Partnership is one of the most common business structures where two or more individuals come together to operate a business and share the profits and losses. It has numerous benefits, such as shared expertise and responsibility, increased capital, and reduced risk. However, this type of business structure also presents a liability concern. Each partner in a partnership is responsible for their co-partner's actions, as well as the actions of the partnership as a whole. Partners can be held jointly and severally liable for any liability incurred by the partnership firm. So, if the partnership is unable to pay its debts, third parties such as creditors or suppliers can pursue payment from any or all of the partners. In Bangladesh, the liabilities of partners towards third parties in a partnership are governed by the Partnership Act of 1932.
Section 4 of the Partnership Act, 1932 defines a partnership as an agreement between individuals to share profits and liabilities while carrying on a business. Partners act as both principals and agents of the firm and each other, and can bind the partnership and other partners through the principle of mutual agency. Therefore, partners are jointly and severally liable for fulfilling liabilities arising from contracts or debts incurred within the scope of the partnership business, and for damages resulting from wrongful acts committed by any partner acting on behalf of the partnership firm.
Partners in a partnership can be held liable in two ways: jointly and severally. As per Section 25 of the Partnership Act, 1932, partners in a firm are jointly and severally liable for the debts and liabilities of the firm, making each partner individually responsible for the full amount. Additionally, Section 26 holds all the partners of the firm responsible for damages or penalties resulting from wrongful acts committed by any partner acting on behalf of the partnership in the ordinary course of business or with authority. In Dena Bank v. Bhikhabhai Prabhudas Parekh & Co. (2000) (5) SCC 694 the Supreme Court of India held that partners in a partnership are jointly and severally liable for the acts of the firm. The partnership is not a separate legal entity, but a collection of individuals, and partners, are personally liable for any debts or obligations of the firm. A decree in favour of or against the partnership is the same as a decree in favour of or against the partners. Similarly, the Andhra Pradesh High Court ruled in The State Bank of Hyderabad, I.D.P.L.Colony Branch vs. Star Electrical Industries and Ors. MANU/AP/3400/2013 case that the liability of partners in a firm is both joint and several, and a creditor of the firm has the right to recover the debt owed by the firm from any one or more of the partners.
In some cases, partners in a partnership firm may be held personally liable if they act beyond the scope of their authority. The Gujrat High Court in Bhagwanji Devraj vs The Union Of India And Anr. (1975) 16 GLR 357, held that partners in a partnership may be personally liable for liabilities incurred by the firm if they exceed the scope of their authority. Commissioner of Income Tax v. Bagyalakshmi & Co AIR 1965 SC 1708 the Court held that if a partner engages with a third party in his personal capacity, the other partners cannot be held liable for any obligations or rights owed to the third party.
The Partnership Act, 1932 provides for vicarious liability of partners in a partnership firm for the wrongful acts or omissions of their co-partners while acting in the ordinary course of the partnership business under Section 26 which is based on the principle of mutual agency. In the Abdul Awal and ors. Vs. Mofasiluddin Ahmed and others 27 DLR (HCD) (1975) 628 case, the Supreme Court of Bangladesh observed that in a tort action, if a partnership firm is found liable, all partners will be jointly and severally liable as joint tortfeasors. If the firm is proven negligent, one of the partners can be held jointly and severally liable for the damages. However, partners cannot be held vicariously liable for acts that are beyond the scope of the ordinary course of business. In the case of Lloyd's Bank Ltd. v. Bundy (1975) QB 326, it was established that a partner cannot be held responsible for the wrongful acts of their co-partner if it was not committed in the ordinary course of the partnership business.
According to section 28 of the Partnership Act, 1932 a person can be held liable as a partner for the liabilities of a firm if he holds himself out as a partner to others who rely on his representation, even if he is not actually a partner. This is known as the doctrine of holding out, which is based on the principle of estoppel. In the case of Snow White Food Product Pvt. Ltd. vs. Sohanlal Bagla and Ors., AIR 1964 Cal 209, the Court found the defendant liable for payment to the plaintiff under the doctrine of holding out as he held himself out as a partner of the firm during their transaction and the plaintiff relied on the representation of the defendant.
A retired partner is liable for all debts and obligations incurred by the firm before their retirement under section 32 of the Partnership Act, 1932, unless there is an agreement to the contrary. The Appellate Division of the Supreme Court of Bangladesh held in the Md. Mahmudun Nabi vs. Mafizur Rahman Manju and ors, (1989) : LEX/BDAD/0105/1989 case that a retiring partner in a partnership remains liable for any acts committed by the other partners that could bind the firm until public notice is given, as prescribed by Section 32(3) of the Partnership Act, 1932. However, in D.C.M. Shri Ram Industries Ltd. vs Indo Organics And Ors., 2003 (66) DRJ 256 case, the Delhi High Court held that a retiring partner can be discharged from prior liabilities to third parties by agreement with the remaining partners and the third party. The agreement can also be implied by their conduct after the partner's retirement.
Partnership can offer various advantages such as shared knowledge and obligations, higher investment, and decreased risk. However, it is crucial for partners to be aware of the potential legal and financial liabilities that come with this type of business structure. In a partnership, partners may be jointly and severally liable for the firm's debts and liabilities, as well as any damages resulting from wrongful acts committed by any partner on behalf of the partnership. Nonetheless, partners can take measures to minimize these risks by establishing clear boundaries for their authority and responsibilities in a partnership agreement and by adhering to the applicable regulations and requirements. By doing so, partners can ensure a successful and prosperous partnership that will benefit all involved parties.
The writer is an Intern of the research wing at A.S.& Associates and a final year LLB(Hons) student at the University of Dhaka.
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