This Relations of Partners – CA Foundation Law Study Material is designed strictly as per the latest syllabus and exam pattern.
Relations of Partners – CA Foundation Business Law Study Material
Question 1.
Explain the rights of a partner, under the Indian Partnership Act, 1932.
Answer:
Rights of partners
Subject to contract between the partners, the Partnership Act confers the following rights upon the partners of a firm:
1. Right to take part in the conduct of the business [Sec.l2(a)]
Every partner has a right to take part in the conduct of the business of the firm. The partners among themselves may agree to entrust the work of management to one or more of them.
2. Right to be consulted[Sec.l2(c)]
Every partner has a right to be consulted and heard before any matter is decided. Ordinary matters may be decided by majority opinion but matters of fundamental nature would require unanimity.
The matters which are to be decided by unanimous consent of all the partners are discussed below :
- Nature of business [Sec. 12]
- Admission of a partner [Sec. 31(1)].
- Transfer by a partner of his interest in the firm [Sec. 29],
- Admission of a minor to the benefits of partnership [Sec. 30(1)].
3. Right to access to books [Sec. 12(d)]
Every partner has a right to have access, to inspect and copy any of the records and books of the firm.
4. Right to share the profits [Sec. 13(b)]
Every partner has the right to share equally in the profits earned and to contribute equally to the losses sustained by the firm. This provision is irrespective of the amount of capital contribution made or business expertise offered. However, they may agree to share the profits in some other ratio.
5. Right to interest on Capital [Sec. 13(c)]
Every partner has the right to interest on capital, if so agreed, out of profits only.
6. Right to interest on advances [Sec. 13(d)]
A Partner is entitled to receive interest at 6% p.a. on any advance, in excess of the agreed amount of capital, made for the purposes of the business.
7. Right to indemnity [Sec. 13(e)]
Every partner has a right to claim indemnity from the firm in respect of payments made or liabilities incurred by him (a) in the ordinary and proper conduct of the business, and (h) in doing such act, in an emer¬gency, for the purpose of protecting the firm from loss, as would be done by a person of ordinary prudence, in his own case, under similar circumstances.
8. Right to prevent the introduction of a new partner [Sec. 31(1)]
Every partner is entitled to prevent the admission of a new partner into the firm.
9. Right to retire [Sec. 32(1)]
A partner to retire from the firm (a) with the consent of all other part¬ners, or (b) in accordance with the terms of the deed, or (c) by giving a notice to all other partners, of his intention to retire.
10. Right not to be expelled [Sec. 33]
Every partner has the right to continue in the partnership and not to be expelled from the firm.
11. Right to carry on competing for business after retirement [Sec. 36(1)]
Every outgoing partner has a right to carry on a competitive business under certain conditions.
12. Right to dissolve the firm (Sec. 43)
Where the partnership is at will, the firm may dissolve by any partner giving notice in writing to all the other partners of his intention to dis¬solve the firm.
Question 2.
What are the duties conferred on the partners under the Indian Partnership Act, 1932?
Answer:
1. General Duties of Partners:
Section 9 of the Partnership Act lays down that all the partners are bound:
- to carry on the business of the firm to the greatest common ad¬vantage,
- to be just and faithful to each other, and
- to render to any partner or his legal representative the true ac¬counts and
- to render full information of all things affecting the firm.
2. Duty to indemnify for loss caused by fraud:
According to Section 10 of the Partnership Act, every partner shall indemnify (reimburse or pay back) the firm for any loss caused to it by his fraud in the conduct of the business of the firm.
3. Duty to attend diligently to his duties [Sec. 12(b)]:
Every partner is bound to attend diligently to his duties in the conduct of the business.
4. Duty to work without remuneration [Sec. 13(a)]:
A partner is normally not entitled to receive any remuneration for taking part in the business of the firm. However if the partnership agreement provides or business custom allows, a partner can be given remuneration.
5. Duty to contribute to the losses [Sec. 13(b)]:
The partners shall contribute equally to the losses sustained by the firm without regard to the capital contribution made by the firm.
6. Duty to indemnify for wilful neglect [Sec. 13(/)]:
A partner shall indemnify the firm for any loss caused to it by his willful neglect in the conduct of the business of the firm.
