Sunday, 25 November 2012

LAW RELATING TO PARTNERSHIP


MEANING OF PARTNERSHIP
 ‘Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.’

CHARACTERISTICS
It is the result of an agreement.
It is organised to carry on business*.
That the persons concerned agree to share the profits of the business.
That the business will be carried on by all or any one of them acting for all*.

Business
 Ordinary Meaning
A person's regular occupation, profession, or trade.
An activity that someone is engaged in.

Partnership Act defines ‘business’ in all inclusive manner, as ‘every trade, occupation and
profession’

Partnership…..
At will: ‘no provision in contract for the duration of the partnership’
Particular partnership : ‘particular adventure or undertakings’

REAL TEST OF PARTNERSHIP
The real test of partnership is not merely sharing of profits or carrying on of business but of Mutual Agency.
Cox V Hickman (1860) – case of trustee appointed by creditors to run a business.

Law of partnership is an extension of the law of agency.

Act of a partner to bind the firm
  • Partnership agreement, whereby one partner is given the power to manage the affairs of the firm, and it is stated that whatever he does shall be binding on the partners – does not give the said partner the power to transfer immovable property.
  • In order to bind the firm an act or instrument done or executed by a partner or other person on behalf of the firm shall be done or executed in the firm name or in any other manner expressing or implying an intention to bind the firm.

 Partners who have entered into partnership with one another are called individually
partners & collectively a firm.
A firm as such, is not entitled to enter into a partnership with another firm or individuals.

 The name under which their business is carried out is called the firm name.

In the case of a partnership, no separate legal entity is created. A partnership is only a putting together of the partners.

The Income Tax Act had provided to treat a firm as separate assessable units. 
(A firm is a separate entity for the purpose of Income Tax)


KINDS OF PARTNERS
 The various kinds of Partners are :
Actual,
Sleeping,
Nominal,
Partners for profits only &
Partner by holding out i.e. partner by Estoppel*

MINOR AS A PARTNER
Partnership is a contract. As such all the essential elements of a valid contract must be present. But a minor may be admitted to the benefits of a partnership without any consideration but with the approval of all partners.

DURATION OF A FIRM
A partnership may be for a fixed period of time. But where no provision is made by the partners for the duration of the partnership, it is a partnership at will.

REGISTRATION OF PARTNERSHIP

Partnership Act does not provide for compulsory registration; but:
  • A partner of an unregistered partnership firm cannot file a suit against the firm or any partner thereof for the purpose of enforcing a right arising from a contract conferred by the Act.
  • No suit can be filed on behalf of an unregistered firm against any third party for the purpose of enforcing a contract.

LIABILITY OF A PARTNER
The liability of partners is unlimited.

RIGHTS OF A PARTNER
Right to take part in the conduct of the business

Majority rights
Ordinary Matter
Right to be consulted & express opinion (can have a contract to the contrary for petty & routine matters)
Fundamental Matter
No change can be made in the nature of the business without the consent of all the partners

CRAG vs. FORD [1842]
FACTS: Crag and Ford were partners in a firm dealing with cotton. They purchased a certain quantity of cotton. After a month’s time, Crag told Ford to sell the same. But Ford did not do so as the prevailing market rates were low and he hoped that they would rise in the coming months. After three months, the rates were still low and Ford finally sold the cotton. Crag sued Ford alleging the delay of two three months caused much greater losses to the firm than those the firm would have suffered if Ford had followed Crag’s directions. Crag claimed damages from Ford for these extra losses suffered by the firm.
HELD: The plaintiff’s case failed as the judges held that both partners had equal rights and duties in the partnership firm. Crag could have sold the cotton himself; after all, he was also responsible for running the business of the firm. He did not perform his duties diligently or in time to be able to succeed in the action for damages.
BLISSET vs. DANIEL [1853]
FACTS: Blisset was a partner in a firm where a proposal was mooted to appoint one of the partner’s son as a co-manager of the firm. Blisset objected to such an appointment. The partner whose son was nominated complained to the other partners behind Blisset’s back and persuaded them to sign and serve a notice of expulsion to him. This was in keeping with a partnership clause that empowered a majority of the partners to expel any partner without citing any reason. Blissett contested the validity of the expulsion.
HELD: The plaintiff’s expulsion was set aside. The court held that it was up to the partners and the majority to decide what was good for the firm but the partners are required to act in good faith when making use of such powers.

