Partners are agents of the firm for business purposes, so acts within the usual course bind the firm and all partners to third parties, subject to statutory limits, agreed restrictions known to outsiders, and protections for good‑faith third parties. The Indian Partnership Act, 1932 codifies these rules on partner authority, firm liability, holding out, and effects of retirement, insolvency, and minor admission.
Partner as agent
- Each partner is an agent of the firm and of the other partners for acts done in the firm’s business; acts done in the firm name with intent to bind the firm generally bind all partners.
- Third parties may rely on apparent authority when dealing in the ordinary course, enhancing commercial certainty in routine transactions.
Implied authority
- Implied authority covers acts done “to carry on, in the usual way, business of the kind carried on by the firm,” such as buying/selling trading stock, drawing or endorsing negotiable instruments in a banking firm, or hiring staff as customary.
- Statutory exclusions: Without express authority or trade custom, a partner cannot submit disputes to arbitration, open a bank account in personal name for the firm, compromise or relinquish claims, withdraw suits, admit liability in proceedings, acquire/transfer immovable property, or enter into a partnership on the firm’s behalf.
Extension and restriction of authority
- Partners may extend or restrict a partner’s implied authority by agreement; however, a contractual restriction does not bind a third party unless the third party knows of it.
- Statutory restrictions under the Act bind all third parties universally, whereas private restrictions are effective only if within the outsider’s knowledge.
Partner’s and firm’s liability
- Acts of a partner within authority bind the firm; partners are jointly and severally liable for obligations incurred while they are partners.
- For acts outside authority, the acting partner may be personally liable unless the firm ratifies the act or the third party proves apparent authority from firm conduct.
Firm’s misapplication and wrongful acts
- The firm is liable if a partner or employee, acting within apparent authority, receives money/property for the firm and misapplies it, or if the firm receives money/property and it is misapplied while in the firm’s custody.
- The firm is also liable for loss or injury caused to third parties by a partner’s wrongful act or omission in the ordinary course of business or with the firm’s authority.
Holding out
- Any person representing or knowingly permitting representation as a partner is liable as though a partner to third parties who extend credit on the faith of such representation (partner by holding out/estoppel).
- Retirement or admission does not, by itself, negate liability by holding out for prior representations unless proper public notice is given and third parties lack reliance.
Rights of a transferee of a partner’s interest
- A transferee of a partner’s share in profits is entitled to receive the transferring partner’s share of profits and to an account on dissolution, but has no right to interfere in conduct, demand accounts, or inspect books during subsistence of the firm.
- The transferee’s rights are derivative and subject to the existing partnership agreement and firm obligations.
Minor admitted to the benefits of partnership
- Legal position: A minor cannot be a full partner but may be admitted to benefits with consent of all partners; the minor’s share is liable for firm acts, but the minor is not personally liable.
- Options on majority: On attaining majority (or knowledge of admission), the minor must elect within the statutory period to become a partner or not; failure to give public notice results in deemed election to become a partner with personal liability prospectively.
Retirement
- A partner may retire with consent of all partners, per agreement, or by notice in a partnership at will; liability to third parties continues for acts before retirement and after retirement until public notice is given, subject to dealings with persons having no knowledge of being a partner.
- An outgoing partner may be discharged from future liability by an agreement among partners and creditors (novation).
Insolvency and death
- Insolvency of a partner results in cessation of partnership with that partner from the date of adjudication; the insolvent partner’s estate is not liable for acts of the firm after that date, and the firm is not liable for acts of the insolvent thereafter.
- Death of a partner ends authority as to the deceased; liability of the estate is confined to acts before death, and public notice rules affect continuing ostensible authority vis‑à‑vis third parties.
Banking and documentation pointers
- Mandates should reflect any restrictions on authority, and public notices should be promptly issued upon retirement or dissolution to cut off continuing liability to outsiders.
- For minors admitted to benefits, ensure records of consent, share allocation, and timely election/notice on majority to prevent unintended personal liability.
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