Liability for misapplication of money or property by a partner – Section 27

In this Section, two kinds of cases of misapplication of money or property have been mentioned:

a) When money or property have been received by a partner and he misapplies the same without accounting for it to the firm, and

b) When the money or property is received by the firm from the third party and same is misapplied by any of the partners.

In both these cases, the firm is liable to make good the loss to the third party.

a) Liability for money or property received by a partner who misapplies the same

According to Section 27(a) when a partner acting under apparent authority receives money or property from the third party and misapplies the same the firm is liable for that.

Case: Willet v. Chambers – One of the partners of a firm of solicitors received money from the client for being invested on a mortgage and misapplied the same. The other partners who were ignorant of this fraud were also held liable along with guilty partner. Similar decision was given in Rhodes v. Moules.

If the act done by the partner is not within his apparent authority the firm cannot be made liable.

Cases:

i) Cleather v. Twisden – One of the partners of the firm of solicitors received bonds payable to bearer and misappropriated the same. It was found that receipt of such securities for safe custody was not a part of business of solicitors and therefore the other partners could not be held liable for same.

– If the money or property has been received by a partner not in the ordinary course of business of the firm but only in his personal capacity then also firm cannot be made liable.

ii) British Homes Corporation Ltd. v. Patterson – It was held that misappropriation of cheque which is received in the name of partner and not in name of the firm is received in his personal capacity and so other partners are not liable.

b) Liability for money and property received by a firm and misapplied by a partner

Cases:

i) Blair v. Bromley – In a firm of solicitors two partners received some money to be invested in a mortgage. The money was deposited with the firm’s banker. One of the partners misapplied the money. This fraud was not known to other partner but it was held that other partner could be made liable.

ii) Ex parte Buddulph – One of the partners of the firm of bankers withdrew the trust money and misapplied the same. All the partners of the firm were held liable to make good the loss. Similar decision was given in Sadler v. Lee.

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