7. Duty to use firm’s property exclusively for the firm (Sec. 15):
Subject to contract between the partners, the property of the firm shall be held exclusively for the purposes of the business of the firm.
8. Duty to account for personal profits derived [Sec. 16(a)]:
If a partner derives any profit for himself from any transaction of the firm, or from the use of the property or business connection of the firm in the firm’s name, he shall account for that profit and pay it to the firm.
9. Duty not to compete with the business of the firm [Sec. 16(b)]:
No partner can carry on a business that is competing with that of the firm without the consent of the other partners, otherwise, the partner carrying on such a business will have to account for and pay to the firm all profits made by him in that business.
10. Not to assign (transfer) his interest in the firm (Sec. 29):
It is the duty of a partner not to assign his interest in the firm to a stranger (outsider) without the consent of all other partners.
Question 3.
What is meant by “implied authority”? What are the statutory restrictions on implied authority as stipulated in the Indian Partnership Act, 1932?
OR
In the absence of any usage or custom of trade to the contrary, the implied authority of a partner does not empower him to do certain acts. State the acts which are beyond the implied authority of a partner under the provisions of the Indian Partnership Act, 1932
Answer:
Meaning of implied authority
Meaning of Implied Authority. The authority of a partner means the capacity of a partner to bind the firm by his act. This authority may be express or implied. Where the authority to a partner to act is expressly conferred by an agreement it is called express authority. It is implied when the law presumes certain powers exercisable by every partner unless negatived by a contract to the contrary.
According to Sec. 19(1) of the Act, “the act of a partner which is done to carry on, in the usual way business of the kind carried on by the firm “is called Implied Authority of partner. It is subject to the following 3 conditions:
(1) The act done by the partner must relate to the normal business of the firm and must be within the scope of the business of the firm. For example, if the partner of a firm dealing in electronic goods, purchases some wine in the name of the firm, the firm would not be liable.
(2) The act must be done in the usual way i.e., in the normal course. What is the usual way of carrying on the business, will depend on the nature of the business, customs and usages in that kind of business, and circumstances of each particular case.
(3) The act must be done in the name of the firm, or in any other manner expressing or implying an intention to bind the firm, by the partner in the capacity of a partner.
Limitation on Implied authority or Statutory Restrictions on Implied Authority [Sec. 19(2)]
Sec. 19(2) contains the list of acts regarding which a partner does not have an implied authority unless there is usage or custom or contract to the contrary. Accordingly, a partner cannot:
- submit a dispute relating to the business of the firm to arbitration;
- open a banking account on behalf of the firm in his own name;
- compromise or relinquish any claim or portion of a claim by the firm;
- withdraw a suit or proceeding filed on behalf of the firm;
- admit any liability in a suit or proceeding against the firm;
- acquire immovable property on behalf of the firm;
- transfer immovable property belonging to the firm; or
- enter into partnership on behalf of the firm.
Question 4.
What is the position of a minor as a partner in the firm, under the provisions of the Indian Partnership Act, 1932?
Answer:
According to Sec. 11 of the Indian Contract Act, an agreement by or with a minor is void. As such, he is incapable of entering into a contract of partnership. But with the consent of all the partners, for the time being, a minor may be admitted to the benefits of the partnership.
The position of a minor partner may be studied, under two heads:
1. Position before attaining majority
(1) Rights:
- He has a right to such share of the property and of profits of the firm as may have been agreed upon.
- He has also a right to have access to and inspect and copy any of the accounts, but not books of the firm. [Sec. 30(2)]
- When he is not given his due share of profit, he has a right to hie a suit for his share of the property of the firm. But he can do so only if he wants to sever his connection with the firm. [Sec. 30(4)].
(2) Liabilities: The liability of the minor partner is confined only to the extent of his share in the profits and property of the firm. Over and above this, he is neither personally liable nor is his private estate liable.
2. Position on attaining majority
On attaining majority, a minor who has been admitted to the benefits of the partnership must give public notice of his intention to become or not to become a partner in the firm. The public notice must be given by him in this instance within 6 months of his attainment of the majority or acquiring knowledge that he had been admitted to the benefits of partnership, whichever date is later.
