices given, he shall be treated as partner after 6 months.

Question 27

What are the rights and liabilities of minor (after attaining age of majority) if he has elected to become a partner in the firm?

Answer 27

1. His share in the property and profits of the firm shall be the share to which he was entitled as a minor.
2. He also becomes personally liable to third parties for all acts of the firm done from the date when he was admitted to the admitted to benefits of partnership.

Question 28

What are the rights and liabilities of minor (after attaining age of majority) if he has elected NOT to become a partner in the firm?

Answer 28

1. His status as a minor continues till the date of public notice.
2. His share shall not be liable for any acts of the firm done after the date of the notice.
3. He shall be entitled to his share of profits and property, and he can sue the partners for it.