Right of access to books; and to inspect & copy any of the books of the firm

Right to indemnity in respect of payments made and liabilities:
  • Incurred by a partner in the ordinary and proper conduct of the business.

Thomas V Atherton (1877)
Trespass by a colliery

In doing such an act, in an emergency, for the purpose of protecting the firm from loss, as would have been done by a person of ordinary prudence, in his own case, under similar circumstances.

Right to profits
Unless otherwise agreed, partners are entitled to share equally in the profits earned by the firm.

Right to interest

Interest on advance at the rate of 6% p.a.
Interest on capital shall be payable only out of profits

Right to remuneration

Unless otherwise agreed, partners are not entitled to receive any salary or remuneration for taking part in the conduct of the business

Right to use of partnership property
Property originally brought in
B N Murthy & Sons V V V Sugana (1978) 
– Land- theatre - firm to exhibit films
Property subsequently acquired
Partner’s property in firm’s use
Robinson V Ashton (1875) 
- Cotton mill case

Right to be consulted for admission of new partner

No liability before joining (there may be a contract to the contrary)

Right to retire*

Right not to be expelled*

Right of outgoing partner to share in the subsequent profits if his final settlement is not carried out by the other partners

Right of outgoing partner to carry on competing business (there may be a contract to the contrary)
  
DUTIES OF A PARTNER
Duty of Good Faith (fiduciary relation - every partner should be just, faithful and observe utmost good faith towards every other partner of the firm)
To carry on the business to the greatest common advantage (He must use his knowledge & skill for the common benefit of the firm)
Bentley V Craven (1853)
– Sugar refiners case

Due diligence: to attend diligently to the business and use his knowledge & skill to the common advantage of all the partners.
A partner shall indemnify the firm for any loss caused to it by his wilful neglect in the conduct of the business of the firm
Sasthi Kenkar V Man Gobinda (1919)
 – dissolution of firm - managing partners failed to sue firms for amounts due – one claim became time barred & other lost due to insolvency of debtor

Duty to indemnify for fraud in the conduct of the business of the firm.

The liability for fraud cannot be excluded by any contract to the contrary.

Duty to render true accounts

Duty to use the property for the firms purposes

Duty to share in the losses

Duty to account for personal profits from partnership transactions
Any transaction of the firm
Use of the property of the firm
Use of the business connection of the firm
Use of the firm name

Duty to account for profits in competing business (opportunity to make it comes his way while he was partner of the firm)

INTRODUCTION OF A PARTNER
A person may be admitted as a partner with the consent of all the existing partners. An incoming partner does not become liable for any act done prior to his admission as a partner. A minor can be admitted only to share the profits of the firm.

RETIREMENT OF A PARTNER
 A partner can retire from a firm:
   
with the consent of all the partners,
 in accordance with an express agreement by the partners, or
where the partnership is at will, by giving notice in writing to all the other partners of his
intention to retire.

LIABILITY OF A RETIRED PARTNER
A retired partner continues to be liable for all acts of the firm done before his retirement. He  continues to be liable as a partner to third parties for any act done by the firm after his retirement until a public notice* is given of the retirement.

*except in the case of a sleeping partner
  
PUBLIC NOTICE
  A public notice has to be given:
On the retirement or expulsion of a partner
On the dissolution of a registered firm
On the election to become or not to become a partner in a registered firm by a minor on attaining majority

NOTICE TO BE GIVEN TO:

The registrar of firms
The official gazette
Publication in at least one vernacular newspaper circulating in the district where the firm has its place or principal place of business.

