Execution of Banks’ Documents by Partnership
Firm
Ashok Mundra, Mumbai.
Unlike a company, a partnership is represented by the partners constituting it. Therefore any one or more of
the partners can execute documents required for obtaining finance from Banks, binding the firm and other
partners.
Security documents play a crucial role in respect of Bank’s advances. Such document establish the legal link
between the parties to a contract. The documents constitute the primary evidence of contract disclosing
respectively the rights and liabilities of the Bank and its borrowers. In view of this, due care has to be taken
while executing documents by both the parties to a contract. If the documents are not properly executed,
there are bound to be difficulties at a later stage/enforcement stage. In the light of this, this article is an
attempt to understand the nuances of relationship of a firm vis-a-vis partners and amongst the partners with
regard to execution of documents with Bank against any loan taken by a partnership firm.
A partnership is an association of persons formed to run a business with a common objective of earning
profit. It is a popular form of organization to carry business in India. A contract of partnership is a special
contract governed by the Indian Partnership Act, 1932. As per law, a partnership is a branch of law of
agency. The judicial committee of the Privy Council, in the 1847 case of Bank of Australiasia v. Breillat, has
extracted with approval, a passage from Story on agency, as follows :
"Every partner is, in contemplation of law, the general and accredited agent of the partnership, or as it
is sometimes expressed, each partner is preapositus negotiis societatis, (put in charge of a
partnership’s business) and may consequently bind all the other partners by his acts in all matters
which are within the scope and objects of the partnership. Hence, if the partnership be of a general
commercial nature, he may pledge or sell the partnership property, he may buy goods on account of
the partnership; he may draw, make, sign, indorse, accept, transfer, negotiate, and procure to be
discounted promissory notes, bills of exchange, cheques and other negotiable paper in the name and
on account of the partnership."
Implied authority in partnership :
Under section 18 of the Partnership Act "every partner is an agent of the firm for the purpose of
business being carried on by the firm."
Again Section 19 of the Partnership Act reads, "subject to the provision of Section 22, the act of a partner
which is done to carry on, in the usual way, the business of the kind carried on by the firm, binds the firm".
That is the scope of the authority of a partner to bind the firm as well as the other partners, by his acts, in the
course of the business of the firm.
The Indian Partnership Act defines partnership as "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." As such, it is transparent that, one partner
can bind others and/or the firm by his acts in the course of business, as he is, then, presumed to be acting for
all the partners.
In the case of a partnership firm having some partners as active partners and others as sleeping partners, it
must be clear that there is an implied or express agency constituted in favour of one partner by the other
partners. If there is no element of agency, even if there is any agreement to share profits, there will not be any
partnership. So a partner has a double capacity, he is the principal so far as he is concerned and the agent so
far as other partners are concerned. (Chimanram v. Janyantilal, 41, Bom. LR 899).
Therefore when documents are executed with banks for and on behalf of a partnership firm, it is desirable to
make the firm by one or more of its partners as a party or one or more partners can be made a party in his or
their names but as partners of their firm. Thus the name of the firm and its partners are different. The name
by itself has no legality alike name of a limited company or a corporate body. Therefore for every document
to which a firm is a party, it is the partners who are parties and it is therefore essential that the partners should
be parties thereto or one or more partners who has or have express or implied authority to represent others.
Section 22 of the Partnership Act also makes it clear that, 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’s name or in any other manner
expressing or implying an intention to bind the firm. In M.M. Abbas Brothers and others v. Chethandas
Fatechand and another AIR 1979 Mad 272, the Madras High Court has held that, 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 the firm and not the individual
partner, who signed the instrument.
Under Section 23 of the Partnership Act, an admission or representation made by a partner concerning the
affairs of the firm is evidence against the firm, if it is made in the ordinary course of the business.
The Calcutta High Court in Bengal National Bank Ltd. v. Jatindra Nath Mazumdzar AIR 1929 Cal 714, has
explained that, an acknowledgement of a debt by a partner in the ordinary course of business is an admission
against the firm. The partner of a trading firm has an implied power to admit a debt. The Kerala High Court
in K A Lona v. Dada Haji Ibrahim Hilari and Co., AIR 1981 Ker 86 at 98 has opined that a reading of
sections 18 and 19 of the partnership act, makes it clear that every partner was an agent of the firm for the
purpose of carrying on business and the act of the partner which was done to carry on only in the usual way,
business of the kind carried on by the firm, binds the firm.
A partner of the firm is, therefore, an agent of the firm and he can bind the other partners by his act. This is
what is called implied authority of a partner. It has been appreciated that implied authority, referred to, is, of
course, with some limitation. A partner can bind the other partner with his act provided it has been done for
the purpose of business carried on by the firm.
