Implied authority of a partner

As held in Cox vs Hickman 1860, if two or more agree to carry on a business, each of them is a principal and
each is an agent for the other. Further, each is bound by the other's contract in carrying on the trade as much as a
single principal would be bound by the act of an agent. This principle has been incorporated in section 18 of
IPA 1932. It says that a partner is the agent of the firm for the purposes of the firm. Its complimentary principle
is incorporated in section 25 which says that every partner is liable jointly with all other partners and also
severally for all acts of the firm done while he is a partner.

This brings us to the implied authority of the partners. Since, a partner is an agent of the firm, his act binds
every other partner and the firm. For example, if a partner A gives a check in the firm's name to a creditor and if
the check is unpaid, partner B is equally liable even though B's signature does not appear on the check. This
authority to bind the firm is called "implied authority". It has been incorporated in section 19 of IPA 1932,
which says that the act of the partner which is done to carry on, in the usual way, business of the kind carried on
by the firm, binds the firm.

The following essential conditions are required for the exercise of Implied Authority to bind the firm -

1. Usual way - The act must be done to carry on the business in the usual way. Any drastic action, which is
out of ordinary, requires the consent of all the partners. For example, if a firm deals in coal, a partner has the
implied authority to enter into a contract to buy and sell coal, but not gold. The implied authority of partners is
limited to only those acts which are done in usual way and related to the business of the kind carried on by the
firm.

2. Mode of doing act to bind firm - Section 22 specifies that in order to bind the firm, the act must be
done in firm's name or in any manner expressing or implying the intention to bind the firm. For example, if a
partner A obtains a loan in his name without mentioning anything about the firm, it will not bind the firm. It
must be clear from the action that it is intended as being done by the firm.
In Devji vs Magan Lal AIR 1965, a partner had taken a sublease in his own name instead of the firm's name.
Further, there did not seem to be any intention to bind the firm. SC held that the firm was not bound by the lease
as the parties did not intend to bind the firm by this transaction.

Power of implied authority also has the following restrictions -

There are two kinds of restrictions - Statutory restrictions, as imposed by section 19 (2) and Restrictions
imposed by partnership deed and those imposed by the agreement between the partners. Statutory restrictions
are binding upon all the partners whether they know them or not, while the second type of restrictions are
applicable only when the partners have knowledge about them.

Statutory restrictions - In the absence of any usage or custom of trade to the contrary, a partner is not allowed
to -

1. Refer a dispute to arbitration.

2. open a banking account on behalf of the firm in his own name.

3. compromise or relinquish any claim or portion of the claim by the firm.

4. withdraw a suit or proceeding filed on behalf of the firm.

5. admit any liability in a suit or proceeding against the firm.

6. acquire immovable property on behalf of the firm.

7. transfer immovable property belonging to the firm.

8. enter into partnership on behalf of the firm.

Contractual Restrictions - As per section 20, Partners may, by contract, put additional restrictions or give
additional powers to the partners. However, any act which falls under the implied authority but is restricted by
the contract, will bind the firm unless certain conditions are satisfied. A firm can avoid its liability in such case,
if the person dealing with the partner knows the restriction or the person dealing with the partner does not know
or does not believe that the partner is a partner in the firm.

In Sanganer Dal & Flour Mill vs F C I AIR 1982, a partner of the firm, who had the implied authority to enter
the contract with FCI to purchase goods, entered in to a contract with FCI to purchase Dal. The contract had an
arbitration clause. In this case, the question was whether the partner had the power to enter into such a contract?
It was held by SC that the partner was within his implied authority to enter into a contract to purchase goods
from the corporation because it was normal for their business and the contract was done in the usual way. Thus,
the contract was valid even if it contained an arbitration clause.

Admission of Partners (Section 23)

Since a partner is an agent of the firm and can bind the firm by his acts, an admission or representation by him
concerning the affairs of the firm, is evidence against the firm. This is incorporated in section 23, which says
that an admission or representation made by a partner concerning the affairs of the firm is evidence against the
firm if it is made in ordinary course of business.
The key factor in this is that the admission or representation must be made in ordinary course of business. This
will also not include the representation by which a partner increases his scope of authority. For example, if a
partner executes a bill of exchange for payment of his personal debts and on inquiry he makes a false statement
that the other partners have authorized him, the said bill of exchange will not bind the firm.

