RETIREMENT OF PARTNER : JUDICIAL

INTERPRETATION

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Table of contents

1 Introduction
4
2 Comparative
analysis.6
3 Incoming and outgoing partners.11
4 Judicial pronouncements
16
5 Conclusion
27
6 Bibliography
28

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 Introduction
A partnership is an arrangement where parties, known as partners, agree to cooperate to
advance their mutual interests. The partners in a partnership may be individuals, businesses,
interest-based organizations, schools, governments or combinations organizations may
partner together to increase the likelihood of each achieving their mission and to amplify their
reach. In what is usually called an alliance, governments may partner to achieve their national
interests, sometimes against allied governments holding contrary interests, as occurred during
World War II and the Cold War. In education, accrediting agencies increasingly evaluate
schools by the level and quality of their partnerships with other schools and a variety of other
entities across societal sectors. Some partnerships occur at personal levels, such as when two
or more individuals agree to domicile together, while other partnerships are not only personal,
but private, known only to the involved parties.

Partnerships present the involved parties with special challenges that must be navigated unto
agreement. Overarching goals, levels of give-and-take, areas of responsibility, lines of
authority and succession, how success is evaluated and distributed, and often a variety of
other factors must all be negotiated. Once agreement is reached, the partnership is typically
enforceable by civil law, especially if well documented. Partners who wish to make their
agreement affirmatively explicit and enforceable typically draw up Articles of Partnership. It
is common for information about formally partnered entities to be made public, such as
through a press release, a newspaper ad, or public records laws.

While partnerships stand to amplify mutual interests and success, some are considered
ethically problematic. When a politician, for example, partners with a corporation to advance
the latter's interest in exchange for some benefit, a conflict of interest results; consequentially,
the public good may suffer. While technically legal in some jurisdictions, such practice is
broadly viewed negatively or as corruption.

Governmentally recognized partnerships may enjoy special benefits in tax policies. Among
developed countries, for example, business partnerships are often favoured over corporations
in taxation policy, since dividend taxes only occur on profits before they are distributed to the
partners. However, depending on the partnership structure and the jurisdiction in which it

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operates, owners of a partnership may be exposed to greater personal liability than they
would as shareholders of a corporation. In such countries, partnerships are often regulated via
anti-trust laws, so as to inhibit monopolistic practices and foster free market competition.
Enforcement of the laws, however, varies considerably. Domestic partnerships recognized by
governments typically enjoy tax benefits, as well.

RESEARCH METHODOLOGY

For the research undertaken, researcher has relied upon Doctrinal Methodology

SOURCES OF DATA

For the research undertaken, researcher has relied upon secondary sources of data.

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COMPARITIVE ANALYSIS WITH DIFFERENT
COUNTRIES

Under common law legal systems, the basic form of partnership is a general partnership, in
which all partners manage the business and are personally liable for its debts. Two other
forms which have developed in most countries are the limited partnership (LP), in which
certain limited partners relinquish their ability to manage the business in exchange for limited
liability for the partnership's debts, and the limited liability partnership (LLP), in which all
partners have some degree of limited liability.

There are two types of partners. General partners have an obligation of strict liability to third
parties injured by the Partnership. General partners may have joint liability or joint and
several liabilities depending upon circumstances. The liability of limited partners is limited to
their investment in the partnership.

A silent partner is one who still shares in the profits and losses of the business, but who is
uninvolved in its management, and/or whose association with the business is not publicly
known; these partners usually provide capital.

Australia

Summarising s. 5 of the Partnership Act 1958, for a partnership in Australia to exist, four
main criteria must be satisfied. They are:

Valid Agreement between the parties; To carry on a business this is defined in s. 3 as "any
trade, occupation or profession";In Common meaning there must be some mutuality of
rights, interests and obligations;

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View to Profit thus charitable organizations cannot be partnerships (charities are typically
incorporated associations under Associations Incorporations Act 1981 (Vic))

Partners share profits and losses. A partnership is basically a settlement between two or more
groups or firms in which profit and loss are equally divided

Canada

Statutory regulation of partnerships in Canada falls under provincial jurisdiction. A

partnership is not a separate legal entity and partnership income is taxed at the rate of the
partner receiving the income. It can be deemed to exist regardless of the intention of the
partners.1 Common elements considered by courts in determining the existence of a
partnership are that two or more legal persons: Are carrying on a business In common with a
view to profit.

Hong Kong

A partnership in Hong Kong is a business entity formed by the Hong Kong Partnerships
Ordinance, which defines a partnership as "the relation between persons carrying on a
business in common with a view of profit" and is not a joint stock company or an
incorporated company.2 If the business entity registers with the Registrar of Companies it
takes the form of a limited partnership defined in the Limited Partnerships Ordinance. 3
However, if this business entity fails to register with the Registrar of Companies, then it
becomes a general partnership as a default.4

India

1 "UVic Business Law Clinic - Partnerships

2 "CAP 38 PARTNERSHIP ORDINANCE". Hklii.org

3 "Hong Kong Partnerships Ordinance, Chapter 38, section 3

4 "CAP 37 LIMITED PARTNERSHIPS ORDINANCE"

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According to section 4 of the Partnership Act of 1932, which applies in both India,
Partnership is defined as the relation between two or more persons who have agreed to share
the profits of a business run by all or any one of them acting for all? This definition
superseded the previous definition given in section 239 of Indian Contract Act 1872 as
Partnership is the relation which subsists between persons who have agreed to combine their
property, labour, skill in some business, and to share the profits thereof between them. The
1932 definition added the concept of mutual agency. The Indian Partnerships have the
following common characteristics:

1) A partnership firm is not a legal entity apart from the partners constituting it. It has limited
identity for the purpose of tax law as per section 4 of the Partnership Act of 1932.5

