Indian Partnership Act
Unlimited, Joint and Several Liability of Partners
The price of partnership is personal liability. Under Section 25, 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. A creditor may sue all of them, or any one of them, for the whole amount, and may reach the personal property of the partner he sues. That is the sharpest difference between a firm and a company. This note explains what the liability covers, how it works in practice, when it begins and ends, and how it compares with an incorporated entity.
How a creditor recovers, joint and several liability, wrongful acts, when liability begins and ends, and the comparison with an incorporated entity
1. The Provision
§ Section 25 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. 'Act of a firm', defined in Section 2(a), means 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. Unlimited. The liability is not confined to the capital contributed; a partner's separate property answers for the firm's debts after the firm's property is exhausted. |
2. Joint and Several, in Practice
Aspect | What it means |
|---|---|
Joint | All the partners may be sued together for the whole obligation |
Several | Any one partner may be sued alone for the entire amount, without joining the others |
Order of application, s. 49 | The firm's property is applied first in payment of the firm's debts; the surplus, if any, goes to the partners. A partner's separate property is applied first to his separate debts, and the surplus to the firm's debts |
Contribution | A partner who pays more than his share may claim contribution from the others in their profit-sharing proportions |
Indemnity, s. 13(e) | The firm must indemnify a partner for payments made and liabilities incurred in the ordinary and proper conduct of the business |
No contracting out | A term in the deed limiting a partner's liability binds only the partners among themselves; it does not affect a third party |
3. Liability for Wrongful Acts and Misapplication
i. Section 26. Where by the wrongful act or omission of a partner, acting in the ordinary course of the business of the firm or with the authority of his partners, loss or injury is caused to a third party, the firm is liable to the same extent as the partner.
ii. Section 27. Where a partner, acting within his apparent authority, receives money or property from a third party and misapplies it, or where the firm receives it in the course of its business and it is misapplied by any partner, the firm is liable to make good the loss.
iii. The common thread. The firm answers for what is done in the ordinary course of its business, and every partner answers with it under Section 25.
4. When Liability Begins and Ends
Stage | The position |
|---|---|
Before joining | An incoming partner is not liable for acts of the firm done before he became a partner, unless he agrees otherwise: Section 31 |
While a partner | Liable for all acts of the firm done during that period: Section 25 |
On retirement | Liable for acts done before retirement; and for acts done afterwards until public notice of retirement is given: Section 32 |
On death | The estate of a deceased partner is not liable for acts of the firm done after his death: Section 35 |
On insolvency | A partner adjudicated insolvent ceases to be a partner, and his estate is not liable for later acts: Section 34 |
Holding out, s. 28 | A person who represents himself, or knowingly allows himself to be represented, as a partner is liable as one to anyone who gives credit on that faith |
5. Partnership and an Incorporated Entity
Basis | Partnership firm | Company | LLP |
|---|---|---|---|
Legal personality | None | Separate legal person | Body corporate |
Liability of members | Unlimited, joint and several | Limited to unpaid amount on shares | Limited to agreed contribution |
Property | Held by partners for the firm | Owned by the company | Owned by the LLP |
Management | Every partner may take part, s. 12 | Board of directors | Designated partners |
Succession | No perpetual succession | Perpetual succession | Perpetual succession |
Registration and disclosure | Optional; accounts private | Compulsory; public filings | Compulsory; public filings |
Cost and flexibility | Low cost, flexible, private | Higher compliance | Moderate compliance |
- The trade-off. A firm offers freedom, privacy and low cost; incorporation offers limited liability and permanence. The unlimited liability of partners is the main reason growing businesses convert into an LLP or a company.
6. Frequently Asked Questions
What does joint and several liability mean for partners?
A creditor may sue all the partners together or any one of them alone for the whole debt, and may recover from that partner's personal property.
Is a partner's liability limited to his capital?
No. Liability is unlimited; personal assets are available after the firm's property is exhausted.
Can a partnership deed limit a partner's liability to outsiders?
No. Such a term operates only between the partners; a third party is not affected by it.
Is a retired partner liable for later debts?
He remains liable for acts done after retirement until public notice is given, under Section 32.