TYPES OF PARTNERS AND THEIR RELATION WITH A THIRD PARTY

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This Article is written by Ishita Jain of 2^nd year of B.A LLB (Hons.) of University Institute of Legal Studies, Panjab University, an intern under Legal Vidhiya

ABSTRACT

The Indian Partnership Act, 1932 defines the law relating to partnership. Partnership as defined in Section 4, is the relation formed between persons who run a business and share its profit and loss together. A partnership must include two or more persons who agree to work and share the output together of a commercial or business activity which is lawful.

Partners in a partnership may have different standing in accordance with the other partner depending upon their nature of contract to form a partnership. Also, the relation of partners with some third party, change according to certain rules and circumstances. This article focuses on the various types of partners and their relation with a third party.

KEYWORDS: Partnership, Types of partners, Relations of partners with third parties, Implied authority, Liability towards a third party

INTRODUCTION

The Indian Partnership Act,1932 defines the term partner under Section 4, which states that, a partner is a person who enters into a partnership with others. Persons in a partnership are individually termed as partners and collectively as a firm who further work under a firm name. Partners share the working of their business and budget together, however, all partners do not have the same share in relation with other partners. In the case of Champaran Cane Concern vs State of Bihar and Anr,[1] the Supreme Court differentiate between a partnership and co-ownership. It stated that the mere use of the word firm does not amount to the formation of a partnership, there are other essentials to be fulfilled for the formation of a partnership.

Sometimes, the relation among the partners may be such that they do not have and enjoy an equal share in the activities and functioning of the firm. Therefore, there are various types of partners depending on the nature, extent of participation etc in the partnership firm.

TYPES OF PARTNERS

There are various types of partners in a partnership which are being discussed below:

Active Partner

A partner who is an active participant and manager of all the activities of the partnership firm is called an active partner. Such a partner is vested with all the daily activities and tasks and is endowed with various responsibilities of the firm. An active partner is termed as an agent of the other partners because he/she acts in different capacities, takes care of the whole functioning and management of the firm and is therefore, entitled to withdraw remuneration from the partnership firm. Also, in cases of retirement of such partners, a public notice of the same is issued so as to discharge the liability of the partner from the acts and conduct of the other partners of the partnership firm.

Dormant Partner

A partner who holds shares or is an equal partner in terms of sharing the profits and losses of the firm but does not participate in the daily activities and tasks of the firm is termed as a dormant partner of the firm. Such a partner is present only in terms of his/her share in the capital but not as an active participant of the firm and therefore, cannot withdraw remuneration from the partnership firm. The liability remains the same, i.e., equal liability for the acts of the other partners of the firm. Also, in case of retirement of a sleeping partner, a public notice of the same may not be issued.

Nominal Partner

A nominal partner, as the name suggest is only minimally concerned with the partnership firm. Such a partner does not engage in any activity, conduct or functioning of the firm and is therefore, a partner only for the namesake. Mostly a nominal partner is someone who is renowned and famous, thereby, uplifting the name of the partnership firm. Such partners do not have any share in the profits and losses of the firm as there is no contribution of time and capital on their part, however, they are liable for the actions of the other partners towards a third party.

Partner by Estoppel

Estoppel is a rule under which a person is prohibited from contradicting his statements in a court of law. The same rule applies in case of partnership, where a person represents to another through his actions, conduct or words that he/she is a partner of a firm, thereby, being obliged not to contradict the same and becoming a partner through estoppel or holding out. Such a person is not an actual partner of the firm, does not contribute anything to the firm but creates an impression in the mind of another that he/she is a partner. Therefore, if a third party endorses anything in favour of that person under such belief, then the person cannot refuse the liability created towards the third party and is considered as a partner.

Minor Partner

A minor is a person who has yet not attained the age of majority i.e., eighteen years of age and is not entitled to be a part of any contract or agreement enforceable by law. A minor’s consent to a contract is considered as void ab initio. However, in a partnership firm, if all the partners agree, then a minor can enjoy the benefits of a partnership. His/her liability is only to the extent of his share in the firm and is not personally liable for the actions of the firm. He/she is accredited to enjoy the share of the profits as agreed upon by the firm. After attaining the age of majority, the person has to decide within six months, either to be a partner or to withdraw from the partnership through a public notice.

