eSaurabhChopra: Semester III - Business Association 1

LB 3031 - Business Association - I

- [Indian Partnership Act, 1932]

- [The Limited Liability Partnership Act, 2008 ( 6 of 2009 )]

- The Indian Contract Act, 1872

Part 1 (Limted Liability Partnership Act, 2008)

Topic 1 - LLP

Concept & nature of Unlimited liability partnerships;

(Note:- Have laid out the nature of LLPs, Unlimited liability partnerships can be interpreted via comparison)

KEY DEFINITIONS

"Body Corporate" is defined to mean a company as defined under the Companies Act, 1956 and includes LLP, LLP incorporated outside India, a foreign company but does not include a corporation sole, a registered co-operative society and any other body corporate notified by the Central Government (not being a company defined under the Companies Act, 1956 or LLP defined under LLP Act). [Section 2(1)(d)]

"Business" includes every trade, profession, service and occupation. [Section 2(1)(e)]

"Financial Year", in relation to LLP, means the period from 1st April of a year to the 31st March of the following year. However, in case of LLP incorporated after 30th September, financial year may end on 31st March of the year next following that year. [Section 2(1)(l)]

"Foreign Limited Liability Partnership" means a LLP formed, incorporated or registered outside India which establishes a place of business within India. [Section 2(1)(m)]

"Limited Liability Partnership" means a partnership formed and registered under LLP Act. [Section 2(1)(n)]

"Limited liability partnership agreement" means any written agreement between the partners of LLP or between the LLP and its partners which determines the mutual rights and duties of the partners and their rights and duties in relation to that LLP. [Section 2(1)(o)]

"Partner" in relation to LLP means a person who becomes a partner in a LLP in accordance with the LLP agreement. [Section 2(1)(q)]

S 3. Limited liability partnership to be body corporate.-

(1) A limited liability partnership is a body corporate formed and incorporated under this Act and is a legal entity separate from that of its partners.

(2) A limited liability partnership shall have perpetual succession.

(3) Any change in the partners of a limited liability partnership shall not affect the existence, rights or liabilities of the limited liability partnership.

S 4. Non-applicability of the Indian Partnership Act, 1932.- Save as otherwise provided, the provisions of the Indian Partnership Act, 1932 shall not apply to a limited liability partnership.

S 5. Partners.- Any individual or body corporate may be a partner in a limited liability partnership: Provided that an individual shall not be capable of becoming a partner of a limited liability partnership, if-

(a) he has been found to be of unsound mind by a Court of competent jurisdiction and the finding is in force;

(b) he is an undischarged insolvent; or

S 6. Minimum number of partners.- (1) Every limited liability partnership shall have at least two partners.

(2) If at any time the number of partners of a limited liability partnership is reduced below two and the limited liability partnership carries on business for more than six months while the number is so reduced, the person, who is the only partner of the limited liability partnership during the time that it so carries on business after those six months and has the knowledge of the fact that it is carrying on business with him alone, shall be liable personally for the obligations of the limited liability partnership incurred during that period.

S 7. Designated partners.- (1) Every limited liability partnership shall have at least two designated partners who are individuals and at least one of them shall be a resident in India:

Provided that in case of a limited liability partnership in which all the partners are bodies corporate or in which one or more partners are individuals and bodies corporate, at least two individuals who are partners of such limited liability partnership or nominees of such bodies corporate shall act as designated partners.

Explanation.- For the purposes of this section, the term "resident in India" means a person who has stayed in India for a period of not less than one hundred and eighty-two days during the immediately preceding one year.

(2) Subject to the provisions of sub-section (1),-

(i) if the incorporation document-

(a) specifies who are to be designated partners, such persons shall be designated partners on incorporation; or

(b) states that each of the partners from time to time of limited liability partnership is to be designated partner, every such partner shall be a designated partner;

(ii) any partner may become a designated partner by and in accordance with the limited liability partnership agreement and a partner may cease to be a designated partner in accordance with limited liability partnership agreement.

(3) An individual shall not become a designated partner in any limited liability partnership unless he has given his prior consent to act as such to the limited liability partnership in such form and manner as may be prescribed.

(4) Every limited liability partnership shall file with the registrar the particulars of every individual who has given his consent to act as designated partner in such form and manner as may be prescribed within thirty days of his appointment.

(5) An individual eligible to be a designated partner shall satisfy such conditions and requirements as may be prescribed.

(6) Every designated partner of a limited liability partnership shall obtain a Designated Partner Identification Number (DPIN) from the Central Government and the provisions of sections 266A to 266G (both inclusive) of the Companies Act, 1956 shall apply mutatis mutandis for the said purpose.

S 8. Liabilities of designated partners.- Unless expressly provided otherwise in this Act, a designated partner shall be-

(a) responsible for the doing of all acts, matters and things as are required to be done by the limited liability partnership in respect of compliance of the provisions of this Act including filing of any document, return, statement and the like report pursuant to the provisions of this Act and as may be specified in the limited liability partnership agreement; and

(b) liable to all penalties imposed on the limited liability partnership for any contravention of those provisions

S 9. Changes in designated partners.- A limited liability partnership may appoint a designated partner within thirty days of a vacancy arising for any reason and provisions of sub-section (4) and sub-section (5) of section 7 shall apply in respect of such new designated partner:

Provided that if no designated partner is appointed, or if at any time there is only one designated partner, each partner shall be deemed to be a designated partner.

Distinction b/w a partnership, a LLP & a company;

Traditional Partnership	Limited Liability Partnership
Distinctions
Unlimited personal liability of each partner for dues of the partnership firm. Personal property of each partner also liable.	No personal liability of partner, except in case of fraud.
Written agreement not essential.	Incorporation document essential.
Partnership can be registered under Partnership Act. Registration is not mandatory.	LLP is incorporated under LLP Act. Incorporation is mandatory.
Not a legal entity separate from its partners	It is a legal entity separate from its partners, having perpetual succession
Property cannot be held in name of partnership firm.	Property can be held in name of LLP.
Partnership deed/agreement is executed. Even verbal agreement is valid.	'Incorporation Document' is required to be executed. In addition, LLP Agreement is required in almost all cases, though such LLP agreement is not mandatory.
Documents are required to be filed with Registrar of Firms (of respective State)	Registrar of Companies (ROC) is the administrating authority.
Death of partner dissolves a firm, in absence of agreement	Death of partner does not dissolve LLP.
Minimum two and maximum twenty partners	Minimum two partners. No limit on maximum number of partners
Each partner can take part in business of firm.	Each partner can take part in business of firm, but LLP Agreement can provide to the contrary.
All partners are liable for statutory compliances under Partnership Act	Only designated partners are liable for statutory compliances as are required under LLP Act (not necessarily in respect of other Acts).
Partner cannot enter into business with firm, though he can give loan to firm.	Partner of LLP can enter into business with LLP. He can also give loans to LLP.
Every partner of firm is agent of firm and also of other partners. He can bind partnership firm as well as other partners by his acts.	Every partner of LLP is agent of LLP but not of other partners. Thus, he can bind LLP by his acts but not other partners. However, LLP agreement can restrict powers of individual partner.
Partnership can be 'at will' i.e. any partner can resign or dissolve firm	Individual partner can resign but cannot dissolve the LLP.
Public notice is required for retirement of a partner.	Filing of return of retirement of partner with ROC is required, but no provision for public notice of retirement of partner.
Partnership firm can be dissolved.	LLP can be would up.

No specific provision to enter into compromise, arrangement, amalgamation, reconstruction etc. This can be done only under civil laws	LLP can enter into compromise, arrangement, amalgamation, reconstruction etc.
Minor can be admitted to benefit of partnership.	There is no specific provision to admit minor to benefit of partnership. It is doubtful if this can be done.
SIMILARITIES
Partner is not employee of firm	Partner is not employee of LLP.
Liability of a person for 'holding out', i.e. representing himself as partner, though he is not	Liability of a person for 'holding out' i.e. representing himself as partner, though he is not [clause 29 of LLP Bill, 2008]
Partner of firm entitled to remuneration only if partnership agreement so provides	Partner of LLP entitled to remuneration only if LLP agreement so provides
New partner can be introduced only with consent of all existing partners	New partner can be introduced only with consent of all existing partners, unless LLP Agreement provides otherwise.
Insolvent person cannot continue as partner of firm.	Insolvent person cannot continue as partner of LLP.
Rights of partnership can be assigned	Rights of partnership can be assigned.
Partner liable to firm for any personal profits made by him by use of property, name or business connection of firm.	Partner liable to LLP for any personal profits made by him by use of property, name or business connection of LLP
Partner cannot undertake competing business without consent of other partners	Partner cannot undertake competing business without consent of LLP. Otherwise, liable to account for and pay profits to LLP
Partner liable to firm if he commits fraud.	Partner liable to LLP if he commits fraud.

Comparison between Company and LLP

Company under Companies Act	Limited Liability Partnership
Distinctions
Memorandum is to be filed with ROC	Incorporation Document is required to be filed.
Memorandum should contain State in which incorporated.	Incorporation Document is not required to contain State in which incorporated. Thus, registered office can be changed to any place in India just by informing ROC subject to prescribed conditions.
Name to contain 'Limited' or 'Private Limited' as suffix	Name to contain 'Limited Liability Partnership' or 'LLP' as suffix
Articles are to be filed at the time of incorporation. Private company must haveArticles. In case of public company, provisions of Table A apply if there are noArticles.	LLP Agreement is required to be filed later. In absence of LLP Agreement, mutual rights and duties will be as specified in first schedule to LLP Act. Thus, practically, each LLP must have LLP Agreement, though not mandatory.
Managing Director and Whole time Director to look after day to day administration..	Designated Partner to look after statutory compliances. Otherwise, all partners can look into affairs of the LLP. However, LLP can delegate powers to some partners who may be designated as 'Managing Partner', or 'Executive Partner' or any other name.
Individual director or member does not have authority in conduct of business of company.	Every partner has authority to conduct business of LLP, unless the LLP Agreement provides to contrary.
Restrictions on remuneration to director as per Companies Act	No restriction on remuneration to partner. Remuneration should be provided in LLP agreement.
Notice of change of director is to be given by company.	A partner who has resigned from LLP can himself file notice of his resignation to ROC.
Share, share certificate, register of members, transfer and transmission of shares etc. required.	No requirement of share and share certificate. Hence, no question of its issue, allotment, transfer, rectification of register etc
Board meetings, general meetings are required.	No provision for regular meeting of Board and members. Partners can decide when and how to meet, delegation of powers etc. Provision is made that LLP should maintain minute book
Charges are required to be registered	No provision for registration of charges.
Elaborate records and registers are required to be maintained	No records and registers have been prescribed.
Restrictions on Board regarding some specified contracts, contracts in which directors interested, investments, loans and guarantees to other companies	Partners are free to enter into any contract.
Disclosures required of contracts where directors are interested	No requirement of disclosures required of contracts where partners are interested, unless specified in LLP Agreement.
Elaborate provision relating to redressal in case of oppression and mismanagement	No provision relating to redressal in case of oppression and mismanagement
Specific provisions relating to nidhis, NBFC	No specific provisions relating to nidhis, NBFC
SIMILARITIES
Limited liability and perpetual succession	Limited liability and perpetual succession
Must have common seal	Common seal is optional
Provision of approval of name, change of name are similar.	Provision of approval of name, change of name are similar.
ROC is the administrative authority	ROC is the administrative authority
Provisions of name, its approval and change are similar.	Provisions of name, its approval and change are similar.
No personal liability of individual director or member [except of director of private company in some cases like income tax and sales tax dues].	No personal liability of partner, except in case of fraud.
Complicated procedure for change of registered office, particularly when change is to other State	Simple procedure to change registered office of LLP anywhere in India just by informing ROC and following prescribed conditions.
Registrar of Companies (ROC) is the administrating authority.	Registrar of Companies (ROC) is the administrating authority.
Memorandum and Articles, details of directors, accounts, annual return, special resolutions etc. filed by LLP with ROC will be available for public inspection	Incorporation document, details of partners, accounts, statement of solvency and annual return filed by LLP with ROC will be available for public inspection [clause 36 of LLP Bill, 2008]
Powers to Central Government to inspect records of company and to order investigation	Powers to Central Government to inspect records of company and to order investigation
Provisions of compromise, arrangement or reconstruction of companies are similar	Provisions of compromise, arrangement or reconstruction of LLP [clauses 60 to 62 of LLP Bill, 2008]
Company can be would up voluntarily or by order of Court	LLP can be would up voluntarily or by order of Court
ROC can strike off name of defunct company.	ROC can strike off name of defunct LLP

Incorporation of LLPs;

S 11. Incorporation document.-

(1) For a limited liability partnership to be incorporated,-

(a) two or more persons associated for carrying on a lawful business with a view to profit shall subscribe their names to an incorporation document;

(b) the incorporation document shall be filed in such manner and with such fees, as may be prescribed with the Registrar of the State in which the registered office of the limited liability partnership is to be situated; and

(c) there shall be filed along with the incorporation document, a statement in the prescribed form, made by either an advocate, or a Company Secretary or a Chartered Accountant or a Cost Accountant, who is engaged in the formation of the limited liability partnership and by any one who subscribed his name to the incorporation document, that all the requirements of this Act and the rules made there under have been complied with, in respect of incorporation and matters precedent and incidental thereto.

(2) The incorporation document shall-

(a) be in a form as may be prescribed;

(b) state the name of the limited liability partnership;

(d) state the address of the registered office of the limited liability partnership;

(e) state the name and address of each of the persons who are to be partners of the limited liability partnership on incorporation;

(f) state the name and address of the persons who are to be designated partners of the limited liability partnership on incorporation;

(g) contain such other information concerning the proposed limited liability partnership as may be prescribed.

(3) If a person makes a statement under clause (c) of sub-section (1) which he-

(a) knows to be false; or

(b) does not believe to be true, shall be punishable with imprisonment for a term which may extend to two years and with fine which shall not be less than ten thousand rupees but which may extend to five lakh rupees.

S 12. Incorporation by registration.- (1) When the requirements imposed by clauses (b) and (c) of sub-section (1) of section 11 have been complied with, the Registrar shall retain the incorporation document and, unless the requirement imposed by clause (a) of that sub-section has not been complied with, he shall, within a period of fourteen days-

(a) register the incorporation document; and

(b) give a certificate that the limited liability partnership is incorporated by the name specified therein.

(2) The Registrar may accept the statement delivered under clause (c) of sub-section (1) of section 11 as sufficient evidence that the requirement imposed by clause (a) of that sub-section has been complied with.

(3) The certificate issued under clause (b) of sub-section (1) shall be signed by the Registrar and authenticated by his official seal.

(4) The certificate shall be conclusive evidence that the limited liability partnership is incorporated by the name specified therein.

Additional notes

Procedure for incorporation of LLP is similar to the procedure for incorporation of a company under the Companies Act, 1956. Applicants are first required to file the application for reservation of name with the Registrar of Companies [ROC]. Once the name applied is approved by the ROC, the documents for incorporation of LLP need to be filed.

Name of every LLP shall end with the words "Limited Liability Partnership" or "LLP".

Name which is undesirable or nearly resembles to that of any other partnership firm or LLP or any body corporate or trade mark, is not allowed.

Any entity (body corporate/registered partnership firm) which has a name similar to the name of LLP which has been incorporated subsequently may seek change of name of such LLP through ROC within 24 months from date of registration of such LLP.

No person shall carry on business under any name/title which contains the words "Limited Liability Partnership" or "LLP" without duly incorporating it as LLP under the LLP Act.

LLP is required to file with the ROC, the LLP agreement ratified by all the partners within 30 days of incorporation of LLP.

Effect of registration;

S 14. Effect of registration.- On registration, a limited liability partnership shall, by its name, be capable of –

(a) suing and being sued;

(b) acquiring, owning, holding and developing or disposing of property, whether movable or immovable, tangible or intangible;

(d) doing and suffering such other acts and things as bodies corporate may lawfully do and suffer.

Partners & their relations;

S 22. Eligibility to be partners.- On the incorporation of a limited liability partnership, the persons who subscribed their names to the incorporation document shall be its partners and any other person may become a partner of the limited liability partnership by and in accordance with the limited liability partnership agreement.

S 23. Relationship of partners.- (1) Save as otherwise provided by this Act, the mutual rights and duties of the partners of a limited liability partnership, and the mutual rights and duties of a limited liability partnership and its partners, shall be governed by the limited liability partnership agreement between the partners, or between the limited liability partnership and its partners.

(2) The limited liability partnership agreement and any changes, if any, made therein shall be filed with the Registrar in such form, manner and accompanied by such fees as may be prescribed.

(3) An agreement in writing made before the incorporation of a limited liability partnership between the persons who subscribe their names to the incorporation document may impose obligations on the limited liability partnership, provided such agreement is ratified by all the partners after the incorporation of the limited liability partnership.

(4) In the absence of agreement as to any matter, the mutual rights and duties of the partners and the mutual rights and duties of the limited liability partnership and the partners shall be determined by the provisions relating to that matter as are set- out in the First Schedule.

S 24. Cessation of partnership interest.-

(1) A person may cease to be a partner of a limited liability partnership in accordance with an agreement with the other partners or, in the absence of agreement with the other partners as to cessation of being a partner, by giving a notice in writing of not less than thirty days to the other partners of his intention to resign as partner.

(2) A person shall cease to be a partner of a limited liability partnership-

(a) on his death or dissolution of the limited liability partnership; or

(b) if he is declared to be of unsound mind by a competent court; or

(3) Where a person has ceased to be a partner of a limited liability partnership (hereinafter referred to as "former partner"), the former partner is to be regarded (in relation to any person dealing with the limited liability partnership) as still being a partner of the limited liability partnership unless-

(a) the person has notice that the former partner has ceased to be a partner of the limited liability partnership; or

(b) notice that the former partner has ceased to be a partner of the limited liability partnership has been delivered to the Registrar.

(4) The cessation of a partner from the limited liability partnership does not by itself discharge the partner from any obligation to the limited liability partnership or to the other partners or to any other person which he incurred while being a partner.

(5) Where a partner of a limited liability partnership ceases to be a partner, unless otherwise provided in the limited liability partnership agreement, the former partner or a person entitled to his share in consequence of the death or insolvency of the former partner, shall be entitled to receive from the limited liability partnership –

(a) an amount equal to the capital contribution of the former partner actually made to the limited liability partnership; and

(b) his right to share in the accumulated profits of the limited liability partnership, after the deduction of accumulated losses of the limited liability partnership, determined as at the date the former partner ceased to be a partner.

(6) A former partner or a person entitled to his share in consequence of the death or insolvency of the former partner shall not have any right to interfere in the management of the limited liability partnership.

S 25. Registration of changes in partners.- (1) Every partner shall inform the limited liability partnership of any change in his name or address within a period of fifteen days of such change.

(2) A limited liability partnership shall-

(a) where a person becomes or ceases to be a partner, file a notice with the Registrar within thirty days from the date he becomes or ceases to be a partner; and

(b) where there is any change in the name or address of a partner, file a notice with the Registrar within thirty days of such change.

(3) A notice filed with the Registrar under sub-section (2)-

(a) shall be in such form and accompanied by such fees as may be prescribed;

(b) shall be signed by the designated partner of the limited liability partnership and authenticated in a manner as may be prescribed; and

(c) if it relates to an incoming partner, shall contain a statement by such partner that he consents to becoming a partner, signed by him and authenticated in the manner as may be prescribed.

(4) If the limited liability partnership contravenes the provisions of sub-section (2), the limited liability partnership and every designated partner of the limited liability partnership shall be punishable with fine which shall not be less than two thousand rupees but which may extend to twenty-five thousand rupees.

(5) If any partner contravenes the provisions of sub-section (1), such partner shall be punishable with fine which shall not be less than two thousand rupees but which may extend to twenty-five thousand rupees.

(6) Any person who ceases to be a partner of a limited liability partnership may himself file with the Registrar the notice referred to in sub-section (3) if he has reasonable cause to believe that the limited liability partnership may not file the notice with the Registrar and in case of any such notice filed by a partner, the Registrar shall obtain a confirmation to this effect from the limited liability partnership unless the limited liability partnership has also filed such notice:

Provided that where no confirmation is given by the limited liability partnership within fifteen days, the registrar shall register the notice made by a person ceasing to be a partner under this section.

Liability of LLPs & its partners;

S 26. Partner as agent.- Every partner of a limited liability partnership is, for the purpose of the business of the limited liability partnership, the agent of the limited liability partnership, but not of other partners.

S 27. Extent of liability of limited liability partnership.-

(1) A limited liability partnership is not bound by anything done by a partner in dealing with a person if-

(a) the partner in fact has no authority to act for the limited liability partnership in doing a particular act; and

(b) the person knows that he has no authority or does not know or believe him to be a partner of the limited liability partnership.

(2) The limited liability partnership is liable if a partner of a limited liability partnership is liable to any person as a result of a wrongful act or omission on his part in the course of the business of the limited liability partnership or with its authority.

(3) An obligation of the limited liability partnership whether arising in contract or otherwise, shall be solely the obligation of the limited liability partnership.

