Tag: Indian Partnership Act

Cox v. Hickman (1860) 8 H.L.C. 268

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EQUIVALENT CITATION


(1860) 8 HLC 268


BENCH


LORD CRANWORTH & LORD WENSLEYDALE


RELEVANT ACT/ SECTION


The Indian Partnership Act, 1932


BRIEF FACTS AND PROCEDURAL HISTORY


Under the name of B Smith & Son, Benjamin Smith and Josiah Timmis Smith carried on a business of iron and maize traders. They owed large amounts of money to the creditors of the company. A meeting was held between S & S and the creditors that included Cox and Wheatcroft. They executed a deed of arrangement in favor of the creditors. The party to the first part of the deed was S & S; to the second part were five creditors including Cox and Wheatcroft. The party to the third part of the deed were the general body creditors of S & S. The party to the second part was to carry the business under the name of The Stanton Iron Company as a trustee. This deed also contained a provision that stated that they would not sue Smiths for their debts. Cox never acted as a trustee; Wheatcroft had resigned six weeks later after the deed. No other trustees were appointed in place of Cox and Wheatcroft.


Hickman – a businessman, drew three bills of exchange for the goods supplied to him after Wheatcroft had resigned. These bills were received on behalf of the Stanton Iron Company by one of the three creditors. Hickman sued Cox and Wheatcroft and stated that they both were liable because they were the original parties to the second part of the deed.
The case was tried before Lord Jervis, who ruled it in favor of the defendants. The action went to the Exchequer Chamber, where three judges wanted to reverse the decision, whereas the other three judges asked to uphold the judgment.


ISSUES BEFORE THE COURT


Is there any partnership between the merchants who were in the essence of the creditors of the company?


RATIO OF THE CASE


The argument that mere sharing of the profits constitutes the partnership is a misconception. The right to share the profits does not cause liability for the debts of the business.
The fact that the business was carried on by the person acting on his behalf is the actual ground for the liability.


DECISION OF THE COURT


The execution of the deed did not make the creditors partners in the Stanton Iron Company. The deed is only an arrangement to pay debts out of the existing and future profits. The creditors were given special powers as per the deed. To make rules to carry out the trade and to decide whether to continue the business. The creditors let the trustees carry out the trade instead of them. This act of the creditors did not make them partners. The trustees would not have accepted the bills of exchange if the creditors had chosen to carry out the trade. The agreement did not constitute the relations of partners between the creditors and trustees. Therefore, the creditors are not liable because they are not the principals of the trustees. However, the trustees are liable because they are the agent of the contract.
Hence, the defendants are not held liable and overturned the decision of the Court of Common Pleas.

The case analysis has been done by Gracy Singh, a student of 2nd Year BA.LLB (Hons.) from Mody University of Science and Technology, Lakshmangarh, Rajasthan.

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INCOMING AND OUTGOING PARTNERS

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Mansi Tyagi, is a student of Symbiosis Law School, Pune. In this article, she has discussed the rules and principles concerning the Incoming and Outgoing partners in a firm. Also, she has tried explaining in the conclusion, the status of partnership firms after such changes in the constitution of partners.

Who is a Partner?

Section 4 of the Indian Partnership Act, 1932 defines “Partnership”[1] as ‘the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all’. And on the same lines, it defines a Partner, the person who enters into such a partnership with another person. In other words, partners are persons working collectively for a common business to share profits. In the case of ‘Mohd. Laiquiddin and Ors. vs. Kamala Devi Misra (Dead) by L.Rs. and Ors.’[2] the hon’ble supreme court went ahead to interpret Section 4 to declare a partnership one purely contractual matter. Now it is important to note what a Partnership Deed is. It is this instrument which formalises the agreed terms of a partnership by the partners. It may be written or oral, but in any case creates a legal agreement. There are a total of nine kinds of partners in any firm. These include:

  1. Active Partners
  2. Quasi Partners
  3. Dormant Partners
  4. Nominal Partners
  5. Sleeping Partners
  6. Salaried Partners
  7. Minor as a Partner
  8. Major Partners
  9. Senior Partners

However, on the basis of the deed effect, there are two more kinds of Partners i.e. Incoming and Outgoing Partners. The new partners are the Incoming Partners while Outgoing Partners can be the retiring partners, the insolvents or the deceased. Chapter V of the Indian Partnership Act, 1932 explicitly lays down the rights and liabilities of these Outgoing and Incoming Partners.