If he fails to give a public notice he is deemed to have become a partner in the firm on the expiry of the said six months [Sec. 30(5)]
(1) Where he elects to become a partner:
- He becomes personally liable to third parties for all acts of the firm done since he was admitted to the benefits of partnership;
- His share in the property and profits of the firm is the share to which he was entitled as a minor partner [Sec. 30(7)];
- He is entitled to all rights & is bound by all the duties of a partner.
(2) Where he elects not to become a partner:
- His rights & liabilities continue to be those of a minor up to the date of the public notice;
- His share is not liable for any acts of the firm done after the date of the public notice;
- He is entitled to sue the partners for his share of the property and profits in the firm.
Question 5.
Discuss the rights and liabilities of an outgoing partner under the Indian Partnership Act, 1932.
Answer:
Rights and liabilities of an outgoing partner
The following are the rights & liabilities of an outgoing partner :
(I) Rights of an outgoing partner
An outgoing partner possesses the following rights:
(a) Right to carry on competing for business
An outgoing partner has the right to carry on the business competing with that of the firm, and he may advertise such business (Sec. 3 6). But section 3 6 imposes some, restrictions on his activities in order to prevent unfair competition with the firm. The restrictions imposed upon outgoing partners are:
(a) he may not use the firm’s name,
(b) he may not represent himself as carrying on the business on behalf of the firm, or
(c) he may not solicit the customers or the persons who were already dealing with the firm before he left the firm. The above restrictions are subject to a contract to the contrary.
However, the firm may enter into an agreement with the retiring partner not to carry on competing business, then he will not be entitled to carry competitive business & such an agreement will not be treated to be in restraint of trade provided reasonable restrictions have been imposed on the outgoing partner & the restriction intend to safeguard the interest of the firm.
(b) Right to share subsequent profit in certain cases
As per section 37, in case the accounts of the outgoing partners continue to remain unsettled and the remaining partners continue to run the business, such a partner is entitled to receive his share of profit or interest at the rate of 6% p.a. on the amount of his share in the firm. Alternatively, he may claim such share in the subsequent profits of the firm as is attributable to his share in the capital employed in the business of the firm [on account of non-settlement of accounts.]
(II) Liabilities of an outgoing partner
These may be classified into two stages.
(a) Liability for acts done before leaving the firm
A retiring partner is liable for the acts done and debts incurred before his retirement, but he may be exempted from this liability in case of an agreement made by him with the third party and the remaining partners of the reconstituted firm.
(b) Liability for acts done after leaving the firm
In the case of the retirement of a partner, a public notice is essential to this effect. If it is not given, the retiring partner will continue to be liable to third parties for the acts of the firm even after his retirement. Public notice is not essential in case of a sleeping or deceased partner who is not known to be a partner, and so as such will not be liable for future acts, of the firm.
Question 6.
What Is the liability of the firm, for misapplication by partners?
Answer:
Liability of firm for misapplication by Partners. (Sec. 27)
Where – (a) a partner acting within in his apparent authority receives money or property from a third party and misapplies it or
(b) a firm in the course of its business receives money or property from a third party, and the money or property is misapplied by any of the partners while it is in the custody of the firm, the firm is liable to make good the loss.
Question 7.
State the modes by which a partner may transfer his interest in the firm in favor of another person under the Indian Partnership Act, 1932. What are the rights of such a transferee?
Answer:
According to the provisions of section 29 of the Indian Partnership Act, 1932, a share in the partnership is transferable like any other property. But since the partnership relationship is based on good faith and mutual confidence, the assignee of a partner’s interest by sale, mortgage or otherwise cannot enjoy the same rights & privileges as the original partner. Further, the transfer of an interest of a partner in the firm can be done only with the consent of all the other partners. The rights of such a transferee are as follows :
(a) During the continuance of partnership
During the continuance of partnership, such transferee is entitled to receive the share of the profits of the transferring partner. However, he is bound to accept the profits as agreed to by the partners ie. he cannot challenge the accounts.
A transferee of a Partner’s share is not entitled:
- to interfere with the conduct of the business.
- to require accounts or
- to inspect books of the firm.
