Liability of Partners — Joint and Several →

Section 25 of the Indian Partnership Act, 1932 contains one of the most consequential sentences in Indian commercial law: every partner is liable, jointly with all the other partners and also severally, for all acts of the firm done while he is a partner. The liability is unlimited and reaches each partner's personal estate; it is the price of the mutual agency that defines a partnership. A creditor of the firm may pursue all the partners together or fix the entire debt on any one of them, and no private arrangement among the partners limiting a share of loss can be raised against an outside creditor. This chapter unpacks Section 25 and the network of provisions — Sections 26, 27, 28, 31, 32, 45 and 49 — that decide for which acts, at what time, and against whose assets a partner can be made to answer.

The starting point is the conceptual one explored in our chapter on the nature of partnership and the essential tests: a firm is not a separate legal person, and so its liabilities are ultimately the liabilities of the natural persons who compose it. Section 25 is the bridge from the firm's act to the partner's purse. We trace that bridge through the law of agency, the three categories of firm acts (contract, wrongful act, misapplication), the special case of the non-partner held out as a partner, and the temporal questions of when liability begins on admission and ends on retirement, death, insolvency or dissolution.

Statutory anchor — Section 25

Section 25 is short and emphatic. The legislature chose to make the liability both joint and several, and to fix it on every partner irrespective of who actually did the act. The provision is the foundation on which the rest of the law on relations of partners to third parties (Sections 18 to 30) is built.

Three words carry the weight. "Jointly" means the partners may be sued together as a body. "Severally" means each may be sued alone for the whole. And "all acts of the firm" imports the wide definition in Section 2(a) — any act or omission by all the partners, or by any partner or agent of the firm, which gives rise to a right enforceable by or against the firm. The liability is not capped at the partner's capital contribution; it is unlimited and extends to his separate property, a feature that distinguishes the ordinary firm from both a company and a limited liability partnership. As we set out in the chapter on the scheme and definitions of the Act, this unlimited personal exposure is the structural counterweight to the freedom and informality with which a partnership may be formed.

Partnership as an extension of agency

Section 25 cannot be read apart from Section 18, which declares that, subject to the Act, a partner is the agent of the firm for the purposes of its business. The law of partnership has been called an extension of the law of agency, and the description is exact: each partner is at once a principal and an agent — a principal as to his co-partners' acts, an agent as to his own. Lord Cranworth's classic statement captures the rationale — the liability of one partner for the acts of his co-partner is in truth the liability of a principal for the acts of his agent; every partner in trade is the agent of his co-partner, and all are therefore liable for the ordinary trade contracts of the others.

It follows that the firm is bound only where a partner acts as its agent for business purposes. Where payment is made to a partner of a sum due to the firm, it discharges the payer; but payment to a partner of a personal debt owed to one of his co-partners is no discharge, because the receiving partner is not the firm's agent for that purpose. Likewise, the agency binds dormant or sleeping partners just as it binds active ones — a sleeping partner is no less a principal for the acts of his agents, as the implied-authority cases discussed in our chapter on the kinds of partners make clear.

Joint and several — the creditor's choice

The practical force of Section 25 lies in the option it gives the third party. A creditor of the firm may bring his action against any one partner severally, or against any two or more jointly, or against all of them. No individual partner can insist that the action be brought against the others instead, or that he be sued only for his proportionate share. The liability being joint and several, the whole of the firm's debt may be recovered from a single solvent partner — a point of enormous practical significance where the other partners are insolvent or untraceable.

Crucially, no partner can plead, against the third party, an internal agreement that limits his liability to a part of the loss. Such a clause is binding only inter se — between the partners themselves — and governs the right of contribution, not the right of the outside creditor. A partner who is compelled to pay more than his rateable share may afterwards recover the excess from his co-partners by way of contribution, but this is an internal adjustment that does not concern the creditor. The liability to the outside world is thus unlimited and indivisible at the creditor's election; the internal sharing of loss is a separate matter governed by the agreement and, in default, by the equal-sharing rule of Section 13(b).

What counts as an "act of the firm"

Section 25 fixes liability for "all acts of the firm." The phrase is wide. An act of the firm includes not only contracts entered into in the course of business but also wrongful acts — fraud, negligence, misrepresentation, misapplication of money, conversion, defamation and other torts — provided they are committed in the ordinary course of the firm's business or with the authority of the partners. The categories are not watertight; a single transaction may give rise to both contractual and tortious liability. What unites them is that each is an act done by a partner in his capacity as agent of the firm, so that the firm — and through it every partner — is answerable.

