Minor As A Partner In Partnership Firm.docx

DR. RAM MANOHAR LOHIYA NATIONAL LAW UNIVERSITY

2018-19 CONTRACT LAW-II ‘MINOR AS A PARTNER’

SUBMITTED TO:

SUBMITTED BY:

DR. VISALAKSHI VEGESNA

NISHI TRIPATHI

ASSOCIATE PROFESSOR (LAW)

III SEM., 2ND YEAR 170101091

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ACKNOWLEDGEMENT

I have taken efforts in this project. However, it would not have been possible without the kind support and help of many individuals. I would like to extend my sincere thanks to all of them. I am highly indebted to Dr. Visalakshi Vegesna mam for her guidance and constant supervision as well as for providing necessary information regarding the project & also for their support in completing the project. I would like to express my gratitude towards my family for their kind co-operation and encouragement which help me in completion of this project. My thanks and appreciations also go to my friends in developing the project and people who have willingly helped me out with their abilities.

Nishi Tripathi 170101091

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Table of Contents INTRODUCTION ................................................................................................ 4 MINORS – ADMITTED ONLY TO BENEFITS ................................................ 4 RIGHTS AND LIABILITIES OF A MINOR ...................................................... 6 Rights of a Minor Partner .................................................................................. 7 Liabilities of a Minor Partner............................................................................. 8 POSITION OF MINOR ON ATTAINING MAJORITY ..................................... 8 CONCLUSION ................................................................................................... 12 REFRENCES ...................................................................................................... 13

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INTRODUCTION A minor is a person who hasn’t yet attained the age of majority according to the Indian Majority Act of 1875.1 Section 32 of the Indian Majority Act states that a person who is domiciled in India will attain majority at the age of eighteen. Section 30 of the Indian Partnership Act3 governs the admittance of a minor into a partnership. This section deals with the rights and liabilities of a minor who is admitted into a partnership and is entitled to the benefits of a partnership. A deeper reading of the provision, specifically sub-section (1)4 of the provision makes it very clear that a minor can’t be a full-fledged partner in a partnership. But with the consent of all the partners, a minor can be admitted to the benefits of a partnership.

MINORS – ADMITTED ONLY TO BENEFITS The general principle which has been laid down in Section 11 5 of the Indian Contract Act, 1872, states that a person has to attain the age of majority and should be of sound mind and not disqualified to enter into a contract to be a competent party. The Indian Partnership Act, 1932 was drafted by a Special Committee. Before the enactment of this statute, the provisions relating to partnerships was enshrined in the Indian Contract Act itself. While drafting the Act, the Special Committee felt that no major changes were required in the Partnership Act, and they believed that there was no reason to deviate from the principle of incapability of a minor to enter into a contract as provided by Section 11 of the Contract Act. Following this, the Committee did not allow minors to become a partner in a partnership, although they allowed a minor to be admitted

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http://admis.hp.nic.in/himpol/Citizen/LawLib/C0141.html. Indian Majority Act, § 3. 3 https://indiankanoon.org/doc/1921150/. 4 Id. 5 http://comtax.up.nic.in/Miscellaneous%20Act/the-indian-contract-act-1872.pdf. 2

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to the benefits of a partnership.6 In the judicial pronouncement of S.C. Mandal v. Krishnadhan,7 It was observed that under Section 4 of the Indian Partnership Act, a firm means a group of person who has entered into a contract of partnership among themselves and reading it with Section 11 of the Indian Contract Act, it can be interpreted that a minor cannot be a part of the contract of partnership. A minor can only be admitted to the benefits of a partnership, and that partnership has to exist independently. Also, there cannot be a contract between two minors. In simple words, there should be a partnership between two major partners before a minor can be admitted to its benefits. In the case of H.R.G Ram v. Commissioner of Income Tax,8 It was held by the High Court of Allahabad that any partnership deed which divides the obligations and rights between the major and minor partners equally will be invalid as it will be in contravention of Section 30 of the Partnership Act because in such a case not only the benefits are given to the minor, but liabilities are also being imposed upon the minor. There was some confusion regarding this proposition of law as in some cases, different high Courts of the country opined that even if a minor is made a full-fledged partner in a partnership firm, the partnership deed is to be interpreted in a liberal manner, and the obligations of the minor will be limited to the extent provided in Section 30 of the Partnership Act. But in the landmark case of Commissioner of Income Tax v. D Khetan and Co.9The Apex Court made the legal stand clear on this issue by stating that where a minor is made a full-fledged partner in the firm, the firm could not be registered by the Income Tax Department. In case the Income Tax Department do register such a partnership firm, a new contract is to be made where the minor is admitted

