ABC & Co. is a renowned partnership firm doing business in textile industry from last twenty years. But due to technical up-gradation, firm incurred heavy debts of ` 50 lakhs. To maintain the integrity of the firm they introduced Mr. D, as a new partner. Before admission of D, other partners A, B, and C decided on their own and made an agreement with the creditors that the new partner will be liable for existing debt through novation. When D joins, he came to know about the debt of ` 50 lakhs. With reference to the provisions of the Indian Partnership Act, 1932, give your opinion:
(i) Whether D would be liable for the debts of the firm incurred prior to his admission by virtue of the agreement between A, B, C and the creditors?
(ii) Whether your answer will be different if D was minor at the time of admission?
(iii) Whether D would be liable to pay the debt upon becoming major?

Question

ABC & Co. is a renowned partnership firm doing business in textile industry from last twenty years. But due to technical up-gradation, firm incurred heavy debts of ` 50 lakhs. To maintain the integrity of the firm they introduced Mr. D, as a new partner. Before admission of D, other partners A, B, and C decided on their own and made an agreement with the creditors that the new partner will be liable for existing debt through novation. When D joins, he came to know about the debt of ` 50 lakhs. With reference to the provisions of the Indian Partnership Act, 1932, give your opinion: 
(i) Whether D would be liable for the debts of the firm incurred prior to his admission by virtue of the agreement between A, B, C and the creditors?
(ii) Whether your answer will be different if D was minor at the time of admission?
(iii) Whether D would be liable to pay the debt upon becoming major?

Accepted Answer

i) Liability of D: As per section 31 of the Indian Partnership Act, 1932, the liabilities of the new partner ordinarily commence from the date when he is admitted as a partner, unless he agrees to be liable for obligations incurred by the firm prior to the date. The new firm, including the new partner who joins it, may agree to assume liability for the existing debts of the old firm, and creditors may agree to accept the new firm as their debtor and discharge the old partners. The creditor's consent is necessary in every case to make the transaction operative. The mere agreement amongst partners cannot operate as Novation. Thus, an agreement between the partners and the incoming partner that he shall be liable for existing debts will not ipso facto give creditors of the firm any right against him. 
In the instant case, D would not be liable for the debts of the firm incurred prior to his admission by virtue of the agreement between A, B, C and the creditors.
ii) If D was minor at the time of admission: As per section 30, the liability of the minor is confined only to the extent of his share in the profits and the property of the firm. 
Minor has no personal liability for the debts of the firm incurred during his minority. 
Moreover, a mere agreement amongst partners cannot operate as Novation. Thus, an agreement between the partners and the incoming partner that he shall be liable for existing debts will not ipso facto give creditors of the firm any right against him. 
Hence, D would not be liable in this case also.
iii) Liability of D upon becoming major: A minor partner on attaining majority becomes personally liable to third parties for all acts of the firm done since he was admitted to the benefits of partnership. 
Moreover, a mere agreement amongst partners cannot operate as Novation. Thus, an agreement between the partners and the incoming partner that he shall be liable for existing debts will not ipso facto give creditors of the firm any right against him. 
Hence, D would not be liable to pay the existing debt upon becoming major.

Question Scenario

Suggested Answer

1. Provisions of the Act / Applicable Law

2. Analysis & Application of Facts

3. Conclusion & Verdict

Ready to Practice More Law Cases?