2) Partnership is a concurrent subject. Contracts of partnerships are included in the Entry no.7
of List III of The Constitution of India (the list constitutes the subjects on which both the
State government and Central (National) Government can legislate i.e. pass laws on).6

3) Unlimited Liability. The major disadvantage of partnership is the unlimited liability of

partners for the debts and liabilities of the firm. Any partner can bind the firm and the firm is
liable for all liabilities incurred by any firm on behalf of the firm. If property of partnership
firm is insufficient to meet liabilities, personal property of any partner can be attached to pay
the debts of the firm.7

4) Partners are Mutual Agents. The business of firm can be carried on by all or any of them
for all. Any partner has authority to bind the firm. Act of any one partner is binding on all the
partners. Thus, each partner is agent of all the remaining partners. Hence, partners are
mutual agents. Section 18 of the Partnership Act, 1932 says "Subject to the provisions of
this Act, a partner is the agent of the firm for the purpose of the business of the firm"8

5 Limited Partnerships Ordinance, Chapter 37, section 4

6 "Indian Partnership Act, 1932"

7 "Indian Partnership Act, 1932"

8 http://indiankanoon.org/doc/214776/

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5) Oral or Written Agreements. The Partnership Act, 1932 nowhere mentions that the
Partnership Agreement is to be in written or oral format. Thus the general rule of the Contract
Act applies that the contract can be in be 'oral' or 'written' as long as it satisfies the basic
conditions of being a contract i.e. the agreement between partners is legally enforceable. A
written agreement is advisable to establish existence of partnership and to prove rights and
liabilities of each partner, as it is difficult to prove an oral agreement.9

6) Number of Partners is minimum 2 and maximum 50 in any kind of business activities.

Since partnership is agreement there must be minimum two partners. The Partnership Act
does not put any restrictions on maximum number of partners. However, section 464 of
Companies Act 2013, and Rule 10 of Companies (Miscellaneous) Rules, 2014 prohibits
partnership consisting of more than 50 for any businesses, unless it is registered as a company
under Companies Act, 2013 or formed in pursuance of some other law. Some other law
means companies and corporations formed via some other law passed by Parliament of India.

7) Mutual agency is the real test. The real test of partnership firm is mutual agency set by
the Courts of India, i.e. whether a partner can bind the firm by his act, i.e. whether he can act
as agent of all other partners.10

United Kingdom limited partnership

A limited partnership in the United Kingdom consists of: One or more people called general
partners, who are liable for all debts and obligations of the firm; and one or of the firm
beyond the amount contributed. Limited partners may not: Draw out or receive back any part
of their contributions to the partnership during its lifetime; or Take part in the management of
the business or have power to bind the firm. If they do, they become liable for all the debts
and obligations of the firm up to the amount drawn out or received back or incurred while
taking part in the management, as the case may be.

United States

The federal government of the United States does not have specific statutory law governing
the establishment of partnerships. Instead, each of the fifty states as well as the District of

9 Indian Contract Act 1872

10 Jairus Banaji (2007), "Islam, the Mediterranean and the rise of capitalism", Historical Materialism 15 (1): 47
74, Brill Publishers.

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Columbia has its own statutes and common law that govern partnerships. These states largely
follow general common law principles of partnerships whether a general partnership, a
limited partnership or a limited liability partnership. In the absence of applicable federal law,
the National Conference of Commissioners on Uniform State Laws has issued non-binding
model laws (called uniform act) in which to encourage the adoption of uniformity of
partnership law into the states by their respective legislatures. This includes the Uniform
Partnership Act and the Uniform Limited Partnership Act. Although the federal government
does not have specific statutory law for establishing partnerships, it has an extensive and
hyper detailed statutory scheme for the taxation of partnerships in the Internal Revenue Code.
The IRC is Title 26 of the United States Code wherein Subchapter K of Chapter 1 creates tax
consequences of such great scale and scope that it effectively serves as a federal statutory
scheme for governing partnerships.

Islamic Law

The Qirad and Mudarabas institutions in Islamic law and economic jurisprudence were
developed in the medieval Islamic world, when Islamic economics flourished and when early
trading companies, big businesses, contracts, bills of exchange and long-distance
international trade were established.11

11 I n many legal systems, salaried partners are not technically "partners" at all in the eyes of the law. However, they
are nonetheless jointly liable as their firms "hold them out" as partners.

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 INCOMING AND OUTGOING PARTNERS

Incoming Partner (Sec. 31)12:

Subject to contract between the partners, no person can be admitted as a partner into a firm
without the consent of all the existing partners. Mutual confidence and trust among the
partners being an essential ingredient of an ideal partnership it is very much natural that there
must be consent of all the partners to the introduction of a new partner, unless the partners
have already agreed otherwise.

Liability of an incoming partner:

A new partner becomes liable for the debts and acts of the firm only from the date he is
admitted as a partner. He cannot be held liable for the acts of the old firm.

A new partner may, however, agree to be liable for debts existing prior to his admission but
such agreeing will not give to a prior creditor the right of suing him because of absence of
privity of contract.

He will be liable to other co-partners only. The creditors can make him liable if he had agreed
with them, expressly or impliedly, for being liable towards them for the past debts.

12 Indian Partnership Act,1932

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Retirement of a Partner (Sec. 32):13

A partner is said to retire when the surviving partners continue to carry on the business of the
firm, and the member retiring ceases to be a partner.

Method of retirement:

In case of a particular partnership a partner may retire with the consent of all the other
partners, unless otherwise agreed.

In case of partnership at will a partner may retire by giving a notice in writing to all the
other partners of his intention to retire, unless otherwise agreed.