Incoming Partners

Incoming Partners are the new partners who get admitted to the firm. Such admission is subject to any procedure that the firm at its will and understanding adopts to include new members. Section 31[3] of the Partnership Act lays down two rules for the inclusion of new members. Firstly, the new members can only be admitted with the consent of all the existing partners. Secondly, once a person is made a partner in the firm, he shall become jointly liable to only the acts that happened after him joining the firm. Therefore we can say that the legal liabilities of any new member begins only after he is admitted to the firm and not before that.

Outgoing Partners

The Indian Partnership Act states four kinds of situations in which a person may on his own or due to other reasons be ousted from the firm. Sections 32-35 states such four conditions, viz.

  • Retirement of a Partner (Section 32)
  • Expulsion of a Partner (Section 33)
  • Insolvency of a Partner (Section 34)
  • Liability of estate of deceased Partner (Section 35)

Thus, now we will see how the act details these four outgoing conditions of a partner:

1. Retirement of a Partner

There are three ways a partner may retire out of a firm. Firstly, he may retire with the consent of all other existing partners; secondly, if an expressed contract between the partners instructs such retirement, and; thirdly, in situations of partnerships at will, the retiring partner may serve a written notice disclosing his intention to retire. Further, the retiring partner in no circumstances can get off the liabilities of the acts that the firm did when he was an existing member and continues to be liable until a public notice of the retirement is served. Such notice can be either served by the retiring partner or the other existing partners of the firm. However, once a partner retires he may discharge himself from any liability towards any third party through an agreement stating the same between him, the third party and the remaining partners. In absence of any express agreement, there can be an implied notion of the same if the third party is aware of the retirement and went ahead with dealings with the reconstituted firm.

2. Expulsion of a Partner

Generally, a partner can only be expelled from a firm in the presence of a pre-decided procedure through an express contract. For such expulsion to happen, there must be a majority of the partners to agree to the same. Also, such expulsion must be done only in the exercise of good faith. Good Faith is tested through three sets of rules: firstly the expulsion shall be in the interest of the firm; secondly, due notice shall be served to the partner before expelling him and thirdly, the concerned partner shall be given an opportunity to justify the actions that were leading him to an expulsion.  Until all these requirements are fulfilled, a partner cannot be expelled whatsoever. Further, after the expulsion, a partner shall be treated like a retired partner and have the concerned liabilities as under section 32 of the act.

3. Insolvency

Whenever any partner is ‘adjudicated’ as an insolvent, he becomes an outgoing partner and ceases to be a part of the firm from the date of such order of adjudication. Where such insolvency does not ipso facto dissolve the firm, the liabilities of the insolvent partner to the firm changes. The date on which such adjudication of insolvency is given, the partner’s estate is no longer liable to any act done by the firm after such date. Also, in the same way, the firm is no longer liable to the acts done by the insolvent partner.

4. Liability of estate of deceased Partner

Usually, death of a partner renders the partnership firm dissolved. However, the exception to it is an expressed contract stating otherwise. In the case of ‘Mohd. Laiquiddin and Ors. vs. Kamala Devi Misra (Dead) by L.Rs. and Ors.’ the court laid down that the death of a partner automatically dissolves the firm of two members. Also, after the death of a partner, his estate is liable to the firm only to the extent of acts done in the firm during his life. Acts done by the firm after the death of the partner have no liability to be born by the deceased’s estate.

Further, Sections 36 and 37 lays down the rights of the outgoing partners:

1. Rights of outgoing partner to carry on competing business (Section 36)

On leaving the firm, the outgoing partner has the right to start and advertise any business that competes with the firm he left. However, at the same time, if there is no express contract to the contrary, there are restrictions on the outgoing partner to either use the firm’s name he left; or misrepresenting himself as the partner of the same firm. Also, the outgoing partner cannot solicit the customs of the clients of the previous firm while he was still a partner there. The second clause of section 36 talks about the restraint of trade. Herein, any express contract can restrict the outgoing partner from exercising any business similar to that of the firm within a reasonable local limit or time. However, such a contract between the outgoing partner and the existing partners shall be tested on the basis of reasonability. In one such case of ‘Firm Daulat Ram vs. Firm Dharm Chand’[4], when two ice factories under a partnership decided to work one at a time and distribute the accruing profits amongst each other, the restriction was considered reasonable. Section 36(2) of the act is an exception to section 27 of the Indian Contracts Act, 1872 which renders any contract that restricts trade void.

