Role of a partner in a partnership firm Essay
Role of a partner in a partnership firm
Statement of problem
According to Section 11 of The Indian Contract Act 1872 a minor cannot be a partner in a partnership firm but as per section 30 of The Indian Partnership ACT 1932 he may be admitted to the benefits of partnership and so he has a share in the profits but doesn’t have to incur any loss suffered by the firm which increases the liability of the other partners. Review of Literature
The first codification of law of partnership in the modern form was made in the Indian Contract Act 1872( Chapter XI).This chapter consisted of 28 sections in all(sections 239 to 266) which were mainly based on English precedents. With the rapid development of commerce and trade in India those provisions felt insufficient and therefore in 1932 the Indian Partnership Act 1932 was passed substituting Chapter XI of the Indian Contract Act, 1872. This Act came in force with effect from 1st date of October,1932. According to section 1 of the said act it extends to the whole of India (except the State of Jammu and Kashmir).1 Section 4 of the Act defines partnership.
1. The analysis of the definition of partnership reveals the following essentials of Partnership.
(i) An Association of Persons
There must be a contract between two or more persons. Therefore unless there are at least two persons, there cannot be a partnership. According to section 11(1) of the Companies Act 1956 in the case of banking there cannot be more than 10 members in a partnership and in the case of any other business there cannot be more than 20 members in a partnership. If limit exceed that mentioned above such partnership becomes illegal under the Companies Act, 1956.
(ii) A valid contract
Partnership is the result of contract. It can be formed by contract only, express or implied. All the essentials of a valid contract must be fulfilled. So a partnership cannot be formed by two or more minors or between a minor and a competent person. It cannot be formed for carrying on any business the object of which is illegal or opposed to public policy.
(iii) Relation between partners
Partners are not co-owners of the assets of the firms.3 They are not creditors or debtors to each other unless the balance has been ascertained to be payable from one to other after completion of accounts on dissolution of the firm.
(iv) Agent and Principal (Section 18)
A partner is there agent of the firm for the purpose of the business of the firm. This relationship between the partners is established by the words ‘carried on by all or any of them acting for all’. A partner is an agent in the sense that he can bind the firm and other fellow partners by his acts done in the course of business and he is also a principal of other partners in the sense that he can also be bound by the acts of other partners done in the course of business.
The existence of business is very essential to form a partnership. Business includes trade, occupation or profession according to the definition given in section 2(b). Unless there is business there will be no partnership. This business must be lawful. The idea behind the business in section 2 is to secure gain. Therefore a society formed for the charitable or religious purpose is not a partnership nor is a voluntary association formed for the purpose of holing a function of a social character, a partnership. Co-ownership doesn’t come under the definition of business but only if it carries with it intrinsically the quality of trade or commerce or business.
(vi) Sharing of profits
Sharing of profits of a business is not only evidence but conclusive evidence of partnership. The sharing of profits or gross returns arising from property by persons holding a joint or common interest in that property doesn’t of itself make such persons partners and the receipt by a person of a share of profits of a business, or of a payment upon the earning of profits or varying with the profits earned by a business doesn’t itself make him a partner with the persons carrying on the business. Minor Partners- Legal Aspects
Under the Indian Contract Act 1872, in terms of Section 11, only such persons as are competent to contract : Who are of sound mind Major. Are not disqualified from continuing by law in force. In other words a minor who is not a person competent to contract in the eye of law as such, would not be entitled to become partner. Under section 30 (1) of the Indian Partnership Act, 1932 a minor can be admitted to the share of profits of a partnership firm. In other words minor cannot become fulfleged partner and he shares only in the profits of the firm and not in losses.
In case where a minor is admitted to the benefits of partnership, the following legal propositions shall be valid: The minor should not be made liable for the losses in the firm. The guardian of the minor should sign the deed.
The minors should not be treated as full partners.
The partnership deed if otherwise valid is not rendered invalid merely because minor has also signed the deed. The deed should specify the share of profits and losses in the firm. A minor admitted to the benefits of partnership is entitled to share in profits and not in the losses.5 Though a minor cannot be made liable for losses, the share of the minors may be made liable for the acts of the firm without attaching any personal liability.6 As regards the minor’s position in a firm of partnership, the well known ruling of the Privy Council in Mohari Bibi v. Dharmodas Ghose 301 A. 114 is very much relevant which obviated the judicial pronouncements in interpreting sections 247 and 248 of the Indian Contract Act(now repealed) and included section 30 in the Indian Partnership Act 1932. Accordingly a minor cannot be bound by a contract because a minor’s contract is void and not merely voidable. A minor cannot become a partner in a firm of partnership because partnership is basically formed on a contract. Even though a minor cannot be a partner in a firm, the minor can however be admitted (with consent of all partners) to the benefits of partnership under Section 30 of the Indian Partnership Act 1932.