(4) The liabilities of the limited liability partnership shall be met out of the property of the limited liability partnership.

S 28. Extent of liability of partner.-

(1) A partner is not personally liable, directly or indirectly for an obligation referred to in sub-section (3) of section 27 solely by reason of being a partner of the limited liability partnership.

(2) The provisions of sub-section (3) of section 27 and sub-section (1) of this section shall not affect the personal liability of a partner for his own wrongful act or omission, but a partner shall not be personally liable for the wrongful act or omission of any other partner of the limited liability partnership.

Holding out;

S 29. Holding out.- (1) Any person, who by words spoken or written or by conduct, represents himself, or knowingly permits himself to be represented to be a partner in a limited liability partnership is liable to any person who has on the faith of any such representation given credit to the limited liability partnership, whether the person representing himself or represented to be a partner does or does not know that the representation has reached the person so giving credit:

Provided that where any credit is received by the limited liability partnership as a result of such representation, the limited liability partnership shall, without prejudice to the liability of the person so representing himself or represented to be a partner, be liable to the extent of credit received by it or any financial benefit derived thereon.

(2) Where after a partner's death the business is continued in the same limited liability partnership name, the continued use of that name or of the deceased partner's name as a part thereof shall not of itself make his legal representative or his estate liable for any act of the limited liability partnership done after his death.

30. Unlimited liability in case of fraud.-

(1) In the event of an act carried out by a limited liability partnership, or any of its partners, with intent to defraud creditors of the limited liability partnership or any other person, or for any fraudulent purpose, the liability of the limited liability partnership and partners who acted with intent to defraud creditors or for any fraudulent purpose shall be unlimited for all or any of the debts or other liabilities of the limited liability partnership:

Provided that in case any such act is carried out by a partner, the limited liability partnership is liable to the same extent as the partner unless it is established by the limited liability partnership that such act was without the knowledge or the authority of the limited liability partnership.

(2) Where any business is carried on with such intent or for such purpose as mentioned in sub-section (1), every person who was knowingly a party to the carrying on of the business in the manner aforesaid shall be punishable with imprisonment for a term which may extend to two years and with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees.

(3) Where a limited liability partnership or any partner or designated partner or employee of such limited liability partnership has conducted the affairs of the limited liability partnership in a fraudulent manner, then without prejudice to any criminal proceedings which may arise under any law for the time being in force, the limited liability partnership and any such partner or designated partner or employee shall be liable to pay compensation to any person who has suffered any loss or damage by reason of such conduct:

Provided that such limited liability partnership shall not be liable if any such partner or designated partner or employee has acted fraudulently without knowledge of the limited liability partnership.

Protection to whistle blowers;

S 31. Whistle blowing.-

(1) The Court or Tribunal may reduce or waive any penalty leviable against any partner or employee of a limited liability partnership, if it is satisfied that-

(a) such partner or employee of a limited liability partnership has provided useful information during investigation of such limited liability partnership; or

(b) when any information given by any partner or employee (whether or not during investigation) leads to limited liability partnership or any partner or employee of such limited liability partnership being convicted under this Act or any other Act.

(2) No partner or employee of any limited liability partnership may be discharged, demoted, suspended, threatened, harassed or in any other manner discriminated against the terms and conditions of his limited liability partnership or employment merely because of his providing information or causing information to be provided pursuant to sub-section (1)

Investigation.

S 43. Investigation of the affairs of limited liability partnership.-

(1) The Central Government shall appoint one or more competent persons as inspectors to investigate the affairs of a limited liability partnership and to report thereon in such manner as it may direct if-

(a) the Tribunal, either suo motu, or on an application received from not less than one-fifth of the total number of partners of limited liability partnership, by order, declares that the affairs of the limited liability partnership ought to be investigated; or

(b) any Court, by order, declares that the affairs of a limited liability partnership ought to be investigated.

(2) The Central Government may appoint one or more competent persons as inspectors to investigate the affairs of a limited liability partnership and to report on them in such manner as it may direct.

(3) The appointment of inspectors pursuant to sub-section (2) may be made,-

(a) if not less than one-fifth of the total number of partners of the limited liability partnership make an application along with supporting evidence and security amount as may be prescribed; or

(b) if the limited liability partnership makes an application that the affairs of the limited liability partnership ought to be investigated; or

(i) that the business of the limited liability partnership is being or has been conducted with an intent to defraud its creditors, partners or any other person, or otherwise for a fraudulent or unlawful purpose, or in a manner oppressive or unfairly prejudicial to some or any of its partners, or that the limited liability partnership was formed for any fraudulent or unlawful purpose; or

(ii) that the affairs of the limited liability partnership are not being conducted in accordance with the provisions of this Act; or

(iii) that, on receipt of a report of the Registrar or any other investigating or regulatory agency, there are sufficient reasons that the affairs of the limited liability partnership ought to be investigated.

Additional Notes

PARTNERS AND THEIR RELATIONS AND EXTENT OF LIABILITY [SECTIONS 22 TO 31]

Mutual rights and duties of partners of an LLP inter se and those of the LLP and its partners shall be governed by an agreement between the partners, or agreement between the LLP and its partners. In absence of any such agreements, the mutual rights and duties shall be governed by the LLP Act.

Every partner of a LLP is, for the purpose of the business of LLP, the agent of LLP, but not of other partners.

LLP, being a separate legal entity, shall be liable to the full extent of its assets whereas the liability of the partners of LLP shall be limited to their agreed contribution in the LLP.

LLP is not bound by anything done by a partner in dealing with a person if –

— the partner in fact has no authority to act for the LLP in doing a particular act; and

— the person knows that he has no authority or does not know or believe him to be a partner of the LLP

LLP is liable if the partner of a LLP is liable to any person for wrongful act/omission on his part in the course of business of LLP/with its authority

Obligation of LLP whether arising in contract or otherwise, shall solely be the obligation of LLP. Liabilities of LLP shall be met out of properties of LLP.

Partner is not personally liable for the obligations of LLP solely by reason of being a partner of LLP.

No partner is liable for the wrongful act or omission of any other partner of LLP, but the partner will be personally liable for his own wrongful act or omission.

The liability of the LLP and partners who are found to have acted with intent to defraud creditors or for any fraudulent purpose shall be unlimited for all or any of the debts or other liabilities of the LLP.

Cessation of a partner on grounds like resignation, death, dissolution of LLP, declaration that a person is of unsound mind, declared/applied to be adjudged as insolvent etc. will not be effective unless —

— the person has notice that the partner has ceased to be so; or

— notice of cessation has been delivered to ROC.

The notice of cessation may be filed by the outgoing partner if he has reasonable cause to believe that LLP has not file the said notice.

CONTRIBUTION BY PARTNER [SECTIONS 32 AND 33]

A contribution of a partner to the capital of LLP may consist of any of the –

— tangible, movable or immovable property

— intangible property

— other benefit to the LLP including money, promissory notes, contracts for services performed or to be performed.

The obligation of a partner for the contribution shall be as per the LLP agreement.

Creditor, which extends credit or acts in reliance on an obligation described in the LLP agreement, without the notice of any compromise made between the partners, may enforce the original obligation against such partner.

AUDIT/FINANCIAL DISCLOSURES [SECTIONS 34 AND 35]

LLP shall maintain the prescribed books of accounts relating to its affairs on cash or accrual basis and according to the double entry system of accounting.

The accounts of every LLP are required to be audited, except in following situations:

— Turnover does not exceed Rs. 40,00,000 in any financial year; or

— Contribution does not exceed Rs. 25,00,000

Central Government has powers to exempt certain class of LLP from requirement of compulsory audit.

LLP are required to file following documents with the ROC –

— Statement of Account and Solvency, within 30 days from the end of 6 months of the financial year;

— Annual return within 60 days from the end of the financial year.

ASSIGNMENT & TRANSFER OF PARTNERSHIP RIGHTS [SECTION 42]

The rights of a partner to a share of the profits and losses of the LLP and to receive distribution in accordance with the LLP agreement are transferable, either wholly or in part. However, such transfer of rights does not cause either disassociation of the partner or a dissolution and winding up of the LLP.

Such transfer of right, shall not, by itself entitle, the assignee or the transferee to participate in the management or conduct of the activities of the LLP or access information concerning the transactions of the LLP.

FOREIGN LLP [SECTION 59 AND RULE 34]

On establishment of a place of business in India, foreign LLP are required to file prescribed documents for registration with ROC within 30 days of the establishment in India.

Any alteration in the constitution documents, overseas principle office address and partner of foreign LLP are required to be filed with the ROC in the prescribed form within 60 days of the close of the financial year.

Any alteration in the certificate of registration of foreign LLP, authorized representative in India and principle place of business in India are required to be filed with the ROC in the prescribed form within 30 days of alteration.

Foreign LLP ceasing to have a place of business in India, are required to give notice to ROC in the prescribed form within 30 days of its intention to close the place of business and from the date of such notice, the obligation of Foreign LLP to file any document with the ROC shall cease, provided it has no other place of business in India and it has filed all the documents due for filing as on the date of the notice.

CONVERSION OF PARTNERSHIP FIRM/PRIVATE COMPANY/UNLISTED PUBLIC COMPANY INTO LLP [SECTIONS 55 TO 58, SECOND, THIRD AND FOURTH SCHEDULES]

GOI has, on May 22, 2009, notified provisions relating to conversion of –

• a partnership firm as defined under the Indian Partnership Act,1932 into LLP;

• a private limited company into LLP;

• an unlisted public company into LLP.

Second, Third and Fourth Schedules to the LLP Act contain provisions relating to conversion of a partnership firm into LLP, a private limited company into LLP and unlisted public company into LLP, respectively.

• Eligibility for conversion:

— Firm into LLP: Firm can be converted into LLP if all the partners of firm become the partners of LLP and no one else.

— Company into LLP: Private limited company/unlisted public company can be converted if and only if -

(a) there is no security interest in its assets subsisting or in force at the time of application for conversion; and

(b) all the shareholders of the company become partners of LLP and no one else.

• For conversion of firm/private limited company/unlisted public company into LLP, the partners of the firm/shareholders of company are required to file a statement and incorporation documents in the prescribed form with the ROC.

• On receiving the documents for conversion, ROC shall register the documents and issue certificate of registration specifying the date of registration as LLP. Upon registration by ROC, LLP shall intimate Registrar of Firm [ROF]/ROC, as the case may be, about conversion within 15 days of registration.

• On and from the date specified in the certificate of registration issued by ROC -

— all tangible (movable/immovable) & intangible property, liabilities, interest, obligation etc. relating to the firm/private limited company/unlisted public company and the whole of the undertaking of the firm/private limited company/unlisted public company, shall be transferred to and shall vest in the LLP without further assurance, act or deed.

— firm/private limited company/unlisted public company shall be deemed to be dissolved and removed from the records of ROF/ROC, as the case may be.

• If any property/rights, etc. of the partnership firm/private limited company/unlisted public company is registered with any authority, LLP shall take steps to notify the authority of the conversion.

• Upon conversion, following things/events in favour of or against the firm/private limited company/unlisted public company on the date of registration may be continued, completed and enforced by or against the LLP:

— all proceedings, conviction, ruling, order or judgment of any Court, Tribunal or other authority pending in any Court or Tribunal or before any authority on the date of registration

— every agreement irrespective of whether or not the rights and liabilities thereunder could be assigned,

— deeds, contracts, schemes, bonds, agreements, applications, instruments and arrangements

— every contract of employment

— appointment in any role or capacity

— any approval, permit or licence issued under any other Act, etc.

• In case of a firm, every partner of a firm which is converted into a LLP shall continue to be personally liable (jointly and severally with LLP) for the liabilities and obligations of the firm incurred prior to the conversion or which arose from any contract entered into prior to the conversion. In case any such partner discharges any such liability or obligation he shall be entitled (subject to any agreement with the LLP to the contrary) to be fully indemnified by LLP in respect of such liability or obligation.

• For a period of 12 months commencing on or before 14 days from the date of registration, LLP shall ensure that every official correspondence of LLP bears the following:

— a statement that it was, as from the date of registration, converted from a firm/private limited company/unlisted public company into a LLP; and

— the name and registration number, if applicable, of the firm/a private limited company/an unlisted public company from which it was converted.

COMPROMISE, ARRANGEMENT OR RECONSTRUCTION OF LLPS [SECTION 60]

Provisions have been made in the LLP Act for allowing a compromise and arrangement including mergers and amalgamations.

Compromise and arrangement can be between LLP and its creditors or between LLP and its partners.

If majority representing 3/4th in value of creditors or partners, at the meeting, agree to compromise or arrangement shall, if sanctioned by National Company Law Tribunal [NCLT] be binding on all the creditors, all the partners and LLP. NCLT to pass order subject to disclosure of all material facts/latest financial position and pendency of investigation proceedings.

NCLT order shall be filed with the ROC within 30 days, in order to be effective.

In case of scheme of the amalgamation, NCLT shall pass order only on receipt of report from the ROC that the affairs of the LLP (transferor LLP) have not been conducted in the manner prejudicial to the interest of the partner/public.

WINDING-UP OF LLP [SECTIONS 63 AND 64]

LLPs may be wound-up either voluntarily or by NCLT. LLP may be wound up by NCLT if –

• LLP decides to wound up by NCLT;

• Number of partners is reduced below 2 for a period of more than 6 months;

• LLP is unable to pay its debts;

• LLP has acted against the interests of the sovereignty and integrity of India, the security of the State or public order;

• LLP has defaulted in filing Statement of Account and Solvency or annual return with the ROC for 5 consecutive financial years; or

• NCLT is of the opinion that it is just and equitable that the LLP be wound up

In January 2010, MCA had notified that certain provisions relating to winding-up of a company under the Companies Act, 1956 will also be applicable to a LLP. The notification also provides details of modification in the provisions of the Companies Act relating to winding up for its applicability to winding up of LLP under the LLP Act. Subsequently, on 30 March 2010, issued Limited Liability Partnership (Winding up and Dissolution) Rules, 2010.

MISCELLANEOUS PROVISIONS

The Central government has been empowered to apply any of the provisions of the Companies Act, 1956 to LLPs with suitable changes or modification. [Section 67]

ROC may strike off the name of LLP from the register of LLP if LLP is not carrying on business or its operation, in accordance with the provisions of LLP Act in the manner prescribed. [Section 75]

Forms/documents required to be filed under the LLP shall be filed in electronic form online on the LLP portal duly authenticated by the partner/designated partner with a digital signature and further attested by the practicing chartered accountant/company secretary/cost accountant whenever required. [Section 68]

Presently all the provisions of the LLP Act, other than those relating to winding-up and dissolution of LLP and appellate provisions to be exercised by NCLT and National Company Law Appellate Tribunal [NCLAT], have been brought into force.

Till the constitution of NCLT and NCLAT under the Companies Act, 1956, the powers of NCLT and NCLAT will be exercised by the Company Law Board or High Court as is specified in the LLP Act. [Section 81]

Unless specifically provided, the provisions of the Indian Partnership Act, 1932 are not applicable to LLPs. [Section 4]

Part II Indian Partnership Act, 1932

Topic 2 - The nature of partnership

Defn of "partnership", partner, firm, & firm name (S 4);

Section 4. DEFINITION OF "PARTNERSHIP", "PARTNER", "FIRM" AND "FIRM-NAME".

"Partnership" is 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.

Persons who have entered into partnership with one another are called individually, "partners" and collectively "a firm", and the name under which their business is carried on is called the "firm-name".

Partnership not created by Status (S5);

Section 5. PARTNERSHIP NOT CREATED BY STATUS.

The relation of partnership arises from contract and not from status; and, in particular, the members of a Hindu undivided family carrying on a family business as such, or a Burmese Buddhist husband and wife carrying on business as such are not partners in such business.

Mode of determining existence of partnership (S6);

Section 6. MODE OF DETERMINING EXISTENCE OF PARTNERSHIP.

In determining whether a group of persons is or is not a firm, or whether a person is or is not a partner in a firm, regard shall be had to the real relation between the parties, as shown by all relevant facts taken together.

Explanation I : The sharing of profits or of gross returns arising from property by persons holding a joint or common interest in that property does not of itself make such persons partners.

Explanation II : The receipt by a person of a share of the profits of a business, or of a payment contingent upon the earning of profits or varying with the profits earned by a business, does not itself make him a partner with the persons carrying on the business; and, in particular, the receipt of such share or payment -

(a) by a lender of money to persons engaged or about to engage in any business

(b) by a servant or agent as remuneration,

(d) by a previous owner or part-owner of the business, as consideration for the sale of the goodwill or share thereof, does not of itself make the receiver a partner with the persons carrying on the business.

Partnership at will (S7);

Section 7. PARTNERSHIP-AT-WILL.

Where no provision is made by contract between the partners for the duration of their partnership, or for the determination of their partnership, the partnership is "partnership-at-will".

Particular of partnership (S8);

Section 8. PARTICULAR PARTNERSHIP.A person may become a partner with another person in particular adventures or undertakings.

(1) Steel Bros & Co. v. CIT, AIR 1958 SC 315

Partnership b/w Steels, Ellermans & Burma( all shares owned by Steels who were also its managing agents) prior to 29 Nov 1928– Rice milling machines – producing rice from paddy – selling rice – Applied to ITO for registration of partnership(u/s 26A of IT Act) b/w Steels & Ellermans fr assessment years 1943-44 & 1944 – 45– ITO rejctd appl contending that (i) third party named in partnership deed (Burma) not named in application of partnership (ii) Loss arising out of previous year was not allocated proportionately between the three, loss arising out of Burma was allocated to Steels only – Court held entire deed must be considered to determine the existence of partnership & all the ingredients of partnership was satisfied – and Burma cud be considered a wholly owned subsidiary of Steels.

(2) K.D. Kamath & Co v. CIT (1971) 2 SCC 873

Appellant carrying on a business with 6 partners – deed dated March 20, 1959 – business carried on since Oct 1, 1958 as per deed – partnership regd under Partnership Act 1932 – applied for registration u/s 26A IT Act for assessment year 1959 – 60 – ITO rejected application contending that deed was not genuine and firm was a sole proprietorship in guise of a partnership – Court held – mere nomenclature in deed not enough to constitute partnership – Two essesntial conditions to be satisfied are (i) Agreement to share profits as well as losses of the business (ii) Business must be carried out by all or any of them acting for all – Fact that exclusive control is under one partner & only he can operate bank account or borrow on behalf of the firm is not destructive to the theory of partnership provided the above two conditions are satisfied – two conditions above are satisfied – theory of agency is satisfied (one partner acting for all + profit/loss sharing in ratio) – registration u/s 26A of IT Act sustained.

(3) K. Jaggaiah v. K. Venkatasatyanarayana, AIR 1984 AP 149

A single venture amounts to carrying on of a business – Plaintiff & two defendants joined together & obtained a contract for the maintenance of a road – held to be partnership u/s 4 – court obsrvd defn of business u/s 2 is not exhaustive – court held that test is not whether the venture consists of a single transaction or not but whether its activity is capable of being participated by more than one person

(4) Helper Girdharbhai v. Sayed Mohmad Mirasaheb Kadri, AIR 1987 SC 1782

Held that sharing of profits and contributing to losses were not the only elements in a partnership, existence of agency was essential and where there was a partnership or not is a mixed question of law & fact depending on the varying circumstances in various cases – The act does not prescribe the degree of kind of participation in profits, for rent paid to the propertied member may be taken as his share of profit – present case bank account not operated by the appellant(a partner) and further that irrespective of profit the deed provided that a fixed percentage of profit should be given to the partner appellant – The appellant was not to share the losses – But there is nothing illegal about it – the appellant was to bring his asset being the tenancy of the premises in question for the partnership

(5) Commissioner of Sales Tax v. K Kelukutty (1985) 4 SCC 5

Same persons were partners in two firms carrying out separate and distinct businesses – whether the firms can be regarded as separate entities for assessment of sales tax – Justice Romer observed that for taxing purposes a partnership is treated as a distinct entity – though it is not a separate juristic entity – firm name only a collective name for individual partners – But each partnership is a distinct relationship between the partners – ( extend a partnership, constitute another partnership, intention of partners) – court refused to give a decision – said to be decided by authorities constituted under Kerala General Sales Tax Act.

(6) Mahabir Cold Storage v. CIT, AIR 1991 SC 1357

Whether registered partnership firm can be a partner in another firm – partners (Hanumanmal & Pragyachand Periwal) took loan from a partnership firm(Periwal & Co) – later included it in their Calcutta operations and made it a separate partnership firm (Mahavir Cold Storage) – court observed old firm was doing operations in Purnea and the new firm was doing business in Calcutta – Court held that a partnership firm cannot be a partner in another firm though its partners can be a partners in their individual capacity – appellant – assessee is a new identity under the act

(7) Bhagwanji Morarji Goculdas v. Alembic Chemical Works AIR 1948 P.C. 100

Nature of an agreement by a company with individuals constituting firm were in issue – agreement was made on 7^th Dec 1907 between company and 4 named individuals constituting a firm, then when all those individuals had ceased to be members of the firm then it was held that there is no privity between the company and the firm.