Liability of a retiring partner:

A retiring partner continues to be liable for the acts of the firm done before his retirement. He
may, however, free himself from his liability towards third parties for the debts of the firm
incurred before his retirement by an agreement with such third parties and the partners of the
reconstituted firm discharging the outgoing partner from all liabilities.

The remaining partners alone cannot give this freedom to the retiring partner. He may be
discharged only if the creditors agree.

A retiring partner also continues to be liable for the acts of the firm, even after retirement,
until public notice is given of the fact of retirement. Similarly, the partners of the
reconstituted firm continue, to be liable for the acts of the retired partner though done after
retirement, until public notice is given of the retirement14.

Such a public notice may be given either by the retiring partner or by any partner of the
reconstituted firm. A dormant or sleeping partner, however, need not give any such notice.

Rule of mis-joinder of parties:

The rule of law that separate suit for separate contract and hence no two distinctly liable
parties can be sued under one suit is known as the rule of mis-joinder of parties.

13 ibid

14 http://www.dateyvs.com/laws1/general-laws/indian-partnership-act-1932/

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This rule should be remembered while making an incoming or outgoing partner liable for the
debts of the firm. For example, if A, B, C and D are partners and D retires without giving
public notice and E is admitted to the partnership on the same very day, i.e., on 1 July 1993,
an innocent creditor, who advances money to the firm after 1 July 1993, can make all of
them, i.e., A, B, C, D and E individually liable or existing partners, i.e., A, B, C, and jointly
liable.

He cannot make A, B, C, D and E jointly liable in one suit because all of them were never
partners of the same partnership at one time.

Restrictions imposed on a retiring partner. Section 36 has imposed the following restrictions
on a retiring partner:

1. He must not use the name of the firm. Although he has a right to carry on a competing
business.

2. He cannot represent himself to the public as carrying on the business of the old firm, e.g.,
as a branch or otherwise.

3. He must not canvass the old customers of the firm.

Some of these restrictions, however, may be removed by a contract between the outgoing and
the other partners. On the other hand, additional restrictions may be imposed by means of a
contract, e.g., the retiring partner may be prohibited from starting a competing business
within a specified period or within specified local limits.

Right of a retiring partner in certain cases to share subsequent profits (Sec. 37)15:

If any member of a firm ceases to be a partner and the business of the firm is carried on
without any final settlement of accounts with him, then, in the absence of a contract to the
contrary, he or his legal representative has an option either:

(a) To claim 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 (i.e., to claim profits in capital
ratio); or

(b) To claim interest at the rate of six per cent per annum on the amount of his share in the
property of the firm.

15 ibid

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Expulsion of a Partner (Sec. 33):

A partner may be expelled from a firm by majority of the partners only if, (a) the power to
expel has been conferred by contract between the partners, and (b) such a power has been
exercised in good faith for the benefit of the firm.

The partner who is being expelled must be given reasonable notice and opportunity to explain
his position and to remove the cause of his expulsion (Nemi Dass vs. Kunj Behari).

If the expulsion is mala fide the same is void and the irregularly expelled partner will not
cease to be a partner. He may get himself reinstated with the help of the court. Of course he
cannot claim any damages for wrong expulsion.

The rights and liabilities of an expelled partner are exactly the same as that of a retiring
partner.

Insolvency of a Partner (Sec. 34)16:

Where a partner in a firm is adjudicated as 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 will
depend upon the agreement of partnership between the partners.

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.

It is to be noted that, unlike a retiring partner, an insolvent partner is not required to give a
public notice of his being adjudicated insolvent in order to absolve himself from liability for
future acts of the firm.

The insolvent partners share in the firms assets will be used for firms debts first and
whatever remains will be utilised for the insolvent partners personal debts.

Death of a Partner (Sec. 35):

16 ibid

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Although on the death of a partner a firm is dissolved, but if the other partners so agree the
firm may not be dissolved [Sec. 42 (c)]. Where a firm is not dissolved, the estate of a
deceased partner is not liable for any act of the firm done after his death. His estate is liable
only for liabilities undertaken during his life time. No public notice of death is required to
relieve the deceased partners estate from future liabilities.

It is important to note that the provisions of Section 36 (Restrictions imposed on retiring

partner) and Section 37 (Right of retiring partner to share subsequent profits in certain cases),
which have been discussed under the heading Retirement of a Partner, 17 are also applicable
when partner ceases to be a partner by expulsion, insolvency or death.

17 ibid

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 JUDICIAL PROUNCEMENT (CASE STUDY)

Meenakshi Achi And Anr. vs P.S.M. Subramanian Chettiar And ... on 13 February,
1956Bench: G Menon, Ramaswami JUDGMENT Ramaswami, J.

1. This is an appeal preferred against the decree and judgment of the learned Subordinate Judge of
Devakottai in O. S. No. 137 of 1951.

2. The facts are :-- Defendants 1 and 4 and the late Palaniappa Chettiar, husband of defendant 2 and
the adoptive father of defendant 3, were carrying on a money-lending business in partnership under
the name and style of P. S. SM. Firm in Burma. Palaniappa Chettiar died on 30-12-1932 surviving
him his widow, who is defendant 2. It is the case for the plaintiff that the widow was taken in as a
partner in the place of her deceased husband and that the firm continued to function with defendants 1
and 4 and defendants Meenakshi Achi as partners.

3. The plaintiff P. S. M. Subramanian Chet-tiar's moneys were in deposit with this firm through the
Maral of V. V. of Ariyaludi, since dead. This depositing was in April 1928. It is the case for the
plaintiff that the new firm assumed liability to pay the debt and consequently that he, the creditor, has
agreed to accept the new firm as his debtor and to discharge the old partnership from its liability.