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http://www.legalindia.com/minority-and-partnership/. (1922) 49 Cal 560,570. 8 [1950] 18 ITR 106 (All). 9 AIR 1961 SC 680. 7

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only to the benefits of the firm, and the original contract will be rendered invalid by registration of the new contract. Therefore, the proposition of the law is very clear. The partnership deed has to make it specifically clear that the minor is admitted only to the benefits of the firm and is not personally liable for the losses. In the judicial pronounce of Banka Mal Lajja Ram & Co. v. Commissioner of Income Tax, Delhi,10 It was held by the Court that even if the other partners consent, a minor still can’t become a full-fledged partner in a firm through his or her guardian. In the case of CIT v. Kedarmall v Keshardeo,11 it was held by the Court that a contract deed is valid when a guardian enters into a partnership on behalf of the minor, provided the minor is not made liable for the losses of the partnership, and the Guardian still had the right of being the guardian of the minor when the contract was entered into. Also, the income of a minor from a partnership will not be considered for the purpose of income tax.

RIGHTS AND LIABILITIES OF A MINOR Sub-section (2)12 of section 30 of the Partnership Act states that a minor is entitled to share of profits and the property of the firm which may have decided at the time the minor was admitted to the benefits of the partnership. Under this provision, a minor also has the right to access and inspects the accounts of the firm. But this right is limited to the access and inspection only of the accounts of the firm and not any other document of the firm. Under sub-section (3) of the provision, it is stated that the minor is liable to the extent of his share in the partnership and cannot be made personally liable for the losses of the firm. In the case of S.C Mandal v. Asutosh Ghose,13 It was held by the Court that the creditors of the firm can only recover the amount from a minor to the extent of his share in

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AIR 1953 Punj 270 (DB). AIR 1968 Assam 68. 12 http://www.mca.gov.in/Ministry/actsbills/pdf/Partnership_Act_1932.pdf. 13 AIR 1915 Cal 482. 11

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the firm, but they can’t sue the minor personally. The full-fledged partners do not enjoy this benefit as they can be made personally liable. In the case of S.R Patil v. C.N. Sedalge,14 It was opined by the Court that a minor who has been admitted to the benefits of a partnership can’t be declared insolvent even if the other partners are declared as insolvent. Sub-section (4) of the provision states that the minor can sue other partners to get the benefits of the partnership, but this right to sue is limited by the provision. The minor gets the right to sue other partners to recover the benefits only if the minor sever all ties with partnership firm. This provision further states that in the case the minor sever all ties with the firm, valuation of his share is to be done by section 4815 of the Act, as far as possible. To summarise; Rights of a Minor Partner i.

A minor partner will obviously have the right to his share of the profits of the firm. But the minor partner is not liable for any losses beyond his interests in the firm. So a minor partner’s personal assets cannot be liquidated to pay the firms liabilities.

ii.

He can also like any other partner inspect the books of accounts of the firm. He can demand a copy of the books as well.

iii.

If necessary he can sue any or all of the other partners for his share of the profits or benefits.

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AIR 1965 SC 212. Indian Partnership Act, § 48. 7

iv.

A minor partner on attaining majority has the right to become a partner of the firm. He has six months from attaining majority to decide if he will execute this right. Whether he decides to become a partner or not he must give public notice about the same.

Liabilities of a Minor Partner i.

A minor cannot be held personally liable for the losses of the firm. And if the firm declares insolvency the minor’s share is kept with the Official Receiver

ii.

After turning 18 the minor partner can choose to become a partner of the firm. But he may choose to not become a partner. In this case, the minor partner has to give a public notice about this decision. And the notice has to be given within 6 months of gaining majority. If such a notice is not given even after 6 months then the minor partner will become liable for all acts done by the other partners till the date of such notice.

iii.

Should the minor partner choose to become a partner he will be liable to all the third parties for the acts done by any and all partners since he was admitted to the benefits of the partnership.

iv.

If he becomes a full-time partner he will be treated as a normal partner and have all the liabilities of one. His share in the profits and property of the firm will remain the same as it was when he was a minor partner.