Equally important is the temporal qualifier: liability under Section 25 attaches only for acts done "while he is a partner." There can be no liability under this section for acts of the firm done after a person has ceased to be a partner — though, as we shall see, a retiring partner's liability may continue under Sections 32(3) and 45 until public notice is given, and a newly admitted partner is generally not liable for what was done before he joined.

Liability for contracts — implied authority

For contractual liability, the firm is bound by any act of a partner done to carry on, in the usual way, business of the kind carried on by the firm (Section 19). This is the partner's "implied authority." The reason the firm is bound is that the third party cannot always know the precise authority conferred on each partner; he is entitled to assume that a partner has authority to do whatever is ordinarily necessary to carry on the firm's business. The scope of implied authority is determined by the nature of the business, and the courts have distinguished trading from non-trading firms in deciding, for example, whether a partner had implied authority to borrow money or accept negotiable instruments.

Two illustrations fix the principle. In Mercantile Credit Co. Ltd. v. Garrod, (1962) 3 All ER 1103, a partnership of an active and a dormant partner carried on a garage business of letting lock-up garages and repairing cars; the sale of a second-hand car by the active partner, though not expressly authorised, was held to fall within the implied authority because it was the kind of thing such a business does, and the dormant partner was bound. In Higgins v. Beauchamp, (1914) 3 KB 1192, by contrast, the business of a cinematograph-theatre proprietor was held not to be a trading business, so that a loan raised by the managing partner did not bind his sleeping co-partner. The dividing line and the statutory restrictions on implied authority under Section 19(2) are developed at length in our chapter on the essentials and tests of partnership; for present purposes the point is that wherever the act falls within actual, implied or apparent authority, Section 25 makes every partner answerable for it.

Liability for wrongful acts — Section 26

Where the firm's liability arises not from contract but from a wrong, Section 26 supplies the rule. It rests on the same agency footing as the master's vicarious liability for the torts of his servant and the principal's liability for the wrongs of his agent under Section 238 of the Indian Contract Act.

Two conditions must be satisfied: the wrongful act must have been done either (i) in the ordinary course of the firm's business, or (ii) with the authority of the co-partners. Where a partner's wrong falls outside the ordinary course of business and is neither expressly authorised nor within his implied or apparent authority, the firm — and the innocent partners — cannot be saddled with it. The "wrongful act" may be a tort, fraud, negligence, misrepresentation, misappropriation, defamation or even a crime carrying a civil penalty; the test is always whether it was committed in the conduct of the firm's business. Because Section 26 makes the firm liable "to the same extent as the partner," the joint-and-several rule of Section 25 then operates to make every partner personally answerable for the wrong of one.

Liability for misapplication — Section 27

Section 27 deals with the specific case of money or property entrusted to the firm or to a partner and then misapplied. It lays down two distinct rules.

Under clause (a), the receipt is by a single partner acting within his apparent authority — the authority as it appears to others — and it is not necessary that the property ever reached the firm's custody; the apparent authority of the receiving partner is enough to bind the firm. Under clause (b), the receipt is by the firm in the course of business, and the misapplication may be by any partner while the property is in the firm's custody. The leading illustration is Rhodes v. Moules, (1895) 1 Ch 236, where a partner in a firm of solicitors, asked to obtain a loan for a client on mortgage, told the client that the mortgagee wanted additional security and obtained share warrants payable to bearer, which he then misappropriated and absconded with. The Court of Appeal held that receiving such warrants was within the partner's apparent authority — the firm habitually received bearer securities from clients — so that the innocent partners were liable.

The limits are equally instructive. Where money is given to a firm of solicitors or bankers for investment generally — at the firm's discretion, rather than on a specific security — and is misappropriated, the firm is not liable, because receiving money to invest at large is no part of the ordinary business of solicitors or bankers. And where a partner receives money or property in a purely personal capacity, the firm escapes. In British Homes Assurance Corpn. Ltd. v. Paterson, [1902] 2 Ch 404, a solicitor took a new partner into his firm and gave the client notice of the change; the client ignored the notice, continued to deal with the original solicitor alone, sent the mortgage money by cheque payable to his order, and accepted his personal receipt. When the solicitor misappropriated the money, the new partner was held not liable, because the client had by his own conduct elected to treat the original solicitor as his sole contracting party. The case is a clean demonstration that where a third party deals with one partner alone, the firm is not bound.