The new firm has been making payments now and then towards this deposit and by 13-4-1941 the
plaintiff's money in deposit in this firm had amounted to Rs. 7813-6-6, the interest stipulated being the
current rate of interest prevailing in Rangoon plus one anna. Towards the balance of the amount due
under this deposit a kaiyeluthu letter, described as a promissory note, was executed under date 13-4-
1941 (Ex. AD which is reproduced below :

"P. S. SM. Sitkwin Ariyakudi V. V. Maral Karalkudi PS. M. Subramanian Chettiar 1st Chitrai of Vishu
year (13-4-1041) Executed by Muthukaruppan Chettiar The amount due from us in settlement of our
previous accounts is Rs. 7.873-6-6. We have credited in your name the said Bum of rupees seven
thousand eight hundred seventy-three annas six & pies six only with interest at Re. 0-1-0 over and

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above the Rangoon nadappu rate of interest. On the money being demanded we shall pay to your
order the principal together with interest thereon and take return of this letter. (Sd.) P. S. SM. Agent,
Muthukaruppan Ohettiar." Payments have been made subsequently and those payments have been
endorsed on the back of Ex. A1. These payments have the bar of limitation. Though the balance was
demanded by a registered notice dated 20-10-1951 to defendants 1 to 4, they have been evading and
no payments have been made. (17) Bearing these factors in mind we have got to examine only the
contentions of defendant 2 Meenakshi Achi in these appeals.

The contentions of Meenakshi Achi are as follows :

(1) The Maral has not been proved;

(2) The suit document is not a promissory note and the endorsements on its back are forgeries;

(3) Defendant 2 has never been a partner of this firm;

(4) Even if she is considered to be a partner during the interrugnum between her husband's death and
before her adopted son defendant 3, was taken in as a partner (date unspecified), this debt is not
binding on her because it has not been shown that the new partnership assumed the liability to pay the
debt and secondly the creditor has not been shown to have agreed to accept the new firm as his debtor
and to discharge the old partnership from its liability; and (5) The suit is, in any event, barred by
limitation.

18. 'Point 1' : It is idle to contend that the Maral has not been proved. Two of the partners who were
equally liable viz., Subramanian Chettiar (defendant 1) and Somasundaram Chettiar (defen-dant 4)
admit the deposit. The telegram Ex. A34 dated 1-4-1928. the letter Ex. A35 dated 12-4-1928, the
Vaddi Chittai Ex. A-36 and the Vaddi Chittai Ex. A-37 referring to the Kaiyeluthu letter relating to the
Maral deposit, the letter Ex. A-18 dated 8-9-1932 referring to the Kaiyeluthu letter in the name of V.
V. Maral P. S. M. Subramanian Chetti of Ariyakudi as having been delivered to the said person, the
Vaddi Chitai Ex. A-38, Ex. A-19 the letter written by Meenakshi Achi calling for the particulars of
Maral debts, the Vaddi Chittais Exs. A-39, and A-40 and the entry in the account book Ex. A-41
evidencing the suit transaction and the endorsements on the back of Ex. A-1, marked as Exs. A-2 to A-
7. all elearlv show that the deposit pleaded by the plaintiff is true.

In fact it is not the case for this Meenakshi Achi that there was no depositing and improving of the
amount of the plaintiff but her case is only that defendant I was managing and she knows nothing,
which is found to be false, and she is putting the plaintiff to strict proof. The depositing was spoken to
during the trial by the plaintiff Subramanian Chettiar as well as by defendant 1 Subramanian Chettiar.
Their evidence stood unshaken in cross-examination and has been accepted by the learned
Subordinate Judge. This plaintiff has given a registered lawyer's notice preceding the suit under Ex.
A-12 and it is significant that there has been no denial of liability by defendant 2.

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It is in evidence that this Meenakshi Achi was receiving throughout the balance-sheets etc., from the
suit firm showing thereby that she could not have been ignorant of the suit transaction, as pretended to
by her now. Therefore the learned Subordinate Judge who had an opportunity of seeing this
Meenakshi Achi in the box as D. W. 1 has rightly disbelieved her evidence and this is a circum-stance
entitled to weight. On point (1) we therefore find that the depositing of the amount for improvement
as pleaded by the plaintiff is true.

19. 'Point 2' : That the suit document Is not a promissory note has not been raised in the lower Court
and both parties have proceeded only on the footing that it was a promissory note. But even assuming
for the sake of arguments that it is not a promissory note, the plaintiff cannot be straightaway non-
suited because the suit has been tried as one based upon the depositing of the amount, it was being
treated as such and utilised as such by the Sitkwin firm and payments were being made thereunder as
such and the suit was filed setting out all these facts for recovery of the money due under that original
debt.

This suit also has not been disposed of under presumptions arising under the Negotiable Instruments
Act. In fact it was the plaintiff and his witness who first got into the witness-box and filed all the
relevant documentary evidence and defendant 2 then got Into the box and filed her documentary
evidence. There is no question of any bar of limitation by this suit not being treated as a suit on a
promissory note, because it is common ground that the demand for the return of the deposit amount
was well within the period of limitation prescribed.

The only two points of substance urged in this connection are that the suit document has been signed
by P.S.SM. Agent Muthukaruppan Chettiar and secondly, that the endorsements on the back of Ex. A-
1 appear to have been written at a stretch. In regard to the first point we have the evidence of the
plaintiff and we are unable to see why the agent of the firm should not sign the promissory note on
behalf of the firm.

Secondly, though some of the endorsements on the back of the promissory note look like having been
made with same ink it is significant that not a single question was put to the plaintiff or defendant 1 in
the lower Court about this. The trial has gone on on the footing that these endorsements had been
made on different dates and not at one stretch. Otherwise it stands to common sense that when
defendant 2 was straining to disown her liability, she would not have neglected this aspect of the
matter.