 2. Right of outgoing partner in certain cases to share subsequent profits (Section 37)

When a person dies or becomes an outgoing partner due to any other reason, and the firm still continues to exist and work, such person or his estate through his legal representatives are entitled to the shares in profits made after the person ceased to become a member. The share of profit shall be either attributable to the use of his property share in the firm or interest of six percent per annum on his share of the property in the firm. However, this is only the case where there is no final settlement of accounts between both parties. In the case of ‘Addanki Narayanappa and Ors. vs. Bhaskara Krishtappa and Ors.’[5] the hon’ble supreme court reaffirmed the sharing of profits to the representatives or estate of a deceased partner under section 37. However, this profit sharing is subject to any contract to the contrary. Therefore, in cases where the firm purchases the remaining interests of the outgoing partner in the firm, such partner does not remain further entitled to any profit sharing.

Conclusion – Status of the new firm

One more question that is important is whether a partnership firm dissolves after a new member is added or an existing member ceases to be a part of the firm? This was answered in the case of ‘Tyresoles (India) Calcutta v. Commissioner of Income-Tax, Coimbatore’[6] where the court laid down the status of any firm after inclusion of any new member as reconstitution of the existing firm rather than the complete dissolution of the older firm. However, at the same time the ‘Mohd. Laiquiddin Case’ laid down the principle of a ‘firm dying with the partner’ in case it is a firm of two partners only. But generally, Reconstitution of a firm keeps it subsisting in another form, and thus the inclusion of a new member or exclusion of an existing member are examples of rearranging the original form of the firm into a novel one. It is for this reason that section 38 of the Act lays down that in case of reconstitution of any firm, the guarantees given to the firm or a third party are automatically revoked in absence of any contract to the contrary. It is thus important to note that once the constitution of partners changes in a firm, the liabilities and status of the firm also takes another side.

[1] INDIAN PARTNERSHIP ACT, 1932  Section  4 – Definition of partnership, partner, firm and firm name.

[2] Mohd. Laiquiddin and Ors. vs. Kamala Devi Misra (Dead) by L.Rs. and Ors., (2010) 2 SCC 407.

[3] INDIAN PARTNERSHIP ACT, 1932  Section  31 – Introduction of a partner.

[4] Firm Daulat Ram vs. Firm Dharm Chand, AIR 1934 Lah 110.

[5] Addanki Narayanappa and Ors. vs. Bhaskara Krishtappa and Ors., AIR 1966 SC 1300.

[6] Tyresoles (India) Calcutta v. Commissioner of Income-Tax, Coimbatore, [1963]49ITR515(Mad).

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Rights and Duties of Partners Inter Se

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This article is authored by Pankhuri Pankaj, a 2nd-year student pursuing her BA-LLB  degree from Vivekananda Institute of Professional Studies. She is currently interning with Lexpeeps. This article summarises certain key provisions of “attempt to suicide and abetment to suicide” under the Indian Penal Code and is qualified in its entirety by reference to the Indian Penal Code, 1860.

INTRODUCTION

A partner in a firm holds the highest position and is a person responsible for the running of the organization owning a co-ownership with the other partner(s) with the goal to earn the profit. All partners in a firm are entitled to form an agreement with regard to their mutual rights and duties, keeping in consultation the certain duties mentioned in the Indian Partnership Act, 1932 which cannot be altered by entering into an agreement to the contrary and this principle has been given statutory recognition under Section 11 of the Indian Partnership Act, 1932. This principle is commonly referred to as one of the two fundamental principles which help govern the relation of one partner to the others. 

The second principle which is recognised by Section 9 of the Indian Partnership Act, 1932 provides that the relation of one partner to the other is of the utmost good faith. It also suggests that every contract entered by one partner in the name of the firm will be binding on other partners too. It says that every partner is an agent of each other and thus it concludes that the relation of partners to one another is based on mutual trust. This principle can be said to be of fundamental nature.

Rights of a Partner in a Firm

In a partnership firm law confers the following rights on a partner:

1. Right To Take Part In The Conduct Of The Business

This right has been conferred on the partners through Section 12(a) of the Indian Partnership Act, 1932. It provides that every partner has the right to take part in the conduct of the business of the firm. This firm does have the right to allow only a few partners to actively participate in the functioning of the business by curtailing this right by the provision of the agreement.