Partner in Profit

A partner who is a part of the partnership only for the profits and gains of the firm and is not bound by any liability so created, is known as a partner in profits only. Such a partner is not an active participant of the firm, has no say in the management activities of the firm and is only concerned with the profits of the firm. Even in cases of third-party dealings, such a partner would be entitled to the profits of the dealing and would not be burdened with any liability whatsoever.

Secret Partner

A person whose identity and membership as a partner are kept hidden from a third party or public, is known as a secret partner. Such a partner is entitled to the profits as well as the losses which accrue in a partnership. He/she has an equal say and an active role in relation to the management of the firm.

RELATION OF PARTNERS WITH A THIRD PARTY

In the Indian Partnership Act, 1932, the essentials, liabilities etc of a partnership have been defined. One of the main things in a partnership include the relation of partners with third parties and outsiders. Section 18 to 30 enlist such relations and their consequent liabilities in a partnership firm.

SECTION 18 – Partner as an agent for the firm

To constitute a partnership, it is essential that there are two or more partners who agree to share the gains and losses of the partnership together. Also, partners may act together as a whole or one may act on behalf of all the partners. Therefore, when a partner acts on behalf of the firm or the other partners, he/she is stated to be an agent of the firm, as the authority to act is drawn from the firm itself. A partner is treated as an agent for the purpose of the business of the firm and not otherwise. So, when a partner acts on behalf of the firm for the business of the firm, he/she is treated as an agent for the firm. This may include any contract with a company, sale and purchase or any such act or business in the name of the firm.

SECTION 19– Implied authority of partner

An implied authority means an authority to act on behalf of another which is implied through the conduct of the person.

This section in compliance with section 22 states, that when a partner acts in the usual course of business on behalf of the firm, he/she impliedly binds the firm through such an act. This is termed as the implied authority of the partner as an agent of the firm.

However, there are certain cases where the partners cannot enforce their implied authority and are enlisted under section 19(2) of the act. These are as follows:

Dispute in relation with the business of the firm cannot be submitted for arbitration
A partner cannot open a bank account in his own name, on the firm’s behalf
Any claim or portion of the claim of the firm cannot be compromised or absolved
Suit or any proceedings filed on the firm’s behalf cannot be withdrawn
Admission of liability in a suit which goes against the firm
Acquiring any immovable property on the firm’s behalf
Transfer of immovable property which belongs to the firm
Entering into a partnership on the firm’s behalf

SECTION 20- The restraint and extent of implied authority

In a partnership, the partners can fix by contract or agreement the extent and restraint to be exercised by a partner in terms of his/her implied authority. Also, if the act done by a partner on behalf of the firm is within his/her authority, it will bind the firm till the time the third party with whom he/she is dealing, does not know of the restriction or does not know that person is a partner.

SECTION 21- Authority in Emergency

In an emergency situation, a partner is entitled to engage in all such acts which would protect the firm from accruing any loss, as a reasonable man of ordinary prudence would act in his own case under similar circumstances and thereby binds the firm for the same.

For instance, in case of perishable goods, if the partner takes an action like a reasonable man, to save the firm from accruing losses, then such act would bind the firm for the same.

SECTION 22– Mode of Binding the firm

It is stated in this section that, a firm is bind, if a partner or any other person by his/her conduct or through execution of an instrument on behalf and in the name of the firm has an intention to expressly or impliedly bind the firm.

SECTION 23- Admission by partner

If a partner makes an admission concerning the affairs of the firm and is in accordance with the ordinary course of business of partnership, then it would be considered as evidence against the firm, thereby binding it.

For instance, A and B are partners of a shop. C on A’s advice, buys some goods from their shop but are found to be defective. In this case both A and B would be liable towards C.

SECTION 24- Notice to an active partner

It is stated that if a notice in relation to the business or any activity of the firm is issued to an active partner of the firm, then it means that the notice has been issued to the firm itself. Therefore, a notice issued to an active partner who is not indulged in any activities relating to fraud, misrepresentation etc is considered as a notice given to a firm. It is essential that the partner is active and not dormant in his/her activities for the firm.

LIABILITY TOWARDS THIRD PARTIES

Section 25 to 27 deal with the liabilities which arise in a partnership

SECTION 25

In a partnership, every partner is liable for the acts of the firm jointly and severally. A partner is liable for the acts of the firm till the time he/she is in a partnership.