(8) Nanchand Gangaram v. Mallappa Mahalingappa Sadalge (1976) 2 SCC 429: AIR 1976 SC 835

Whether an acknowledgement by the Karta of Jt Hindu trading family after its severance would extend limitation against all the former members of the family – Appellant business dealings in tobacco and money dealings with defendant jt family – periodical verification of accounts and acknowledgements were made from time to time by the manager of the family – Court obsrvd legislature excuded JF’s from S4 of Partnership Act – S5 further makes it clear that partnership arises from contract and not from status – therefore no question of applying principle of S45 of the act on a HJF – SC held duty of creditor to ascertain the representative capacity of person making acknowledgement – Law does not cast any duty upon the members of the family who do not figure in the endorsement or writing admitting the debt to inform the creditor by a general notice about the disruption of the family

(9) Lachhman Das v. CIT, AIR 1948 P.C.8

Member of HJF to contract in his individual capacity a partnership firm with the HJF – Court held if a stranger can contract then no reason to withhold such a benefit from a member of the HJF – though court observed that this benefit does not extend to Karta as there may be a conflict of personal interest with family interest and he cannot represent both interests at the same time

(10) Chandrakant Manilal Shah v. CIT, AIR 1992 SC 197

HUF – Karta’s son joined business on monthly salary – 35 % P/L share to son 65% to appellant – registration refused on ground that no valid partnership – Issue whether valid partnership between Karta and member of family moreso when son has not brought any separate capital into the business– Court cited Privy council in PKPS Chettiar v Chokalingam Pillai said if stranger can enter into partnership with HUF so can coparcener – Court obsrvd situation before & after Hindu Gains & Learnings act –

(11) Champaran Cane Concern v. State of Bihar, AIR 1963 SC 1737

Where two jt owners of a land agreed to raise crop and for this borrowed money fr the cultivation & took active steps in raising crops they were held to be partners, but where two persons purchased certain land for growing cane and appointed a manager to manage the agricultural operations and the profits arising out of the joint cultivation were divided between them, it was held that they were no partners as there was no mutual agency between them -

(12) Laxmibai v. Roshanlal, AIR 1972 Raj. 288

Held when there is no written agreement, it is the conduct of the parties that determines the existence of partnership – plaintiff’s contention was that he entered into partnership orally for taking building contracts & to share profits & losses in equal proportion – defendants contention was that no such oral agreement ever took place – and the plaintiff had agreed to finance him for a contract and there was only a relation of debtor & creditor between them – Court held that mere use of words such as partner or partnership in an agreement does not necessarily show that there is a partnership – further a creditor by advancing money & receiving share of profits does not become a partner – However in this case witness corroborated the fact of existence of partnership – plaintiff used to participate in construction work and also used to act as agent for the other – such partnership was admitted by the defendant though he said that the plaintiff was engaged to look after the work in lieu of payment – held that there was a partnership between them.

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

S & S iron merchants in partnership– suffered financial embarrassment – made a compromise with creditors under which the firms property was assigned to a few creditors selected as trustees – they were empowered to carry on the business to divide the net income among creditors in a rateable proportion & after the debts had been discharged the business would be returned to S & S. – Cox was one of the trustees although he never acted – other trustees continued the business – they purchased certain goods from the plaintiff Hickman and gave him a bill of exchange for the price – the bill remaining unpaid Hickman brought an action against the trustees including Cox for the price – it was held that although the creditors were sharing profits and the business was being managed by the trustee, still the relationship between S&S on one hand and the creditors on the other hand was of a debtor & creditor and not that of partnership hence they (including Cox) could not be made liable – further trustees were mere agents of S&S and were not principals hence there was no mutual agency – S & S were principles hence business still belonged to S&S and not to trustees

(14) Mollow, March & Co v. The Court of Wards (1872) L.R. 4 P.C. 419

Hindu Raja advanced large sums of money to British firm – Raja was given extensive powers of control over business and he was to get commission on profits until the repayment of his loan with 12% interest thereon. – Firm entered into contract with Mollow, March & Co but failed to fulfill its contract – company sued both firm & Raja, taking them to be partners on the ground of participation in the net profits of business – court observed that the whole scope of the agreement and all its terms ought to be looked at before any presumption of intention of partnership be made. – As in Cox v Hickman the real objective here was to give Raja a security for the credit extended by him to the firm, therefore no intent to create a partnership – Partnership requires a community of interest and not a conflict of them – the interest of the firm and that of the Raja were at conflict and provisions of the agreement were designed to protect the Raja’s interest – Court observed even when parties call themselves partners in agreement between them, this does not constitute a partnership if the true relation is not that of partners – powers of Raja of control only (not initiative powers)

(15) Abdul Latiff v. Gopeswar Chattoraj, AIR 1933 Cal 204: 141 I.C. 225

Plaintiff undertook contract under a company & appointed defendant to manage the business – the defendant could receive advances from the company and make advances from his own pocket whenever necessary, he was to keep proper accounts of income and expenditure and would be liable to all losses on account of his negligent work and was entitled to 3/4^th of the profits – plaintiff sued defendant for an account of the work done by him as if the defendant were his agent whereas the defendant contended that it was a case of partnership and the suit should have been differently instituted – court had to check whether partnership or simple agency – court obsrvd à thin line of distinction between partnership and agency – especially when remuneration is sharing of profits – discussion on the words partnership in agreement – share p/l in agreement is partnership even though a partner can indemnify another partner against losses – court emphasized even when losses are shared the agreement can still provide that a partnership was not intended.

Court held that if above principle was to be applied it would be a partnership – but a more certain test is to find out whether not only there is a common business but a common interest of all parties in it or whether common business was to be carried on by the defendant on behalf of the plaintiff so that the plaintiff could be regarded as principal.

Quite true that for a partnership joint stock or capital not essential – Present case business belonged to the plaintiff –decision making power also belonged to the plaintiff – no mutual agency – no position of partner – hence defendant an agent and not a partner

(16) Holme v. Hammond (1872) 7 Ex. 218 : 41 L.J. Ex. 157

5 persons entered into partnership – decided to carry on business for 7 years – on death agreed to pay share of deceased to their executers – the plaintiff sued the executors of the deceased to make them liable in respect of a contract entered into by the surviving parties after death of deceased – Court held no agreement expressed or implied between executors and partners which is essential for a partnership – executors do not become partners by merely receiving profits – no evidence of contract of partnership between executors & partners – no mutual agency between them – Hence executors not liable.

(17) Badri Parshad v. Nagarmal, AIR 1959 SC 559

Illegal association – 25 cloth dealers formed an association to collect and sell a quota, the plaintiff members charged the defendant for not giving account of some month – Defendant contended that association ws illegal – violated S4(2) of Rewa State Companies Act (now S11 of the Companies Act) – plaintiff contended that objects of association were not illegal – moreover association being dissolved the recovery should be allowed in the manner of realization of the assets of a dissolved firm – in other words they had a right to bring a suit for accounts of dissolved association, even though association was illegal as u/s 69 of partnership act accounts could be sought of an unregistered firm – Court held such a claim is clearly untenable – reliefs asked by the plaintiff implied a recognition by the court that a legal association existed of which accounts ought to be taken – When association itself is illegal then getting its accounts would mean enforcing of an illegal contract of partnership – Partnership analogy was rejected – Court also held that unregistered partnership was not illegal

(18) Narayanlal Bansilal Pittie v. Tarabai Motilal (1970) 3 SCC 293

NBP Son in law of TM(a widow) – TM carried on business in cotton, cotton seed in name of Narayandas Chunilal in Bombay & Jalna – TM instituted suit against NBP alleging she, NBP & Chogmal entered into partnership to carry on business at Jalna in cotton for a period of 5 years (Samvat years 1982 to 86) – demanded 2,84,308/- as her share – NBP through written statement denied partnership agreement for 5yrs as alleged by TM – she accepted NBPs case that the original agreement was for one year and that it was extended for another year- she alleged at the end of two years it was agreed b/w the three partners to extend partnership for 3 years – Issue whether partnership agreement which was by mutual consent extended by 3 years – No evidence to prove that partnership was extended – Infact NBP had sent letter complaining that TM had not submitted accounts of partnership and expressed desire to end the partnership– only oral evidence as witness – Reversed HC decision – held no proof of extension of partnership

(19) Uduman v. Aslum, AIR 1991 SC 1020

Partnership of appellant, respondent and their father was constituted as per French Law – Business carried on – By relinquishment deed father retired from business – Misunderstanding arose after sometime and respondents laid suit for dissolution of partnership and for accounting etc – it is the respondents case that the partnership is at will and the partnership stood dissolved at the date of receipt of notice by the appellants – Appellants contended that the partnership is not at will – Court held that – settled cannon that contract of the partnership must be read as a whole – intention of the partners must be gauged - Clause (5) of the contract manifests the intention of the partners that partnership will not dissolve so long as there are two partners – although a partner may withdraw himself from the partnership and terminate the legal relationship between himself and other partners the partnership will continue as long as there are two or more partners – given principle applies to death of a partner – Court held that the duration of partnership is mentioned in the partnership deed namely that the partnership will continue till the time there are two partners hence it is not a partnership at will

(20) Chandrika Prasad Agarwal v. Vishnu Chandra, 1981 All LJ 967

Issue: Whether partnership at will or for a fixed duration?

Facts: Clause 7 of agreement – incase of death partnership will not dissolve but nominee of deceased to replace

Clause 18 – one month notice if anyone wants to separate – Clause 20 Non withdrawal of capital for 1 year – Clause 20 amended : non withdrawal till bank loan not paid off –

Court Obsrvd: Partnership agreement contemplates partnership to be indefinite until all partners agree to dissolve – Clause 7 à non dissolution on death, contingency against S42(c) of the partnership act – in the instrument in question remaining partners can expel a partner if unanimous – Clause 18 is thus a provision made by contract between the parties for the non determination of the partnership between all the partners at the instance of one partner only

Further Clause 20 of the partnership fixes minimum duration at 1 yr, amended Cl 20 à bank loan not repayed hence not a partnership at will

(21) Gherulal Parakh v. Mahadevdas Maiya, AIR 1959 SC 781

The question for determination in this appeal was whether an agreement of partnership with the object of entering into wagering transactions was illegal within the meaning of s. 23 of the Indian Contract Act. The appellant and the respondent No. 1 entered into a partnership with the object of entering into forward contracts for the purchase and sale of wheat with two other firms and the agreement between them was that the respondent would enter into the contracts on behalf of the partnership and the profit or loss would be shared by the parties equally. The transactions resulted in loss and the respondent paid the entire amount due to the third parties. On the appellant denying his liability for the half of the loss, the respondent sued him for the recovery of the same and his defence, inter alia, was that the agreement to enter into the wagering contracts was unlawful under s. 23 Of the Contract Act. The trial Court dismissed the suit. The High Court on appeal held that though the wagering contracts were void under s. 30 of the Indian Contract Act, the object of the partnership was not unlawful within the meaning of the Act and decreed the suit. It was contended on behalf of the appellant (1) that a wagering contract being void under S. 30 Of the Contract Act, was also forbidden by law within the meaning of S.23 Of the Act, that

(2) the concept of public policy was very comprehensive in India since the independence, and such a contract would be against public Policy,

(3) that wagering contracts were illegal under the Hindu Law and (4) that they were immoral, tested by the Hindu Law doctrine of pious obligation of sons to discharge the father's debts.

Held that the contentions raised were unsustainable in law and must be negatived.

Although a wagering contract was void and unenforceable under S. 30 Of the Contract Act, it was not forbidden by law and an agreement collateral to such a contract was not unlawful within the meaning of s. 23 Of the Contract Act. A partnership with the object of carrying on wagering transactions was not, therefore, hit by that section.

Topic 3 - Relation of one partner to One Another

General duties of partners (S9 IPA);

Section 9. GENERAL DUTIES OF PARTNERS.

Partners are bound to carry on the business of the firm to greatest common advantage, to be just and faithful to each other, and to render true accounts and full information of all things affecting the firm to any partner, his heir or legal representative.

Duty to indemnify for loss caused by fraud (S10);

S10 Duty to indemnify for loss caused by fraud

Every partner shall indemnify the firm for any loss caused to it by his fraud in the conduct of the business of the firm.

Determination of rights & duties of partners by contract between the partners (S11);

Sectionn 11

(1) Subject to the provisions of this Act, the mutual rights and duties of the partners of a firm may be determined by contract between the partners, and such contract may be express or may be implied by a course of dealing.

Such contract may be varied by consent of all the partners, and such consent may be express or may be implied by a course of dealing.

(2) AGREEMENTS IN RESTRAINT OF TRADE.

Notwithstanding anything contained in section 27 of the Indian Contract Act, 1872, such contracts may provide that a partner shall not carry on any business other than that of the firm while he is a partner.

The conduct of the business (S12);

Section 12. THE CONDUCT OF THE BUSINESS.

Subject to contract between the partners -

(a) every partner has a right to take part in the conduct of the business;

(b) every partner is bound to attend diligently to his duties in the conduct of the business;

(c) any difference arising as to ordinary matters connected with the business may be decided by a majority of the partners, and every partner shall have the right to express his opinion before the matter is decided, but no change may be made in the nature of the business without the consent of all the partners;

(d) every partner has a right to have access to and to inspect and copy any of the books of the firm;

(e) in the event of the death of a partner, his heirs or legal representatives or their duly authorised agents shall have a right of access to and to inspect and copy any of the books of the firm.

Mutual Rights & Liabilities (S13);

Section 13. MUTUAL RIGHT AND LIABILITIES.

Subject to contract between the partners -

(a) a partner is not entitled to receive remuneration for taking part in the conduct of the business;

(b) the partners are entitled to share equally in the profits earned, and shall contribute equally to the losses sustained by the firm;

(c) where a partner is entitled to interest on the capital subscribed by him, such interest shall be payable only out of profits;

(d) a partner making, for the purposes of the business, any payment or advance beyond the amount of capital he has agreed to subscribe, is entitled to interest thereon at the rate of six per cent. per annum;

(e) the firm shall indemnify a partner in respect of payments made and liabilities incurred by him

(i) in the ordinary and proper conduct of the business; and

(ii) in doing such act, in an emergency, 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; and

(f) 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.

The property of the firm (S14);

Section 14. THE PROPERTY OF THE FIRM.

Subject to contract between the partners, the property of the firm includes all property and rights and interest in property originally brought into the stock of the firm, or acquired, by purchase or otherwise, by or for the firm for the purposes and in the course of the business of the firm, and includes also the goodwill of the business.

Unless the contrary intention appears, property and rights and interest in property acquired with money belonging to the firm are deemed to have been acquired for the firm.

Application of the property of the firm (S15);

Section 15 Application of the property of the firm

Subject to the contract between the partners, the property of the firm shall be held and used by the partners exclusively for the purposes of the business.

Personal profits earned by partners (S16);

Section 16 Personal profits earned by partners

Subject to the contract between the partners, -

(a) 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 the firm-name, he shall account for that profit and pay it to the firm;

(b) if a partner carries on any business of the same nature as and competing with that of the firm, he shall account for and pay to the firm all profits made by him in that business.

Rights & Duties of the partners (S17);

Section 17 Rights & Duties of Partners

Subject to contract between the partners, -

(a) where a change occurs in the constitution of a firm, the mutual rights and duties of the partners in the reconstituted firm remain the same as they were immediately before the change, as far as may be;

(b) AFTER THE EXPIRY OF THE TERM OF THE FIRM.

where a firm constituted for a fixed term continues to carry on business after the expiry of that term, the mutual rights and duties of the partners remain the same as they were before the expiry, and so far as they may be consistent with the incidents of partnership-at-will; and

where a firm constituted to carry out one or more adventures or undertakings carries out other adventures or undertakings, the mutual rights and duties of the partners in respect of the other adventures or undertakings are the same as those in respect of the original adventures or undertakings.

(22) Chennuru Gavaraju Chetty v. Chennuru Sitaramurthy Chetty, AIR 1959 SC 109

Whether benefits of renewal of a lease is to be treated as a partnership property – Court observed that the general duty of good faith requires partners to renew a lease of the firm only in favor. It has been decided more than once that if one partner obtains in his own name, either during the partner or before its assets have been sold a renewal of a lease of immovable property, he will not be allowed to treat this renewed lease of immovable property as his own and as one in which not clandestine(hidden) but open. In Halsbury is stated thus: The renewal of a lease of the partnership property by one or more of the partners without the privity of the others ensures for the benefit of all.

Supreme Court however observed: The law will not however prevent a partner from acquiring personal interest in something which formerly belonged to the firm where it is not inequitable for him to do so. There is no irrefutable presumption of law that a renewal of a lease belonging to a partnership by one of the partners ensures to the benefit of all the partners. A partner no doubt occupies a fiduciary position in relation to other partners in firm’s affair, but he does not suffer from an absolute disability by virtue of his position to acquire any benefit or advantage for himself in any circumstances. There may be cases when a partner during the continuance of a partnership can acquire a new lease to himself (though not as a partner but in his personal capacity) without the new lease being held to be for the benefit of the partnership. Thus there is a presumption of fact as distinguished from a presumption of law, that there is such equity. But presumption of fact is rebuttable and must depend upon the facts and circumstances of the case.

Held: In the instant case, the facts that. the parties deliberately chose to fix the term of the partnership as conterminous with the term of the lease and licence ending with the year 1942; that they did not, in express terms, or by necessary implication, make any provision for extending the period of the partnership or for obtaining renewal of the lease and the necessary licence; that there was no averment or proof of any clandestine acts on the part of the contesting defendants in the matter of obtaining the renewal of the lease; that the plaintiffs themselves made attempts, though unsuccessful, to get themselves included in the category of grantees at the time of the renewal of the lease ; that the special nature of the business required personal efficiency and good conduct on the part of the actual managing agents; that no funds of the expiring partnership or any goodwill of the partnership was utilized for obtaining the fresh lease; that the fresh lease and licence were granted to the contesting defendants in consideration of their personal qualities of good management and good conduct; that the parties were not on the best of terms during the last few years of the partnership, and finally, that the lease and the permanent licence were actually granted after the partnership stood automatically dissolved at the end of 1942, are all facts and circumstances which point to only one conclusion, namely, that the renewal of the lease was not intended to be for the benefit of all the quondam partners. Those facts and circumstances amply rebut any presumption of fact that the lease should enure to the benefit of all the parties. For the reasons given above, it must be held that the judgment and decree passed by the High Court, in so far as they reverse those of the trial court, are erroneous, and must be set aside. The appeal is, accordingly, allowed with costs throughout, which are attributable to the single issue which has been decided in this Court.

Appeal allowed.

(23) Miles v. Clarke (1953) 1 All ER 779

Clarke carried on business as a photographer at premises of which he owned the lease for seven years from 1948. In 1950 he and Miles, who was a freelance photographer entered into partnership by which all the profits were to be shared equally. Miles brought with him his personal connection. The partners quarreled, and a dispute arose as to whether the following items constituted partnership property;

(i) the consumable stock-in-trade

(ii) the personal connection brought in by each partner

(iii) the lease of the premises

(iv) the furniture, fittings and equipment of the studios.

It was held by the Chancery Division that no more agreement between the parties should be supposed that was absolutely necessary to give business efficacy to the relationship between the parties. Accordingly, since the only agreement was as to the share of the profits only the consumable stock-in-trade should be regarded as partnership property.

(24) Arjun Kanoji Tankar v. Santram Kanoji Tankar (1969) 3 SCC 555

Defendant started the printing business and built up certain assets including certain immovable properties. Later he admitted his brother into partnership with him on certain terms, one of them being that they would have equal share in profits, losses and all assets and properties of the business. They could not pull on together and the question arose whether the properties acquired earlier to the admission had also become the firm’s assets? Apex Court held that this was not the case. SC observed there was no agreement that the properties brought in by the partner when he established the partnership with his brother, that he would surrender his ownership to the firm and there is no rule of law that whatever is brought by a partner in the partnership and is continued to be used by the members necessarily becomes the partnership property.

(25) ARM Group Enterprises Ltd. v. Waldorf Restaurant (2003) 6 SCC 423

Facts: Under the terms of a compromise decree between the appellant (the landlord) and the tenant Allenberry & Co(Respondent 3) the latter has vacated the suit premises. In the (suit) leased premises a well known restaurant in the trade name of “Waldorf Restaurant” is being run by registered partnership firm of that name (Respondent 1). The firm in assertion of its claim to the status of sub-tenant has been successful for the past 45 years in resisting the executing of the decree against it. It may be noted that the tenant Allenberry & Co had sublet the suit premises to the sole proprietor of Waldorf Restaurant who later on formed a partnership firm( registered in same trade name) and thus became a partner along with other new partners in that firm. However the Waldorf became a partnership only after the surrender of tenancy by the tenant.

Issue: Whether the respondent firm can claim status of sub-tenant and seek protection against eviction in execution of the compromise decree obtained against the tenant Allenberry & Co?