EXPULSION OF A PARTNER

A partner may be expelled from the partnership provided the power of expulsion is conferred by the contract between the partners and the power is exercised by a majority of the partners.
The power should be exercised in good faith.
The test of good faith is that the expulsion must be in the interest of the partnership, the expelled partner is served with a notice and that he is given an opportunity of being heard.

INSOLVENCY OF A PARTNER
 Where a partner is adjudicated insolvent, he ceases to be partner on the date on which the order of adjudication is made, whether or not the firm is thereby dissolved.
The firm is not liable for any act of the insolvent partner after the date of the order of adjudication.
  
DEATH OF A PARTNER
Subject to contract between the partners, a firm is dissolved by the death of a partner.
No public notice is required of the death of the partner.
Whether or not the firm is dissolved, the estate of the deceased partner is not liable for the acts of the firm done after his death.

TRANSFER OF PARTNER’S INTEREST
A partner may transfer his interest in the firm by sale, mortgage or charge. The transfer may be absolute or partial. It does not entitle the transferee, during the continuance of the firm:
  • to interfere in the conduct of business of the firm,
  • to require accounts of the firm or
  • to inspect the books of the firm.

On transfer of interest by a partner, the transferee only becomes entitled to receive the share of profit of the transferring partner.

 DISSOLUTION OF A FIRM
A firm can be dissolved without the order of court.
A firm can be dissolved by the court at the suit of a partner.

DISSOLUTION WITHOUT COURT ORDER
By agreement by the partners
By compulsory dissolution –

When all the partners or all but one partners is insolvent  or
By the happening of any event which makes it unlawful for the business of the firm to be
carried on by the partners
When the term of the partnership expires
When the particular adventure for which the firm was constituted is accomplished

On the death of the partner or when a partner becomes insolvent*
 Dissolution by notice of partnership at will

DISSOLUTION BY COURT ORDER
(On a Suit by a Partner)

Insanity of partner
When a partner is permanently incapable of performing duties of a partner
Misconduct of a partner*

Snow V Milfred (1868)
– Case of the adulterous banker
Persistent breach of agreement & destruction of mutual confidence
Transfer of interest in the firm
Business cannot be carried on except at a loss
Any other ground which the court finds as just & equitable




Wednesday, 21 November 2012

INDEMNITY & GUARANTEE



CONTRACT OF INDEMNITY
A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself , or by the conduct of any other person, is called a contract of indemnity.

CONTRACT OF GUARANTEE
It is a contract to perform the promise, or discharge the liability, of a third person in case of his default.

The person who gives the guarantee is called the ‘surety’; the person in respect of whose default the guarantee is given is called the ‘principal debtor’, and the person to whom the guarantee is given is called the ‘creditor’.

Economic function of guarantee
The function of a contract of guarantee is to enable a person to get a loan, or goods on credit or an employment.
‘Guarantees are usually taken to provide a second pocket to pay if the first should be empty’

Essential Features
Principal Debt:
When the debt itself is void.
Swan V Bank of Scotland (1836)
Payment of overdraft by bank’s customer was guaranteed -those days overdrafts were contrary to statute-penalty was imposed upon parties  to such drafts & the overdraft was void-customer having defaulted, surety was sued-he was held not liable as no debt was due.
Garrard V James (1925)
Directors of Company guaranteed their company’s loan which was void as being ultra Vires, they were nevertheless liable.

Consideration:
A contract of guarantee is made without consideration.

There should be no misrepresentation or concealment:
A contract of guarantee is not a contract of absolute good faith.
Any guarantee obtained by means of misrepresentation made by the creditor, or with his knowledge and assent, concerning a material part of the transaction is invalid.
A guarantee which the creditor has obtained by means of keeping silence as to material circumstances is invalid.

There should be no misrepresentation or concealment:
London General Omnibus Co V Holloway (1912)
Defendant invited to guarantee for the fidelity of a servant-Employer had earlier dismissed him for dishonesty but did not disclose this fact to the surety-the servant committed another embezzlement-surety was held not liable.

