Unit 3: Partnership Act and Negotiable Instruments

Partnership (Section 4): relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Essentials: agreement, business, sharing of profits, mutual agency (the true test — Cox v. Hickman, 1860).

Admission of a partner (Section 31)

• With the consent of all partners; a new partner is not liable for acts before admission unless agreed.
• A minor can be admitted only to the benefits (Section 30); on majority, must elect within six months to become a partner or not.

Retirement (Section 32)

• With consent of all, by express agreement, or by notice in a partnership at will.
• Retiring partner remains liable to third parties for acts until public notice of retirement is given; may carry on a competing business (subject to restraint agreements).

Death of a partner (Section 35)

• Dissolves the firm unless the contract provides otherwise; the estate of the deceased is not liable for acts after death; no public notice needed.

Dissolution of a firm (Sections 39–44)

• Settlement of accounts (Section 48): losses paid first from profits, then capital, then by partners individually; assets applied to pay third-party debts, then partners' advances, then capital, and surplus shared in profit ratio.

A negotiable instrument (Section 13) means a promissory note, bill of exchange or cheque payable either to order or to bearer.

Classification

• Inland and foreign instruments (Sections 11–12).
• Bearer and order instruments.
• Demand and time (usance) instruments.
• Ambiguous instrument (may be treated as a note or bill — Section 17) and inchoate (incomplete, signed blank stamped paper — Section 20).
• Instruments negotiable by custom — hundis, government promissory notes, share warrants, dividend warrants.

• A promissory note cannot be made payable to bearer (RBI Act, Section 31) except by RBI/Central Government.

A cheque (Section 6) is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand; includes the electronic image of a truncated cheque and a cheque in electronic form.

• Crossing: general (two parallel lines — pay only through a bank), special (bank named), account payee (credit only to the payee's account), not negotiable (transferee gets no better title).
• Validity: 3 months from the date of issue (RBI direction).

Dishonour of cheque — Section 138

• Section 143A: court may order interim compensation up to 20% of the cheque amount.
• Section 148: in appeal, the appellant may be directed to deposit at least 20% of the fine or compensation.
• Offence is compoundable (Section 147).

• Paying banker's duty (Section 31): must honour cheques when sufficient funds are available; wrongful dishonour makes the banker liable to compensate the drawer.
• Banker must refuse payment on countermand (stop-payment) by the customer, notice of the customer's death, insolvency or insanity, a garnishee or court order, or a materially altered or irregular cheque.
• Protection of paying banker (Section 85): payment in due course of an order cheque bearing a forged endorsement is protected; Section 128 protects payment of a crossed cheque in accordance with the crossing.
• Collecting banker (Section 131): protected when collecting a crossed cheque in good faith, without negligence, for a customer.
• Drawer's liability: to compensate the holder on dishonour if due notice is given (Section 30); criminal liability under Section 138 for dishonour due to insufficient funds.
• Notice of dishonour (Section 93): must be given to prior parties to hold them liable; not required in some cases (e.g., drawer has no funds).