RELATIONS OF PARTNERS TO 3rd Parties Flashcards
CH # 13
Authority of partners
Actual authority
▪ The authority of each partner may be specified in the partnership agreement.
Implied authority80
▪ The act of a partner done by him as an agent of the firm in the course of business of the firm
in the name of the firm, or in any other manner expressing an intention to bind the firm.
▪ An authority to bind the firm is known as implied authority of a partner.
Every partner within the scope of his implied authority may bind the firm by following acts:
▪ Buying and selling good, on behalf of the firm and giving valid receipts for them
▪ Receiving payments of debts due to the firm and giving valid receipts or discharge for them
▪ Contracting debts and paying debts on behalf of the firm
▪ Settling accounts with persons dealing with the firm
▪ Employing servants for the partnership of the firm
▪ Drawing cheques, accepting or endorsing bills of exchange and promissory notes in the name
of the firm
▪ Pledging movable property of the firm
▪ Suing on behalf of the firm and defending suits in the name of the firm
Restrictions on the implied authority of a partner
Following acts are not included in the implied authority of a partner unless there is any usage
or custom of trade
▪ Arbitration Submit a dispute relating to the business of the firm to arbitration
▪ Bank account Open a banking account on behalf of the firm in his own name
▪ Compromise Compromise or relinquish any claim or portion of a claim by the firm
▪ Withdrawal of suit Withdraw a suit or proceeding filed on behalf of the firm
▪ Liability Acceptance Admit any liability in a suit or proceeding against the firm
▪ Acquisition Acquire immovable property on behalf of the firm
▪ Transfer Transfer immovable property belonging to the firm
▪ Partnership Enter into partnership on behalf of the firm.
Restriction on implied autority of parteners by partnership deed
▪ Restriction which is specifically written in partnership deed
▪ It is effective only against the person dealing with the firm having knowledge of it81
Ratification of actions taken by a partner outside his actual authority
▪ When a partner exceeds his authority, the other partners may approve such unauthorized
act with retrospective effect.
▪ By ratification, partners can remove any doubt about
- Existence of implied authority
- Knowledge of the other party that the partner did not have the actual authority
Partner’s Authority in an Emergency
▪ A partner has authority, in an emergency, to do all such acts for protecting the firm from loss
as would be done by a person of ordinary care, in his own case under similar situation82.
In order to bind a firm, an act done or instrument executed by a partner or other person on behalf
of firm shall be done or executed in firm name, or in manner implying an intention to bind the firm.
Liabilities of partners and firm
Effect of admissions by a partner
Any admission or representation made by a partner is valid against the firm if:
▪ Such admission or representation relate to the affairs of the firm and
▪ Such admission or representation made in the ordinary course of business.
Effect of notice to an active partner
Any notice to a partner operates as a notice to the firm if the following conditions are fulfilled:
▪ Such notice must relate to the affairs of the firm
▪ Such notice must be given to a working partner and not to a sleeping partner
▪ There must not be any fraud committed by the partner receiving the notice.
▪ Liability of a partner for acts of a firm (Joint & Several Liability) 83
- The liability of the partner is both joint and several, so that the creditor may compel any
one or more of the partners to discharge the whole of the debts of the firm.
▪ Liability of the firm for wrongful acts of a partner84
- Where by wrongful act or omission of a partner acting in ordinary course of business
any loss or injury is caused to any third party, firm is liable to same extent as partner.
- For fraud, the firm is liable to the third party for loss caused to them
(same must be borne by partner committing the fraud and cannot be shared among all)
▪ Liability of firm for misapplication by partners85
- A partner/firm acting within his apparent authority receives money or property from a
third party and misapplies it, the firm is liable to make good the loss.
HOLDING OUT
A person who expressly or impliedly represents himself, or knowingly permits himself to be so
represented to third party that he is a partner in a firm, is called partner by holding out. If third
party gives credit to the firm, ‘partner by holding out’ shall be liable just like any other partner.
In order to render a person liable as a partner on the ground of holding out:
▪ He must have by spoken or written or by his conduct represented himself to be a partner
(Direct representation)
▪ He must have knowingly permitted himself to be represented as a partner to other person
(Indirect representation)
▪ Other person must have acted on the faith of such representation and gives credit to firm.
(whether or not person representing know that representation has reached other person)
Silence may also constitute holding out representation.
Principle of holding out also applies in case of retiring partner; however, it does not apply in
case of deceased or insolvent partner.
RIGHTS OF TRANSFEREE OF A PARTNER’S INTEREST
A partner may transfer his interest in the firm by sale, mortgage or charge fully or partially.
Rights of Transferee
▪ He is entitled to receive the share of the profits of the transferring partner.
▪ On the dissolution of firm or on retirement of transferring partner he is entitled to receive:
- Share of the assets of the firm to which the transferring partner is entitled.
- Account from the date of the dissolution for the purpose of ascertaining the share.
Disabilities of Transferee
▪ No status of a partner.
▪ Disability to interfere in the conduct of the business during the continuance of the firm
▪ Disability to require accounts.
▪ Disability to inspect the books of the firm.
▪ Disability to challenge the accounts of profits agreed to by the partners.
▪ Disability to sue for dissolution of the firm.
MINOR’S ADMISSION TO THE BENEFITS OF PARTNERSHIP
A minor cannot enter into a partnership agreement but with the consent of all the partners for
the time being a minor may be admitted to the benefits of partnership.
Position of a minor before attaining majority
Rights
▪ Right to share property and profits of the firm as agreed by the partners
▪ Right to have access to accounts of the firm only and not to the secret books
Liabilities:
▪ Personally not liable i.e. limited liability.
▪ His share is liable for the acts of the firm.
Disabilities:
▪ No status of a partner.
▪ No suit against partners for profit and property except after disconnecting his relation with
the firm.
▪ Not entitled to have access to books other than accounts.
Position of a minor on attaining majority
▪ On attaining majority, the minor partner has to decide within 6 months whether he shall
continue in the firm or leave it.
▪ These 6 months run from the later of:
- His attaining majority or
- When he first comes to know that he had been admitted to the benefits of partnership
▪ He should give a public notice of his choice to become or not to become a partner.
▪ If he fails to give a public notice, he is deemed to have become a partner in the firm on the
expiry of those 6 months
▪ The burden of proving the fact that such minor had no knowledge of such admission until a
particular date after the expiry of six months of his attaining majority shall lie on such minor.
Where such person elects to become a partner
▪ He hold Personal liability since the date of admission to the benefits of the firm
▪ He hold same share in profits and property of firm to which he was entitled as a minor.
Where such person elects not to become a partner
▪ The status of a minor holds up to the date of public notice
▪ His share is not liable for any act of the firm after the date of public notice
▪ He has right to sue partners for share of the property and profits