Liability of a non-partner — holding out

So far the liability has fallen on actual partners. Section 28 extends liability to a person who is not a partner but who allows himself to be treated as one. The doctrine of "holding out" is a branch of the law of estoppel: a person who, by words or conduct, represents himself or knowingly permits himself to be represented as a partner is estopped from denying it against anyone who, on the faith of that representation, has given credit to the firm.

Two requirements emerge. First, there must be a representation — express or implied, and made by the person himself or knowingly permitted by him. The use of a person's name on the firm's signboard, letterhead or correspondence, with his assent, is a typical instance; mere appearance of a name without any voluntary act is not enough. Thus in Oriental Bank of Commerce v. S.R. Kishore, AIR 1992 Del 174, liability by holding out was fastened on a person whose signatures appeared on all the essential documents and who took an all-round part in the business. The principle was stated long ago in Waugh v. Carver, (1793) 2 H Bl 235 — a person who lends his name as a partner to the world will be liable as one, on grounds of general policy, to prevent the frauds to which creditors would otherwise be exposed.

Second, the claimant must have known of the representation and given credit on its faith. If he never heard of it, or knew the true position, or would have given credit anyway, there is no liability, for he was not misled. The motive or state of knowledge of the person holding himself out is immaterial. The negative side of the doctrine is illustrated by Tower Cabinet Co. v. Ingram, (1949) 1 All ER 1033: after Ingram retired and Christmas carried on alone, Christmas ordered goods on old notepaper bearing both names; Ingram was held not liable, because his mere negligence in failing to destroy the old stationery did not amount to knowingly permitting himself to be represented as a partner. By contrast, Scarf v. Jardine, (1882) 7 App Cas 345 establishes the converse rule for retirement — those who had dealt with the firm before a change are entitled to assume, until they receive notice, that no change has occurred, and a retiring partner who fails to give notice may be fixed with liability on the holding-out principle. The interaction of holding out with the categories examined in our chapter on partnership distinguished from co-ownership, HUF, company and club is a fertile source of examination problems, because the apparent-partner of a club or association is often not a partner at all.

Finally, holding out is confined to liability for credit given on the faith of the representation; it does not extend to a tort committed by or on behalf of the firm. Nor does it apply to a deceased partner whose name is continued in the firm name (Section 28(2)), to an insolvent partner, or to a dormant partner whose connection with the firm was never known — for in each case there is no representation on which a creditor could have relied.

When liability begins — incoming partners

Because Section 25 fixes liability for acts done "while he is a partner," an incoming partner is, as a rule, not liable for debts contracted before he joined. Section 31(2) confirms that a person admitted as a partner does not thereby become liable for any act of the firm done before he became a partner. Thus where goods were supplied before a new partner's admission, the new partner is not answerable for the price even if a bill for it is later accepted in the joint names of all the partners, including his own, as in Shirreff v. Wilks, (1800) 1 East 48. The only way the pre-admission liability can be transferred to the incoming partner is by novation — a tripartite agreement between the creditor, the old firm and the incoming partner, by which the creditor agrees to accept the new firm as his debtor in substitution for the old. Absent such an agreement, the incoming partner's liability runs only from the date of admission.

When liability ends — retirement and notice

Retirement is where the temporal limits of Section 25 are tested hardest. The governing principle, in the words of the cases, is that one may retire from a firm but one cannot retire from subsisting liabilities. A retiring partner remains liable for acts of the firm done before his retirement, and even an internal arrangement releasing him from outstanding debts does not bind the firm's existing creditors. He may, however, be discharged from such past liability under Section 32(2) by an agreement — express, or implied from a course of dealing — between himself, the reconstituted firm and the creditor. This is again novation, requiring the creditor's assent.

For acts done after retirement, Section 32(3) keeps the retiring partner and the continuing partners liable to third parties as if he were still a partner, "until public notice is given of the retirement." The rationale is that a creditor who knew the person to be a partner is entitled to assume that the mutual agency continues until he is told otherwise. Public notice is, however, not the only way to terminate this liability: a retired partner can defend himself against a particular creditor by proving that that creditor actually knew of the retirement, for then there is no representation on which the creditor could have relied. New customers who never knew the retired partner to be a partner cannot fix him with post-retirement liability at all. The liability of an expelled partner is, by Section 33(2), the same as that of a retiring partner. These mechanics are part of the broader law on outgoing partners and the firm's continuity discussed in our chapter on kinds of partnership and partners.

