Section 17: Effect of change in the firm

Sometimes, after certain rights & duties of partners are in existence certain changes might occur in the firm. This section contemplates three kinds of changes in a partnership firm:
a) Change in constitution of the firm – A change in constitution of the firm occurs either when a new partner is admitted or a partner ceases to be partner by retirement, expulsion, insolvency or death.
b) Business continued after the expiry of the term – Partners may have originally agreed to carry on business only for fixed term, it is possible that inspite of completion of term, partners do not close down business but continue to run same.
c) Carrying out of additional undertakings – A firm may have constituted to carry out one or more adventures or undertakings but subsequently the partners may decide to carry out some more adventures or undertakings.

In all such cases, the question arises that what will be the position of mutual rights and duties of the parties after the changes take place. Inspite of these changes, the mutual rights & duties of parties after the change continue to be same as they were existing earlier.
– This rule is however subject to contract between the partners. The partners may by a contract vary their rights and duties when one or the other of the changes take place.

# Some other relevant case law
i) Aas v. Benham – A partner in a firm of ship-brokers helped the formation of a company for building ships. In so doing he used information which he had acquired as a member of the firm. He received remuneration for his services and subsequently joined the company as a director at a salary. He was sued for an account of these earnings.
But was held not liable as the formation of a company and the business of a shipbuilding company were something entirely beyond the scope of the partnership.

ii) Velji Raghavji v. State of Maharashtra – The appellant was the working partner of a firm. It was agreed among the partners that he should carry on the work of realising the dues of the partnership. On the allegation that he misappropriated certain sums and also failed to deposit in the bank some collections, he was convicted for the offence of criminal breach of trust under Section 409, IPC. The Supreme Court acquitted him. Even if there was a mandate to the appellant with respect to some dues to collect and deposit them in the bank, failure to do so would not constitute the offence, as the appellant was also authorised by the other partners to spend the money for the business of the partnership.
The appellant would not also be guilty of dishonest misappropriation of property under Section 403 of the Code, because he had undefined ownership along with the other partners over all the assets of the partnership and as such owner, in whatever way, and with whatever intention he used the property, he would not be liable for misappropriation.

iii) Blisset v. Daniel – The plaintiff was working in partnership with certain persons. It was proposed to appoint one of the partner’s son as a co-manager of the firm. The plaintiff objected. The aggrieved father complained to his partners behind the back of the plaintiff
and persuaded them to sign and serve upon the plaintiff a notice of expulsion. This was done in the exercise of a power which authorised a majority to expel any partner without giving any reason.
The plaintiff contested the validity of the expulsion and it was set aside. The court pointed out that powers are given to the majority so that in case of need they may be exercised in good faith for the benefit of the firm. It is no doubt for the partners to decide what is in the interest of the firm but they must do so in good faith. Majority powers should not be used for base or unworthy purpose or merely to injure a co-partner.

iv) Thomas v. Atherton – T, the managing partner of a colliery, received notice from L, an adjoining owner, that the workings were being carried on beyond the boundary. T insisted
that he was entitled to the disputed ground, and carried on his working. The matter, having been referred to arbitration, he was held liable to pay £6,000 as damages for the trespass. His claim for contributions from his co-partners failed as the loss was not suffered in the ordinary and proper conduct of the business.
“He worked beyond the limits of the partnership colliery without proper inquiry as to limits and had acted with gross negligence and recklessness in continuing his working after notice and without consulting his partner, when it was evident that his right to work in the disputed area was extremely doubtful.”

v) Robinson v. Ashton – The owner of a cotton-mill entered into partnership with two others. The business was carried on at his mill. The value of the assets of the mill was credited to his capital account and he was allowed interest on it. The mill was enlarged and improved by the firm and also new buildings were erected on land acquired by the firm. It was held that the mill had become the property of the firm.

vi) Jayalakshmi v. Shanmugham – The question arose before the Kerala High Court as to whether and under what principles the tenancy rights of a partner in the premises where the business of the firm is being carried on would become the property of the firm. The court noted the provisions of Section 14 and also the fact that the goodwill of the firm, being the property of all the partners, attaches to the firm’s place of business and came to the conclusion that the overriding principle is that the property of a partner, whether it be in the shape of a tenancy right or anything else, cannot become the property of the firm by the mere fact that it was being used in business.

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