Observations: Under Section 14 of the Partnership Act 1932, property exclusively belonging to a person, in the presence of an agreement to the contrary, does not, on the person entering into partnership with others, became a property of the partnership merely because it is used for the business of the partnership. Such property will become property of the partnership only if there is an agreement - express or implied- that the property was, under the agreement of the partnership, to be treated as the property of the partnership. In the present case, in the absence of the partnership agreement to which the proprietor was a party it is not ascertainable whether tenanted premises were assets brought into the business of the firm by the erstwhile sole proprietor.

Waldorf Restaurant is merely a trade name and is not a legal entity. The legal entity or the legal persons are the proprietor of the partnership firm.

Held that after the tenant Allenberry & Co. surrendered the tenancy and Eng Chick Wong as the sole proprietor of the proprietary concern Waldorf Restaurant who was sub-let into the premises prior to the surrender of tenancy had already vacated the premises and left India, the present firm and its partners with whom the possession of the leased premises were left have to vacate the premises on extinguishment of the rights of the tenants and the sub-tenants the impugned judgment of the Division Bench thus deserves to be set aside and that of the learned Single Judge is restored.

(26) Gattulal v. Gulab Singh, AIR 1985 SC 547

One Gattulal entered into partnership with Jagdeo Singh. Later J Singh assumed an exclusive control and excluded Gattu. Gattu entered into a sub partnership with Gulab Singh on the condition that if latter refused to supply funds Gattulal had the right to break partnership. Also Gulab Singh was to bear all expenses if Gattu decided to take legal action against Jagdeo Singh. However Gulab Singh did not provide any funds and instead adopted a non-cooperative attitude while Gattu was proceeding with the legal action out of his own funds. Gattu obtained a money decree . Gulab Singh claimed a share in the decreed amount. Held that he was not entitled to claim such share as he had abandoned his rights, as showed by his conduct of non-cooperation.

Court quoted Lindley: Independently of the Statutes of Limitation, a plaintiff may be precluded by his own laches from obtaining equitable relief. Laches pre-supposes not only lapse of time, but also the existence of circumstances which render it unjust to give relief to the plaintiff; and unless reasonable vigilance is shown in the prosecution of a claim to equitable relief, the Court, acting on the maxim vigilanti-bus non dormientibus subveniunt leges, will decline to interfere.

The doctrine of laches is of great importance where persons have agreed to become partners, and one of them has unfairly left the other to do all the work, and then, there being a profit, comes forward and claims a share of it. In such cases as these, the plain- ; tiff's conduct lays him open to the remark that nothing would have been heard of him had the joint adventure ended in loss instead of gain; and a court will not aid those who can be shown to have remained quiet in the hope of being able to evade responsibility in case of loss, but of being able to claim a share of gain in case of ultimate success.

(27) Lachhman Das v. M.T. Gulab Devi, AIR 1936 All. 271

Members of HJF effected partition, but agreed to continue the business of the family by way of partnership. Some variance was made in their respective share in the business but none in their shares in the property, except that they were to have equal shares in any property which they might later acquire. A partner died and the partnership was dissolved; his heir did not institute any suit for an account and a share of the profits of dissolved partnership but for the paritition of certain properties(as inherited from the deceased partner). The question was whether the properties were of a partnership or of a HJF?

Court observed: Whether it is or is not depends upon the agreement (express or implied) between the partners. In present case the question was whether it was the intention of the members that properties in existence at the time of partition should become partnership property or that it should be regarded as JF property apart from partnership and should be used only so far as necessary for purpose of partnership.

Court held that because certain partners jointly own immovable property which was used for the purpose of partnership business , it does not necessarily follow that the property is partnership property. If two brothers jointly inherit a house and thereafter set up a business in the house in partnership, it could not be inferred that they were intending to transfer their shares in the house to the partnership business. Thus a mere use of a property for its business does not make the property as belonging to the partnership. In the present case the fact that the shares in properties were not varied whereas the shares in business itself were varied, is a strong evidence of the fact that they did not intend the property to be treated as an asset of the partnership. Moreover the value of the property does not appear nowhere in the accounts of the firm as an asset of the firm.

(28) Shashi Kapila v. R.P. Ashwin (2002) 1 SCC 583

Tenant tried to resist evacuation suit by insisting that landlord was part of a partnership agreement of which he too was one of the partners. And in the agreement the landlord had agreed to sell of the said property within 3months for Rs 12 lac of which Rs 1 lac was already received by the landlord. Rent control court did not accept the above contention of the appellants counsel that tenant was possession of the property not as a tenant but as a partner. The partnership agreement showed no evidence that the landlord was a partner in the same firm as the appellant. Also the court observed that the mere fact that the partner has agreed to include himself as a partner in a firm will not result in incorporation of all his individual properties as the assets of the partnership. Dismissed appeal gave appellant 6 months extension to vacate premises on the condition that he give a written declaration to the landlord that he will vacate the premises on the end of 6 months failing which the benefit of the extension will not be provided.

(29) Trimble v. Goldberg (1906) AC 494 (PC)

Two partners of a partnership of three which was formed to purchase and resale certain properties of a gentleman called Hallard consisting of 5,500 shares in a company called Sigma Syndicate and of 'stands or plots of land, purchased other stands belonging to the Syndicate and made profits, and the question arose whether these other stands purchased by the two partners were partnership property in which their third partner was entitled to benefit, and the Privy Council held that as the purchase was not within the scope of the partnership and as the subject of the purchase was not a part of the business of the partnership, or an undertaking in rivalry with the partnership, or indeed connected with it in any proper sense, the property could not be regarded as partnership property.

(30) Pulin Bihari Roy v. Mahendra Chandra Ghosal, AIR 1921 Cal. 72

A partnership was entered into for the business of importing salt into India and for re-selling the same in Chittagong. One of the partners in the course of the operations bought some quantity of salt for himself and re-sold the some on his own account. The Calcutta High Court held that the partner was liable to account for this profit to his co-partners, as the opportunity to make such a profit came his way while he was on the business of this firm.

Topic 4 - Relations of Partners to 3rd Parties

Partners to be agent of the firm (S18);

Section 18 Partners to be agents of the firm

Subject to the provisions of this Act, a partner is the agent of the firm for the purposes of the business of the firm.

Implied authority of partner as agent of the firm (S19);

Section 19 Implied authority of partner as agent of the firm

(1) Subject to the provisions of section 22, the act of a partner which is done to carry on, in the usual way, business of the kind carried on by the firm, binds the firm.

The authority of a partner to bind the firm conferred by this section is called his "implied authority".

(2) In the absence of any usage or custom of trade to the contrary, the implied authority of a partner does not empower him to -

(a) submit a dispute relating to the business of the firm to arbitration,

(b) open a banking account on behalf of the firm in his own name,

(d) withdraw a suit or proceeding filed on behalf of the firm,

(e) admit any liability in a suit or proceeding against the firm,

(f) acquire immovable property on behalf of the firm,

(g) transfer immovable property belonging to the firm, or

(h) enter into partnership on behalf of the firm.

Extension and Restriction of partner's implied authority (S20);

Section 20 Extension & Restriction of partner’s implied authority

The partners in a firm may, by contract between the partners, extend or restrict the implied authority of any partner.

Notwithstanding any such restriction, any act done by a partner on behalf of the firm which falls within his implied authority binds the firm, unless the person with whom he is dealing knows of the restriction or does not know or believe that partner to be a partner.

Partner's authority in an emergency (S21);

Section 21 Partner’s authority in an emergency

A partner has authority, in an emergency, to do all such acts for the purpose of protecting the firm from loss as would be done by a person of ordinary prudence, in his own case, acting under similar circumstances, and such acts bind the firm.

Mode of doing act to bind firm (S22);

Section 22. MODE OF DOING ACT TO BIND FIRM.

In order to bind a firm, an act or instrument done or executed by a partner or other person on behalf of the firm shall be done or executed in the firm-name, or in any other manner expressing or implying an intention to bind the firm.

Effect of admission by a partner (S23);

Section 23. EFFECT OF ADMISSION BY A PARTNER.

An admission or representation made by a partner concerning the affairs of the firm is evidence against the firm, it is made in the ordinary course of business.

Effect of notice to acting partner (S24);

Section 24. EFFECT OF NOTICE TO ACTING PARTNER.

Notice to a partner who habitually acts in the business of the firm of any matter relating to the affairs of the firm operates as notice to the firm, except in the case of a fraud on the firm committed by or with the consent of that partner.

Liability of partner for acts in a firm (S25);

Section 25. LIABILITY OF A PARTNER FOR ACTS OF THE FIRM.

Every partner is liable jointly with all the other partners and also severally, for all acts of the firm done while he is a partner.

Liability of the firm for wrongful acts of a partner (S26);

Section 26. LIABILITY OF THE FIRM FOR WRONGFUL ACTS OF A PARTNER.

Where, by the wrongful act or omission of a partner acting in the ordinary course of the business of a firm or with the authority of his partners, loss or injury is caused to any third party, or any penalty is incurred, the firm is liable therefore to the same extent as the partner.

Liability of firm for misapplication by partners (S27);

Section 27. LIABILITY OF FIRM FOR MISAPPLICATION BY PARTNERS.

Where -

(a) a partner acting within 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.

Holding out (S28);

(1) Anyone who by words spoken or written or by conduct represent himself, or knowingly permits himself to be represented, to be a partner in a firm, is liable as a partner in that firm to anyone who has on the faith of any such representation given credit to the firm, whether the person representing himself or represented to be a partner does or does not know that the representation has reached the person so giving credit.

(2) Where after partner's death the business continued in the old firm-name, the continued use of that name or of the deceased partner's name as a part thereof shall not of itself make his legal representative or his estate liable for any act of the firm done after his death.

Rights of transferee or a partner's interest (S29);

(1) A transfer by a partner of his interest in the firm, either absolute or by mortgage, or, by the creation by him of a charge on such interest, does not entitle the transferee, during the continuance of the firm, to interfere in the conduct of the business or to require accounts or to inspect the books of the firm, but entitles the transferee only to receive the share of profits of the transferring partner, and the transferee shall accept the account of profits agreed to by the partners.

(2) If the firm is dissolved or if the transferring partner ceases to be a partner, the transferee is entitled as against the remaining partners, to receive the share of the assets of the firm to which the transferring partner is entitled and, for the purpose of ascertaining that share, to an account as from the date of the dissolution.

Minors admitted to the benefits of partnership (S30);

(1) A person who is a minor according to the law to which he is subject may not be a partner in a firm, but, with the consent of all the partners for the time being, he may be admitted to the benefits of partnership.

(2) Such minor has a right to such share of the property and of the profits of the firm as may be agreed upon, and he may have access to and inspect and copy any of the accounts of the firm.

(3) Such minor's share is liable for the acts of the firm but the minor is not personally liable for any such act.

(4) Such minor may not sue the partners for an account or payment of his share of the property or profits of the firm, save when severing his connection with the firm, and in such case the amount of his share shall be determined by a valuation made as far as possible in accordance with the rules contained in section 48 :

Provided that all the partners acting together or any partner entitled to dissolve the firm upon notice to other partners may elect in such suit to dissolve the firm, and thereupon the Court shall proceed with the suit as one for dissolution and for settling accounts between the partners and the amount of the share of the minor shall be determined along with the shares of the partners.

(5) At any time within six months of his attaining majority, or of his obtaining knowledge that he had been admitted to the benefits of partnership, whichever date is later, such person may give public notice that he has elected to become or that he has elected not to become a partner in the firm, and such notice shall determine his position as regards the firm :

Provided that, if he fails to give such notice, he shall become a partner in the firm on the expiry of the said six months.

(6) Where any person has been admitted as a minor to the benefits of partnership in a firm, the burden of proving the fact that such person had no knowledge of such admission until a particular date after the expiry of six months of his attaining majority shall lie on the person asserting that fact.

(7) Where such person becomes a partner -

(a) his rights and liabilities as a minor continue upto the date on which he becomes a partner, but he also becomes personally liable to third parties for all acts of the firm done since he was admitted to the benefits of partnership, and

(b) his share in the property and profits of the firm shall be the share to which he was entitled as a minor.

(8) Where such person elects not be to become a partner, -

(a) his rights and liabilities shall continue to be those of a minor under the section upto the date on which he gives public notice;

(b) his share shall not be liable for any acts for the firm done after the date of the notice; and

(c) he shall be entitled to sue the partners for his share of the property and profits in accordance with sub-section (4).

(9) Nothing in sub-sections (7) and (8) shall affect the provisions of section 28.

(31) Holme v. Hammond (1872) L.R. 7 Ex. 218: 41 L.J. Ex. 157

5 persons entered into partnership for 7 years and agreed to share the profits and losses equally – further agreed if any one of them died before the expiry of the said period of 7 years the others would continue the business and pay the share of the profits of the deceased to his executors. On the death of one of the partners the survivors continued the business – The executors of the deceased who did not take any part in the management of the business were paid 1/5^th share of the profits made since the death of the deceased partner. The plaintiff sued the executors of the deceased to make them liable in respect of a contract entered into by the surviving partners after the death of the deceased.

Court held that in order to constitute partnership there must be an agreement express or implied. In the absence of it the executors cannot said to have become partners, merely by receiving profits. No evidence to establish contract of partnership between the executors and the surviving partners. No mutual agency between them. Hence executors could not be made liable.

(32) Rhodes v. Moules (1895) 1 Ch. 236 (CA)

- Rew was a solicitor in a partnership with Messrs Hughes and Masterman. Mr Rhodes was a client of the firm and the firm had acted for him on previous occasions.

- Mr Rhodes wanted to borrow some money on a property and asked Rew as his solicitor to assist him to affect the mortgage.

- Some clients of the firm, the Moules, were willing to lend the money. As security for the mortgage, Mr Rhodes gave Rew some share certificates and these were misappropriated by Rew.

- One of the questions facing the court was whether the other two partners were liable for Rew’s actions. The court held that the partners were jointly and severally liable for the value of the shares under part (a) and part (b).

- The judge said that ‘the inference that the plaintiff’s certificates were received by the firm in the course of its business’ was justified.

(33) Hamlyn v. Houston & Co. (1903) 1 K.B. 81

Defendant’s firm consisted of two partners (1active + 1dormant)

One side of the defendant's business as grain merchants was to obtain, by lawful means, information about its competitors' activities. Houston, a partner in the firm, obtained confidential information on the plaintiff Hamlyn's business by bribing one of Hamlyn's employees. Held: The firm was liable for the loss suffered by Hamlyn. If it was within the scope of Houston's authority to obtain the information by legitimate means, then for the purpose of vicarious liability it was within the scope of his authority to obtain it by illegitimate means and the firm was liable accordingly. This was on the broad 'risk' principle: the principal having selected the agent, and being the person who will have the benefit of his efforts if successful, it is not unjust he should bear the risk of the agent 'exceeding his authority in matters incidental to the doing of the acts the performance of which has been delegated to him'. It was conceded that a tort or even a crime may not be outside the scope of authority of a partner or agent.

(34) Tower Cabinet Co., Ltd v. Ingram(1949) 1 KBD 1032

Facts:

Tower Cabinet sought money from Merry¶s Co. ± the price of goods sold and delivered in January 1948

Tower Cabinet brought action against Ingram ± alleged he was a partner of Merry

January, 1946 ± Ingram and Christmas form partnership under name of "Merry¶s"

April, 1947 (dissolution of partnership) ± parties agreed to dissolve partnership and Ingram gave notice to firm¶s bankers that had ceased to be a partner

Ingram arranged with Christmas to notify those dealing with the firm that he was no longer associated with the firm, but Christmas did not put ad in newspaper

During 'the partnership' ± firm¶s notepaper had both names at the top and indicated that both were partners

After 'dissolution' ± new notepaper printed and only Christmas¶ name put on as "Director"

January, 1948 (after dissolution) ± Christmas send order to Tower Cabinet on old note paper with both names as partners

Note: Christmas did not have Ingram¶s authority to use paper and its use was in direct conflict with arrangements of dissolution

Tower Cabinet brought action against Ingram as a partner of the firm

Issue: Is Ingram liable under the "holding out" principle or as an "apparent partner" of the firm?

Decision: Ingram not liable

Ingram did not by words or spoken or written or by conduct represent himself to be a partner of the firm

Also ± "«or who knowingly suffers himself to be so represented" ± Ingram had NO knowledge that Christmas used the old notepaper with his name on it

"Knowingly suffers" = does not refer to being negligent or careless in not seeing that all the notepaper had been destroyed when he left

RATIO: Holding out principle ± '' 'An individual will only be deemed to be "holding out as a partner" (and therefore liable for the partnership¶s debts/obligations) where the person "by words or spoken or written conduct" represents himself to be a partner or "who '''knowingly suffers'' 'himself to be so represented"

(35) Snow White Food Products Ltd v. Sohan Lal, AIR 1964 Cal. 239

Clerk of firm (Sohan Lal) entered into negotiation on behalf of the firm with Snow White Ltd for carrying their goods. Goods were not delivered but were wrongfully disposed off and converted to their use by Sohan Lal. In a suit filed against the firm he denied that he had ever been a partner of the firm.

Court however held that he held himself out as a partner of the firm during negotiations with Snow White Ltd. He talked like a partner one in authority and behaved so before the Snow White Ltd. Moreover the fact that he represented the firm was also admitted by him. In various letters written to Snow White Ltd (during negotiations) he signed the letters as if a partner of the firm.

(36) Scarf v. Jardine (1882) 7 A.C. 345

FACTS: A firm consisted of two partners, Scarf and Rodgers. Scarf retired and Beach joined in his place. The business was carried on as before and no public notice about the change of partners was given to the customers of the firm. Jardine was an old supplier to the firm. He supplied the goods ordered without any idea about the change. He came to know about the change when the firm failed to pay the dues and he was considering a legal action against the firm. He preferred to sue the new firm which subsequently went bankrupt. Then he sued the earlier partner, Scarf.

HELD: He had a right against Scarf provided he had proceeded against the old firm and partners in the first instance itself. Now he had acknowledged the new firm, he could not reject its identity and sue Scarf. It was held that novation might involve either a change of parties with the contract remaining the same or a change in the contract between the same parties. An implied agreement is presumed from the fact that the creditor, after the knowledge of the change, has brought a suit against the new firm. Jardine knew of the change of the constitution of the firm when he sued and he chose to sue the new firm. Now he could not sue the older firm for the same cause of action as it is against principles of natural justice as well as Partnership Act.

There are exceptions to the rule established in the SCARF vs. JARDINE case as given below:

a) Death of a partner constitutes sufficient notice by itself.

b) Insolvency of a partner is also sufficient notice and attracts Section 42 of the Indian Partnership Act.

c) If one has been a dormant or sleeping from beginning to end, notice can be dispensed with as neither the customers nor the clients know of his participation in the firm.

In English law, Partnership by holding out is referred to as apparent partnership instead and the legal provisions in both countries are very similar.

In SMITH vs. BAILEY 2 QB 432, it was decided that the liability on the principle of Estoppel extends only on account of credit given to the firm and not to torts or civil wrongs committed on behalf of the firm.

(37) Mathura Nath v. S Bagheshwari Rani, AIR 1928 Cal. 57

A partner hired an elephant for the purpose of trapping wild elephants which was the business of the firm. Elephant died and the plaintiff sued the court for recovery of penalty amount of Rs 5000 which was agreed upon if the elephant was not returned. The court observed that whether a firm is liable to pay money borrowed by one of its partners in its own name is a question of fact and thus depends upon circumstances of each case. In the present case the court held the firm liable as it was in the course of business of the firm. The firm used to enter into similar agreements.

Court relied on the principle under Section 231, Contract Act, the principal is as much liable for the act of the agent himself.

(38) CIT v. Dwarkadas Khetan & Co., AIR 1961 SC 680

There cannot be a partnership consisting of all minors or of one adult and all other minors. A minor cannot even become a full fledged partner in an existing firm. Law of partnership arises from contract. Minor is incompetent to contract. Minor can be admitted to a benefit of partnership but no further than that.

(39) Shivgouda Ravji Patil v. Chandrakant Neelkanth Sadalge, AIR 1965 SC 212

A partnership firm was being run wherein one of the partners was a minor (respondent 1) and was admitted to the benefits of the partnership. The partnership was dissolved and subsequently the minor partner became a major. However, he did not exercise his option to become a partner under Section 30(5) of the Indian Partnership Act.[1] When the appellants claimed their dues, the respondents were unable to pay them and so all three of them were sued by the appellants for adjudicating them for being insolvent.

Issue: Is respondent 1, who did not exercise his right to be a partner for the firm, a partner under Section 30(5) of the Indian Partnership Act?

Judgement

Trial Court: Declared all the partners including the minor (respondent 1) insolvent.

High Court: Respondent 1 was not a partner of the firm.

Supreme Court

Contention [The appellants (creditor)]: Respondent 1 is a partner of the firm as he did not exercise his option not to be a partner in the firm under Section 30(5).

Held

Under ordinary circumstances a respondent 1 would be a partner of the firm. However, in this case he had attained majority only after the firm had been dissolved. A minor after attaining majority cannot elect to be a partner of a firm that does not exist. Hence Section 30 of the Partnership Act does not apply to him.

Appeal dismissed with costs.