Incoming partners
The mutual relations of the partners is based on the principle that they have to be just and fair to each other and
are bound to carry on the business of the firm to the greatest common advantage. Thus, it is important for each
partner to have trust in each other. Therefore, section 31 lays down a general principle that a partner cannot be
introduced into a firm without the consent of all the existing partners. However, the existing partners may, by
contract, authorize a partner to introduce a new partner. A contract may also be made that upon death of a
partner, a new partner may be nominated in his place. If there are only two partners and one of them dies, there
is no question of nominating a new partner because the partnership ends as soon as the partner dies.
Also, a new partner is not liable for any act of the firm done before he became a partner.

Outgoing partners
In many situations, a partner may have to leave the partnership. A partner may leave in the following ways -
CANEID
323232333442

1. With the consent of all other partners - According to section 32(1) (a), a partner may retire with he
consent of all the other partners.

2. With an express agreement by partners - Section 32 (1)(b) provides that a partner may retire with an
express agreement by partners. This means that if there is a provision in the contract deed of partnership that
allows a partner to retire, a partner can retire using that agreement.
In Vishnu Chandra vs Chandrika Prasad Agarwal AIR 1983, 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. SC held that it is consistent with the provisions of section 31(1)(b) and the
partner can retire according to the deed.

3. By giving notice to all other partners in case of partnership at will - According to section 32(1)(c), a
partner may retire where the partnership is at will, by giving notice in writing to all the other partners of his
intention to retire.

4. By Expulsion (Can a partner be removed? How?) - According to section 33 (1) a partner may not be
expelled by any majority of the partners, save in exercise of good faith of powers conferred by contract between
the partners. Thus, to expel a partner by majority of the partners, the following two conditions must be satisfied
-

1. Such a power must be conferred by contract between the partners. This means, the contract of
partnership must clearly give this power to the partners otherwise, a partner cannot be expelled.

2. The power to expel a partner conferred under the contract must be exercised in good faith. Thus,
if majority of the partners try to expel a partner with evil intention and without any reasonable cause, it is not
possible.

In Carmichael vs Evans 1904, a partner was caught traveling without ticket and was convicted on this
charge. He was expelled by the majority of the partners. It was held that the expulsion was justified.
In Blisset vs Daniel 1953, a partner was expelled by the majority of the partners because he opposed the
appointment of the son of a partner on the post of manager. It was held that the expulsion was invalid.

5. On insolvency of a partner - According to section 34(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 firm is
thereby dissolved.

6. By Death - Upon death of a partner, his association with the firm ends and he ceases to be a partner. His
estate will not be liable for the acts of the firm after his death. According to section 42(c), subject to the contract
between the partners, a firm is dissolved by the death of a partner. This means that partners may by contract that
by death of a partner the firm will not be dissolved but if there is no such contract, the firm will be dissolved.

Liability of a retired partner

The liability of a retired partner may be of two types - For acts done before retirement and for acts done after
retirement.

1. Acts before retirement - The general rule is that a partner is liable for all acts done before retirement
even after he is retired. However, a retiring partner may be discharged of his liabilities for act before retirement
by an agreement between the retiring partner and the remaining partners. The agreement should specify that all
such liabilities will be borne by the remaining partners. A notice to this effect must also be given to the
creditors.

2. Acts after retirement - The general principle is that a retired partner is not liable for the acts of the
firm done after his retirement. However, he must give a public notice of his retirement to escape liabilities.