A banker, may, therefore, be legal in granting credit to a firm at the request of single partner and bind the
other partners with the debt. However, if the credit is disputed by the other partners, the banker, in addition to
providing the proof of execution of documents, will also have to establish that the credit availed by the single
partner was for the purpose of the business use being carried on by the firm. This additional burden of proof
will place the banker in a disadvantageous position as it is very difficult to establish utilisation of funds as
demanded. And a Banker would therefore have to make all partners of the firm joint signatories to any
request for credit for execution of documents for credit, which is against the basic principal.
Liability of partnership
The liability of partnership is joint and several. This is clearly explained in Section 25 of the Partnership Act
which says : "Every partner is liable jointly with all the partners and also severally for all the acts of the firm
done while he is a partner."
Thus, all the partners are jointly and severally liable for all the debts of the firm. However, the personal
liability of a partner for the debts of the firm arises only when there is something available out of the assets of
a partner after his private secured debts are cleared, as mentioned in Section 49 of the Partnership Act. For
example, if the debts due by a partnership to a banker is Rs.30 lacs and there are no partnership assets
available for realization of the amount due, the banker can have recourse to the personal assets of the
partners. But if the partners of the firm, viz., A & B have insufficient assets available after repayment of their
liabilities, then there will be difficulty in realising from the personal assets of the partners towards the
partnership debt. This is overcome by specifically making the partners execute the promissory
note/agreement liable jointly and individually using the standard phrase "not only as partners but also in
individual capacity".
Inclusion of such a phrase would make the partner liable individually transgressing the limitation stipulated
under section 49 of the Partnership Act & giving a right to a banker to move against the personal assets of the
partner side by side with the personal creditors of the partner instead of being pushed behind the private
creditor of a partner.
Another advantage to a banker on account of the joint and several liability of the partners is that a banker
could exercise his right of set off by approaching a credit balance outstanding payable to a partner against the
firm’s debts.
In view of the joint and several liability of the partners in a partnership firm, a banker will be able to take into
account the financial net worth of each of the individual partner in addition to the partnership’s net worth
while computing latter’s net worth.
Now the question arises, whether an instrument becomes defective, invalid, or unenforceable if it has been
signed by only one partner of the firm on behalf of the firm ? This issue has been answered in the negative by
the Supreme Court of India, in Purshottam Umedbhai and Co. v. Manilal and Sons AIR 1961 SC 325. In that
case, a power of attorney (POA)was not signed by all the partners of the firm but only one of the partners.
The Supreme Court pointed out that, it was not necessary that, the POA should have been signed by all the
partners of the firm because, this partner was also the manager of the firm. The Supreme Court further
observed that under Section 18 of the Partnership Act, a partner is an agent of the firm for the purposes of the
business of the firm, and he was therefore, the agent of the firm as well as its manager.
In the subject context, the following are other few examples where the relationship of partner vis-à-vis the
firm, have been decided by the courts :
In Pattabhirami Reddi v. Balliah, (AIR 1928 Mad. 1196), the promissory note was signed by two partners,
whereas there were three partners in the firm. The documents recited that the borrowing was made for the
necessity of the partnership firm. It was held that, on a fair interpretation of the instrument, the name of the
firm as the party was liable was sufficiently disclosed and a such, all the partners were liable. It was argued
in the Court that, the firm will be liable only if the partner signed in their capacity as partners or specifically
in the name of the firm. This argument was rebutted by the High Court explaining that Section 27 of the
Negotiable Instruments Act, which provides that a person may be bound by a duly authorized agent, acting in
his name. Accordingly, the instrument was held to be binding on the firm and its partners.
In Keshari Engineering Works v. Bank of India (AIR 1991 Pat. 194) : It is beyond dispute that a managing
partner of a firm can borrow money for the purposes of the business of the firm and the other partners are
bound by his acts and are answerable for the debts contracted by him. The Patna High Court observed that so
far as plaintiff bank is concerned, the loan was advanced by it in respect of the firm’s business and
promissory notes and other documents have been signed on behalf of the firm. As such, all the partners were
liable to the bank to repay the amount advanced to them, jointly and severally. It was further held that, the
guarantee bond executed by the guarantors being continuing one, their liability was also co-extensive with
the principal borrowers. As the loan was advanced to the firm and its partners, the privity of contract existed
between the plaintiff bank and the defendant.
In Onkarlal v. Madanlal Sidhulal (AIR 1952 MP 78), an acknowledgement of the account by one partner
was held to be binding on the other partners of the firm.
Conclusion
Subject to the restrictions if any, in the partnership deed of the firm, any partner can apply for a loan for the
business of the firm, execute required documents and that will bind the firm in the normal course of business.
In other words, signing of documents/instruments, by all the partners of a firm is not necessary vis a vis the
validity and enforceability thereof qua the firm.
FOOTNOTES:
e-mail : ashok_mundra@rediffmail.com