(40) CIT v. Shah Mohandas Sadhuram, AIR 1966 SC 15

Partnership deed executed between two adult persons, one of whom was also signing it on behalf of two minors. All were entitled to equal shares and the capital contribution of each was equal, but minors were not to bear liabilities. The department disputed the validity of the firm for IT purposes on the ground that minors were made parties to contract by the eldest brother acting on their behalf. It was held that as long as a partnership deed does not make minor a full partner it can’t be regarded as invalid on the ground that a guardian has purported to contract on behalf of a minor.

The partnership deed must be construed reasonably. The recital set out above expressly states that it is the major members who had decided' to constitute the partnership and admit the minors to the benefits of the said partnership, The rest of the clauses must be construed in the light of this recital. Clause 4 only states the business to be carried on and the name of the business. It seems to us that the expression 'it has been agreed between us' has reference to the agreement mentioned in the recital. Regarding clause 7, which deals with capital contribution, it is urged that a guardian is not entitled to agree to contribute capital. We are unable to agree. If it is one of the terms on which benefits of partnership are being conferred either the guardian must refuse to accept the benefits or he must accept this term. In some cases such an agreement by a guardian may be avoided by the minor, if it was not entered into for his benefit, but the agreement will remain valid as long as it is not avoided by the minor.

it is necessary to consider what are the incidents and true nature of 'benefits of partnership' and what is a guardian of a minor competent to do on behalf of a minor to secure the full benefits of partnership tO a minor. First it is clear from sub-s.(2) of s. 30 of the Partnership Act that a minor cannot be made liable for losses. Secondly, s. 30, sub. s (4) enables a minor to sever his connection with the firm and if he does so, the amount of his share has to be determined by evaluation made, as far as possible, in accordance with the rules contained in s. 48, which section visualises capital having been contributed by partners. There is no difficulty in holding that this severance may be effected on behalf of a minor by his guardian. Therefore, sub-s.(4) contemplates that capital may have been contributed on behalf of a minor and that a guardian may on behalf of a minor sever his connection with the firm. If the guardian is entitled to sever the minor's connection with the firm, he must also be held to be entitled to refuse to accept the benefits of partnership or agree to accept the benefits of partnership for a further period on terms which are in accordance with law. Sub-Section (5) proceeds on the basis that the minor may or may not know that he has been admitted to the benefits of partnership. This sub-section enables him to elect, on attaining majority, either to remain a partner or not to become a partner in the firm. Thus it contemplates that a guardian may have accepted the benefits of a partnership on behalf of a minor without his knowledge. If a guardian can accept benefits of partnership on behalf of a minor he must have the power to scrutinize the terms on which such benefits are received by the minor. He must also have the power to accept the conditions on which the benefits of partnership are being conferred. It appears to us that the guardian can do all that is necessary to effectuate the conferment and receipt of the benefits of partnership.

Referred to case of CIT v Shah Jethaji Phulchand where HC in its decision observed that an instrument of partnership entered into between persons, some of whom are by law incompetent to ontract, as might happen if one of them is a minor, is not necessarily null and void, and in a case like the present one, where the execution of the instrument of partnership on behalf of a minor by his guardian was for the purpose of admitting the minor to the benefits of partnership, no question of the invalidity of the instrument can properly arise".

Held in the present case the deed valid as it didn’t make minors full partners and only admitted them to the benefits.

Topic 5 - Incoming & Outgoing Partners

Introduction of a partner(S31);

(1) Subject to contract between the partners and to the provisions of section 30, no person shall be introduced as a partner into a firm without the consent of all the existing partners.

(2) Subject to the provisions of section 80, a person who is introduced as a partner into a firm does not thereby become liable for any act of the firm done before he became a partner.

Retirement of a partner (S32);

(1) A partner may retire -

(a) with the consent of all the otter partners,

(b) in accordance with an express agreement by the partners, or

(2) A retiring partner may be discharged from any liability to any third party for acts of the firm done before his retirement by an agreement made by him with such third party and the partners of the reconstituted firm, and such agreement may be implied by a course of dealing between such third party and the reconstituted firm after he had knowledge of the retirement.

(3) Notwithstanding the retirement of a partner from a firm, he and the partners continue to be liable as partners to third parties for any act done by any of them which would have been an act of the firm if done before the retirement, until public notice is given of the retirement

Provided that a retired partner is not liable to any third party who deals with the firm without knowing that he was a party.

(4) Notices under sub-section (3) may be given by the retired partner or by any partner of the reconstituted firm.

Expulsion of partners (S 33);

(1) A partner may not be expelled from a firm by any majority of the partners, save in the exercise in good faith or powers conferred by contract between the partners.

(2) The provisions of sub-sections (2), (3) and (4) of section 32 shall apply to an expelled partner as if he were a retired partner.

S34 INSOLVENCY OF A PARTNER. ( Not sure if there in syllabus)

(1) Where a partner in a firm is adjudicated an insolvent, he ceases to be a partner on the date on which the order of adjudication is made, whether or not the firm is thereby dissolved.

(2) Where under a contract between the partners the firm is not dissolved by the adjudication of a partner as an insolvent, the estate of a partner so adjudicated is not liable for any act of the firm and the firm is not liable for any act of the insolvent, done after the date on which the order of adjudication is made.

Insolvency of a partner liability of estate of deceased partner (S 35);

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

Rights of outgoing partner in certain cases to share subsequent profits (S 37);

Where any member of a firm has died or otherwise ceased to be a partner, and the surviving or continuing partners carry on the business of the firm with the property of the firm without any final settlement of accounts as between them and the outgoing partner or his estate, then, in the absence of a contract to the contrary, the outgoing partner or his estate is entitled at the option of himself or his representatives to such share of the profits made since he ceased to be a partner as may be attributable to the use of his share of the property of the firm or to interest at the rate of six per cent. per annum on the amount of his share in the property of the firm :

Provided that where by contract between the partners an option is given to surviving or continuing partners to purchase the interest of a deceased or outgoing partner, and that option is duly exercised, the estate of the deceased partner, or the outgoing partner of his estate, as the case may be, is not entitled to any further or other share of profits, but if any partner assuming to act in exercise of the option does not in all material respects comply with the terms thereof, he is liable to account under the foregoing provisions of this section.

Revocation of continuing guarantee by change in firm (S38);

A continuing guarantee given to a firm, or to a third party in respect of the transactions of a firm, is in the absence of agreement to the contrary, revoked as to future transactions from the date of any change in the constitution of the firm.

(41) Syndicate Bank v. R.S.R. Engg Works (2003) 6 SCC 265

The plaintiff appellant filed two suit against the respondents. First respondent in both the suits is a partnership firm engaged in engineering works. Respondent Nos. 2 to 4 are its partners. In the first suit, O.S. No. 1921/80 hich was filed for recovery of Rs. 59,775.95 with interest thereon, the plaintiff alleged that for the purpose of expansion of industry of the respondent, a loan of Rs. 40,000/- was sanctioned in favour of the respondents on 5.12.1974. The loan was to be re-paid after 9 months in instalments. They respondents had also executed the requisite documents in favour of the plaintiff bank. spondent Nos. 2 and 3 in their written statement admitted that the respondents had borrowed Rs. 40,000/- from the appellant, but they contended that the first respondent firm was dissolved and the fourth respondent took over the entire liability and, herefore, they are not liable for the suit claim. The Trial Court passed the decree only against Respondent-1 and Respondent-4 for the suit claim. TC order was reaffirmed by the HC

SC observed and decided as follows.

Under section 32(2) of the Indian Partnership Act, 1932 the liability of a retiring partner as against the third party would be discharged only if there is an agreement made by the retiring partner with the third party and partners of the reconstituted firm, of course an agreement could be implied by the course of dealing between the third party and the re-constituted firm after the retirement of the partner. It was held further that if a creditor takes a new security for the debt from the continuing firm, then it shows his intention to deal with the continuing partner for debts owed by the firm. In absence of such express or implied agreement, a public notice is necessary.

It is perhaps self evident that a creditor's rights will not normally be prejudiced by an agreement transferring an accrued liability from one partner to another unless the creditor is made a party to the agreement or assents to its operation. Otherwise the agreement will, as regards him, be strictly res inter alias acta. Lord Lindley illustrated this proposition for the following example:--let it be supposed that a firm of three members, A, B, and c, is indebted to D; that a retires, and B and C either alone, or together with a new partner, E, take upon themselves the liabilities of the old firm. D's right to obtain payment form A, B, and C is not affected by the by arrangement, and A does not cease to be liable to him for the debt in question. But if, after A's retirement, D accepts as his sole debtors B and C, or B, C, and E (if E enters the firm), then A's liability will have ceased, and D must look for payment to B and C, or to B, C and E, as the case may be."

There is no a priori presumption to the effect that the creditors of firm do, on the retirement of a partner, enter into an agreement to discharge him from liability. An adoption by the creditor of the new firm as his debtor does not by any mean necessarily deprive him or his rights against the old firm especially when the creditor is not a party to the arrangement and then there is no fresh agreement between the creditor and the newly constituted firm. After the creditor has taken a new security for a debt from a continuing partner, it may be a strong a evidence of an intention to look only the continuing partner for the payment due form the firm.

It is also important to note that it has long been recognized that partnership is not a species of joint tenancy and that, in the absence of some contrary agreement, there is no survivorship as between partners, at least so far as it concerns their beneficial interests in the partnership assets.

Having due regard to these principles, the High Court erred in confirming the judgment passed by the trial court and the plaintiff appellant had every right to proceed against all the defendants in the suit. Hence, the appeals are allowed and the impugned decree is modified to the extent that there shall be a decree against all the respondents, namely respondent 1 to 4, both the suits.

(42) Pamuru Vishnu Vinodh Reddy v. Chhillakuru Chandrashekhara Reddy (2003) 3 SCC 445

The plaintiff retired from the partnership firm on a particular date after selling his share in the firm. The firm is reconstituted thereafter. It was held that once he had retired from the partnership firm, he had no right to claim any further share in the profits of the firm. When the defendants had not paid the value of the share of the plaintiff pursuant to the agreement for retiring from the firm, it has become a debt on the defendants and the plaintiff is entitled to recover the same with interest. The value of the share of die plaintiff on the date of his retirement from the firm would be regarded as a pure debt with effect from the date on which he ceased to be a partner as per the agreement entered into between the partner. Otherwise the result would be that he was deemed to have been continued as partner of the firm even after he retired from the firm. If consideration is not paid as per the agreement, he would be entitled to enforce it as per law. Mere non-payment of consideration does not take away the legal effect of retirement from the partnership firm.

The Commissioner is appointed by the court for ascertaining the value of his share. The relevant date for such ascertainment is the date of which the partner retires and not the date on which the Commissioner makes the valuation. The unpaid share of the retiring partner was a debt payable with interest whenever paid.

(43) Vishnu Chandra v. Chandrika Prasad Agrawal, AIR 1983 SC 523

Q before HC

(i) whether the partnership was a partnership at will or for a fixed duration; (ii) whether the respondent (appellant before us) was entitled for retirement from the partnership or for dissolution of the firm itself."

HC held that the partnership was a partnership at will. Ist question was not brought up before the SC.

The question before SC was whether a partner was entitled to retire on the basis of partnership deed. The deed provided that a partner may retire by giving one month notice and that a partner cannot retire within one year of commencement of business and if he does so, his capital will not be returned. Held that it is consistent with the provisions of Section 31(1)(b) and the partner can retire according to the deed.

Topic 6 - Dissolution of a Firm

Dissolution of a firm (S 39);

The dissolution of a partnership between all the partners of a firm is called the "dissolution of the firm".

Dissolution by agreement (S 40);

A firm may be dissolved with the consent of all the partners or in accordance with a contract between the partners.

Compulsory dissolution (S 41);

A firm is dissolved

(a) by the adjudication of all the partners or of all the partners but one as insolvent, or

(b) by the happening of any event which makes it unlawful for the business of the firm to be carried on or for the partners to carry it on in partnership :

Provided that, where more than one separate adventure or undertaking is carried on by the firm, the illegality of one or more shall not of itself cause the dissolution of the firm in respect of its lawful adventures and undertakings.

S 42 DISSOLUTION ON THE HAPPENING OF CERTAIN CONTINGENCIES.

Subject to contract between the partners a firm is dissolved

(a) if constituted for a fixed term, by the expiry of that term;

(b) if constituted to carry out one or more adventures or undertakings, by the completion thereof;

(d) by the adjudication of a partner as an insolvent.

Dissolution by notice of partnership at will (S43);

(1) Where the partnership is at will, the firm may be dissolved by any partner giving notice in writing to all the other partners of his intention to dissolve the firm.

(2) The firm is dissolved as from the date mentioned in the notice as the date of dissolution or, if no date is so mentioned, as from the date of the communication of the notice

Dissolution by the Court (S 44);

At the suit of a partner, the Court may dissolve a firm on any of the following grounds, namely :-

(a) that a partner has become of unsound mind, in which case the suit may be brought as well by the next friend of the partner who has become of unsound mind as by any other partner;

(b) that a partner, other than the partner suing, has become in any way permanently incapable of performing his duties as partner;

(c) that a partner, other than the partner suing, is guilty of conduct which is likely to affect prejudicially the carrying on of the business regard being had to the nature of the business;

(d) that a partner, other than the partner suing, willfully or persistently commits breach of agreements relating to the management of the affairs of the firm of the conduct of its business; or otherwise so conducts himself in matters relating to the business that it is not reasonably practicable for the other partners to carry on the business in partnership with him;

(e) that a partner, other than the partner suing, has in any way transferred the whole of his interest in the firm to a third party, or has allowed his share to be charged under the provisions of rule 49 of Order XXI of the First Schedule to the Code of Civil Procedure, 1908, or has allowed it to be sold in the recovery of arrears of land revenue or of any dues recoverable as arrears of land revenue due by the partner;

(f) that the business of the firm cannot be carried on save at a loss; or

(g) on any other ground which renders it just and equitable that the firm should be dissolved.

Liability for acts done by partners after dossolution (S 45);

(1) Notwithstanding the dissolution of a firm, the partners continue to be liable as such to third parties for any act done by any of them which would have been an act of the firm, if done before the dissolution, until public notice is given of the dissolution :

Provided that the estate of a partner who dies, or who is adjudicated an insolvent, or of a partner who, not having been known to the person dealing with the firm to be a partner, retires from the firm, is not liable under this section for acts done after the date on which he ceases to be a partner.

(2) Notices under sub-section (1) may be given by any partner.

Right of partners to have business wound up after dissolution (S 46);

On the dissolution of a firm every partner or his representative is entitled, as against all the other partners or their representatives, to have the property of the firm applied in payment of the debts and liabilities of the firm, and to have the surplus distributed among the partners or which representatives according to their rights.

Continuing authority of partners for purpose of winding up (S47);

After the dissolution of a firm the authority of each partner to bind the firm, and the other mutual rights and obligations of the partners, continue notwithstanding the dissolution, so far as may be necessary to wind up the affairs of the firm and to complete transactions begun but unfinished at the time of the dissolution, but not otherwise :

Provided that the firm is in no case bound by the acts of a partner who had been adjudicated insolvent, but this proviso does not affect the liability of any person who has after the adjudication represented himself or knowingly permitted himself to be represented as a partner of the insolvent.

Mode of settlement of accounts between partners (S 48);

In settling the accounts of a firm after dissolution, the following rules shall, subject to agreement by the partners, be observed :

(a) Losses, including deficiencies of capital, shall be paid first out of profits, next out of capital, and, lastly, if necessary, by the partners individually in the proportions in which they were entitled to share profits;

(b) the assets of the firm, including any sums contributed by the partners to make up deficiencies of capital, shall be applied in the following manner and order :

(i) in paying the debts of the firm to third parties;

(ii) in paying to each partner ratably what is due to him from the firm for advances as distinguished from capital;

(iii) in paying to each partner ratably what is due to him on account of capital; and

(iv) the residue, if any, shall be divided among the partners in the proportions in which they were entitled to share profits.

Payment of firm debts and of separate debts (S 49);

Where there are joint debts due from the firm, and also separate debts due from any partner, the property of the firm shall be applied in the first instance in payment of the debts of the firm, and, if there is any surplus, then the share of each partner shall be applied in payment of his separate debts or paid to him. The separate property of any partner shall he applied first in the payment of his separate debts, and the surplus (if any) in payment of the debts of the firm.

Personal profits earned after dissolution (s 50);

Subject to contract between the partners, the provisions of clause (a) of section 16 shall apply to transactions by any surviving partner or by the representatives of deceased partner, undertaken after the firm is dissolved on account of the death of a partner and before its affairs have been completely wound up :

Provided that where any partner or his representative has bought the good will of the firm, nothing in the section shall affect his right to use the firm-name.

Return of premium on premature dissolution (S 51);

Where a partner has paid a premium on entering into partnership for a fixed term, and the firm is dissolved before the expiration of that term otherwise than by the death of a partner, he shall be entitled to repayment of the premium or of such part thereof as may be reasonable, regard being had to the terms upon which he became a partner, and to the length of time during which he was a partner, unless -

(a) the dissolution is mainly due to his own misconduct, or

(b) the dissolution is in pursuance of an agreement containing no provision for the return of the premium or any part of it.

Rights where partnership is rescinded for fraud or misrepresentation (S 52);

Where a contract creating partnership is rescinded on the ground of fraud or misrepresentation of any of the parties thereto, the party entitled to rescind is, without prejudice to any other right, entitle -

(a) to a lien on, or right of retention of, the surplus of the assets of the firm remaining after the debts of the firm have been paid, for any sum paid by him for the purchase of a share in the firm and for any capital contributed by him;

(b) to rank as a creditor of the firm in respect of any payment made by him towards the debts of the firm; and

Rights for refrain from use of firm name or firm property (S 53);

After a firm is dissolved, every partner or his representative may, in the absence of a contract between the partners to the contrary, restrain any other partner or his representative from carrying on a similar business in the firm-name or from using any of the property of the firm for his own benefit, until the affairs of the firm have been completely wound up :

Provided that where any partner or his representative has brought the goodwill of the firm, nothing in this section shall affect his right to use the firm-name.

Agreement of restraint of trade (S 54);

Partners may, upon or in anticipation of the dissolution of the firm, make an agreement that some or all of them will not carry on a business similar to that of the firm within a specified period or within specified local limits and notwithstanding anything contained in section 27, of the Indian Contract Act, 1872, such agreement shall be valid if the restrictions imposed are reasonable.

Sale of goodwill after dissolution (S 55);

(1) In settling the accounts of a firm after dissolution, the goodwill shall, subject to contract between the partners, be included in the assets, and it may be sold either separately or along with other property of the firm.

(2) RIGHTS OF BUYER AND SELLER OF GOODWILL.

Where the goodwill of a firm is sold after dissolution, a partner may carry on a business competing with that of the buyer and he may advertise such business, but, subject to agreement between him and the buyer, he may not

(a) use the firm-name,

(b) represent himself as carrying on the business of the firm, or

(3) AGREEMENTS IN RESTRAINT OF TRADE.

Any partner may upon the sale of the goodwill of a firm, make an agreement with the buyer that such partner will not carry on any business similar to that of the firm within a specified period or within specified local limits, and, notwithstanding anything contained in section 27 of the Indian Contract Act, 1872 such agreement shall be valid if the restrictions are reasonable.

(44) Saligram Ruplal Khanna v. Kanwar Rajnath, AIR 1974 SC 1094

A partnership consisting of the appellants and the respondent had entered into a lease agreement with the Custodian of Evacuee Property in respect of a mill and took possession of the mill on 31st August, 1952. The period of partnership was for 5 years being the period of the said lease. The partners having failed to pay one installment of rent the Custodian served on the partners a show cause notice on 12-2-54 why the lease should not be terminated. On account of certain financial difficulties the parties entered into a second agreement on February 24, 1954.

Disputes having arisen between appellants and the respondent, the appellants filed a suit on December 20. 1960 alleging that after the termination of the lease by the Custodian on May 25, 1954 the two appellants and the respon- dent had orally agreed not to dissolve the partnership in spite of the termination of the lease and prayed for a declaration that the partnership between them and the respondent was still subsisting on the terms and conditions set out in the partnership deed dated 24th February, 1954.

They also prayed for rendition of the partnership accounts.

The respondent on. the other hand alleged that there was no oral agreement between the parties and that the claim for rendition of accounts was barred by limitation.

The trial court held that the appellants had failed to prove that there was an oral agreement between the parties and that the claim for rendition of accounts was barred by limitation.

On appeal the High Court upheld the findings of the trial court.