It is necessary that this right should be used by the partners for the purpose of promoting the business of the firm and not for damaging the firm’s business and a similar contention was held in the case of Suresh Kumar Sanghi v. Amrit Kumar Sanghi (AIR 1982 Del 131) where the Delhi High Court imposed an injunction against the partner concluding that his act was to damage the business of the firm.

2. Right To Access And Inspect Books

According to Section 12(d) of the IPA, 1932 the partners in a firm have the right to access, inspect and copy the account books of the firm and this right can be accessed by the partner in the first person or through his/her agent but the information gained by either is strictly prohibited from being used against the firm. 

In case a partner denies granting access to the books of the firm a reasonable ground for the same needs to be provided. If the reason given by the person is found to be trivial, he will have to grant access to the books even if he is reluctant.

3. Right To Be Consulted

Under Section 12(c) of the Indian Partnership Act, 1932 a partner’s right to be consulted has been granted. This right provides that in the matters of resolving disputes related to the ordinary course of business a majority between the partners is to be seen. Every partner is given the right to express an opinion before the matter is decided. 

In case the dispute is related to the Fundamental matters of business of the firm, it is necessary to get the consent of every partner in the firm. This provision can be further understood by taking the example of the case when a minor is to be included as a beneficiary in the firm.

4. Right To Share Profits

In a partnership firm, every partner has been granted the right to share profits equally in the firm and has been prescribed under Section 13(b), Indian Partnership Act, 1932. This right to share profits is not to be affected by the fact that the partners may have contributed unequally or possess different skills and the same contention was held in the case of Mansha Ram v. Tej Bhan (AIR 1958 P&H 5) where the Punjab and Haryana High Court held that the partners were entitled to share equal profits in a firm irrespective of the fact whether they had been paid separately and had done unequal work.

5. Right To Interest

Under Section 13(c) of the Indian Partnership Act, 1932 it has been stated that generally a partner is not entitled to make a claim on the capital of the firm but if there exists an express agreement between the partners which allows interest on the capitals then such an interest has to be paid out of the profits of the firm. A partner is deemed to be an adventurer rather than a creditor and therefore, interest is not to be provided to the partner on capital except when there is an agreement or usage to that effect.

In case of interest in advance, under Section 13(d) it is stated that a partner is rightfully entitled to an interest of maximum six percent per annum for the advances made by him to the firm beyond the capital he agreed to subscribe to.

It is important to note that the interest in the capital of a partner ceases after the dissolution of a firm but the interest on advances would continue to exist until it is paid completely.

6. Right To Be Indemnified

Right to indemnity has been provided to the partners under Section 13(c) of the Indian Partnership Act, 1932 under two circumstances, which are:

  1. A partner is granted the right to be indemnified to recover any expenses he may have incurred in the ordinary and proper conduct of the business; or
  2. In the cases wherein order to protect the firm from the loss, the partner incurred expenses in any emergency. Here, it is necessary that the partner acted in a reasonable manner.

This right is not lost with the dissolution of the firm and continues to exist. Mere settlement of accounts is also not important to indemnify the partner.

The reason behind this right is pure fairness. It is believed that the burden of expenses of the partners should not be borne by a single partner.

7. Right To Remuneration

Under Section 13(a) of the Indian Partnership Act, 1932 it has been provided that in a firm no partner is entitled to claim remuneration for the act of taking part in the conduct of the business. In the same breath, it is provided that remuneration can be provided to certain partners along with the share in the profits if that has entered into an agreement to that effector when such remuneration is payable under the continued usage of the firm.

Along with these rights, the partners may compile some mutual rights which generally depends upon the provisions of the agreement.

Duties of a Partner in a Firm

In addition to the multiple rights enjoyed by a partner in a firm, certain duties have to be performed by them to hold entitlement over those rights too. These duties of partners emerge directly from the second principle discussed above, i.e. the relation of the partners to one another of utmost good faith.

1. Duty To Act In Good Faith

Section 9 of the Indian Partnership Act, 1932 states that it is the duty of every partner in a firm to act in good faith of the firm and to act for the greatest common advantage of the firm. It provides that the partners should work honestly to secure the greatest profits for the firm and no profit should be gained by the partner at the expense of the firm.

In the case of Bentley v. Craven ((1853) 18 Beav 75) where the partner who was entitled with a responsibility gained secret profits wrongfully, the court held that the partners are not entitled to make secret profits and therefore, the firm was held entitled to the profits earned by the partner.

