A partner has no implied authority to transfer an asset of the firm without consideration after dissolution, and a third party can challenge the validity of such a transfer.

Headnote:
PARTNERSHIP - DISSOLUTION - AUTHORITY OF PARTNER - TRANSFER OF ASSET - CONSIDERATION - VALIDITY - SECTION 19 (2) (C) AND SECTION 47 OF THE PARTNERSHIP ACT, 1932.
Fact of the Case:

A partnership firm dissolved and one of the partners, without consideration, endorsed a promissory note in favor of the appellant. The appellant filed a suit on the basis of the promissory note against the defendant, who was a third party to the partnership. The defendant contended that the endorsement was invalid due to lack of consideration and authority.
Finding of the Court:

The court held that the endorsement of the promissory note was invalid as it was made without consideration and the partner who made the endorsement had no authority to do so. The court relied on Section 19 (2) (c) and Section 47 of the Partnership Act, 1932, which limit the authority of partners to bind the firm after dissolution.
Issues: 1. Whether a partner has the authority to transfer an asset of the firm without consideration after dissolution? 2. Whether a third party can challenge the validity of an endorsement made by a partner without consideration?
Ratio Decidendi: 1. Under Section 19 (2) (c) of the Partnership Act, 1932, a partner has no implied authority to compromise or relinquish any claim or a portion of a claim of the partnership. 2. Under Section 47 of the Partnership Act, 1932, a partner's authority to bind the firm continues after dissolution only for the purpose of winding up the affairs of the firm and completing unfinished transactions. 3. A transfer of an asset without consideration or a compromise or relinquishment of a claim without receiving consideration thereunder does not fall within the scope of winding up the affairs of the firm. 4. A third party can challenge the validity of an endorsement made by a partner without consideration, as the endorsement is invalid and the defendant would be liable to the partners if they filed a suit against him.
Final Decision: The second appeal was dismissed with costs.

( 1 ) IN view of the important question raised in this case I think the decision reported in Nagappa v. Bhagawanji Rasaji, (1936)71 M. L. J. 378 : I. L. R. (1936)59 Mad. 1936 : A. I. R. 1936 Mad. 593 has to be carefully considered. Its effect also will have to he examined. As there is no authority of the Court and the decision cited above is likely to effect the transactions of the trading firms, i think it is advisable to refer the case to a Bench for an authoritative decision. In pursuance of the abovesaid order, this second appeal came on for hearing before the Bench. C. Seetharamayya for G. Venkatarama Sastry, for Appellant. K. Suryanarayana and Y. S. Tatarao, for Respondent. The Judgment of the Court was delivered by jaganmohan Reddy, C. J.-Our learned brother Gopal Rao Ekbote, J. , has referred this second appeal to a Bench as in his view the decision in Nagappa v. Bhagawanji rasaji, requires careful consideration, and the matter is one of importance. The question that requires consideration in this second appeal is whether the endorsement of a promissory note made by one of the partners of a dissolved firm without consideration in favour of the appellant is a valid one entitling the appellant to sue and recover the sum as a holder of the promissory note. It appears, and the facts are not in dispute, that four persons viz. , (1) Venkataramanjaneyulu (defendant), (2) Dhananjayudu, (3) M. Satyanarayana, and (4) Kodali Venkata sub bar ao constituted a partnership firm on 29th November, 1949 of which the last named person was the managing partner. In the year 1953, M. Satyanarayana retired and in his place Venkataramiah was taken as partner and this partnership continued till 15th July, 1953 on which date the defendant Venkataramanjaneyulu retired and the other three constituted a new firm.

( 2 ) IT is contended by the defendant that though he was not to share the profits and losses in the partnership firm, nonetheless he was made a partner as the banks were insisting op his signature. Consequently, the partners executed an indemnity letter (Exhibit B-3) by and under which any liability which the defendant may have to incur on behalf ol the firm will be indemnified by the firm and the individual partners. The appellant, however, does not admit tnat the defendant was a partner in any sense of the term. It was only because he was a surety that the indemnity bond was given. To all intents and purposes according to the appellant, the defendant was a stranger to the partnership after the dissolution and re-constitution of the firm on 15th July, 1953. It is, however, not disputed that when the accounts were gone into on tnat date, the delendant was found owing to the partnership firm a sum of Rs. 6,800 ol which Rs. 4,800 was paid by the delendant and for the balance of Rs. 2,000 he executed a promissory note (Exhibit A-1) in lavour of the partnership firm viz. . Kodali Venkata Subba Rao being tne managing partner. It is again not in dispute that several suits were filed against the partnership firm in which the delendant was made a partner in the new firm constituted alter the defendant had ceased to be a partner on 15th July, 1953, and that decrees also were obtained in those suits by and under which tlie delendant became liable for the debts of the partnership firm, and which according to the delendant the partners of the firm were liable to pay under the indemnity bond. Since the partnership firm had huge losses it was dissolved and there was also a suit filed by dhananjayudu, one of the partners, on 17th April, 1958 lor accounts ol dissolved firm. When this suit was pending, the erstwhile managing partner, Kodali venkata Subba Rao purported to transfer Exhibit A-l by an endorsement (Exhibit a-2) for a consideration of Rs. 2,000 in iavour of the appellant on 2nd August, 1958. The appellant on 22nd June, 1959 filed a suit on the basis of the promissory note in the District Munsif s Court, Gudivada, against the defendant stating

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Judicial Analysis

1966 Supreme(AP) 284

Andhra Pradesh High CourtJudges : ANANTA NARAYANA AYYAR, JAGMOHAN REDDYBellapu Venkatappayya - AppellantVersusAdusumilli Venkataramanjaneyulu - RespondentDecided On : 12-29-66

A partner has no implied authority to transfer an asset of the firm without consideration after dissolution, and a third party can challenge the validity of such a transfer.

Cases Referred (2)

Judicial Analysis

Andhra Pradesh High Court
Judges : ANANTA NARAYANA AYYAR, JAGMOHAN REDDY
Bellapu Venkatappayya - Appellant
Versus
Adusumilli Venkataramanjaneyulu - Respondent
Decided On : 12-29-66