It states that an agreement made by a minor is absolutely void and inoperative as against him. Minor cannot be ordered to make compensation for a benefit obtained under an agreement that is void , because Sections 64 and 65 of the Contract Act, which deal with restitution, are applicable only to contracts that take place between competent parties and don’t apply to a case where there isn’t and could not have been any contract at all. It mentions that beneficial agreements are valid contracts. That is if the contract is in favor of the minor and he is under no obligation in the contract, the contract is a valid one. Therefore a minor can be a beneficiary. Stating the role of a minor as a partner in a firm the essay tells us that a minor being incompetent to contract cannot be a partner in a partnership firm, but under Section 30 of the Indian Partnership Act, he can be admitted to the ‘benefits of partnership’ with the consent of all the partners by an agreement executed through his lawful guardian with the other partners. Such a minor will have a right to such share of the property or profits of the firm as may be agreed upon and he would have access to and inspect and copy any of the accounts of the firm. The minor cannot participate in the management of the business and shall not share losses except when liability to third parties has arisen but then, too, up to his share in the partnership assets. He cannot be made personally liable for any share in the partnership assets. He cannot be made personally liable for any obligations of the firm, although he may after attaining majority accept those obligations if he thinks fit to do so.
1. To understand the concept of minor as a partner in a partnership firm including subjects such as: rights of a minor, liabilities of a minor, duties of a minor. 2. To know the position of a minor under the Indian law of partnership
According to Section 4 of Indian Partnership Act following are the 4 essentials of partnership.
1. There must be an agreement to constitute partnership.
2. Partnership must be organized to constitute a business.
3. There must be an agreement to share profit of the business between the
4. The business must be carried out by all or one acting for all.
Even if all these essentials are met with, then also there are some categories of individuals who are not competent to enter into the partnership agreement. Minors are such category of individuals who are not competent to enter into the partnership deed even though all the requirements of section 4 are met with. This exception has been made by the legislature with an intention.
1. Whether a minor can be admitted in the business of a partnership firm?
2. Is a suit by a minor maintainable?
3. What is the liability of a minor on attaining majority?
4. Can a partnership firm that has appointed a minor as a full partner with equal rights and obligations as that of adults be registered?
This is a doctrinal research and hence the methodology includes referring various books and articles on the subject of “Minor as a partner in a partnership firm”.
Minor as a partner: Legal aspects
1. Position of a Minor in Indian Partnership Act, 1932: Minors admitted to the benefit of Partnership along with format of agreement.
2. Legal position of a minor
4. Liability of minor
5. Formats of notice
1. The Indian Contract Act, 1872
2. The Indian Partnership Act, 1932
3. The English Partnership Act, 1890
1. Textbook on Indian Partnership Act with LLP Act, Dr Madhusudan Saharay, Universal Law Publishing Co. 2. Partnership Firms, V.S Vadivel,Third Revised Edition 2008-09. 3. The Law of Partnership, PC Markanda, Edition 2010, Lexis Nexis,Butterworths Wadhwa.
i. A person who is a minor according to the law which he is subject may not be a partner in a firm, but with the consent of all the partners in the time being, he may be admitted to the benefits of partnership.
ii. Such minor has right to such share of 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.
iii. Such minor’s share will be liable to the acts of the firm but the minor is not personally liable for any such act.
iv. Such minor may not sue the partners for an account or payment of his share of property of profits of the firm, but if he severs his connection with the firm, in such a case the amount of his share shall be determined according to the rules contained in Section 48: Provided that all the partners acting together or any partner entitled to dissolve the firm on notice no 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 between the partners, and the amount of the share of the minor shall be determined along with the share of the partners.
v. At any time within 6 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.
vi. Where any person has been admitted as a minor to the benefits of partnership in a firm, the burden of providing 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 persons asserting that fact.
vii. Where such person becomes a partner:
his rights and liabilities as minor continue up to the date on which he becomes a partner, but he also becomes personally liable to third parties for all acts of firm done since he was admitted to the benefits of partnership, and his share in the property and profits of the firm shall be the share to which he was entitled to as a minor.
i. Where such person elects not to become a partner- his rights and liabilities shall continue to be those of a minor under this section up to the date on which he gives public notice, his share shall not be liable for any acts of the firm, done after the date of the notice, and he shall be entitled to sue the partners for his share of the property and profits in accordance with sub section (4). Nothing in sub sections (7) and (8) shall affect the provisions of section 28.
3. Legal position of a minor
If the minor wants to sue the firm than he has to sever his connection with the firm. When he gives notice to the partners of his intention to leave the firm, any partner or all of them who have the right to dissolve the firm may elect in such a suit to dissolve the firm. The court then shall proceed with the suit as one for dissolution. In either case the share of the minor is to be ascertained in accordance with the rules in section 48 of the Indian contract act.
The legal position of a minor, not being a partner in the firm, has its impact on the right to file the suit for a dissolution, as envisaged under section 44 of the Indian partnership act 1932. A suit filed by the minor for dissolution of the firm would be incompetent. This suggests that the minor is incapable to dissolve the firm in case of the seven grounds mentioned under section 44.
Minor can only be admitted to the benefits of the partnership and he only acquires the character of the full-fledged partner when he himself elects to become the partner as elucidated under section30 clause (5).
The minors share in the property and the profits is liable for the acts of the firm. He is entitled to only what would fall to his share after paying off the liabilities of the firm. But he is not personally liable for the act of the firm.