It is important to note that this duty does not cease to exist even after the partnership ceases to exist. The partners in the firm owe the duty to legal representatives of the partner as well as the former partner.

2. Duty Not To Compete

Under Section Section 16(b) of the Indian Partnership Act, 1932 a partner should be held accountable for all the profits that he gains if the partner makes them by engaging in business which is similar to or competing with the firm.

To understand this duty better the case of Pullin Bihari Roy v. Mahendra Chandra Ghosal (AIR 1921 Cal 722) can be taken into account where the accused was held liable to account to his co-partners for the profits earned by him.

However, it is important to note that this duty does not restrict the partner from carrying out any business outside the scope of the business of the firm.

This duty can be altered by the partners through partnership deed and partners may enter into an agreement which allows a partner to carry the business competing with the business of the firm or can restrict the partners too from carrying out any business other than that of the firm and such an agreement will be held legally valid owing to the provisions provided under Section 11 of the Act. In case a person breaches such an agreement and carries out a business not competing to that of the firm then, such a partner will not be held liable for the profits but the other partners will be given the right to apply for the dissolution of the firm. 

3. Duty To Be Diligent

Under Section 12(b) of the Partnership Act, it has been provided that a partner in a firm is bound to diligently attend to his duties and under Section 13(f) of the act, it has been provided that the partner must indemnify the firm in case of any losses incurred by the firm due to the wilful neglect of the partner. 

It is important to note that the partner cannot be held liable for simple errors of judgement or for acts done in good faith but for wilful negligent behaviour only. 

This duty can be better understood by taking the example of the case of Cragg v. Ford (62 ER 889).

Only the firm or the partners on behalf of the firm can bring an action for indemnity under this head and a partner cannot bring an action for indemnity in his personal capacity.

4. Duty To Render True Accounts

In case of things related to the firm or things that affect the firm, the partners are bound to disclose and provide full information about it to any partner or his legal representative and the same has been laid down under Section 9 of the Indian Partnership Act, 1932. To understand this duty in general terms, the partners are prohibited from concealing things from other co-partners in relation to the business of the firm.

In the case of Law v. Law ((1905) 1 Ch 140 (CA)), the court held that in case a partner possesses some extra information then he is legally bound to deliver the same to the co-partners in the firm. If the partner enters into a contract with other co-partners without furnishing them the material details which are known to him but not his co-partners then such a contract is voidable at the option of the co-partners.

5. Duty To Indemnify For Fraud

Section 10 of the Indian Partnership Act, 1932 deals with the duty to indemnify for fraud and it states that the partner shall be liable to indemnify his co-partners in case a loss is caused to the business because of his actions. 

The purpose of this section to inculcate accountability and induce partners to deal fairly and honestly with the customers.

It is important to note that the liability for fraud cannot be excluded merely by entering into an agreement to the contrary because entering into such an agreement would oppose the public policy.

6. Duty Not To Earn Personal Profits

Under Section 16 of the Indian Partnership Act, 1932, it has been provided that a person should account for the property in case he uses the property of the firm to earn profits out of it. This duty is deemed to arise because of the Fiduciary relationship between the partners. 

To understand this duty better the example of a partner entering into a business which happens to compete with the business of the firm can be taken. Here, it is held that the partner should account for the profits earned from any such business.

It is important to note that in case a competing business is carried out after the dissolution of the partnership, reasonable restrictions can be put by the firm for carrying out the competing business by the ex-partner.

This duty is not a compulsory duty and can be avoided by a partner by entering into an agreement to the contrary.

7. Duty To Properly Use The Property Of The Firm

It has been laid down under Section 15 of the Indian Partnership Act, 1932, that the property of the firm should be used by the firm only for the purposes of the business of the firm. A partner is not entitled to use this property for his personal use and if he does the same then he will be held accountable to all the co-partners and can be held liable for any loss incurred because of any such use as well.

It is important to note that this duty can be avoided by entering into an agreement to the contrary.

It is important to note that the mutual rights and duties of the partners do not get affected in case there is any change in the constitution of the firm or if the partnership continues after the expiry of the term or undertaking for which it was constituted.

In conclusion, partners in a partnership are entitled to form an agreement and decide mutual right and duties along with the rights and duties legally provided. It is a fundamental principle in a partnership that a partner must act in utmost good faith and should always work for the greater good of the firm and with the common goal to gain maximum profits for the firm. In case no explicit agreement between the partners exists, these rights and duties can be easily abrogated by entering into an agreement to the contrary. 

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