In addition some of the endorsements in the middle appear to be in different inks. There are also
corresponding entries in the account books of the firm in regard to the payments made under these
endorsements and they arc not denounced as non-genuine. Therefore point (2) also fails.

20. 'Point 3' : A partnership is defined by 6. 4 replacing the repealed Section 239 Contract Act &
widening it (Birdichand v. Harakchand. AIR 1940 Nag 211 (A)) as "the relation subsisting between

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persons who have agreed to share the profits of a business, carried on by all or any of them acting for
all".

As the definition shows, a partnership consists of three essential elements: (i) it must be the result of
an agreement between several persons, (ii) the agreement must be to share the profits of a business
and (Hi) the business must be carried on by all or any of them acting for all. All the three above
essentials must exist before a partnership can come into existence; and there must be an intention to
become partners: per Lord Esher Sutton & Co. v. Grey, (1894) 1 Q. B. 285(B).

As to (i) we have to remember that a partnership cannot be the result of status but only of a
contractual agreement between the various parties. (See 40 Am. Jur. 145 -- Tests of Judicia of
Partnership), it is pointed out by Section 5 which further goes on to say that the members of an
undivided Hindu family carrying on a joint family business are not necessarily partners. Of course this
does not mean that there can be no partnership between the members of a joint Hindu family to carry
on a family business in partnership; Jamunadhar v. Jamunaram, AIR 1944 Cal 138 : 48 Cal WN
203CC). But this is not the case here.

Partnerships are of two kinds, namely, (i) partnerships at will and (ii) partnerships for a fixed period.
(see Section 7).

On the death of a partner in the absence of a contract, express or implied, to the contrary, a firm is
dissolved : see Section 42(c), even though the partnership be for a definite number of years.

In the absence of a contract to the contrary, no person shall be introduced as a new partner into a firm
without the consent of all the existing partners: see Section 31(1). The general idea is that the consent
of all the existing partners is required to the introduction of a new partner so that the firm may work
harmoniously. Lindley, pp. 435-436; Love-grove v. Nelson, (1834) 1 My & K 1 (20) (D); Byrne v.
Reid. (1902) 2 Ch. 735 (E).

In addition, a new partnership may be by an oral agreement or in writing. Again, it may be express or
implied. It neeci not be express and can arise out of mutual understanding evidenced by a consistent
course of conduct and by express admission of the parties concerned. Tajammal Hussain v. Ahmad
Ali, AIR 1937 Oudh 438 (F); In re K. Narasayya, (G); Jakiuddin v. Vithoba, AIR 1939 Nag 301 (H):
Chotte Lal v. Raj Mal, AIR 1951 Nag 448 (I); Haji Isa Haji Noor Finn v. Saru Bai', AIR 1938 Nag
324(J). See Lindley p. 105.

21. In determining whether a particular group of persons constitutes a partnership regard is to be had
to the real relation between the parties as shown by all relevant facts taken together. The question
whether a particular group of persons constitutes a partnership or not, is often a difficult one to decide.

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No general rule can be laid down in this connection. No doubt sharing of profits will be an important
criterion but as laid down by the House Of Lords in Cox v. Hickman, (1860) 8 HLC 268 (K), it is not
conclusive. Taking part in the conduct of the business is another important element to be considered,
though with a similar qualification. This can be shown by books of account, by testimony of clerks,
agents and other persons, and letters and admissions and in short by any of the modes by which facts
can be established.

The books of account will usually give a good indication as to whether the parties are partners or not.
The reason is that partnership accounts are generally maintained in a different way than is the case
where one or more of the parties are lenders. Even this however is not an infallible guide.

As Section 6 says all the relevant facts must be scrutinised in each case in order to determine whether
a particular set of persons are partners or not. AIR 1937 Oudh 438(P); Commr. of I. T. v. Kikabhai,
(1930) 4 ITC 178: (AIR 1930 Nag 6) (L); British Cotton Growers Association v. Commr. of I. T.,
(1937) 5 ITR 279 : (AIR 1937 Lah 338) (M); Debt Parshad v. Jai Ram Das, (N) ; Madho Prasad v.
Gouri Dutt, AIR 1939 Pat 323 (O); Chimanrani Motilal v. Jayantilal, AIR 1939 Bom 410(P);
Raghumall v. O. A. Calcutta, AlR 1924 Cal 424 (Q); Hakam Rai v. Ganga Ram, AIR 192G Lah 340
(R); Chokalinga v. Muthuswami, AIR 1925 Mad 768 (S); English Cases: Davis v. Davis (1894) 1 Ch
393 (T); In re Young Ex parte Jones, (1896) 2 QB 484 (U); Walker v. Hirsch, (1884) 27 Ch. D. 460
(V); Adam v. Newkiggins. (1888) 13 AC 308 at p. 315 (W). For detailed discussion and cases, see
Lindley, pp. 105 et seq.).

22. Once admitted as partner, the rules as to relations of partners with third persons are contained in
Sections 18 to 30. Section 18 lays down the fundamental rule of the law of partnership via., that
subject to the provisions of the Act, a partner is the agent of the firm for all purposes of the business
of the firm. The authority of a partner is defined in Sections 19 to 22 and the effect of admission by a
partner in Section 23 and the effect of notice to a partner in Section 24.

Sections 25 to 27 deal with the question of the firm's Jiabiiity for (i) contract (ii) for torts and (iii) for
misappropriation of third person's property by a partner. As regards the contractual liability, Section
25 provides that every partner is jointly and severally liable for all acts of the firm while he was a
partner.