- On the dissolution of the firm
On the dissolution of the firm or on the retirement of the transferring partner, the transferee will be entitled against the remaining partners:
- to receive the share of the assets of the firm to which the transferring partner was entitled; and
- for the purpose of ascertaining the share, to an account as from the date of the dissolution.
Question 8.
List the acts which are considered to fall within the scope of implied authority of a partner.
Answer:
The implied authority of a partner generally includes the following acts :
- To purchase goods for the purpose of the business of the firm on cash or credit
- To effect the sale of the goods of the firm on a cash or credit basis.
- To settle the accounts with debtors & creditors of the firm within the scope of his authority.
- To receive payments from the debtors of the firm, on behalf of the firm and issue receipts with respect to the same.
- To engage or hire employees or servants for the purpose of the conduct of the business of the firm.
- To hire the services of an attorney to maintain or defend a suit in relation to the business of the firm.
- To borrow money for the purpose of the business of the firm.
- To pledge the goods of the firm as a security for the borrowings on behalf of the firm & for the purpose of the business of the firm.
- To draw, accept, endorse or negotiate any P/N, B/E, or cheque in the name & on behalf of the firm.
Question 9.
How can a partner be admitted into the firm? What are the rights and liabilities of a newly introduced partner?
Answer:
A partner can be admitted into a partnership firm only with the consent of all the partners. The share in the profits of the firm to which the incoming partner shall be entitled to, along with his rights and duties shall be fixed by way of mutual agreement at the time of his admission.
Rights of an incoming Partner:
Thus an incoming partner on his admission shall be entitled to the share in profits and property of the firm as fixed by way of mutual agreement at the time of his admission. Further, he shall be entitled to all such rights of a partner as conferred by the Indian Partnership Act, 1932, unless the same has been restricted by a contract to the contrary with the existing partners.
Liabilities of an incoming partner:
1. Generally an incoming partner is not liable for the acts of the firm, done prior to his admission.
2. However, in the following instances, the incoming partner shall be liable for the acts of the firm done before his admission:
- If the incoming partner assumes liability for the past debt by novation that is by a tripartite agreement between the creditor; the existing partners & the incoming partner.
- a minor who had been admitted to the benefits of the partnership shall be liable for all the acts of the firm done since he was admitted to the benefits if he decides to become a partner on attaining majority.
3. An incoming partner shall be liable for all the acts of the firm, done after his admission.
Question 10.
What are the legal consequences of the Insolvency of a Partner?
Answer:
The following are the legal consequences of the insolvency of a partner:
- A partner who is adjudicated as insolvent ceases to be a partner in the firm on the date on which the order of adjudication is made by the Court.
- Ordinarily but not invariably, the insolvency of a partner results in the dissolution of the firm from the date of the order of adjudication. Thus subject to a contract between the partners, the firm is dissolved on the date of adjudication.
- If a contract to the contrary exists and the firm continues to carry on business with the remaining partners after the insolvency of one, then the estate of the insolvent partner shall not be liable for any of the acts of the firm, done after the date of the order.
- The firm is also not liable for any of the acts of the insolvent partner done after the date of order of adjudication.
- In case the firm is not dissolved, the share of the insolvent partner, in the firm, shall vest in the Official Assignee or Receiver.
- Further, no public notice is required to be given on the insolvency of a partner.
Question 11.
What are the legal consequences of the Death of a partner?
Answer:
The following are the legal consequences of Death of a Partner :
1. In the absence of a contract to the contrary, the death of partner results in the dissolution of the firm.
2. Where under a contract, a firm is not dissolved on the death of a partner, the estate of the deceased partner shall not be liable for the acts of the firm done after his death.
3. However, the estate of the deceased partner shall be liable for the acts of the firm done prior to his death except the following :
- For the money borrowed by surviving partners so as to pay for the goods ordered during the lifetime of the deceased partner.
- For the goods ordered during the lifetime of the deceased partner but delivered after his death.
4. Further no public notice is required on the death of a partner.
Question 12.
What is the provision related to the effect of notice to an acting partner of the firm as per the Indian Partnership Act, 1932?
