- What are the liabilities imposed on Partners when dealing with third parties?
- Does the Indian Partnership Act impose any liability on the firm for acts of its partners?
- What is the extent of the liability imposed on the partners of a firm?
- Do partners still bear liabilities after they have ceased to be partners?
- Do partners still bear liabilities after the firm has been dissolved?
Where a right exist, as of necessity, a duty or legal obligation also exist. In law, liability means the legal obligations or duties imposed by the law. Partnerships enjoy a variety of legal rights, and in the same vein, the law imposes legal obligations on them.
In this article, we shall be considering the liability or legal obligations placed by the law on partnerships under the Indian Partnership Act, 1932. Our discourse shall flow in the following order
- Provisions of the Indian Partnership Act, 1932 on Liability of Partners
- Liability of Partners on Dissolution of Firm
Partners are persons who agree to jointly run a business, make profit and share the profit amongst themselves. The partnership business runs through the partners, and as such, actions of the partners, jointly or severally, can build or destroy the business, especially where such acts involve contractual relationships with third parties.
When the actions of a firm or partners of a firm are wrongful to a third party, the Indian Partnership Act, 1932, has made ample provisions on who bears the liability, in what circumstance. The liability imposed under the Act ranges from liability of the partners for the act of the firm to liability for misapplication by partners, and liability of the firm for the acts of the partners.
A look at the relevant sections of the Act will show that both the firm and its partners are liable for wrongs done to outsiders. The circumstance determines who bears the liability.
Provisions of the Indian Partnership Act, 1932 on Liability of Partners
The Indian Partnership Act, 1932 makes specific provisions which outline the legal obligations obtained in a partnership. Sections 25, 26 and 27 of the Act, are the relevant provisions for this discourse. The sections state the liability of partners for the firm’s act, liability of the firm, liability of a firm for misappropriations by partner, respectively.
- Liability of Partners for the Act’s of a Firm while he is still a Partner:
Section 25 of the Act provides as follows – “Every partner is liable, jointly with all other partners and also severally for all the acts of the firm, done while he is a partner”. This section aligns with the basic principle of law on joint and several liabilities of a partnership.
The implications of the above provision are as follows:
- Where the firm is indebted or insolvent, every partner, whether active, dormant/sleeping, will be liable to contribute to pay off the whole debt owed by the firm to third parties. Thus, funds can be drawn from the personal assets of the partners, with or without their consent.
- Third parties can sue the partners of a firm, whether individually or jointly, for every wrongful act of the firm.
In Nilkanth Balappa Managave Shop vs. M/s Raj & Co. AIR 1982 Bom. 288, it was held by the Bombay High Court that partners are jointly and several liable and a creditor of a firm may sue any of the partners or all of them together.
This liability exists only for the period a person remains a partner of a firm. If a partner cuts all connections with the firm and ceases to be a partner of the firm, he cannot be held liable for acts of the firm carried out after he has ceased to be a partner. However, he will still be held liable for acts of the firm which occurred while he was a partner.
- Liability of the Firm:
Partners are agents of the firm. Therefore, where they carry out acts on behalf of the firm, and such acts are within their express or implied authority, such acts are deemed to be acts of the firm.
If a partner carries out a wrongful act in the ordinary course of the firm’s business, section 26 of the Act, imposes the liability for such wrongful act on the firm. Section 26 provides as follows: “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 as a partner loss or injury is caused to any party or any penalty is incurred, the firm is liable therefore to the same extent as the partners”.
To impute liability on the firm, the elements contained in section 26 must be present. The elements are:
- The wrongful act must have been carried out by the partner in the ordinary course of the firm’s business; and
- The partner must have carried out such act under the authority of all other partners.
- Liability of Firm for Misapplication by Partners
In the course of dealing with the firm or any of its partners, a third party may be required to deposit or give to the firm money or property for specific purposes. In the event that such money or property is misapplied, the law makes provisions on who bears the liability of remedying the loss occasioned to such third party. Section 27 of the Act, imposes on the firm the legal obligation in such a circumstance.
From the section, the following conclusions are drawn:
- Where a partner misapplies money or property which he received from a third party while acting within his authority, the firm is liable to make good the loss occasioned to the third party.
- Where in the course of its business, a firm receives money or property and same is misapplied by any of the firm’s partners, the firm is liable to make good the loss occasioned to the third party.
Liabilities of a Partner on Dissolution of a Firm
Once a firm is dissolved, section 45 of the Act requires that the partners issue a public notice of this fact. This is to prevent the partners from incurring any liabilities which may be occasioned by the act of any partner after the dissolution of the firm.
Where the partners fail to issue the mandatory notice, the liability of the partners continue; as such, the partners will be liable for any subsequent wrongful act done by any of the partners to a third party after the dissolution of the partnership.
However, the liability occasioned by failure to issue a public notice will not affect an insolvent partner, a sleeping or dormant partner who retires, or the estate of a deceased partner. In Begel vs. Miller, 1903, King Bench, the court held that the estate of a deceased partner is not liable for the actions of a firm done after the partner had died.
In the course of carrying out the business of the firm, a firm or partners of a firm will always enter into contractual relationships with third parties. In other to protect such third-parties from wrongs which may be occasioned to them by the acts of the firm or acts of the partners of the firm, statutory liabilities are imposed on partnerships. Sections 25, 26 and 27 of the Indian Partnership Act, 1932, make adequate provisions on the liability of the firm and partners when dealing with outsiders.
The circumstances surrounding the wrong occasioned to the third-party determines who bears the liability. A third party can always elect to sue the partners of the firm, individually or jointly. A partner who ceases to be involved in the partnership is not liable for acts done after he has ceased to be a partner. However, he remains liable for acts which were done while he was still a partner. The dissolution of a firm does not absolve the partners of subsequent liability except where the partners have issued the requisite public notice announcing the dissolution of the partnership.
Quick Questions and Answers
Question: The death of a partner automatically absolves him from every liability in the firm. True or false.
Answer: False. The death of a partner does not automatically absolve him from every liability. The estate of a partner will be liable for acts committed before the death of the partner. However, the estate will not be liable for subsequent acts.
Question: Mr. Dee is a partner of XYZ firm. XYZ is involved in the sell of real estate. Mr. Dee obtained on credit, 50 vehicles from a car dealer in the name of XYZ and with the consent of his fellow partners. The car dealer intends to file a law suit against XYZ firm for the payment of the vehicles. XYZ is liable to make the payments. True or false.
Answer: False. To impute the liability of Mr. Dee’s act on the firm, the wrongful act must have been carried out in the ordinary course of the firm’s business. XYZ firm is in the business of selling real estate and not car sales. XYZ is not liable to for the conduct of Mr. Dee.
Question: XYZ firm was dissolved. The partners agreed to go their separate ways. Two weeks after the dissolution, Mr. Dee made a fraudulent sale of real estate to Chicken Republic, and in the name of XYZ. Chicken Republic found out that it was defrauded by Mr. Dee. Chicken Republic has instituted an action against all the partners of XYZ firm. The lawyer to the partners has advised the partners that they are not liable to Chicken Republic because XYZ firm was dissolved before the fraudulent sale was made by Mr. Dee. Is the lawyer’s statement true or false?
Answer: It depends. The lawyer’s statement would be true if there is evidence of the fact that a public notice was issued by the partners in accordance with section 45. If the partners had failed to issue the requisite notice, the lawyer’s statement is false, because the partners liability continues, despite the dissolution of XYZ firm.