Every partner is liable to the utmost farthing of his property for the debts and the engagements of the
firm and the decree-holder is under no obligation to levy execution against the property of the firm
before having recourse to the separate property of the partner; nor is he under any obligation to levy
execution against the partners rateably; but he may select any one or more of them to levy execution
against him or them until the decree is satisfied leaving all questions of contribution to the partners

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themselves. Lindley, pp. 260-61; Sections 11, 49 and 50 of Order 21, Civil P. C. No device or
contrivance will enable a partner to escape from his or her liability under the partnership.

As stated in the Report of the Special Committee making a departure from the English Act of 1890
this section makes the liability of partners joint and several in accordance with Section 43, Indian
Contract Act: See Lukmldas Khimji v. Purshotam Hari, 6 Bom 700 (X) ; Motilal v. Gellabhai, 17 Bom
6 (Y); Narayana Chetti v. Lakshmana Chetti, 21 Mad 256 (Z); Md. Askari v. Radhe Ram Singh (1900)
22 All 307 (Z-1); Hemendra Coomar v. Rajendra Lall, 8 Cal 35-3 (73.).

23. Under Section 32 a partner may retire (i) with the consent of all the partners; (ii) by virtue of an
express agreement between the partners and (iii) in case of a partnership at will, by giving notice in
writing to all other partners of his intention to retire. Such a partner, however, continues to be liable to
third parties for acts of the firm, after his retirement, until public notice of his retirement as required
by Section 72 has been given, either by himself or by the other partners (Clauses (3) and (4) of
Section 32).

As regards liability for acts of the firm done before retirement, the retiring partner remains liable for
the same, unless, as Section 32(2) provides. On the words of Underbill (p. 79) a tripartite agreement is
made by him with the third parties concerned and the partners of the reconstituted firm, discharge him
from such liability.

Even where partners agree amongst themselves that the continuing partners shall be liable for the
obligation of a retiring partner, such an agreement cannot per se affect the rights of the creditors being
res inter alios acta. Such agreement may be either express or may be implied by a course of dealing
between the third parties and the new firm, after knowledge of his retirement. But it will not be
presumed and if it exists will have to be strictly proved. Eenson v. Hadfield, (1844) 4 Hare 32 (37)
(Z3). This refers to the subject of "novation" for which Section 62, Contract Act provides. Scarf v.
Jardine, (1882) 7 AC 345 at p. 350 (Z4). Retirement is not the same as dissolution. On retirement of a
part-ner, the firm continues to exist as such, which is not the case when a partnership is dissolved.

24. Bearing these principles in mind, if we examine the facts of this case, we find that on the death of
Palaniappa, the partnership at will stood automatically dissolved. Thereupon two of the remaining
partners have taken in this Meenakshi Achi as a partner and the old business has been run under a
different style and vilasam. It will be remembered that at that stage Meenakshi Achi had not adopted
defendant 3 and it was only in 1937 that she did so.

That this Meenakshi Acht thus became a partner of the new firm is evidenced by the following facts.
She gives her own version as to how she became a partner in the agreement of 1941. The
correspondence which has been filed in this case, in the shape of letters written by this Meenakshi
Achi, shows that she was taking an active interest in the management of the business of this firm as a
partner.

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It is also clear that balance-sheets etc., were being sent to her and she was scrutinising them. In fact
she has appointed one of her own nominees as an agent in Burma in order to improve the conduct of
the business there realize the outsandings and discharge the liabilities.

It is also the admitted case of this Meenakshi Achi, and in fact it is on that footing that she filed her
suit on the two deposit letters, O. S. No. 22 of 1950, that she became a partner in the Kha-jang firm
and had an eight anna share therein. There is no reason why when she admittedly became a partner of
the Khajang firm, she should not have become a partner of the Sitkwin firm. The partnership of this
Meenakshi Achi in the Sitkwin firm is in addition spoken to by the plaintiff and defendant 1 arid
nothing has been elicited in their cross-examination to discredit their testimony.

It is unnecessary to multiply these details to show that this Meenakshi Acni was admitted as a partner
in the Sitkwin firm after the death of her husband and when the new firm was constituted that she
actively participated in the management of the business as a partner and that she had net retired from
that partnership in accordance with the provisions of the Indian Partnership Act. It need not be pointed
out that this Meenakshi Achi could not have occupied herself legally the dual role of guardian and a
partner.

There can be no partnership between the same individual acting on the one hand as the guardian of the
minor and on the other as a partner in his or her individual capacity. In re Mohan Lal, (1942) 10 ITR
219 (Z5). See also Lachman Das v. Commr. of I. T., (1948) 16 ITR 35: (AIR 1948 PC 8) (Z6). The
only point of substance urged in favour of the contention that Meenakshi Achi was not a partner itwo-
fold viz., that in the other suits filed against Meenakshi Achi as well as in the present suit allegations
have been made suggesting as if Meenakshi Achi was not a partner but only the guardian of her minor
adopted son, the present defendant 3.

Secondly, in O. S. No. 131 of 1944 the three partners who were found entitled to shares were held to
be Somasundara, Subramania and Meyyappa. In regard to the former, the plain provisions of the
Partnership Act can only be displaced by contracts to the contrary and the alleged custom of the
Nattukottai Chettys is neither here nor there.

In regard to the suit O. S. No. 131 of 1944, it will be remembered that the present plaintiff was not a
party to that suit and he will not be bound by what the three persons alleged as between themselves
adjudicated and got.

25. Therefore, on point (3) it has to be held that defendant 2 Meenakshi Achi continued throughout as
a partner of the Sitkwin firm and is therefore liable for the suit debt both out of the assets of the firm
and also personally.