Answer:
According to the provisions of Section 24 of the Indian Partnership Act, 1932, notice to an acting partner with respect to any matter relating to the affairs of the firm, operates as a notice to the firm, except in case of fraud committed by that partner or with the connivance/consent of that partner.
Thus the notice to an active partner serves as a notice to the rest of the partners just as a notice to the agent operates as a notice to the Principal. However, for the notice to be binding on all the other partners, it must be an actual notice (not constructive), received by an active partner (& not a dormant partner) & relate to the business of the firm.
Question 13.
Discuss the provision regarding personal profit earned by a partner under the Indian Partnership Act, 1932.
Answer:
According to the provisions of section 16 of the Indian Partnership Act, 1932, subject to a contract between the partners:
- If a partner derives any profits for himself from any transaction of the firm or from the use of the property or business connection of the firm or from the name of the firm, he shall account for that profit and pay it to the firm.
- If a partner carries on any business of the same nature as and competing with that of the firm, then he shall be liable to account for and pay to the firm all profits made by him in that business.
Question 14.
X, Y and Z are partners in a partnership firm. They were carrying their business successfully for the past several years. Spouses of X and Y fought in lady’s clubs on their personal issues and X’s wife was hurt badly. X got angry about the incident and he convinced Z to expel Y from their partnership firm. Y was expelled from the partnership without any notice from X and Z. Considering the provisions of the Indian Partnership Act, 1932, state whether they can expel a partner from the firm. What are the criteria for the test of good faith in such circumstances?
Answer:
Hint:- According to provisions of Section 33 of the Indian Partnership Act, 1932, a partner can be expelled from a firm on the fulfilment of the following conditions :
1. When the power of expulsion of a partner is expressly conferred on the partners in the deed of partnership.
2. The power of expulsion must be exercised by a majority of partners in the interest of the firm.
3. The power of expulsion must be exercised in good faith. Further, the power of expulsion is said to have been exercised in good faith only if
- The expelled partner has been served with a notice of charges against him
- The expelled partner has been given a reasonable opportunity of being heard by the other partners
- The expulsion is in the interest of the firm.
In the given case it is evident that the expulsion of Y was not valid since it was not done in good faith.
Thus Y, the expelled partner shall have a right to sue the other partners for reinstatement in the firm.
Question 15.
A B and C are partners of a partnership firm ABC & Co. The firm is a dealer in office furniture. A was in charge of purchase and sale, B was in charge of maintenance of accounts of the firm and C was in charge of handling all legal matters. Recently through an agreement among them, it was decided that A will be in charge of maintenance of accounts and B will be in charge of purchase and sale. Being ignorant about such an agreement, M, a supplier supplied some furniture to A, who ultimately sold them to a third party. Referring to the provisions of the Indian Partnership Act, 1932, advise whether M can recover money from the firm. What will be your advice in case M was having knowledge about the agreement?
Answer:
HintThe acts of a partner which are performed by him for the purpose of carrying on the business of the firm, in the usual way shall be binding on the firm. Further, the partners may by contract between them impose certain restrictions on the implied authority of a partner. However such a restriction shall be effective against a third party provided the third party has knowledge of such a restriction. Thus if any restriction on the implied authority of a partner has been imposed, the firm shall be bound by the act of such a partner which falls outside of the scope of his actual restricted authority provided the third party has no knowledge of such restriction on the authority.
Thus M can recover the money from the firm since he is not aware of the restrictions on the implied authority of A and he is acting in good faith.
However, if M had the knowledge of the restriction he cannot recover the money from the firm.
Question 16.
A B and C are partners in a firm called ABC Firm. A, with the intention of deceiving D, a supplier of office stationery, buys certain stationery on behalf of the ABC Firm. The stationery is of use in the ordinary course of the firm’s business. A does not give the stationery to the firm, instead brings it to his own use. Supplier D, who is unaware of the private use of stationery by A, claims the price from the firm. The firm refuses to pay for the price, on the ground that the stationery was never received by it (firm). Referring to the provisions of the Indian Partnership Act, 1932 decided:
- Whether the Firm’s contention shall be tenable?
- What would be your answer if a part of the stationery so purchased by A was delivered to the firm by him, and the rest of the stationery was used by him for private use, about which neither the firm nor the supplier D was aware?