Adult members of the firm cannot be prevented from offering the benefits of partnership to the minor, but they cannot entitle him to sue them for an account or otherwise as on a contract. Still less can a minor’s guardian enter into a partnership on his behalf and bind his share. Sub-section (5) contemplates that the guardian may have accepted the benefits of the partnership on behalf of the minor without his knowledge. The guardian has the power to scrutinize the terms and accept the conditions and do all that is necessary to effectuate the conferment receipt of the benefit. The important point, however, is that his share in the firm’s property is subject to the firm’s debt.
1. Incidents and nature of benefits of partnership: It is clear from Section 30(2) of the Act that a minor cannot be made liable for losses. Section 30(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 sec 48 which visualizes capital having been contributed by partners.
2. Benefit of share: The word “benefit of share” are not equivalent to the expression “benefit of partnership” in sec. 30 of the Partnership Act.7
3. Deed not signed by or on behalf of minor: Where a partnership deed is not signed by or on behalf of the minors, the minors are not parties to the document and they cannot be admitted to the benefits of partnership.8
4. Liability of a minor: Section 30(3) draws distinction between personal liability and liability limited to the share held by a minor in the firm’s assets.
5. When to admit minor: Where a partnership is already in existence independently of the minor, he can be admitted to the benefits of the partnership.
6. Minor cannot be partner: Minor cannot be partner even with the consent of all the partners.
7. Minor admitted to the benefits of partnership: A minor cannot become partner though with the consent of all the partners he can be admitted to the benefits of partnership.
8. Deed signed by minors and guardians on their behalf: The income tax authority cannot reject an application for registration of firm merely on the ground that the application and partnership deed were signed by minors and also their guardians on their behalf when the minors were not made partners but were simply admitted to the benefits of the firm.9
9. Income of minor from the firm: Where a minor is admitted to the benefits of the firm in which his mother is also a partner, the income derived by the minor from the firm should be included in her total income.10
5.Liability of minor
1. Minor cannot be adjudicated insolvent: A minor who was admitted to the benefits of the firm cannot be adjudicated insolvent on the basis of debts of the firm after the dissolution of partnership on the ground that he attained majority subsequent to the dissolution but did not exercise his option to become a partner or cease to be a partner of the said firm.
2. Suit for enforcing debt of a firm: Where a suit was instituted for enforcing debt of a firm, before expiry of six months allowed to the minor after his attainment of majority to repudiate his connection with the firm and also before issuance of the public notice as required by sec. 30(5), the minor cannot be considered a partner merely for the reasons of failure to comply with the same.12
3. Effect of election by minor: If a minor partner on attaining elects to continue as a partner, the partnership doesnot come to an end. It continues and the minor having become a fullfleged partner is entitled to his profits at the end of the year regulated by the partnership deed. On the other hand if he elects to sever all his connections with the partnership, he becomes entitled to whatever amount is due to him at the date when he elects not to become a partner.
4. No change in constitution of firm on election of minor to become partner: When a minor on attaining majority elects to become a partner of the firm there is no change in the constitution of the firm, but there is a change in the shares of the partners.
5. Status of minor during the period of election: Under sec. 30(5) of the Act a minor on attaining majority is given a period of six months to take a decision whether he wants to continue as a partner or not. During the period of six months he continues to enjoy the same status in the firm which he did earlier before attaining majority. Although sec. 30 (5) has not clearly said so, but by the legal fiction incorporated in this provision, a minor continues to be a minor and doesnot become partner.
1. Partnership deed-Admission of minor as partner-Admission to an existing partnership-Admission to the benefits of firm-Simple format.
Above is a partnership deed, executed amongst three persons, to admit a minor to the benefits of an existing partnership. The net profits of the partnership as arrived at after providing for payment of remuneration to working partners and interest to the partners, as provided shall be divided among the partners in the specified shares and proportion. The existing partners admit the minor to the benefits of the partnership by paying him a share in the net profits of the partnership. The minor is however not liable to pay any part of the losses of the said firm.
2. Partnership Deed- Specimen Notice- Public Notice of Election by a minor on attaining majority.
Incase on attaining majority he decides not to become a partner the only difference in the above format would be “ do hereby elect not to become a partner……from thr said date”.
The intent of the legislature while drafting this law seems to provide the benefit to the minor that the partner enjoys. But not all the benefits, he only enjoys a few. Otherwise he would be termed as the minor as a partner under section 30 of the partnership firm. But the words used are- minor as the beneficiary to the partnership. Thus in certain conditions, minor is open to enjoy the privileges of the partner but not all the privileges. He can only fit into the shoes of the full-fledged partner when he attains majority and he himself elects to be the partner of the firm. The very basic pre requisite of partnership deed, that the contract/agreement should be formed between the partners is the criteria that the minor cannot fulfill. He is incompetent to form the contract. Thus he cannot be a full-fledged partner to the partnership firm until and unless he attains the age of majority. Thus it is fully justified to term the minor under section 30 of the Indian partnership act as the beneficiary to the partnership and not as the partner to the partnership firm.