>> Accounts of Partnership Firms



·         The ­­­Partnership Act, 1932, defines partnership as the "the relation between persons who have agreed to share the profits of the business, carried on by all." A partnership firm is thus established by an agreement amongst the partners. This agreement may be oral or written.

·         According to Section 11 of the Companies Act, 1956, a partnership firm consisting of more than 10 persons for the purpose of carrying on banking business and of more than 20 persons for the purpose of carrying on any other business for the acquisition of gain or profit, shall be an illegal association unless it is registered under the Companies Act, 1956, or is formed in pursuance of some other Indian Law or is a joint Hindu family carrying on such business. The minimum number of partners in a firm must be two, excluding a minor partner, who is not competent to enter into a contract.

·         A minor may be admitted into the partnership with the consent of all other partners of all other partners but he shall not be liable for the losses or debts for the firm. The banker should note the date when the minor partner will attain majority so that a fresh partnership letter signed by him and partners is obtained by the banker.

·         An account in the name of a firm may be opened by a banker on receipt of an application from one or more of the partners should join to open the firm’s account. If any partner has gone out of the country, the rest of the partners can open a bank account in the name of the firm. Specimen signatures of all partners should also be taken for the purpose of record. But if any of the partners is deprived of the right to open an account in the firm’s name and this fact is within the knowledge of the banker, he should not open the firm’s account at the request of such partner. The banker should, therefore, confirm the right of the applicant/applicants to open an account in the name of the firm from the partnership deed or from any other available evidence, e.g., the authority letter signed by all other partners.

The banker should take a letter signed by all the partners stating:

(a)    the names or addresses of the partners;

(b)   the nature of the business undertaken by the firm; and

(c)    the name/names of the partner/partners who will operate the account on behalf of the firm and will have the authority to draw and accept bills etc., and to sell and mortgage the property of the firm.

·         The banker’s should honour the cheques signed by all the partners or by those partners who are authorized to operate the account.

·         The authority given in favour of a particular partner/ partners to operate the firm’s account may be withdrawn by any of them by giving a notice to the banker. In such a circumstance, the banker should stop payment of cheques signed by such partners. A partner can also stop the payment of a cheque issued by any other partner on the firm’s account.The power to revoke the authority to operate the account is vested in any other partner who is a sleeping partner or is not authorized to operate the account.

·         A partner authorized to operate the firm’s account cannot delegate his authority to another person without the consent in writing of all other partners. If such consent is given by all of them, the authorized partner may execute a Power of Attorney in favour of such other person.

·         If a cheque payable to the firm is endorsed by a partner in his own favour and is deposited by him to be credited to his personal account, the banker should do so after making an enquiry about it from other partners and after being satisfied about it. Otherwise, he will bear the risk of losing the statutory protection granted to the collecting banker under the Negotiable Instruments Act, 1881. The banker should be particularly careful in this regard if the partner sends such a cheque in response to a request from the bank to repay overdraft taken by him from the bank.

·         In Surjit Singh and Others vs. Ram Ratan Sharma(AIR, 1975 Gauhati 14), the High Court observed that from the very definition of partnership itself it follows that there is implied mutual agency to each of the partners of a registered partnership firm. When an amount was borrowed by a partner on behalf of the partnership firm, that act of his was binding on the firm as well as on the members of the firm. Similarly, when a promissory note is executed on behalf of a firm by its managing partner, and the money is utilized for the purpose of the firm, every partner is liable for the debt incurred [Gurrrum Subbaravude & Others vs. Moto Pothula Narsimhan & Others(A.I.R. 1975 A.P. 307)]

·         It is to be noted that while one of the partners can bind the firm for the debts incurred by him on behalf of the firm, it is not necessary that documents for the debt are signed by all the partners. Signature of only one partner will be sufficient. However, as a precaution on loan documents.If a partner signs an instrument on behalf of the firm, his intention to do so must be apparent from the firm in which he was signed.

·         The liability of a partnership firm in respect of a promissory note signed by a partner was considered by the Madras High Court in M/s M.M Abbas Bros. and Other vs. Chethandas Fateh Chand and Another (A.I.R. 1979, Madras 272). In this case a partner of the firm signed a promissory note in his name and thereafter added the words "Partner M.M. Abbas Bros." The Court held that the words "Partner M.M. Abbas Bros." represented only a description and not indicate that he had signed the instrument as a partner. If the said partner had the intention of binding the firm, then he would have signed ‘for and on behalf of the firm’. On another promissory note the partner had signed ‘for and on behalf of the firm’. Pointing out the difference between the two, the Court held that "it is true that different legal result follows from the mere change in the collocation of the words. But it is inevitable as different results are produced in law by the mere change in the collocation (position or arrangement) of the words." The pronote in question was not thus not binding on the firm.