Answer:
HintThe firm is liable for the acts of a partner within the scope of his implied authority. Further, if the partner receives any money or property from a third person in the course of business of the firm & misapplies it or where a firm in the course of business receives money or property and the same is misapplied by a partner while in the custody of the firm, the firm shall be liable to compensate the third party.
Further, it is a duty of the partner to indemnify the firm for the loss sustained by it due to his fraud or misconduct:
- This firm’s contention is not valid and it shall be bound to pay the price irrespective of the fact of not having received the stationery.
- Where the stationery has been delivered to the firm and then it is used by A for private purpose, then also the firm shall be bound to make payment to D.
In both the above cases the firm can sue A for the loss sustained by it due to A’s misconduct.
Question 17.
Ram & Co. a firm consists of three partners A, B, and C having one-third share each in the firm. According to A and B, the activities of C are not in the interest of the partnership and thus want to expel C from the firm. Advise A and B whether they can do so quoting the relevant provisions of the Indian Partnership Act, 1932. (C.A. Foundation RTP Nov. 2018)
Answer:
HintRules with respect to expulsion;
Thus A & B can expel C, provided the power of expulsion is conferred by the partnership deed and the expulsion is being done in good faith, in the interest of the firm, after affording C a reasonable opportunity of being heard and a notice with respect to the same is served on C.
Question 18.
Mr. M, Mr. N and Mr. P were partners in a firm, which was dealing in refrigerators. On 1st October 2018, Mr. P retired from the partnership but failed to give public notice of his retirement. After his retirement, Mr. M, Mr. N and Mr. P visited a trade fair and enquired about some refrigerators with the latest techniques. Mr, X, who was exhibiting his refrigerators with the new techniques was impressed with the interactions of Mr. P and requested for the visiting card of the firm. The visiting card also included the name of Mr. P as a partner even though he had already retired. Mr. X supplied some refrigerators to the firm and could not recover his dues from the firm. Now, Mr. X wants to recover the dues not only from the firm, but also from Mr. P.
Analyse the above case in terms of the provisions of the Indian Partnership Act, 1932 and decide whether Mr. P is liable in this situation.
Answer:
According to the provision of the Indian Partnership Act, 1932, when a person represents himself or knowingly permits himself to be represented as a partner in the firm, when in fact he is not, then he is liable like a partner in the firm to anyone who on the faith of such representation has given credit to the firm. Thus when a person by his words or conduct has wrongly induced a third party to believe that he is a partner then he shall be liable as a partner by holding out, to such a party, under the law of estoppel. This rule is also applicable to a former partner who has retired from the firm without giving proper public notice of his retirement. In such a case a person who even subsequent to the retirement of the partner, gives credit to the firm on the belief that he was a partner, shall be entitled to hold him liable, under the law of estoppel as a partner by holding out.
Thus applying the above provisions in the given case it can be concluded that Mr. P becomes a partner by holding out because he failed to give public notice of his retirement and made representations on behalf of the firm. Thus Mr. X can recover the amount not only from the firm but also from Mr. P under the law of estoppel.
Question 19.
Mr. A, Mr. B and Mr. C were partners in a partnership firm M/s ABC & Co., which is engaged in the business of trading of branded furniture. The name of the partners was clearly written along with the firm name in front of the head office of the firm as well as on the letterhead of the firm. On 1st October 2018, Mr. C passed away. His name was neither removed from the list of partners as stated in front of the head office nor from the letter-heads of the firm. As per the terms of the partnership, the firm continued its operations with Mr. A and Mr. B as partners. The accounts of the firm were settled and the amount due to the legal heirs of Mr. C was also determined on 10th October 2018. But the same was not paid to the legal heirs of Mr. C. On 16th October 2018, Mr. X, a supplier supplied furniture worth ₹ 20,00,000 to M/s ABC & Co. M/s ABC & Co. could not repay the amount due to heavy losses. Mr. X wants to recover, the amount not only from M/s ABC & Co., but also from the legal heirs of Mr. C.
Analyse the above situation in terms of the provisions of the Indian Partnership Act, 1932 and decide whether the legal heirs of Mr. C can also be held liable for the dues towards Mr. X.