26. Point (4) : When a person has been introduced as a partner into an existing firm, as in the case of
Meenakshi Achi, she does not thereby become liable for any act of the firm done, i.e., any obligation
of the firm incurred, before she became a partner : see Section 31(2). This rule, however, does not

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apply where a minor admitted to the benefits of partnership of a firm elects to become a partner
therein on attaining majority or ipso facto becomes so on the expiration of six months from the date of
his attaining majority, under the provisions of Section 30: see Section 31(2).

27. Though the mere fact that a certain per-son has been introduced as a partner into a firm does not
make him liable for the obligations incurred by the firm before he was so introduced, he may, by
agreement between the partners, become liable for such obligations. But to determine whether an
incoming partner becomes liable to an existing creditor of the firm, two questions have to be answered
:Firstly, whether the new firm has assumed the liability to pay the debt; Secondly, whether the creditor
has agreed to accept the new firm as his debtor and to discharge the old partnership from its liability.
A creditor cannot rely merely on agreement between the partners inter se such as that the new partner
would be liable for antecedent debts. He must prove novation of contract, that is to say, he must prove
both the conditions stated above in order to hold the new firm liable for his debts. Rolfe v. Flower
Salting & Co., (1865) 35 LJPC 13 at p. 38: 146 RR 96 at p. 104 (Z1); B. D. Sharma v. Phanindra
Nath, 35 Cal WN 593 (Z8); Russa Engineering Works v. Kanara Transport Co. 49 Mad 930 (Z9); AIR
1939 Pat 323 (O).28. In regard to proof of such agreement between the old partners and the incoming
partner Lindley observes :

The Courts, it has been said, lean in favour of such an agreement, and are ready to infer it from
slight circumstances; and they seem formerly to have inferred it whenever the incoming partner
agreed with the other partners to treat such debts as those of the new firm. But this certainly is not
enough for the agreement to be proved is an agreement with the creditor; and of such an agreement
an agreement between the partners is of itself no evidence."

The American Law is also the same. Whether an an incoming partner assumed liability expressly or
impliedly as can be deduced from the facts and circumstances attendant upon his entry is a question of
fact and circumstances indicating assumption or non-assumption have to be gathered from the
treatment of the existing debts by the firm to the knowledge of the incoming partner as the debts of
the new firm or from other facts and circumstances which justly raise an implication and its
assumption (40 AM. Jur Section 219 et seq.).

The result of the Indian authorities on the subject also appears to be that there must be evidence
which, though not much, must be sufficient to establish privity between the newly constituted firm
and the creditor if an incoming partner is to be held liable for any old debt of the firm. (1865) LR 1
PC 27 (Z7); 35 Cal WN 593 CZ8); Jagan Nath and Co v. Cresswell. ILR 40 Cal 814 (Z10); ILR 49
Mad 930: (AIR 1926 Mad 1138) (Z9);- Shewak Mahtom v. Saint Joseph, 9 Cal LR 21 (Z11); Ex. P.
Whitmore, (1838) 3 Deac. 365 (Z12); British Homes Assurance Corpn. Ltd. v. Paterson, (1902) 2 Ch
404 (Z13); Crau-furd v. Cocks, 6 Ex. 287 (Z14); Panduranga Bhatta v. Krishna Nayak & Sons, AIR
1027 Mad 889 (Z15); Smith v. Patrick, (1901) AC 282 (Z16).

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29. In this case Meenakshi Achi after she has been admitted as a new partner and the firm has been
reconstituted, has assumed the liability to pay the plaintiff's debt. It is unnecessary to repeat the
evidence already set out above as to how the balance-sheets were drawn, how the account entries have
been made and how Vaddi chittais have been sent.

Then in the agreement of 1941 there is a narration of this Meenakshi Achi as to how the new business
assumed the liabilities of the old business and how Meenakshi Achi was a consenting party thereto
and how the business was continued. The correspondence of Meenakshi Achi shows that she was fully
aware of these Maral debts and how she as sumcd liability for the same and at no time thought of
repudiating them. It is clear in the circumstances of this case that the new firm has assumed the
liability to pay the plaintiff his debt.

30. That the creditor had agreed to accept the new firm as his debtor and to discharge the old
partnership from its liability is evident from this plaintiff receiving payments and Vaddi Chittais and
his continuing the deposit without making any demand for its return. The option is that of the plaintiff
on the. constitution of the new firm to either continue the deposit or not. Therefore, it has been proved
in this case that the creditor had agreed to accept the new firm as his debtor and to discharge the old
partnership from its liability and which can be safely deduced from the circumstances of this case.

31. Before closing this aspect of the case, we must briefly refer to the position of defendant 3 who has
not, as we have already stated, disputed through his learned Advocate Mr. Kesava Ayyangar, his
liability for the. suit debt and the decree passed against him. This position is understandable both in
view of the fact that the mother and the son are sailing together and it suits defendant 3's purpose to
make out that he alone is liable and not his adoptive mother for this partnership debt.

Secondly, though defendant 3 has been taking up inconsistent positions, the substance of his claim
seems to be that he was admitted to the benefits of the partnership when he was a minor and in fact, as
set out by his adoptive mother in the 1950 suit, after he attained majority he became a partner and
gave notice in 1941 that nothing should be done without consultation with him and that it was on that
foot that the 1944 suit filed by Soma. sundaram Chettiar has been decreed making him a partner in
regard to an one-third of the partnership business of the P. S. SM. firm.

Therefore, this Meyyappa Chettiar, in any event, under Section 28, Partnership Act, can be construed
as holding out as a partner and the two essential elements emphasised under Section 28 viz., (i) that
there must be a representation and (ii) credit must be given to the firm on the faith of such
representation, have been made out. That Meyyappa Chettiar has been making representations to all
and sundry, including this plaintiff who is a close relative and living in the vicinity has been made out.