Dismissing the appeal,

HELD :-(1) No inference of implied agreement can be drawn from the material on record. According to section 42 of the Indian Partnership Act, subject to a contract between the partners a firm is dissolved if constituted for a fixed term by the expiry of that term. This provision makes it clear that unless some contract between the partners to the contrary is proved. the firm, if constituted for a fixed term would be dissolved by the expiry of that term. [371G-H] In the instant case it was indicated in the agreement of partnership that the period of partnership had been fixed at 5 years because that was the period of the lease of the mills and the lease was terminated on May 25, 1954. [372B-C] According to s. 47 of the Indian Partnership Act after the dissolution of the firm the authority of each partner to bind the firm and the other mutual rights and obligations of the partners continue notwithstanding the dissolution so far as may be necessary to wind up the affairs of the firm and to complete transactions begun but unfinished at the time of dissolution but not otherwise. The word 'transaction' in section 47 refers not merely to a commercial transaction of purchase and sale but would include also all other matters relating to the affairs of the partnership. The completion of a transaction would cover also the taking of necessary steps in connection with the adjudication of a dispute to which the firm before its dissolution was a party. In the instant case after dissolution, the partnership subsisted merely for the purpose of completing pending transactions, winding up the business and 359 adjusting the rights of partners and for these purposes and these only the authority, rights and obligations of the partners continued [374B-D, F-G] (3)The suit for rendition of accounts brought by the appellants on December 20, 1960 was barred by limitation.

In the absence of a contract to the contrary there could be no survival of the firm after August 30, 1957 when the period of partnership expired.

(45) Santiranjan Das Gupta v. Dasuram Murzamull, AIR 1973 SC 48

According to the plaintiff-appellant he had a mill at Nojai where he was carrying on his milling business. The defendants represented to him that if the milling business was carried on in partnership with them then the plaintiff would make large profits and on that representation and assurance he entered into a partnership with the defendants on or about January 10, 1948. The partnership business, to quote the plaint "commenced from about the middle of January, 1948 and the work continued upto 10th September, 1948". Some disputes arose and on or about November 6, 1948 Murzamull Agarwal told the plaintiff that the business in partnership was no longer possible. In September 1951 the plaintiff instituted the present suit for dissolution of partnership. Besides other legal objections taken by the defendants in their writ ten statement it was pleaded that there was no partnership between the parties and that there was only a milling agreement dated January 11, 1948 between them under which the defendants were getting paddy milled in the plaintiff's rice mills for which the dues had all along been paid to the plaintiff In accordance with the milling contract.

TC decreed in favor of plaintiff. HC reversed decision. SC upheld HC decision. Held no partnership.

SC Observations:

(i) No record of terms & conditions of partnership.

(ii) No maintenance of accounts of partnership business

(iii) No account of partnership opened in any bank

(iv) No written information conveyed to Deputy Director of procurement wrt to the newly created partnership.

(46) M/s Juggilal Kamlapat v. M/s Sew Chand Bagree, AIR 1960 Cal 443

Commercial – liability – Section 45 (1) of Partnership Act, 1932 – award holders did not admit that there was dissolution of firm – under Section 45 notwithstanding dissolution of firm liability of partners continues until public notice given of dissolution – Proviso to Section 45 (1) exempts estate of partner who dies or adjudicated insolvent or retires from firm if act done after date on which he ceases to be partner independently – Proviso to Section 45 (1) applied and other two previous partners not liable to pay decretal amount – application dismissed. When appellants entered into contract the two previous partners were not known to them.

(47) Sharad Vasant Kotak v. Ramniklal Mohanlal Chawda (1998) 2 SCC 171

Failure to inform the Registrar about the firm does not amount to deregistration of the firm. On the death of the partner a new partner was inducted in his place. Court said this would not necessitate re-registration of firm. Failure to inform registrar about changes only attracts penalties. Status of the registered firm does not cease to exist.

(48) S.V. Chandra Pandian v. S.V. Sivalinga Nadar (1993) 1 SCC 589

6 Brothers running partnership firm – dissolution of firm after dispute – referred to arbitration – arbitrators gave awards – divided firm immovable properties in question among each of them.

Some of the disputants filed a petition praying for a direction to the arbitrators to file their award in court.

They also filed another petition requesting the court to pass a decree in terms of the award. Two other disputants flied a petition under Section 30 of the Arbitration Act to set aside the award. A Single Judge heard these matters.

It was contended before him that having regard to the allotment of partnership properties including immovable properties under the award, It was Incumbent that the award should have been registered as required by Section 17(1) of the Registration Act and since it lacked registration, the Court had no jurisdiction to make it the rule of the Court and grant a decree In terms 59 thereof. The Single Judge directed taking steps for getting the award registered.

In the meantime, one of the arbitrators passed away. At the request of some of the parties, the surviving arbitrators presented the award to the Registrar for registration.

Thereupon one of the brothers served a notice on the Registrar not to register the document.

Against the order of the Single Judge, an appeal was preferred to Division Bench and it reversed the finding of the Single Judge. It held that the award required registration under section 17(1) of the Registration Act;

and in the absence of registration there was no valid award and the Court had no jurisdiction to grant a decree in terms of the award. Being aggrieved by this order, the present appeals were flied by four of the six brothers.

On the question whether the award required registration under section 17(1) of the Registration Act

SC setting aside the ruling of the division bench and upholding the ruling of the Single Judge of TC held

"The above provisions make it clear that regardless of the character of the property brought in by the partners on the constitution of the partnership, such property shall become the property of the firm and an individual partner shall only be entitled to his share of profits, if any, accruing to the partnership from the realization of this property and upon dissolution of the partnership to a share in the money representing the value of the property. It is well-settled that the firm is not a legal entity, it has no legal existence, it is merely a compendious name and hence, the partnership property would vest in all the partners of the firm. Accordingly, each and every partner of the firm would have an interest in the property or asset of the firm but during its subsistence no partner can deal with any portion of the property as belonging to him, nor can he assign his interest in any specific item thereof to anyone. On a true reading of the award as a whole, there was no doubt that it essentially dealt with the distribution of the surplus properties belonging to the dissolved firms. The award, therefore, did not require registration under s. 17(1) of the Registration Act."

(49) CIT v. M/s Pigot Champan and Co., AIR 1982 SC 1085

Partnership was for a fixed period (6 years) after the expiry of which it was stated to have been dissolved by mutual consent of the partners and therafter the said business with its assets and goodwill shall belong to and be carried by continuing partners. Question was whether there had been a dissolution of old firm followed by the creation of the new firm which succeeded to the business of the old firm (it would entitle the firm a relief under IT act) or there was merely a reconstitution of the firm.

SC held: [Wud be a question of fact – old firm dissolved – assets & liabilities taken over by new firm – hence entitled to relief under IT Act]

The principle is well settled that it is on the examination of relevant documents and relevant facts and circumstances that the court has to be satisfied in each case as to whether there has been a succession or a mere change in the constitution of the partnership. It cannot be disputed that ‘dissolution’ and ‘reconstitution’ are two distinct legal concepts, for, dissolution brings the partnership to an end while a reconstitution means the continuation of the partnership under altered circumstances. In law, there would be no difficulty in the dissolution of a firm being followed by the constitution of a new firm by some of the erstwhile partners who may take over the assets and liabilities of the dissolved firm.

Topic 7 - Registration of Firms

Power to exempt from application of this chapter (S 56);

The State Government of any State may, by notification in the Official Gazette, direct that the provisions of this Chapter shall not apply to that State or to any part thereof specified in the notification.

Appointment of Registrars (S 57);

(1) The State Government may, by notification in the Official Gazette, appoint a Registrar of Firms who shall exercise, perform and discharge the powers, functions and duties of the Register under this Act throughout the State of Maharashtra.

(2) The State Government may likewise appoint one or more Deputy Registrars of Firms and Assistant Registrars of Firms who shall exercise, perform and discharge all or such of the powers, functions and duties of the Registrar and in such areas as the State Government may, by notification in the Official Gazette, specify.

(3) The officers appointed under sub-section (1) and sub-section (2) shall be deemed to be public servants within the meaning of section 21 of the Indian Penal Code.

Application for registration (S 58);

(1) Subject to the provisions of sub-section of sub-section (1A), the registration of a firm effected by sending by post or delivering to the Registrar of the area in which any place of business of the firm is situated or proposed to be situated, a statement in the prescribed form and accompanied by the prescribed fee and a true copy of the deed of partnership stating :

(a) the firm-name,

(aa) the nature of business of the firm;

(b) the place or principal place of business of the firm,

(d) the date when each partner joined the firm,

(e) the names in full and permanent addresses of the partners, and

(f) the duration of the firm.

The statement shall be signed by all the partners, or by their agents specially authorised in this behalf.

(1A) The statement under sub-section (1) shall be sent or delivered to the Registrar within a period of one year from the date of constitution of the firm :

Provided that in the case of any firm carrying on business on or before the date of commencement of the Indian Partnership (Maharashtra Amendment) Act, 1984, such statement shall be sent or delivered to the Registrar within a period of one year firm such date.

(2) Each person signing the statement shall also verify it in the manner prescribed.

(3) A firm shall not have any of the names or emblems specified in the Schedule to the Emblems and Names (Prevention of Improper Use) Act, 1950, or any colourable imitation thereof, unless permitted so to do under that Act, or any name which is likely to be associated by the public with the name of any other firm on account of similarity, or any name which, in the opinion of the Registrar, for reasons to be recorded in writing, is undesirable :

Provided that nothing in this sub-section shall apply to any firm registered under any such name before the date of the commencement of the Indian Partnership (Maharashtra Amendment) Act, 1984.

(4) Any person aggrieved by an order of the Registrar under sub-section (3), may, within 30 days from the date of communication of such order, appeal to the officer not below the rank of Deputy Secretary to Government authorised by the State Government in this behalf, in such manner, and on payment of such fee, as may be prescribed. On receipt of any such appeal, the authorised officer shall, after giving an opportunity of being heard to the appellant, decide the appeal, and his decision shall be final.

Registration (S 59);

(1) When the Registrar is satisfied that the provisions of section 58 have been duly complied with, he shall record an entry of the statement in a register called the Register of Firms, and shall file the statement. [19 On the date such entry is recorded and such statement is filed, the firm shall be deemed to be registered.

(2) The firm, which is registered, shall use the brackets and word (Registered) immediately after its name.

Recording of alterations in firm name and principal place of business (S 60);

(1) When an alteration is made in the firm name or in the nature of business of a firm or in the location of the principal place of business of a registered firm, a statement shall be sent to the Registrar, within a period of 90 days from the date of making such alteration, accompanied by the prescribed fee, specifying the alteration and signed and verified in the manner required under section 58.

(2) When the Registrar is satisfied that the provisions of sub-section (1) have been duly complied with, he shall amend the entry relating to the firm in the Register of Firms in accordance with the statement, and shall file it along with the statement relating to the firm filed under section 59.

Noting of closing and opening of branches (S 61);

When a registered firm discontinues business at any place or begins to carry on business at any place, such place not being its principal place of business, any partner or agent of the firm shall send intimation thereof to the Registrar, within a period of 90 days from the date of such discontinuance or, as the case may be, from the date on which the firm begins to carry on business at such place. The Registrar shall then make a note of such intimation in the entry relating to the firm in the Register of Firms, and shall file the intimation along with the statement relating to the firm filed under section 59.

Noting of changes in names and addresses of partners (S 62);

When any partner in a registered firm alters his name or permanent address, an intimation of the alteration' shall be sent, within a period of 90 days from the date of making such alteration, by any partner or agent of the firm to the Registrar, who shall deal with it in the manner provided in section 61.

Recording of changes in and dissolution of a firm (S 63);

When a change occurs in the constitution of a registered firm, every incoming, continuing or outgoing partner, and when a registered firm is dissolved, every person who was a partner immediately before the dissolution, or the agent of every such partner or person specially authorised in this behalf shall, within a period of 90 days from the date of such change or dissolution, given notice to the Registrar of such change or dissolution, specifying the date thereof; and the Registrar shall a record of the notice in the entry relating to the firm in the Registrar of Firms and shall file the notice along with statement relating to the firm filed under section 59.

(1A) Where a change occurs in the constitution of a registered firm, all persons, who after such change are partners of the firm, shall jointly send an intimation of such change duly signed by them, to the Registrar, within a period of 90 days from the date of occurrence of such change and the Registrar shall deal with it in the manner provided by section 61.

(2) RECORDING OF WITHDRAWAL OF A MINOR.

When a minor who has been admitted to the benefits of partnership in a firm attains majority and elects to become or not to become a partner, and the firm is then a registered firm, he, or his agent specially authorised in this behalf, shall within a period of 90 days from the date of his election, give notice to the Registrar that he has or has not become a partner, and the Registrar shall deal with the notice in the manner provided in sub-section (1).

Rectification of mistakes (S 64);

(1) The Registrar shall have power at all time to rectify any mistake in order to bring the entry in the Register of Firms relating to any firm into conformity with into documents relating to that firm filed under this Chapter.

(2) On application made by the all parties who have signed any document relating to a firm filed under this Chapter, the Registrar may rectify any mistake in such document or in the record of note thereof made in the Register of Firms.

Amendment of Register by order of Court (S 65);

A Court deciding any matter relating to a registered firm may direct that the Registrar shall make any amendment in the entry in the Register of Firms relating to such firm which is consequential upon its decision; and the Registrar shall amend the entry accordingly.

Inspection of Register and Field documents (S 66);

(1) The Registrar of Firms shall be open to inspection by any person on payment of such fee as may be prescribed.

(2) All statements, notices and intimations filed under this Chapter shall be open to inspection, subject to such conditions and on payment of such fee as may be prescribed.

Grant of Copies (S 67);

The Registrar shall on application, furnish to any person, on payment of such fee as may be prescribed, a copy, certified under his hand, of any entry or portion thereof in the Register of Firms.

Rules of evidence (S 68);

(1) Any statement, intimation or notice recorded or noted in Register of Firms shall, as against any person by whom or on whose behalf such statement, intimation or notice was signed, be conclusive proof of any fact therein stated.

(2) A certified copy of an entry relating to a firm in the Register of Firms may be produced in proof of the fact of the registration of such firm, and of the contents of any statement, intimation or notice recorded or noted therein.

Procedure for registration and effect of non registration (S69);

S69 Effect of non registration

(1) No suit to enforce a right arising from a contract or conferred by this Act shall be instituted in any Court by or on a behalf of any persons suing as a partner in a firm against the firm or any person alleged to be or to have been a partner in the firm unless the firm is registered and the person suing is or has been shown in the Register of Firms as a partner in the firm :

Provided that the requirement of registration of firm under this sub-section shall not apply to the suits or proceedings instituted by the heirs or legal representatives of the deceased partner of a firm for accounts of the firm or to realise the property of the firm.

(2) No suit to enforce a right arising from a contract shall be instituted in any court by or on behalf of a firm against any third party unless the firm is registered and the persons suing are or have been shown in the Register of Firms as partners in the firm.

(2A) No suit to enforce any right for the dissolution of a firm or for accounts of a dissolved firm or any right or power to realise the property of a dissolved firm shall be instituted in any Court by or on behalf of any person suing as a partner in a firm against the firm or any person alleged to be or have been a partner in the firm, unless the firm is registered and the person suing is or has been shown in the Register of Firms as a partner in the firm :

(3) The provisions of sub-sections (1), (2) and (2A) shall apply also to a claim of set-off or other proceedings to enforce a right arising from a contract but shall not affect

(a) the firms constituted for a duration upto six months or with a capital upto two thousand rupees; or;

(b) the powers of an official assigned, receiver or Court under the Presidency Towns Insolvency Act, 1909, or the Provincial Insolvency Act, 1920, to realise the property of an insolvent partner.

(4) This section shall not apply

(a) to firms or partners in firm which have no place of business in the territories to which this Act extends, or whose places of business in the said territories are situated in areas to which, by notification under section 56 this Chapter does not apply, or

(b) to any suit or claim of set-off not exceeding one hundred rupees in value which, in the presidency towns, is not of a kind specified in section 19 of the Presidency Small Cause Courts Act, 1882, or outside the Presidency towns, is not of a kind specified in the Second Schedule to the Provincial Small Cause Courts Act, 1887, or to any proceeding in execution or other proceeding incidental to or arising from any such suit or claim.

Penalty for furnishing false particulars (S70);

Any person who signs any statement, amending statement, notice or intimation under this Chapter containing any particulars which he knows to be false or does not believe to be true, or containing particulars which he knows to be incomplete or does not believe to be complete, shall, on conviction, be punished with imprisonment for a term which may extend to one year, or with fine, or with both :

Provided that in the absence of special and adequate reasons to the contrary to be mentioned in the judgement of the Court, the fine shall not be less than one thousand rupees.

Power to make rules (S 71);

(1) Subject to the provisions of section 70A, the State Government may, by notification in the Official Gazette, make rules prescribing the fees which shall accompany documents sent to the Registrar or which shall be paid in respect of any intimation, notice or application given to the Registrar or which shall be payable for the inspection of documents in the custody of the Registrar or for copies from the Register of Firms or which shall be paid for supply of any prescribed forms.

(2) The State Government may also make rules

(a) prescribing the form of statement submitted under sub-section (1) of section 58 and of the verification thereof;

(aa) prescribing the manner of filing an appeal under sub-section (4) of section 58;

(b) requiring statements, intimations and notices under sections 60, 61, 62 and 63 to be in prescribed form, and prescribed the form thereof;

(c) prescribing the form of the Register of Firms, and the mode in which entries relating to firms are to be made therein, and the mode in which such entries are to be amended or notes made therein;

(d) regulating the procedure of the Registrar when dispute arises;

(e) regulating the filing of documents received by the Registrar;

(f) prescribing conditions for the inspection of original documents;

(g) regulating the grant of copies;

(h) regulating the elimination of registers and documents;

(i) providing for the maintenance and form of an Index to the Register of Firms

(j) generally, to carry out the purposes of this Chapter.

(3) All rules made under this section shall be subject to the condition of previous publication.

(4) Every rule made under this section shall be laid, as soon as may be after it is made, before each House of the State Legislature, while it is in session, for a total period of thirty days, which may be comprised in one session or in two successive sessions, and if, before the expiry of the session in which it is so laid or the session immediately following, both Houses agree in making any modification in the rule or both Houses agree that the rule should not be made, and notify such decision in the Official Gazette, the rule shall, from the date of publication of such decision, have effect only in such modified form or be of no effect, as the case may be; so, however, that any such modification or annulment shall be without prejudice to the validity of anything previously done or omitted to be done in pursuance of that rule.

(50) CIT v Jaylakshmi Rice & Oil Mills Contractor cO., AIR 1971 SC 1015

Held that registration is complete only when the requirements of S59 are complied with. A firm cannot be said to be registered when the statement prescribed by S58 and the required fee are sent to the registrar. The registration of the firm is effected only when the entry of the statements is recorded in the register of firms and the statement is filed by the registrar as provided by S59.

(51) Jagdish Chandra Gupta v Kajaria Traders (India) Ltd, AIR 1964 SC 1882

A clause in a deed of partnership provided that in case of dispute between the partners; the matter will be referred to arbitration. A dispute having arisen, one partner appointed an arbitrator to which the other partner gave no response. An action was then commenced to enforce the arbitration clause of the agreement.

The other partner contended that the firm was not registered and therefore the suit should be dismissed. The Supreme Court held that the suit was not maintainable and the Court observed that

"It is impossible to think that the right to proceed to arbitration is not one of the rights which are founded on the agreement of parties. The word of section 69(3) or other proceedings to enforce a right 'arising from a contract' are sufficient to cover the present matter".

If arbitration proceedings were allowed, unregistered firm would, by providing for arbitration in the partnership deed, to escape the disability contained in the section.

(52) Mohatta Brothers v.Bharat Suryadaya Mills Co. Ltd., AIR 1976 SC 1703

Plaintiff partner in firm consisting of 5 partners (in addition one minor was entitled to some share – mother as guardian) under the name and style of Mohatta Brothers – Plaintiff managing agents of defendant company up to Sep 4, 1960 – Sometime before that it appears the plaintiff-firm expressed an intention of giving up the post of managing agents. The plaintiff firm after submitting its resignation to the board of directors of the respondent- company, the appellant filed a suit claiming a sum of money in accordance with an agreed scheme. Defendants held that plaintiff firm could not maintain the suit as the constitution of the old firm had been changed on Oct 24, 1949. From that date it was stated the plaintiff-firm consisted of 6 partners including Satyawati (mother of minor). The newly constituted firm according to the defendant had not been registered and as such the suit was not maintainable.

Issue: Scope of S69(2) of Partnership Act?

Observation & Decision: The court held that when a firm is reconstituted by introduction of new partner, it would remain the same registered firm and there would be no necessity of fresh registration if the continuing firm was registered with the Registrar of Firms under S69(2) of the Indian Partnership Act. The mandatory conditions u/S 69(2) of the Indian Partnership Act was not fulfilled in the present case as the name of Satyawati who was a partner of the reconstituted firm and in whose favor a cause of action had accrued was not shown in the register of the firm.

For the institution of the suit all those who are partners at the time of institution must be or have been shown in the register; person suing in S69(2) means the partner.

Apex Court held “Looking to all the facts we are of the opinion that the trial court took a correct view of the matter in so far as it held that Satyavati had not become a partner of the plaintiff-firm and that the deed of partnership dated October 24, 1949 had not been acted upon.” HC was wrong in reversing the judgment of the TC.