POSITION OF MINOR ON ATTAINING MAJORITY Under sub-section (5), the minor has an option to either become a full-fledged partner of the firm or severe his connections with the same. He may, within six months of attaining eighteen years of age, choose to become or not, become a 8

partner and signify the same by way of a public notice as described under Section 72. Failing to do the same, results in his ispo facto becoming a partner in the firm.16The minor need not issue a public notice in case he wants to continue being a partner because he would anyway, by default, become a partner on the expiry of six months.17 The minor does continue to enjoy the rights, which he had enjoyed as a minor, after he turns into a major till he decides to either continue or repudiate the partnership or the expiry of the period six months, whichever is earlier.18 If the minor did not have the knowledge that he was entitled to benefits of the partnership, he may signify his will to repudiate the said contract within six months of his attaining knowledge of the fact that of he was entitled to benefits of the partnership in question. Under sub-section (6), the burden of proving that the minor did not have knowledge that he was in fact entitled to the benefits of partnership rests with the party asserting the same. If the person asserting so is the minor himself, then he would have the onus to prove the same in accordance with Section 10619 and if it is someone else then Section 10120 and Section 10321 will throw the onus on him.22 Under sub-section (7), clause (a), the minor, who has either chosen to continue as a full-fledged partner post attainment of majority or fails to signify his will to repudiate under sub-section (5), becomes a full-fledged partner and such a minor can be held liable for not only the debts incurred by the partnership after his becoming a partner, but also the ones which had been incurred ever since he was entitled to benefits of the partnership. Thus, the minor in a way becomes 16

Desai 231. Singh 458. 18 HK Saharay (‘Saharay’), Indian Partnership and Sales of Goods Acts 97 (2000). 19 The Indian Evidence Act, § 106. 20 The Indian Evidence Act, § 101. 21 The Indian Evidence Act, § 103. 22 Singh 458. 17

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retrospectively liable. This is a major departure from English Law, wherein the creditors are in a less favourable position.23 In English Law, the minor would be liable only for debts incurred by the firm since he attained majority.24 A minor’s share in the profits, on his joining the firm as a full-fledged partner post attainment of majority, remains the same as was set out in the deed.25 This is in line with the view taken in Bhogilal v. Commissioner of Income-tax26 (subsection (7), clause (b)) that there is no break in the continuity of a partnership in the case where the minor elects to become a partner and hence a new partnership does not come into existence. In Shivgouda Rajiv Patil v. Chandrakant Neelkanth Sedalge27 the question arose as to whether the minor partner (Chandrakant) who had attained majority subsequent to commitment of acts of insolvency by the other partners could be held to be personally liable for the debts of the firm. The Supreme Court held that it was legally impossible for the Court to hold the Chandrakant liable for the debts of a partnership that had already been dissolved before he attained majority.28 This establishes that a minor who was entitled to benefits of a partnership cannot be held personally liable for the debts of the firm when it had already been dissolved before he attained majority, i.e., attained the capacity to be a party to losses of the firm along with profits. Under sub-section (8), the minor who elects not to be a partner his share in the firm will be liable to the extent of losses and debts incurred until he gave public notice about his intention to sever his connections with the firm.29 He might

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Harmohan v. Sudarshan (1920) 25 CWN 847 as cited in Desai 232. Godde v. Harrison (1821) 5 B & Ald. 147, p. 157 as cited in Desai 232. 25 Imadadali Tayabali v. C.I.T., Poona 1972 Mah LJ 285. 26 AIR 1956 Bom 411 as cited in Desai 231. 27 AIR 1965 SC 212. 28 Id. 29 S.D. Singh 459 24

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thereafter bring a suit to enforce this quasi-contract like contract to receive his share.30 Sub-section (9) states that the two sub-sections which immediately precede sub-section (9) do not in any way affect the rights of the party to whom the minor after attaining majority might have misrepresented himself as a partner. He will be liable for “holding out”.31

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Id. Desai 233. 11

CONCLUSION This project deals with the rights and liabilities of a minor with respect to a partnership, under S.30 of the Indian Contract Act. A minor, while not being a full-fledged partner in any case, can only avail the benefits of such partnership via consent of all partners, not all of which can be minors. The position of law stands – minor partners are not personally liable for the losses suffered by the firm. A guardian may contract on the minor’s behalf to enter the partnership – as long as it is not detriment to the minor’s interest. Furthermore, a minor’s income under a partnership cannot be brought under the head of earning income and hence cannot be considered for purposes of income tax. After attaining majority, the minor can choose to stay with the partnership and subsequently become liable for losses, or severe relations altogether.

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REFRENCES  lawctopus.com/academike/minors-and-partnership-rights/  sol.du.ac.in/mod/book/view.php?id=1569&chapterid=1558  toppr.com/guides/business-laws/the-indian-partnership-act/minorsadmitted-to-benefits-of-partnership/  blog.ipleaders.in/rights-minor-partnership/  SCC OnLine  Indian Partnership Act, 1932  Indian Majority Act, 1875  Indian Contract Act, 1872

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