That on the faith of such representation the, present plaintiff has given credit to the firm in the sense
that he has not withdrawn the deposit and allowed the firm to make use of that money and enjoy that
credit has also been made out. This Meyyappa Chettiar by reason of his adoption also has become

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entitled to the right, title and interest of his adoptive father in the firm. Therefore, apart from the fact
that Meyyappa Chettiar has not been opposing here the decree passed against him, it is obvious that
he has been rightly made liable with Meenakshi Achi.

32. Point (5) : The suit is not barred by limitation for the reasons set out by the learned Sub-ordinate
Judge in para 38 of his judgment. The acknowledgment by one partner is good as against the other
partners and saves limitation against all Veeranna v. Veerabhadraswami, ILR 41 Mad 427. (AIR 1919
Mad 1140) (PB) (Z17); Mahadeva Iyer v. Ramakrishna Reddiar, 50 Mad LJ 67 : (AIR 1926 Mad 114)
(7,18); Chegamul v. Govindaswami, AIR 1928 Mad 972 (Z19).

33. In this connection an attempt was made both in the lower Court and here to show that the
acknowledging partner did so not as a partner but in his individual capacity and only initialled the
endorsements. But an investigation shows that this contention is nothing more than the proverbial
mare's nest and the first defendant has given an explanation regarding the mode of his signing. He has
stated :

'I made all payments, Exs. A-2 to A-7. The initials refer to me and are not contractions of vilasams
of the firm. I have power-of-attorney executed in favour of Muthukaruppan Chetti.....I affixed my
initials only acting on behalf of the firm. The moneys were paid only on behalf of the firm..... If a
partner acts, he would affix hisown signatures and not vilasam of the firm.....My vilasam is S. M. S.
M. The ledger will show these vilasams..... My (family diety) is Panchala-moorthi." The plaintiff as
P. W. 2 deposes : "The partner will sign his own name and only agents will pay on behalf of the
firm.....I did not ask defendant 1 to sign on behalf of the firm. have worked as assistant in my uncle's
shop on three occasions..... I was present each time when. A-2 to A-7 were written..... My thunai is
Annamalai."

There can be no difference as to the binding nature or legality of the endorsements merely because
they bear the initials instead of full signature. Rajah of Tarla v. Guduru Ramana Rao, (1942) 2 Mad LJ
242: (AIR 1942 Mad 680) (Z20), The fact that the acknowledgments were made when no active
money-lending was carried on would not make any difference because even if no fresh business is
done, unless the premises of the shop are surrendered to the landlord and no business is actually
carried on the dissolution of the partnership, the partnership I would not stand dissolved. Therefore,
the suit, look-ed at from any point of view, is not barred by limitation.34. The Jurisdiction of the
Devakottai Sub-Court is the last point for determination and this has been effectively dealt with by the
learned Subordinate Judge in para 41 of his judgment. There can be no doubt that under Section 20,
Civil P. C., the suit could be filed in the Devakottai Sub-Court.35. In the result, the decree and
judgment of the lower Court are affirmed subject to the modification that the plaintiff will be entitled
to recover one-third of the decree amount from defendant 1, another one-third from defendants 2 and

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3, and the remaining one-third from defendant 4 and that only in the event of the one-tnird of the
amount not being recovered, after all legitimate steps have been taken, from defendant 4, that that
one-third will be recoverable from defendants 2 and 3 and from defendant 1 in moieties, as conceded
by the learned advocate for the plaintiff Mr. R. Gopalaswami Ayyangar. This appeal is dismiss-ed with
1/2 costs.

36. On these findings it follows that the plaintiff was fully justified in attaching the decree and the
amount in deposit in O. S. No. 22 of 1950. Therefore, there are no merits in the C. M. As. and they are
also dismissed with 1/2 costs.18

CONCLUSION

Partnerships present the involved parties with special challenges that must be navigated unto
agreement. Overarching goals, levels of give-and-take, areas of responsibility, lines of authority and
succession, how success is evaluated and distributed, and often a variety of other factors must all be
negotiated. Once agreement is reached, the partnership is typically enforceable by civil law, especially
if well documented. Partners who wish to make their agreement affirmatively explicit and enforceable
typically draw up Articles of Partnership. It is common for information about formally partnered
entities to be made public, such as through a press release, a newspaper ad, or public records laws.

While partnerships stand to amplify mutual interests and success, some are considered ethically
problematic. When a politician, for example, partners with a corporation to advance the latter's
interest in exchange for some benefit, a conflict of interest results; consequentially, the public good
may suffer. While technically legal in some jurisdictions, such practice is broadly viewed negatively
or as corruption.

Governmentally recognized partnerships may enjoy special benefits in tax policies. Among developed
countries, for example, business partnerships are often favoured over corporations in taxation policy,
since dividend taxes only occur on profits before they are distributed to the partners. However,
depending on the partnership structure and the jurisdiction in which it operates, owners of a

18 THE ENTIRE CASE HAS BEEN TAKEN FROM

http://indiankanoon.org/doc/99032/ RETRIVED ON 12TH OCTOBER, 2015 7 P.M.

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partnership may be exposed to greater personal liability than they would as shareholders of a
corporation. In such countries, partnerships are often regulated via anti-trust laws, so as to inhibit
monopolistic practices and foster free market competition. Enforcement of the laws, however, varies
considerably. Domestic partnerships recognized by governments typically enjoy tax benefits, as well.

BIBLIOGRAPHY

STATUES

INDIAN PARTNERSHIP ACT, 1932

INDIAN CONTRACT ACT,1872

BOOKS

R. K. BANGIA, CONTARCT-II

AVATAR SINGH, INDIAN CONTRACT AND SPECIFIC RELIEF ACT

M.C.KUCCHAL, MERCANTILE LAW

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WEBSITES

www.manupatra.in

www.indiakanoon.in

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