(53) Seth Loonkaran Sethiya v Ivan E John AIR 1977 SC 336

Facts: Plaintiff partner in an unregistered firm – files suit against defendant for recovery outstanding of dissolved firm.

Dismissing the plaintiff's appeal and allowing the appeal of the defendants (first set) held: (1) Section 69 of the Partnership Act is mandatory in character and its effect is to render a suit by a plaintiff in respect of a right vested in him or acquired by him under a contract which he entered into as a partner of an unregistered firm, whether existing or dissolved, void. A partner of an erstwhile unregistered partnership firm cannot bring a suit to enforce a right arising out of a contract failing within the ambit of section 69 of the Partnership Act. The suit out of which the appeals arise was for enforcement of the agreement entered into by the plaintiff as partner of Serbia & Co. It was never pleaded by the plaintiff not even in his replication that he was suing to recover the outstanding of a dissolved firm. Thus the suit was clearly wharfage etc. which had been debited to their account. It was also pleaded by the said defendants that the plaintiff had no floating or prior charge on any of their stocks, stores etc. nor could any such charge be claimed by him in law; that the suit was barred by the provisions of Section 69 of the Partnership Act and that the agreement dated July 6, 1948 which was insufficiently stamped could not form the basis of the suit.

(54) Delhi Development Authority v Kochhar Construction Work (1998) 8 SCC 559

Held that an application filed by unregistered firm under S20 of the arbitration act, 1940 would also be treated as a suit and would be hit by S69(2) of the partnership act. The fact that it is an application to be registered and numbered as a suit would not make any difference for the obvious reason that though the sub-sections(1) & (2) of S69 refer to a suit, sub-section (3) thereof makes those sub-sections applicable even to other proceedings which would include an application unregistered and numbered as a suit under S20 of the Arbitration act. It is submitted that if arbitration proceedings were allowed unregistered firm would by providing for arbitration in the partnership deed escape disability contained in S69.

(55) Gwalior Oil Mills v Supreme Industries (1999) 9 SCC 113

A registered firm was reconstituted and an application was filed with the Registrar for recording of changes. The new firm entered into a contract with a 3^rd party which resulted in a dispute. The firm filed a suit against the 3^rd party for breach of contract. The suit was filed by one of the partners who prior to reconstitution was a partner in his individual capacity and who after the reconstitution was a partner as Karta of HUF. Registrar recorded the changes after institution of the proceedings but with retrospective effect from the date of the actual reconstitution. It was held that the firm never ceased to be a registered firm. The suit was thus held to be maintainable.

(56) Haldiram Bhujiawala v Anand Kumar Deepak Kumar (2000) 3 SCC 250

IT is clear that the suit in question is based on infringement of statutory rights under the Trade Marks Act. It is also based upon the common law principles of tort applicable to passing-off actions. The suit is not for enforcement of any right arising out of a contract entered into by or on behalf of the unregistered firm with third parties in the course of the firm's business transactions. The suit is, therefore, not barred by Section 69(2) of the Partnership Act, 1932.

By that order, the High Court had summarily dismissed that appeal of the appellants against the order of a Single Judge. The appellants wanted the plaint to be rejected on the ground that the plaintiff was an unregistered partnership on the date of the s uit, and its subsequent registration could not cure the initial defect.

The Supreme Court judgment was based on the following points/reasons:

Following Raptokas Brett Co. Ltd vs. Ganesh Property 1998 (7) SCC 184, it must be held that a suit is not barred by Section 69(2) of the Partnership Act, 1932 if a statutory right or a common law right is enforced.

It is well settled that a passing-off action is a common law action based on tort. Hence a suit for perpetual injunction to restrain the opposite party not to pass-off its goods as those of the plaintiffs by using the latter's trade mark, and for damag es is an action at common law and is not barred by Section 69(2).

If the reliefs of permanent injunction or damages are being claimed on the basis of a registered trade mark and its infringement, the suit is to be treated as one based on a statutory right under the Trade Marks Act and is not barred by Section 69(2). In both these situations, the unregistered partnership in this case cannot be said to be enforcing any right arising from a contract.

It was on the basis of the Report of the Special Committee (1930-31) that the Partnership Act, 1932 was passed by the Legislature. Para 16 of the Report states that the Bill seeks to overcome certain difficulty by making registration optional, and by creating inducements to register which only bear upon firms in a substantial and fairly permanent way of business.

Para 17 of the Special Committee Report, inter alia, says that any firm which is not registered will be unable to enforce its claim against third parties in the civil court, and any partner who is not registered will be unable to enforce his claims eit her against third parties or against fellow partners.

The right that is sought to be enforced by the unregistered firm and which is barred must be a right arising out of a contract with a third party in respect of the firm's business transactions.

The real crux of the question is that the Legislature when it used the words `arising out of a contract' in Section 69(2), it is referring to a contract entered into in course of business transactions by the unregistered plaintiff firm with its custome rs, and the idea is to protect those in commerce who deal with such a partnership firm in business.

Section 69(2) is not attracted to any and every contract which is referred to in the plaint as the source of title to an asset owned by the firm. If the plaint, in the present case, referred to such a contract it could only be as a historical fact. It has no bearing on the right which is a statutory right. Hence the suit will be maintainable.

The Partnership Act has not prescribed that the transactions or contracts entered into by a firm with a third party are bad in law if the firm is an unregistered firm. On the other hand, if the firm is not registered on date of suit, and the suit is to enforce a right arising out of a contract with the third party-defendant in the course of its business, then it will be open to the plaintiff to seek withdrawal of the plaint with leave, and file a fresh suit after registration of the firm subject of course to the law of limitation and subject to the provisions of the Limitation Act.

(57) Kamal Pushp Enterprises v D.R. Construction Co. AIR 2000 SC 2676 : (2000) 6 SCC 659

Appellant entered into contract with unregistered firm – arbitration clause – on dispute arising – arbitral proceedings were carried out – arbitrator filed award in favor of respondent –respondent suo moto filed the award before the TC u/S14(2) of arbitration act 1940 - plaintiff challenged award on the ground that an unregistered firm cannot enforce a right arising from a contract (i.e. contended that suit was barred by sec 69). – High Court held that the provisions of S69 do not stand in the way of an unregistered firm defending proceedings against it and it precludes only the initiation of any proceedings by such a firm – SC held that the provisions contained in S69 is in respect of instituting proceedings to enforce a right arising from contract in any court by a unregistered firm – arbitration proceedings cannot be treated as suit or other proceedings to enforce right arising under the contract. The bar under section 69 of the Act is not applicable at the stage of enforcement of the award by passing a decree in terms thereof because the award crystallizes the rights of the parties under Indian Contract Act & the general law to be paid for the work executed and not arising only and what is being enforced at that stage is not any right arising from the objectionable contract.

Topic 8 - Agency

Agent & Principal defined;

Who may employ an agent;

Who may be appointed as agent;

Rights, Duties & liabilities of principal and agent, scope and limitation, ratification and revocation of authority;

Appointment of sub agent (The Indian Contract Act 1872, Ss 182 - 238 )

Indian Contract Act 1872 (Ss 182 – 238)

Section 182. "Agent" and "principal" defined -

An "agent" is a person employed to do any act for another, or to represent another in dealing with third persons. The person for whom such act is done, or who is so represented, is called the "principal".

Comments

Principle of agency

D.e.s.u. is not an insurance agent within the meanings of life Insurance Corporation Act, 1956 and the Life Insurance Corporation of India (Agents) Regulations, 1972 but D.E.S.U. is certainly an agent as defined in section 182 of the Act. When there is no insurance agent as defined in the Regulations and the Insurance Act, general principles of the law of agency as contained in the Contract Act are to be applied; D.E.S.U. v. Basanti Devi, AIR 2000 SC 43.

Section 183. Who may employ agent -

Any person who is of the age of majority according to the law to which he is subject, and who is of sound mind, may employ an agent.

COMMENTS

Scope

Since the defendant is weak, mentally infirm and cannot comprehend for herself, the power of attorney which authorised to act as agent of the defendant had been exhausted because of the defendant’s incapacity; Mahendra Pratap Singh v. Padam Kumari Devi, AIR 1993 All 182.

S184. Who may be an agent -

As between the principal and third persons, any person may become an agent, but no person who is not of the age of majority and sound mind can become an agent, so as to be responsible to the principal according to the provisions in that behalf herein contained.

S 185. Consideration not necessary.—- No consideration is necessary to create an agency.

S 186. Agent’s authority may be expressed or implied.— The authority of an agent may be expressed or implied.

S 187. Definitions of express and implied -

An authority is said to be express when it is given by words spoken or written. An authority is said to be implied when it is to be inferred from the circumstances of the case; and things spoken or written, or the ordinary course of dealing, may be accounted circumstances of the case.

Illustration

A owns a shop in Serampor, living himself in Calcutta, and visiting the shop occasionally. The shop is managed by B, and he is in the habit of ordering goods from C in the name of A for the purposes of the shop, and of paying for them out of A’s funds with A’s knowledge. B has an implied authority from A to order goods from C in the name of A for the purposes of the shop.

S 188. Extent of agent's authority -

An agent, having an authority to do an act, has authority do every lawful thing which is necessary in order to do so such act.An agent having an authority to carry on a business, has authority to do every lawful thing necessary for the purpose, or usually done in the course, of conducting such business.

Illustrations

(a) A is employed by B, residing in London, to recover at Bombay a debt due to B. A may adopt any legal process necessary for the purpose of recovering the debt, and may give a valid discharge for the same.

(b) A constitutes B his agent to carry on his business of a ship-builder. B may purchase timber and other materials, and hire workmen, for the purpose of carrying on the business.

S 189. Agent's authority in an emergency -

An agent has authority, in an emergency, to do all such acts for the purpose of protecting his principal from loss and would be done by a person or ordinary prudence, in his own case, under similar circumstances.

Illustrations

(a) An agent for sale may have goods repaired if it be necessary.

(b) A consigns provisions to B at Calcutta, with directions to send them immediately to C, at Cuttack. B may sell the provisions at Calcutta, if they will not bear the journey to Cuttack without spoiling.

S 190. When agent cannot delegate -

An agent cannot lawful employ another to perform acts which he has expressly or impliedly undertaken to perform personally, unless by the ordinary custom of trade a sub-agent may, or, from the nature or agency, a sub-agent must, be employed.

S 191. "Sub-agent" defined –

A "sub-agent" is a person employed by, and acting undue the control of, the original agent in the business of the agency.

S 192. Representation of principal by sub-agent properly appointed -

Where a sub-agent is properly appointed, the principal is, so far as regards third persons, represented by the sub-agent, and is bound by and responsible for his acts, as if he were an agent originally appointed by the principal.

Agent's responsibility for sub-agent: The agent is responsible to the principal for the acts of the sub-agent.Sub-agent's responsibility:

The sub-agent is responsible for his acts to the agent, but not to the principal, except in cases of fraud, or wilful wrong.

S 193. Agent's responsibility for sub-agent appointed without – authority

Where an agent, without having authority to do so, has appointed a person to act as a sub-agent stands towards such person in the relation of a principal to an agent, and is responsible for his act both to the principal and to third person; the principal is not represented, by or responsible for the acts of the person so employed, nor is that person responsible to the principal.

S 194. Relation between principal and person duly appointed by agent to act in business of agency -

When an agent, holding an express or implied authority to name another person to act for the principal in the business of the agency, has named another person accordingly, such person is not a sub-agent, but an agent of the principal for such part of the business of the agency as is entrusted to him.

Illustrations

(a) A directs B, his solicitor, to sell his estate by auction, and to employ an auctioneer for the purpose. B names C, an auctioneer, to conduct the sale. C is not a sub-agent, but is A’s agent for the conduct of the sale.

(b) A authorizes B, a merchant in Calcutta, to recover the moneys due to A from C & Co. B instructs D, a solicitor, to take legal proceedings against C & Co. for the recovery of the money. D is not a sub-agent, but is solicitor for A.

S 195. Agent's duty in naming such person -

In selecting such agent for his principal, an agent is bound to exercise the same amount of discretion as a man or ordinary prudence would exercise in his own case; and, if he does this, he is not responsible to the principal for the acts of negligence of the agent so selected.

Illustrations

(a) A instructs B, a merchant, to buy a ship for him. B employs a ship-surveyor of good reputation to choose a ship for A. The surveyor makes the choice negligently and the ship turns out to be unseaworthy and is lost. B is not, but the surveyor is, responsible to A.

(b) A consigns goods to B, a merchant, for sale. B, in due course, employs an auctioneer in good credit to sell the goods of A, and allows the auctioneer to receive the proceeds of the sale. The auctioneer afterwards becomes insolvent without having accounted for the proceeds. B is not responsible to A for the proceeds.

S 196. Right of person as to acts done forhim without his authority, effect of ratification -

Where acts are done by one person on behalf of another, but without his knowledge or authority, he may elect to ratify or to disown such acts. If he ratifies them, the same effects will follow as if they had been performed by his authority.

S 197. Ratification may be expressed or implied -

Ratification may be expressed or may be implied in the conduct of the person on whose behalf the acts are done.

Illustrations

(a) A, without authority, buys goods for B. Afterwards B sells them to C on his own account; B’s conduct implies a ratification of the purchase made for him by A.

(b) A, without B’s authority, lends B’s money to C. Afterwards B accepts interest on the money from C. B’s conduct implies a ratification of the loan

S 198. Knowledge requisite for valid ratification -

No valid ratification can be made by a person whose knowledge of the facts of the case is materially defective

S 199. Effect of ratifying unauthorized act forming part of a transaction -

A person ratifying any unauthorized act done on his behalf ratifies the whole of the transaction of which such act formed a part.

S 200. Ratification of unauthorized act cannot injure third person -

An act done by one person on behalf of another, without such other person's authority, which, if done with authority, would have the effect of subjecting a third person to damages, or of terminating any right or interest of a third person, cannot, by ratification, be made to have such effect.

Illustrations

(a) A, not being authorized thereto by B, demands, on behalf of B, the delivery of a chattel, the property of B, from C who is in possession of it. This demand cannot be ratified by B, so as to make C liable for damages for his refusal to deliver.

(b) A holds a lease from B, terminable on three months’ notice. C, an unauthorized person, gives notice of termination to A. The notice cannot be ratified by B, so as to be binding on A.

S 201. Termination of Agency -

An agency is terminated by the principal revoking his authority, or by the agent renouncing the business of the agency; or by the business of the agency being completed; or by either the principal or agent dying or becoming of unsound mind; or by the principal being adjudicated an insolvent under the provisions of any Act for the time being in force for the relief of insolvent debtors.

S 202. Termination of Agency, where agent has an interest in subject-matter -

Where the agent has himself an interest in the property which forms the subject-matter of the agency, the agency cannot, in the absence of an express contract, be terminated to the prejudice of such interest.

Illustrations

(a) A gives authority to B to sell A’s land, and to pay himself, out of the proceeds, the debts due to him from A. A cannot revoke this authority, nor can it be terminated by his insanity or death.

(b) A consigns 1,000 bales of cotton to B, who has made advances to him on such cotton, and desires B to sell the cotton, and to repay himself out of the price the amount of his own advances. A cannot revoke this authority, nor is it terminated by his insanity or death.

COMMENTS

Agent may enforce Contracts if personally enterested

A power of attorney executed in favour of an agent recording or recognizing an interest of the Agent/Attorney in the property which is the subject-matter of the Agency, cannot be revoked or terminated, even if the instrument does not state specifically that it is irrevocable, as then it would be a power coupled with an interest but a power of attorney simplicitor which merely authorised an agent to do certain acts in the name of or on behalf of the executant at any time in spite of the instrument that power of attorney be revoked or cancelled by the executant at any time in spite of the instrument stating that the Power of Attorney is irrevocable; Corporation Bank, Bangalore v. Lalitha H. Holla, AIR 1994 Kant 133.

S 203. When principal may revoke agent's authority -

The principal may, save as is otherwise provided by the last preceding section, revoke the authority given to his agent at any time before the authority has been exercised so as to bind the principal.

S 204. Revocation where authority has been partly exercised -

The principal cannot revoke the authority given to his agent after the authority has been partly exercised, so far as regards such acts and obligations as arise from acts already done in the agency.

Illustrations

(a) A authorizes B to buy 1,000 bales of cotton on account of A and to pay for it out of A’s moneys remaining in B’s hands. B buys 1,000 bales of cotton in his own name, so as to make himself personally liable for the price. A cannot revoke B’s authroty so far as regards payment for the cotton.

(b) A authorizes B to buy 1,000 bales of cotton on account of A, and to pay for it out of A’s money remaining in B’s hands. B buys 1,000 bales of cotton in A’s name, and so as not to render himself personally liable for the price. A can revoke B’s authority to pay for the cotton.

S 205. Compensation for revocation by principal, or renunciation by agent -

Where there is an express or implied contract that the agency should be continued for any period of time, the principal must make compensation to the agent, or the agent to the principal, as the case may be, for any previous revocation or renunciation of the agency without sufficient cause.

S 206. Notice of revocation or renunciation -

Reasonable notice must be given of such revocation or renunciation; otherwise the damage thereby resulting to the principal or the agent, as the case may be, must be made good to the one by the other.

S 207. Revocation and Renunciation may be expressed or implied -

Revocation and renunciation may be expressed or may be implied in the conduct of the principal or agent respectively.

Illustration

A empowers B to let A’s house. Afterwards A lets it himself. This is an implied revocation of B’s authority.

S 208. When termination of agent's authority takes effect as to agent, and as to third persons -

The termination of the authority of an agent does not, so far as regards the agent, take effect before it becomes known to him, or, so far as regards third persons, before it becomes known to them.

Illustrations

(a) A directs B to sell goods for him, and agrees to give B five per cent. commission on the price fetched by the goods. A afterwards by letter, revokes B’s authority. B after the letter is sent, but before he receives it, sells the goods for 100 rupees. The sale is binding on A, and B is entitled to five rupees as his commission.

(b) A, at Madras, by letter directs B to sell for him some cotton lying in a warehouse in Bombay, and afterwards, by letter revokes his authority to sell, and directs B to send the cotton to Madras. B after receiving the second letter, enters into a contract with C, who knows of the first letter, but not of the second for the sale to him of the cotton. C pays B the money, with which B absconds. C’s payment is good as against A.

(c) A directs B, his agent, to pay certain money to C. A dies, and D takes out probate to his will. B, after A’s death, but before hearing of it, pays the money to C. The payment is good as against D, the executor.

S 209. Agent's duty on termination o agency by principal's death or insanity -

When an agency is terminated by the principal dying or becoming of unsound mind, the agent is bound to take, on behalf of the representatives of his late principal, all reasonable steps for the protection and preservation of the interests entrusted to him.

S 210. Termination of Sub-agent's authority -

The termination of the authority of an agent causes the termination (subject to the rules herein contained regarding the termination of an agent's authority) of the authority of all sub-agents appointed by him.

S 211. Agent's duty in conducting principal's business -

An agent is bound to conduct the business of his principal according to the directions given by the principal, or, in the absence of any such directions, according to the custom which prevails in doing business of the same kind at the place where the agent conducts such business. When the agent acts otherwise, if any loss be sustained, he must make it good to his principal, and, if any profit accrues, he must account for it.

Illustrations

(a) A, an agent engaged in carrying on for B a business, in which it is the custom to invest from time to time, at interest, the moneys which may be in hand, on its to make such investments. A must make good to B the interest usually obtained by such investments.

(b) B, a broker in whose business it is not the custom to sell on credit, sells goods of A on credit to C, whose credit at the time was very high. C, before payment, becomes insolvent. B must make good the loss to A.

S 212. Skill and Diligence required from agent -

An agent is bound to conduct the business of the agency with as much skill as is generally possessed by persons engaged in similar business, unless the principal has notice of his want of skill. The agent is always bound to act with reasonable diligence, and to use such skill as he possesses; and to make compensation to his principal in respect of the direct consequences of his own neglect, want of skill or misconduct, but not in respect of loss or damage which are indirectly or remotely caused by such neglect, want of skill or misconduct.

Illustrations

(a) A, a merchant in Calcutta, has an agent, B, in London, to whom a sum of money is paid on A’s account, with orders to remit. B retains the money for a considerable time. A, in consequence of not receiving the money, becomes insolvent. B is liable for the money and interest, from the day on which it ought to have been paid, according to the usual rate, and for any further direct loss—as, e.g., by variation of rate of exchange—but not further.

(b) A, an agent for the sale of goods, having authority to sell on credit, sells to B on credit, without making the proper and usual enquiries as to the solvency of B. B at the time of such sale is insolvent. A must make compensation to his principal in respect of any loss thereby sustained.

(c) A, an insurance-broker employed by B to effect an insurance on a ship, omits to see that the usual clauses are inserted in the policy. The ship is afterwards lost. In consequence of the omission of the clauses nothing can be recovered from the underwriters. A is bound to make good the loss to B.

(d) A, a merchant in England, directs B, his agent at Bombay, who accepts the agency, to send him 100 bales of cotton by a certain ship. B, having it in his power to send the cotton, omits to do so. The ship arrives safely in Engalnd. Soon after her arrival the price of cotton rises. B is bound to make good to A the profit which he might have made by the 100 bales of cotton at the time of ship arrived, but not any profit he might have made by the subsequent rise.

