"Understanding Partnership Laws: Active, Expelled, Insolvent, and Minor Partners Explained

 

Types of Partners under Indian Partnership Act

Active Partner

An active partner is one who actively participates in the day-to-day functioning of the business. Such a partner may serve in various capacities such as a manager, organizer, advisor, or controller of the firm's affairs. He may also be referred to as a working partner.

An active partner may retire from the partnership. Such information becomes necessary when other partners either do not agree to the retirement or are not available to give consent.

Expulsion of a Partner

According to Section 33 of the Indian Partnership Act, a partner can be expelled under certain conditions:

• The expulsion must be in the interest of the partnership.
• Notice must be given to the partner.
• The partner must be given an opportunity of being heard before expulsion.

Insolvency of a Partner

Section 34 of the Act deals with the insolvency of a partner. A person declared insolvent cannot remain a partner. From the date of such a declaration, the person ceases to be a partner. Whether the firm gets dissolved or not depends upon the agreement between the partners.

Death of a Partner

As per Section 35, on the death of a partner, the firm stands dissolved unless the remaining partners agree to continue the business.

Minor Partner and Its Ramifications

Position of a Minor Admitted to the Benefits of Partnership (Section 30)

Since a partnership arises from a contract (Section 5) and not from status, all individuals entering into it must be competent to contract. A minor is not capable of entering into a valid contract as per Sections 10 and 11 of the Indian Contract Act, and thus, cannot become a full partner.

Important Case Laws:

• Mohori Bibi v. Dharmodas Ghose (1903): A minor’s agreement is void ab initio.
• CIT v. Uttam Kumar (1973): Minors cannot be shown as partners in partnership deeds. Such deeds are void and unenforceable.

Why a Minor Cannot Be a Partner

• A minor is immature and unable to fully comprehend the implications of legal obligations.
• If made a partner, they could be exploited by other partners due to their incapacity.
• Under Section 2(a), every partner has a right to take part in business operations. If a minor is made a partner, he may attempt to exercise such rights, which may harm other partners’ interests.

Minor's Admission to Benefits of Partnership

Under Section 30(1), a minor cannot be a partner but may be admitted to the benefits of partnership with the consent of all existing partners. There is no requirement of formal notice—knowledge of such inclusion is sufficient.

Case Laws:

• Shri Ram v. Gauri Shankar (1959): There must be an existing partnership between competent persons before admitting a minor to its benefits.
• Laxmi Narayan v. Beni Ram (1930): A minor alleged posthumous inclusion in benefits; the court directed fair division of profits with proper allowances.

Why a Minor Is Admitted Only to Benefits and Not Liabilities

Partnership is based on mutual trust and often extends to emotional relationships like that of a parent and child. Hence, minors are included out of compassion and legacy considerations, not responsibility.

Minor's Position During Minority

• Has a right to a share in property and profits as agreed (Section 30(2))
• Can inspect and copy firm accounts (limited right)
• He is not personally liable for firm acts; only his share is liable (Section 30(3))

Option on Attaining Majority (Sections 30(5) and 30(6))

Upon attaining majority or knowledge of his inclusion, a minor has six months to decide whether to become a full partner. This decision must be notified through public notice under Section 72. Failure to give such notice results in automatic admission as a partner.

Case Law:

• Shivagouda Patil v. Chandrakant Medalghe (1964): A minor did not exercise the option in time and was held liable as a full partner. However, the Supreme Court ruled that Section 30 does not apply if the firm is dissolved before the minor attains majority.

Minor’s Position If He Chooses Not to Become a Partner

• His rights and liabilities remain the same as a minor until the date of public notice.
• No liability arises beyond that date.
• He may sue the firm for his share of assets and profits under Section 30(4).

According to Section 30(9), if the minor represents himself or permits representation as a partner post-majority, he may still be held liable on the grounds of representation.

Partner by Holding Out / Partner by Estoppel (Section 28)

The principle of holding out is a branch of the doctrine of estoppel. According to the doctrine of estoppel, if a person, through his representation, induces another to act in a manner which they otherwise would not have, the person making the representation cannot later deny the truth of that representation.

Section 28 of the Indian Partnership Act

Sub-section (1)

Any person who, by words spoken or written or by conduct, represents himself or knowingly permits himself to be represented as a partner in a firm is liable as a partner to anyone who has, on the faith of such representation, given credit to the firm, whether or not the person representing himself or being represented as a partner was aware that the representation had reached the person giving the credit.

Sub-section (2)

Where after a partner’s death, the business is continued in the same firm name, the continued use of that name, or the name of the deceased partner, does not make the legal representatives or the estate of the deceased liable for any acts done after his death.

Essential Conditions under Section 28(1)

1. The person must have either represented himself as a partner, or knowingly allowed others to represent him as such.
2. A third party must have acted upon such representation and given credit to the firm based on that belief.

Representation (Abhyavandan)

Any representation, in any form, indicating that a person is a partner in a firm can create liability under this doctrine. There is no requirement of fraudulent intent to mislead others.

Liability under the doctrine of holding out does not depend on the intention of the person making the representation, but on whether a third party acted in good faith upon such representation. Thus, if a person was unaware of the representation when giving credit to the firm, the doctrine cannot be invoked.

Case Law:

• Tower Cabinet Co. Ltd. v. Ingram (1949): A third party cannot hold someone liable as a partner by holding out if they were unaware of the alleged representation at the time of extending credit to the firm.

Key Points

• Only the person to whom the representation was made and who acted in reliance on it can claim under estoppel.
• Thus, the presence of both—representation of partnership and reliance on such representation—is essential to create liability under this doctrine.