For instance, A is a partner in a firm named QBC. However, due to an act of another partner B, the firm is sued. Here, all the partners will be held liable for the action of B, jointly and severally.

Also, it is essential that at the time of the act done by the firm, a person must be a partner in the partnership firm.

In the case of M/S. Glorious Plastics Ltd. vs. Laghate Enterprises and Others,[2] the court held that a person can be held liable jointly and severally under Section 25, while he/she is a partner of the firm. If anything happens where the firm’s liability arises, after the person retires from the partnership, he/she cannot be held liable for the same along with the other partners.

SECTION 26

This section deals with the wrongful act of a partner. It states that if a partner is engaged in any act i.e., wrongful, in the ordinary course of business of the firm or with the partners authority, thereby injuring a third party would make all the partners liable to the same extent as the person who commits the act.

For instance, P being in a partnership and acting in the ordinary course of business sells a defective/stolen product to Y, thereby causing injury/loss to Y. So, all the partners would be held liable for such injury/loss and to the same extent as P.

In the case of Lloyd vs Grace Smith and Company,[3] the managing clerk acted on behalf of the company/firm and suggested Mrs. Lloyd to sell the cottages which she owned to earn better returns. However, the clerk instead of the sale deeds made her sign the gift deeds in his favour. Therefore, the employee as well as the firm were held liable to compensate Mrs. Lloyd for the damages she incurred.

SECTION 27

When a partner or a firm receives money or property from a third party within their authority, but misappropriate it’s use, then the firm is held liable for the loss of the third party. So, even if the money is received by a partner and not the firm itself but is misappropriated, the firm would be liable for the act of the partner.

For instance, A and B are partners and grant loans. C takes a loan from their firm by keeping his property as collateral. However, A misappropriates the property by selling it to D. Therefore, both A and B are going to be held liable for the act of A.

SECTION 28- Holding out

Section 28(1) states that if a person through holding out or by estoppel represents himself to be a partner of the firm and a third party in good faith endorses such person with credit, then he would be liable in the same respect as the firm. Also, it does not matter whether the person holding out is aware of the third party’s impression as to his partnership.

Clause 2 of the section, enlists the situation where on the death of a partner his partnership also ceases. If a partner is dead but the firm continues with the same name, it does not make the legal representatives or his/her estate accountable to a third party for the actions of the firm. Therefore, when a partner dies the partnership also ends on his behalf as a partner.

SECTION 29 – Rights of Transferee

There are instances where a partner transfers his interest in the firm to another person, by way of sale, mortgage etc. however, the transferee of such interest is not bestowed with the same rights and privileges as the true partner of the firm. The transferee however, has certain rights which can be exercised such as:

Receive the share of profits of the transferring partner
In case of dissolution of the firm or end of partnership by the transferring partner, the transferee can claim the share of assets of the firm, entitled to the transferring partner
For ascertaining this share, transferee is entitled to an account from the date of dissolution.

SECTION 30 – Minor’s partnership

Minors are not entitled to enter into a partnership firm as a partner, however, can be admitted to the benefits of the partnership. A minor’s share in the property and profits of the firm maybe agreed upon by the partners. His/her share is held liable for the acts of the firm and personal liability is not attached. Once the minor has attained the age of majority then within six months, he/she has to decide whether to be part of the firm and become an actual partner or not and declare the same through a public notice. However, if he/she fails to do the same within six months of attaining majority then, he/she would be considered as a part of the firm. If the person chooses to be a partner, then he would become personally liable for all the acts of the firm since the time he was admitted to the benefits of the firm and also his share in the firm as a minor would become his/her share in the profits and property of the firm.

If he/she chooses not to be a partner then, his/her share in the firm would not be liable for the firm’s actions and he/she would be eligible to sue the firm in respect of his/her share in the profits and property of the firm.

CONCLUSION

In a partnership there are minimum two or more partners who agree to share the profits and losses together. There are various types of partners from active to sleeping partners. A partner is regarded as an agent of the firm while he/she acts on behalf of and in the interest of the firm. They are endowed with an implied authority to bind the firm for their actions jointly and severally. In a partnership the act of one, binds the whole firm towards the third party. Therefore, there are many aspects of a partnership firm and this article focuses on the types of partners and their relation with third parties.

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