Answer:
According to section 35 of the Indian Partnership Act, 1932, where under a contract between the partners, the firm is not dissolved by the death of a partner, the estate of a deceased partner is not liable for any act of the firm done after his death. Further, in order that the estate of the deceased partner may be absolved from liability for the future obligations of the firm, it is not necessary to give any notice either to the public or to the persons dealing with the firm.
Thus applying the above-stated provisions in the given case, it can be concluded that Mr. X, the supplier may sue M/s. ABC & Co. for the recovery of his dues, but he cannot hold the legal heirs of Mr. C liable, since Mr. C’s estate shall not be liable for transactions of the firm made after his death i.e. after 1st October, 2018.
Question 20.
Ram, Mohan and Gopal were partners in a firm. During the course of the partnership, the firm ordered sunrise Ltd. to supply a machine to the firm. Before the machine was delivered, Ram expired. The machine, however, was later delivered to the firm. Thereafter, the remaining partners became insolvent and the firm failed to pay the price of the machine to Sunrise Ltd.
Explain with reasons:
- Whether Ram’s private estate is liable for the price of the machine purchased by the firm?
- Against whom can the creditor obtain a decree for the recovery of the price?
Answer:
Hint: Where under a contract between the partners, the firm is not dissolved by the death of a partner, & the remaining partners continue to carry on the business of the firm, then the estate of the deceased partner shall not be liable for any acts of the firm done after his death. Thus the estate of the deceased partner shall not be liable for the liabilities of the firm arising after his death.
In the given case order for the supply of the machine is given to Sunrise Ltd. by the firm during the lifetime of Ram, which does not result in the creation of any liability. The machine is delivered subsequent to the death of Ram.
- Thus Ram’s estate shall not be liable for the price of the machinery.
- The creditor shall have a right of action against the surviving partners & recover the amount from the partnership assets and the partners’ assets since they have become insolvent.
Question 21.
X, Y & Z carry on business in partnership business as merchants trading between Mumbai & London. Wheaton, a merchant in London to whom they sent their consignments secretly allows the share of commission which he received upon such consignments in consideration of Z using his influence to obtain consignments for him. Is Z liable to account to the firm the monies so received by him?
Answer:
Hint: Duty of the partner to account for any secret profits earned by him in the course of conduct of the business of the firm by virtue of the use of the property or name or connections of the firm. Thus here Z shall be liable to account for the share of commission that he receives from Wheaton during the course of conduct of the business of the firm.
Question 22.
M/s XYZ & Associates, a partnership firm with X, Y, Z as senior partners were engaged in the business of carpet manufacturing and exporting to foreign counties. On 25th Aug. 2016, they inducted Mr. G an expert in the field of carpet manufacturing as their partner. On 10th Jan. 2018, Mr. G was blamed for unauthorized activities and thus expelled from the partnership by the united approval of the rest of the partners.
- Examine whether action by the partners was justified or not?
- What should have the factors to be kept in mind prior to expelling a partner from the firm by other partners according to the provisions of the Indian Partnership Act, 1932?
Answer:
According to the provisions of section 33 of the Indian Partnership Act, 1932, generally, a partner cannot be expelled from a firm, except on the fulfilment of the following conditions:
- the power of expulsion must have existed in the contract between the partners.
- the power of expulsion must have been exercised by a majority of the partners &
- it has been exercised in good faith.
Further expulsion is deemed to have been made in good faith only if
- the expulsion is in the interest of the partnership,
- the partner to be expelled is served with a notice
- and he is given a reasonable opportunity of being heard.
In the given case X, Y, Z, the senior partners of M/s. XYZ & Associates expel Mr. G unanimously on the grounds of unauthorised activities.
(i) Thus applying the above-stated provisions it is evident that the action of the partners was not justified, since all the conditions required for the lawful expulsion of Mr. G were not duly complied. Expulsion of Mr. G would have been valid if such a power existed in the contract of partnership & if all conditions of ‘expulsion made in good faith’ were satisfied.
2. The partners before unanimously expelling Mr. G should have assured that
- the power of expulsion must have existed in the partnership deed;
- Mr. G. should have been served with a notice of expulsion;
- Mr. G should have been given an opportunity of being heard.