Writing is not necessary:
In the Indian context, a guarantee may be either oral or written.
In English Law, under the provisions of the Statute of Frauds, a guarantee is not enforceable unless it is ‘in writing and signed by the party to be charged’.

Extent of Surety’s Liability
  • It is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract.
  • When there is a condition precedent to the surety’s liability, he will not be liable unless that condition is first fulfilled.(when another person has to join as a co-surety)
  • ‘The surety has no right to dictate terms to the creditor and ask him to pursue his remedies against the principal in the first instance. The surety is a guarantor, and it is his business to see that the principal pays, and not that of the creditor’ Supreme Court in Bank of Bihar Ltd V Damodar Prasad (1969)
  • ‘Even if the decree is a composite one against the principal debtor, mortgaged property & the guarantor, the creditor/decree holder can proceed as he liked i.e. he could proceed against the guarantor if he so wished’ Supreme Court in State Bank of India V Indexport Registered(1992)
  • ‘In case of a company in liquidation, the principal debtor can claim from the surety & need not claim from the liquidation proceedings of the company’ Supreme Court in MSEB, Bombay V Official Liquidator, H C Ernakulam (1982)
  • Ganga Kushan's appeal, Supreme Court, May 2012 (Guarantor liable to repay loan if debtor defaults)Ganga Kishun, who had stood as a guarantor to a bank loan, raised by one Ganga Prasad, who had died without clearing it. Ganga Kishun had come to the apex court against the Uttar Pradesh government's decision to recover the loan arrears from him after the death of principal debtor Ganga Prasad.While dismissing Ganga Kishun's appeal, the apex court, however, faulted the government's decision to auction Ganga Kishun's entire stretch of land for Rs 25,000 to recover an arrear worth Rs 8,500 only and not confining the auction to only 1/3rd of the land which could have fetched the arrears.Impact: Provoke people into thinking twice before becoming a guarantor for a bank loan

  • Continuing Guarantee:Covers a number of transactions over a period of time.The surety undertakes to be answerable to the creditor for his dealings with the debtor for a certain time.


Discharge of Surety From Liability
  • By revocation:Ordinarily a guarantee is not revocable when once it is acted upon.A continuing guarantee may at any time be revoked by the surety, as to the future transactions, by notice to the creditor.

  • By death of Surety:The death of the surety operates as a revocation of a continuing guarantee so far as regards future transactions.The surety’s heirs can be sued for liability already incurred.
  • By Variance:Any variance made without the surety’s consent, in the terms of the contract between the principal debtor and the creditor, discharges the surety as to transactions subsequent to the variance.


Bonar V Macdonald (1850)Guarantee of good conduct of Bank Manager-afterwards salary raised-condition that Manager would be liable for 1/4th of losses on discount allowed by him-no communication of new arrangement to surety-substitution of a new agreement for the former discharged the surety.


While the general principle is that if the agreement of the surety is altered in a single line, the surety in entitled to be discharged, but the law now accepts that where it is self evident that the alteration is unsubstantial or for the benefit of the surety, he is not discharged from his liability.

M S Anirudhan V Thomco’s Bank Ltd. (1963)Supreme court heard the appeal-defendant guaranteed repayment of loan-guarantee paper showed the loan to be Rs.25,000-bank refused to accept-principal reduced the amount to Rs.20,000  without intimation to surety gave it to the bank which was then accepted by bank-principal failed to pay-bank sued surety-question was whether the alteration had discharged him- held by a majority that the surety was not discharged.

  • By release or discharge of Principal Debtor:
  • The surety is discharged by any contract between creditor and the principal debtor, by which the principal debtor is released, or by any act or omission of the creditor, the legal consequence of which is the discharge of the principal debtor.
  • Any release of the Principal Debtor is a release of the surety also.
  • Where, however, the Principal Debtor is discharged by operation of insolvency laws or, in case of a company, by the process of liquidation, that does not absolve the surety of his liability.