Partnership with a minor

By virtue of section 10 and 11 of Indian Contract Act 1872, a minor is not considered capable of giving consent
and thus any contract with a minor is void ab initio. Therefore, a contract of partnership with a minor is also
void. In other words, a partnership cannot be done with a minor and a minor cannot become a partner of a firm.
However, a minor can be admitted to the benefits of the partnership as per section 30 (1), by the consent of all
the partners. In Venkatarama Iyer vs Balayya AIR 1936, it was held that there must be some positive act of
the partners so that the court may infer that the minors have been admitted to the benefits of the partnership.
Merely assuming that the minors were admitted would be an error in law and is not sufficient.
Further, in Addl Commr. of Income Tax vs Uttam Kumar Pramod Kumar 1975, a partnership deed was not
signed by minor or anybody on his behalf. It was held that to admit the minor to the benefits of partnership it is
necessary to have an agreement between the partners and the minor. Since the property and money of the minor
can be used for the firm, an agreement is necessary between the partners and someone on behalf of the minor.

Rights and Liabilities of a minor

He has the following rights -

1. to such share of the property and of the profits of the the firm as may be agreed upon.
 2. to access, copy, and inspect the records of the firm.

3. his share is liable for the acts of the firm but he is not personally liable for them.

4. may sue the partners for his share of profits of the firms when severing his connection with the firm.

5. As per Section 30(5), he has a right of election to become or not to become the partner of the firm after
becoming a major. Upon attaining the age of majority, the minor can, within six months , give public notice that
he has elected to become or not to become a partner of the firm. If he fails to give such notice, he will be
become partner of the firm at the expiry of six months.

Illustration - In Shivganda R Patil vs Chandrakanth Neelkanth Sadalge AIR 1965, C a minor was admitted
to the benefits of the partnership between A and B. The partnership became indebted and was dissolved while C
was still a minor. Upon majority, C did not exercise the option of election. Later on, the creditor started
insolvency proceedings against the partners and impleaded C as well in the proceedings. It was held that a
minor cannot be impleaded in insolvency proceedings against the firm on the ground that he had become a
major after dissolution of the firm. At the time of his majority the firm had ceased to exist and thus there was no
question of electing to become or not to become a partner.

Registration of a firm
Chapter 7 of IPA 1932 deals with the registration of firms. Under this act, registration of firms is not
compulsory. There is no penalty for not registering. However, the effects of non-registration are so severe that
usually firms opt to register.
Consequences of not registering

1. Suits between partners and Firm - A per Section 69 (1) unless a firm is registered and the party is
shown as a partner, no suit can be filed by or on behalf of any partner against the firm. In Loonkaran Sethia vs
Mr Ivan E John AIR 1977, the firm was not registered and the plaintiff filed the suit to enforce an agreement
entered into by a partner of the firm. The suit was filed on behalf of the firm and was for its benefit. SC
observed that a partner of an unregistered firm cannot bring a suit to enforce a right arising out of a contract
falling within the ambit of section 69. It held that the suit was unmaintainable.

2. Suit between firm and third parties - Until the firm is registered, no suit can be filed by the firm
against third parties. In Ram Adhar vs Rama Kirat Tiwary AIR 1981, the plaintiff sold bricks to the
defendant. The defendant did not pay the price to the partnership firm and so the firm filed the suit. It was held
that since the firm was not registered the suit was unmaintainable.

3. Bar to claim set off and other proceedings - According to section 69(3), suit cannot be filed for claim
of set off or other proceedings to enforce a right arising from a contract.

Exception
According to section 69(3)(a), the provisions of section 61(1) and (2) shall not affect the enforcement of any right
to sue for the dissolution of the firm, or for accounts of the dissolved firm or any right or power to realize the
property of dissolved firm. Thus, a partner of a dissolved firm can sue a third party for releasing the property of
the firm.

Procedure for registration

As per section 58, registration of a firm can be done any time by sending a statement in prescribed form 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. The form should also be accompanied with the prescribed fee. The form must contain -

1. the firm name

2. place or principal place of the business of the firm.

3. the names of any places where the firm carries on business.

4. the date when each partner joined the firm.

5. the names in full and permanent address of the partners.

6. the duration of the firm.

The statement must be signed by all of the partners or by their agents specially authorized in this behalf. Each
person signing the statement shall also verify it in the manner prescribed. There is a restriction on the name of
the firm that it cannot contain certain words such as Crown, Emperor, Empress, King etc. that give an
impression that the firm is associated with the govt.

When the registrar is satisfied that the provisions of section 58 have been fulfilled, he shall record an entry in
the Register of Firms and shall file the statement.