COMMENTS

General

The defendant/respondent had grossly misconducted himself firstly when he communicated to the appellant that the goods had been purchased at the rate of Rs. 36 per pound when they had not been and further stating that these goods would be despatched as soon as the transporters strike was over. The defendant later on informed the appellant that the goods could not be purchased as their delivery was dependant on yet another party. The defendant had misinformed his principal and his misconduct squarely comes within section 212 of Contract Act; and the defendant must bear the brunt to pay the damages; Jayabharathi Corporation v. SV P.N. SN Rajasekara Nadar, AIR 1992 SC 596.

S 213. Agent's accounts - An agent is bound to render proper accounts to his principal on demand.

S 214. Agent's duty of communicate with principal –

It is the duty of an agent, in cases of difficulty, to use all reasonable diligence in communicating with his principal, and in seeking to obtain his instructions.

S 215. Right to principal when agent deals, on his own account, in business of agency without principal's consent -

If an agent deals on his own account in the business of the agency, without first obtaining the consent of his principal and acquainting him with all material circumstances which have come to his own knowledge on the subject, the principal may repudiate the transaction, if the case shows either that any material fact has been dishonestly concealed from him by the agent, or that the dealings of the agent have been disadvantageous to him

Illustrations

(a) A directs B to sell A’s estate. B buys the estate for himself in the name of C. A, on discovering that B has bought the estate for himself, may repudiate the sale, if he can show that B has dishonestly concealed any material fact, or that the sale has been disadvantageous to him.

(b) A directs B to sell A’s estate. B, on looking over the estate before selling it, finds a mine on the estate which is unknown to A. B informs A that he wishes to buy the estate for himself, but conceals the discovery of the mine. A allows B to buy, in ignorance of the existence of the mine. A, on discovering that B knew of the mine at the time he bought the estate, may either repudiate or adopt the sale at his option.

S 216. Principal's right to benefit gained by agent dealing on his own account in business of agency -

If an agent, without the knowledge of his principal, deals in the business 6f the agency on his own account instead of on account of his principal, the principal is entitled to claim from the agent any benefit which may have resulted to him from the transaction.

Illustration

A directs B, his agent, to buy a certain house for him. B tells A it cannot be bought, and buys the house for himself. A may, on discovering that B has bought the house, compel him to sell it to A at the price he gave for it.

S 217. Agent's right of retainer out of sums received on principal's account –

An agent may retain, out of any sums received on account of the principal in the business of the agency, all moneys due to himself in respect of advances made or expenses properly incurred by him in conducting such business, and also such remuneration as may be payable to him for acting as agent.

S 218 . Agent's duty to pay sums received for principal -

Subject to such deductions, the agent is bound to pay to his principal all sums received on his account.

S 219. When agent's remuneration becomes due -

In the absence of any special contract, payment for the performance of any act is not due to the agent until the completion of such act; but an agent may detain moneys received by him on account of goods sold, although the whole of the goods consigned to him for sale may not have been sold, or although the sale may not be actually complete.

S 220. Agent not entitled to remuneration for business misconducted -

An agent who is guilty of misconduct in the business of the agency is not entitled to any remuneration in respect of that part of the business which he has misconducted.

Illustrations

(a) A employs B to recover 1,00,000 rupees from C, and to lay it out on good security, B recovers the 1,00,000 rupees and lays out 90,000 rupees on good security, but lays out 10,000 rupees on security which he ought to have known to be bad, whereby A loses 2,000 rupees. B is entitled to remuneration for recovering the 1,00,000 rupees and for investing the 90,000 rupees. He is not entitled to any remuneration for investing the 10,000 rupees, and he must make good the 2,000 rupees to B.

(b) A employs B to recover 1,000 rupees from C. Through B’s misconduct the money is not recovered. B is entitled to no remuneration for his services, and must make good the loss.

S 221. Agent's lien on principal property -

In the absence of any contract to the contrary, an agent is entitled to retain goods, papers, and other property, whether movable or immovable, of the principal received by him, until the amount due to himself for commission, disbursements and services in respect of the same has been paid or accounted for to him.

COMMENTS

General

The lien of an agent extends only to the retention of the property till his dues are paid. At common law a legal lien merely confers on the holder of the articles in respect of which it was claimed, a passive right to detain the articles until the debt is paid. Such a lien cannot be enforced by sale of the goods; Kavita Trehan v. Balsara Hygiene Products Ltd., AIR 1992 Del 103.

S 222. Agent to be indemnified against consequences of lawful acts -

The employer of an agent is bound to indemnify him against the consequences of all lawful acts done by such agent in exercise of the authority conferred upon him.

Illustrations

(a) B, at Singapure, under instructions from A of Calcutta, contracts with C to deliver certain goods to him. A does not send the goods to B, and C sues B for breach of contract. B informs A of the suit, and A authorises him to defend the suit. B defends the suit, and is compelled to pay damages and costs, and incurs expenses. A is liable to B for such damages, costs and expenses.

(b) B, a broker at Calcutta, by the orders of A, a merchant there, contracts with C for the purchase of 10 casks of oil for A. Afterwards A refuses to receive the oil, and C sues B. B informs A, who repudiates the contract altogether. B defends, but unsuccessfully, and has to pay damages and costs and incurs expenses. A is liable to B for such damages, costs and expenses.

S 223. Agent to be indemnified against consequences of acts done in good faith -

Where one person employs another to do an act, and the agent does the act in good faith, the employer is liable to indemnify the agent against the consequences of that act, though it causes an injury to the rights of third persons

Illustrations

(a) A, a decree-holder and entitled to execution of B’s goods requires the officer of the Court to seize certain goods, representing them to be the goods of B. The officer seizes the goods, and is sued by C, the true owner of the goods. A is liable to indemnify the officer for the sum which he is compelled to pay to C, in consequence of obeying A’s directions.

(b) B, at the request of A, sells goods in the possession of A, but which A had no right to dispose of. B does not know this, and hands over the proceeds of the sale to A. Afterwards C, the true owner of the goods, sues B and recovers the value of the goods and costs. A is liable to indemnify B for what he has been compelled to pay to C, and for B’s own expenses.

S 224. Non-Liability of employer of agent to do a Criminal Act -

Where one person employs another to do an act which is criminal, the employer is not liable to the agent, either upon an express or an implied promise, to indemnify him against the consequences of that act.

Illustrations

(a) A employs B to beat C, and agrees to indemnify him against all consequences of the act. B thereupon beats C, and has to pay damages to C for so doing. A is not liable to indemnify B for those damages.

(b) B, the proprietor of a newspaper, publishes, at A’s request, a libel upon C in the paper, and A agrees to indemnify B against the consequences of the publication, and all costs and damages of any action in respect thereof. B is sued by C and has to pay damages, and also incurs expenses. A is not liable to B upon the indemnity.

S 225. Compensation to agent for injury caused by principal's neglect -

The principal must make compensation to his agent in respect of injury 1caused to such agent by the principal's neglect or want of skill.

Illustration

A employs B as a bricklayer in building a house, and puts up the scaffolding himself. The scaffolding is unskilfully put up, and B is in consequence hurt. A must make compensation to B.

S 226. Enforcement and Consequences of agent's contracts -

Contracts entered into through an agent, and obligations arising from acts done by an agent, may be enforced in the same manner, and will have the same legal consequences, as if the contracts had been entered into and the acts done by the principal in person.

Illustrations

(a) A buys goods from B, knowing that he is an agent for their sale, but not knowing who is the principal. B’s principal is the person entitled to claim from A the price of the goods, and A cannot, in a suit by the principal, set-off against that claim a debt due to himself from B.

(b) A, being B’s agent, with authority to receive money on his behalf, receives from C a sum of money due to B. C is discharged of his obligation to pay the sum in question to B.

S 227. Principal how far bound, when agent exceeds authority -

When an agent does more than he is authorised to do, and when the part of what he does, which is within his authority, can be separated from the part which is beyond his authority, so much only of what he does as is within his authority is binding as between him and his principal.

Illustration

A, being owner of a ship and cargo, authorizes B to procure an insurance for 4,000 rupees on the ship. B procures a policy for 4,000 rupees on the ship, and another for the like sum on the cargo. A is bound to pay the premium for the policy on the ship, but not the premium for the policy on the cargo.

S 228. Principal not bound when excess of agent's authority is not separable -

Where an agent does more than he is authorised to do, and what he does beyond the scope of his authority cannot be separated from what is within it, the principal is not bound to recognise the transaction.

Illustration

A, authorizes B to buy 500 sheep for him. B buys 500 sheep and 200 lambs for one sum of 6,000 rupees. A may repudiate the whole transaction.

S 229. Consequences of notice given to agent -

Any notice given to or information obtained by the agent, provided it be given or obtained in the course of the business transacted by him for the principal, shall, as between the principal and third parties, have the same legal consequence as if it had been given to or obtained by the principal.

Illustrations

(a) A is employed by B to buy from C certain goods, of which C is the apparent owner, and buys them accordingly. In the course of the treaty for the sale, A learns that the goods really belonged to D, but B is ignorant of that fact. B is not entitled to set-off a debt owing to him from C against the price of the goods.

(b) A is employed by B to buy from C goods of which C is the apparent owner. A was, before he was so employed, a servant of C, and then learnt that the goods really belonged to D, but B is ignorant of that fact. In spite of the knowledge of his agent, B may set-off against the price of the goods a debt owing to him from C.

S 230. Agent cannot personally enforce, nor be bound by, contracts on behalf of principal -

In the absence of any contract to that effect, an agent cannot personally enforce contracts entered into by him on behalf of his principal, nor is he personally bound by them.

PRESUMPTION OF CONTRACT TO THE CONTRARY. -

Such a contract shall be presumed to exist in the following cases :-

(1) where the contract is made by an agent for the sale or purchase of goods for a merchant resident abroad;

(2) where the agent does not disclose the name of his principal; and

(3) where the principal, though disclosed, cannot be sued.

Comments

When agent can be sued

Before the agent can be sued it must be pleaded and shown that the principal is undisclosed and the contract, the breach of which is sued on was entered into by the agent as having contracted personally. Where the contract is entered into by agent contracting on behalf of a foreign principal who is named and disclosed, the agent can not be sued personally nor made personally liable; Midland Overseas v. “CMBT Tana”, AIR 1999 Bom 401.

S 231. Rights of Parties to a contract made by agent not disclosed -

If an agent makes a contract with a person who neither knows, nor has reason to suspect, that he is an agent, his principal may require the performance of the contract; but the other contracting party has, as against the principal, the same rights as he would have had as against the agent if the agent had been the principal. If the principal discloses himself before the contract is completed, the other contracting party may refuse to fulfil the contract, if he can show that, if he had known who was the principal in the contract, or if he had known that the agent was not a principal, he would not have entered into the contract.

S 232. Performance of contract with agent supposed to be principal -

Where one man makes a contract with another, neither knowing nor having reasonable ground to suspect that the other is an agent, the principal, if he requires the performance of the contract, can only obtain such performance subject to the rights and obligations subsisting between the agent and the other party to the contract.

Illustration

A, who owes 500 rupees to B, sells 1,000 rupees worth of rice to B. A is acting as agent for C in the transaction, but B has no knowledge nor reasonable ground of suspicion that such is the case. C cannot compel B to take the rice without allowing him to set-off A’s debt

S 233. Right of person dealing with agent personally liable -

In cases where the agent is personally liable, a person dealing with him may hold either him or his principal, or both of them, liable.

Illustrations

A enters into a contract with B to sell him 100 bales of cotton, and afterwards discovers that B was acting as agent for C. A may sue either B or C, or both, for the price of the cotton.

S 234. Consequence of Inducing agent or principal to act on belief that principal or agent will be held exclusively liable-

When a person who has made a contract with an agent induces the agent to act upon the belief that' the Principal only will be held liable, or induces the principal to act upon the belief that the agent only will be held liable, he cannot afterwards hold liable the agent or principal respectively.

S 235. Liability of pretended agent -

A person untruly representing himself to be the authorised agent of another, and thereby inducing a third person to deal with him as such agent, is liable, if his alleged employer does not ratify his acts, to make compensation to the other in respect of any loss or damage which he has incurred by so dealing.

S 236. Person falsely contracting as agent not entitled to performance -

A person with whom a contract has been entered into in the character of agent, is not entitled to require the performance of it if he was in reality acting, not as agent, but on his own account.

S 237. Liability of principal inducing belief that agent's unauthorized acts were authorized -

When an agent has, without authority, done acts or incurred obligations to third persons on behalf of his principal, the principal is bound by such acts or obligations, if he has by his words or conduct induced such third persons to believe that such act and obligations were within the scope of the agent's authority.

Illustrations

(a) A consigns goods to B for sale, and gives him instructions not to sell under a fixed price. C, being ignorant of B’s instructions, enters into a contract with B to buy the goods at a price lower than the reserved price. A is bound by the contract.

(b) A entrusts B with negotiable instruments endorsed in blank. B sells them to C in violation of private orders from A. The sale is good.

S 238. Effect, on agreement, of misrepresentation or fraud by agent -

Misrepresentations made, or frauds committed, by agents acting in the course of their business for their principals, have the same effect on agreements made by such agents as if such misrepresentations or frauds had been made or committed, by the principals; but misrepresentations made, or frauds, committed, by agents, in matters which do not fall within their authority, do not affect their principals.

Illustrations

(a) A, being B’s agent for the sale of goods, induces C to buy them by a misrepresentation, which he was not authorized by B to make. The contract is voidable, as between B and C, at the option of C.

(b) A, the captain of B’s ship, signs bills of lading without having received on board the goods mentioned therein. The bills of lading are void as between B and the pretended consignor.

(58) Narandas Morardas Gajiwala v SPAM Papammal AIR 1967 SC 333

Agent sued principal for certain accounts – Principals in turn sued agent for promissory notes – Agent held that an oral agreement by principal to not enforce promissory notes during period of agency. – TC ordered decree against promissory notes but held that it should be adjusted with any sum found due after accounting in the agent’s suit – Principles appealed to HC and failing there appeal to the Apex Court

Court considered the maintainability of a suit by an agent against the principle for accounts. Negating the contention that only a principal can sue the agent for rendering proper accounts and not vice versa, (as Section 213 of the Contract Act provided that an agent is bound to render proper accounts to his principal on demand without a corresponding provision in the Contract Act enabling the agent to sue the principal for accounts), this Court held:

"In our opinion, the statute is not exhaustive and the right of the agent to sue the principal for accounts is an equitable right arising under special circumstances and is not a statutory right Though an agent has no statutory right for an account from his principal, nevertheless there may be special circumstances rendering it equitable that the principal should account to the agent. Such a case may arise where all the accounts are in the possession of the principal and the agent does not possess accounts to enable him to determine his claim for commission against his principal. The right of the agent may also arise in a exceptional case where his remuneration depends on the extent of dealings which are not known to him or where he cannot be aware of the extent of the amount due to him unless the accounts of his principal are gone into."

Held oral agreement proved in HC. Upheld the HC decision.

(59) Kuchwar Lime and Stone Co v Dehri Rohtas Light Rly & Co Ltd AIR 1969 SC 193

A quantity of coal was booked by a Colliery to the appellant Company carriage to Banjari station on the respondent Railway’s line and the freight on the consignment was to be paid by the appellant Company. The Company declined to take delivery of a part of the consignment which reached Banjari on November 12, 1954 on account of inferior quality of the coal. After some correspondence between the parties as well as with the Coal Controller, the Railway sold the coal by public auction on June 2, 1955, after serving a notice on the appellant. It thereafter filed a suit against the Company claiming outstanding amount of freight and demurrage charges for 202 days during which six wagons in which the coal was loaded were detained and ‘sought a decree for Rs. 17,625/14/- after giving credit for the amount realized from the sale of the coal.

Issues

(i) Whether consignee liable to pay after refusing to accept consignment?

(ii) If railway entitled to demurrage for full period or obliged to unload and claim demurrage only for reasonable period?

Judgement

Trial court: The trial court granted a decree for about Rs. 1,620/- with interest, but in appeal the High Court decreed the Railway’s claim in full.

High Court: The High Court modified the decree passed by the Trial Court and decreed the claim of the Railway against the Company in full.

Supreme Court

Contentions

Company

(i) The Company being a consignee of the goods booked by the Colliery there was no privity of contract between the Company and the Railway and no claim for demurrage or freight lay at the instance of the Railway against the Company;

(ii) In any event the Railway ought to be awarded demurrage for only 22 days out of the total period for which the wagons were detained.

(iii) It is only in those cases where delivery of goods is taken by the consignee that the liability to pay demurrage may be imposed upon him.

J.C. Shah, J.

It is clear that the Colliery supplied coal in pursuance of the “sanction order” in favour of the Company and arranged to transport it in wagons which were allotted for that purpose by order of the Deputy Coal Commissioner. Under the forwarding notes the freight was made payable by the Company. In these circumstances, it would be reasonable to infer that the Colliery was acting as an agent of the Company in entering into the contract of consignment and the liability for payment of freight and of demurrage charges for failure to take delivery of the goods lay upon the Company.

The High Court erred in holding that the Company was liable to pay demurrage for the full period of 202 days. Railway was entitled to demurrage for the detention of wagons for only one month and cannot claim the entire amount. The Railway was in the position of a bailee qua the Company and was bound to minimize the loss. It could have sold off the coal under s, 56 of the Railways Act. Even assuming that in view of the Colliery Control Order, the Railway could not sell the coal without the Coal Commissioner’s sanction, it could have unloaded the coal from the wagons and put the wagons to use. Hence, the consignee could be liable only for wharfage.

(w.r.t 3rd contention of the company) There was no force in the contention that it is only in those cases where delivery of goods is taken by the consignee that the liability to pay demurrage may be imposed upon him. Even where the consignee does not ultimately take delivery, if the wagon is detained for his benefit, normally the Railway would be entitled to hold him liable for demurrage.

(60) Lakshminarayan Ram Gopal v Govt of Hyderabad AIR 1954 SC 367

Honorable Judges of the Supreme Court pointed out the distinction between an agent, a servant and an independent contractor and quoted the following passage from Halsbury's Laws of

England (Hail-sham Edn., Vol. I, p. 193, para 345), as follows (p. 456 of 25 ITR) :

"An agent is to be distinguished on the one hand from a servant and on the other from an independent contractor. A servant acts under the direct control and supervision of his master, and is bound to conform to all reasonable orders given to him in the course of his work; an independent contractor, on the other hand, is entirely independent of any control or interference and merely undertakes to produce a specified result employing his own means to produce that result. An agent though bound to exercise his authority in accordance with all lawful instructions which may be given to him from time to time by his principal, is not subject in his exercise to the direct control or supervision of the principal."

Factors distinguishing servant from agent - The distinction between a servant or an agent can be summarized as follows : (i) generally a master can tell his servant what to do and how to do it; (ii) generally a principal cannot tell his agent how to carry out his instructions; (iii) a servant is under more complete control than an agent; (iv) generally, a servant is a person who not only receives instructions from his master but is subject to his master’s right to control the manner in which he carried out those instructions; an agent receives his principal’s instructions but is generally free to carry out those instructions according to his own discretion; (v) generally a servant qua servant has no authority to make contracts on behalf of his master; generally, the purpose of employing an agent is to authorize him to make contracts on behalf of his principal; (vi) generally an agent is paid commission upon effecting the result which he has been instructed by his principal to achieve; (vii) generally a servant is paid wages or salary

Bhagwati J observed that when a company is incorporated it does not necessarily imply that the company has come into existence for the purpose of carrying on a business. Further observed that the objects of an incorporated company as laid down in a memorandum of association is certainly not conclusive of the question whether the activities of the company amount to carrying on a business.

(61) Snow White Indl Corpn v Collector of Central Excise AIR 1989 SC 1555

Held that mere commonness of partners and Directors between the buyer and seller was not sufficient to treat the buyer as a 'related person' even if entire production was sold through them. We have examined the file of C.A: 9850/95. What we find is that the appeal was filed by the Revenue which was barred by limitation and delay was condoned subject to payment of cost Rs. 500/- payable within four weeks to the Counsel for respondents. Since the cost had not been paid the appeal was dismissed by order dated April 4, 1996. This dismissal of the appeal, therefore, does not help the appellant. The Appellate Tribunal in the order, which was impugned in C.A. 9850/95, found that the assessee had sold 95 out of 96 arc lamps to a company of which one of the partners of the assessee firm was a Director. On this Department took the view that the company was a related person and sought to assess the goods at a higher price at which the assessee sold the goods to the buyer company. Appellate Tribunal was of the view that merely because there was some common Directors between the assessee and the company that itself would not be sufficient ground for hold- ing that both were related persons. Appellate Tribunal found that no evidence regarding mutuality of interest had been brought on record except the sale of goods by the assessee to the buyer company. It said that while this fact of sale may create one way interest of the company in the business of the assessee firm it was not indicative of the interest of the assessee in the business of the buyer company.

eSaurabhChopra

Monday, 26 November 2012

Semester III - Business Association 1

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