Death, insolvency and the dormant partner

Three categories of outgoing partner need no public notice to end their liability for future acts. On the death of a partner, Section 35 provides that, where the firm is not dissolved by the death, the estate of the deceased is not liable for acts of the firm done after the death — and Section 28(2) adds that continuing the deceased's name in the firm name does not by itself make his estate liable. On the insolvency of a partner, the fact of adjudication is itself treated as public notice, so the insolvent's estate is not liable for the firm's acts after the date of the order. And a dormant or sleeping partner, whose connection with the firm was never known to those dealing with it, need give no public notice on leaving, because there was no representation of partnership to displace. The rule is symmetrical with the holding-out doctrine: notice is required only to undo a state of affairs the creditor was entitled to rely on.

Liability after dissolution — Section 45

What is true of retirement is true, on a larger scale, of dissolution of the whole firm. Section 45 preserves the partners' liability to third parties after dissolution until the world is told of it.

The structure mirrors Section 32(3): continuing liability until public notice, with the same exceptions for the deceased, the insolvent and the unknown (dormant) retiring partner. The reason is identical — a third party who knew of the firm and of the mutual agency between its members may continue to presume that the agency subsists until public notice of its end is given. The detailed mechanics of winding up, the order of distribution and the rights inter se on dissolution are taken up separately; for the present subject, Section 45 is the provision that prevents partners from quietly dissolving and then disclaiming liability for what is done in the firm's name in the interim.

Marshalling — firm and separate debts (Section 49)

When the firm and its partners face both firm creditors and the partners' personal creditors, Section 49 lays down the rule of marshalling that decides who is paid out of which fund. It is a question that becomes acute on insolvency, where the firm's assets and a partner's separate assets must be applied to competing classes of debt.

The principle is one of separate funds for separate classes of creditor. Firm creditors have the first claim on firm property; only the surplus of a partner's share, after the firm's debts are met, is available to that partner's personal creditors. Conversely, a partner's separate creditors have the first claim on his separate property; only the surplus, after his personal debts are met, goes to the firm's creditors. This double rule of priority — sometimes called the rule in Garner v. Murray's family of insolvency principles, though Section 49 states it directly — prevents the two classes of creditor from cannibalising each other's security and reflects the idea that, although the firm is not a separate person, its assets are nonetheless a distinct fund earmarked primarily for its own creditors.

The LLP escape from unlimited liability

The unlimited, joint-and-several liability of Section 25 is the single most important reason a business may choose not to be an ordinary partnership. Under the Limited Liability Partnership Act, 2008, a partner's liability is limited to his agreed contribution, and a partner is not personally liable for the wrongful acts or frauds of another partner committed without his knowledge or authority. This is the deliberate inversion of the general-partnership rule that "each partner is liable jointly as well as severally for the debts and obligations of the business." The LLP thus offers the limited liability of a company combined with the internal flexibility of a partnership — at the cost of registration, disclosure and the regulatory regime of the 2008 Act. For an ordinary firm governed by the 1932 Act, however, there is no such shelter: Section 25 stands, and every partner's personal estate is on the line for the firm's debts.

Exam pointers and recurring distinctions

A handful of propositions recur in judiciary and CLAT-PG papers. First, the bare text of Section 25 — "jointly with all the other partners and also severally" — is frequently asked verbatim; the liability is joint and several, not merely joint, and the creditor has the choice. Second, the three statutory heads of firm liability map to three sections: contracts to Sections 18–19 (implied authority), wrongful acts to Section 26, and misapplication to Section 27 — and Section 27 itself splits into apparent-authority receipt by one partner (clause a) and in-custody misapplication by any partner (clause b). Third, holding out under Section 28 is liability of a non-partner on estoppel principles, requires a representation plus reliance, and does not cover torts; Tower Cabinet v. Ingram (not liable — mere negligence) and Oriental Bank v. S.R. Kishore (liable — active participation) are the contrasting authorities.

Fourth, on the temporal questions: an incoming partner is not liable for prior debts absent novation (Section 31); a retiring partner stays liable for future acts until public notice (Section 32(3)), as does the firm after dissolution (Section 45); but no public notice is needed for the death, insolvency or departure of a dormant partner. Fifth, Section 49 marshals firm property to firm debts first and separate property to separate debts first. Candidates who can keep these section numbers and the joint-and-several formula straight will handle the bulk of the questions on partner liability. For the conceptual underpinning, revisit the introduction, scheme and definitions and the Partnership Act hub, where the agency foundation of the whole subject is set out.