Act or Omission:
Example:Act of creditor in terminating the agreement of Hire-Purchase by taking possession of goods, discharges the surety.There is a contract for the construction of a building, which is guaranteed by the surety, and the creditor has to supply the building material. An omission on the part of the creditor to supply the material would discharge the contractor and so would the surety be discharged.

Compromise, extension of time and promise not to sue:
A contract between the creditor and the principal debtor, by which the creditor makes a composition with, or promises to give time to, or not to sue the principal debtor, discharges the surety, unless the surety assents to such contract.
(Mere forbearance to sue does not discharge the surety)

By Impairing surety’s remedy:
If the creditor does any act which is inconsistent with the right of the surety, or omits to do any act which his duty to the surety requires him to do, and the eventual remedy of the surety himself against the principal debtor is thereby impaired, the surety is discharged.


M R Chakrapani Iyengar V Canara Bank (1997)
The  principal debtor disposed of the hypothecated property, the surety submitted all the particulars to the creditor but the latter took no steps to seize the property or to issue criminal process against the debtor, the surety became discharged.
Chistovan Vaz V Indian Overseas Bank (1998)
Sale of seized vehicles after  4 years’ exposure to sun and rains, considerable diminution in value, the liability of surety to be reduced to that extent.

Union Bank of India V M P Sreedharan Kartha (1993)
A hypothecation, being not a possessory security, not much duty can be expected from the creditor towards the care of the security. Accordingly, where the contents of a hypothecated godown are lost  and the banker was not aware of any such loss otherwise than in the ordinary course of business, the guarantor was held to be not discharged to the extent of the value of the security.

State Bank of Saurashtra v Chitranjan Ranganath Raja (1980)
A pledge, being a possessory security, duty can be expected from the creditor towards the care of the security. Accordingly, where the creditor was utterly negligent with regard to the safe keeping & handling of the goods pledged & the security was lost on account of the negligence of the bank, the guarantor was held to be discharged to the extent of the value of the security.

Rights of the Surety
Against the Principal Debtor:
  • Right of subrogation: The surety steps into the shoes of the creditor when he has paid all that he is liable for, or performed all he is liable for
  •  Right to Indemnity:In every contract of guarantee there is an implied promise by the principal debtor to indemnify the surety. The right enables the surety to recover from the principal debtor whatever sum he has rightfully paid under the guarantee.

Against the Creditor:
  •  Right to securities:
  • The surety steps into the shoes of the creditor and gets the right to have the securities, if any, which the creditor has against the principal debtor, irrespective of the fact whether the surety knows of the existence of such security or not.
  • If the creditor loses or without the consent of the surety, parts with such security, the surety is discharged to the extent of the value of the security.

State of M P V Kaluram (1967)
State sold lot of felled timber to a person-price payable in 4 instalments-payment guaranteed by defendant-if there was default in payment of an instalment, State would prevent further removal of timber & sell remaining timber for realisation of price-buyer defaulted but even so State allowed him to remove the timber-Surety was then sued for the price-held not liable-by allowing goods to be removed by the buyer the security was lost.
  • If the securities are burdened with further advances it will not affect the rights of the surety

Forbes V Jackson 1882
Mortgage of leasehold premises & insurance policy for loan of £ 200-principal debtor borrows further sums upon same security from creditor without knowledge of surety-defaults on payment-surety pays amount with interest & claims the securities

  • Right of set off:

If the creditor sues the surety, the surety may have the benefit of the set off, if any, that the principal debtor had against the creditor.
He is entitled to use the defenses of the debtor against the creditor.

Against Co sureties:
Release by the creditor of one of the co sureties does not discharge the others; neither does it free the surety so released from his responsibility to the other sureties.
The co sureties, in the absence of a contract to the contrary, are liable, as between themselves, to pay each an equal share of the whole debt, or that part of it which remains unpaid by the principal debtor.