·         The general principle of law, the High Court held that every one of the partners in a mercantile firm is liable upon a bill drawn by a partner in he recognized trading name of the firm for a transaction incidental to the business of the firm, although the particular partner’s name does not appear on the face of the instrument and although he is sleeping and secret partner. Partners are mutual agents and can bind the firm by their acts. Even in the absence of an indication under the signature that a person was signing as a partner, it may be possible to infer a liability on the firm provided it is found on the face of the instrument that the borrower is firm and not the individual partner who signed the instrument. A person merely describing himself as a partner cannot bind the firm. There must be some indication in the instrument to show that he was signing on behalf of the firm.          

·         In Porbandar Commercial Co-operative Bank Ltd. vs. M/s Bhanji Lavji & Others (A.I.R. 1985 Gujarat 106), a loan from bank was guaranteed by two firms and the bond was signed by one partner of each firm. The Court held that merely by signing as sureties on behalf of their respective firms, the concerned two partners could not bind any other partner of the firm or the firms themselves for the purpose of repayment of the dues of the bank. The signatories to the surety bonds were held personally liable to repay.

·         The personal property of a partner may be attached even before judgement is delivered in a suit against the firm and its partners. In D.V. Krishna Murthy vs. P. Vishwanath (A.I.R. 1994 AP 43) the Andhra Pradesh High Court held that when each partner is liable, in the event of passing of a decree and in the event of passing of a decree and in the event of the apprehension that one of the partners is screening away the property and is removing the same out of the jurisdiction of the court, the court is competent to pass an order attaching his property under order 38 Rule 5 CPC.

·         If a partner dies, the firm stands dissolved automatically, if an agreement to the contrary does not exist. It means that the firm is not dissolved on the death of a partner if the partnership deed specifically provides for this. The deceased partner’s heirs cannot succeed him as partners. They can demand the share of the deceased in the firm from the surviving partners, or they may be admitted as new partners by the existing partners.

·         If the firm stands dissolved on the death of a partner, the banker must close the firm’s account immediately on receipt of the intimation about the partner’s death. This is important if the firm’s account shows a debit balance at the time of a partner’s death because the latter’s estate would be liable to pay the debts incurred by the firm before his death. Hence, to determine the liability of the deceased partner, the banker should close the account of the firm soon after the death of a partner. If he defaults in doing so, the rule in Clayton’s case will apply.

·         If the firm does not stand dissolved, it is reconstituted by the surviving partners with or without the admission of a new partner. The banker should open a new account in the name of the reconstituted firm and obtain a fresh mandate and undertaking from the partners. In any case the cheques drawn by the deceased partner should not be honoured by the banker without confirmation from the surviving partners.

·         When a partner retires, his liability towards the banker or any other third party ceases in respect of all transaction undertaken subsequent to the date of his retirement. But if the banker is not informed about his retirement, the retiring partner continues to be liable for the transactions of the firm even after the date of his retirement. The retiring partner should give a public notice for this purpose to terminate his liability to the third parties.

·         If the bank account of the firm at the time of retirement of a partner shows a debit balance, the banker must close the account of the firm, in order to retain his right to claim money from the retiring partner. If this is not done, the rule in Clayton’s case will apply. If an account shows a credit balance, the banker need not close it but the cheques drawn by the retiring partner should be honoured after securing confirmation from other partners. On the opening of a new account or on the continuance of the existing account after the retirement of a partner, a fresh mandate should be taken from the partners of the new firm.

·         In case of insolvency of a partner, the partnership comes to an end, if an agreement to the contrary does not exist. The insolvent partner ceases to be a partner with effect from the date he is declared as insolvent and he shall not be liable to the firm for any of its transactions thereafter. The insolvent partner does not remain competent to operate the firm’s account. The solvent partner can operate the account for winding up the affairs of the firm. The banker should honour the cheques drawn by the insolvent partner before his adjudication only after getting confirmation from the solvent partners. Bankers usually close the account of the firm and open a new account in the name of the reconstituted firm to determine the liability of the insolvent partner. Otherwise the rule in Clayton’s case will apply.