Surety or guarantee given by Partnership Firm

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Krishna Murthy (Querist)
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04 December 2007

Dear sir,

Can a firm give guarantee or surety on behalf third party to a bank or financial institution evenif there is no such clause in the Deed.If not what is the requirement to be fulfilled.Does the partnership act speak anywhere regarding guarantee given by the firm. Please let me know this soon.

R.V.RAO

R.V.RAO (Expert)
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05 December 2007 A PARTNERSHIP FIRM HAS NO SEPARATE LEGAL EXISTENCE APART FROM ITS PARTNERS.
THE PARTNER'S HAVE UNLIMITED LIABILITY.
SO AN ENTITY WHICH HAS NO INDIVIDUAL IDENTITY IS NOT LIABLE EVEN FOR A SURETY OR GUARANTEE GIVEN BY IT.
THAT IS WHY NO BANKER OR A LENDER IN ORGANISED SECTOR ACCEPTS SURETY OF A FIRM.

about the effects of such a surety on the firm and on the partners,IAM QUOTING relevant extracts BELOW FROM www.incometaxinfo.com
"Every partner is liable, jointly with all the other partners and also severally, for all acts of the firm done while he is a partner.
However, where, by wrongful act or omission of a partner acting in the ordinary course of the business of a firm, or with the authority of his partners, loss or injury is caused to any third party, or any penalty is incurred, the firm is liable therefore to the same extent as the partner.
Where -

(a) a partner acting within his apparent authority receives money or property from a third party and misapplies it, or
(b) a firm in the course of its business receives money or property from a third party, and the money or property is misapplied by any of the partners while it is in the custody of the firm,

the firm is liable to make good the loss."

"A continuing guarantee given to a firm, or to a third party in respect of the transactions of a firm, is, in the absence of agreement to the contrary, revoked as to future transactions from the date of any change in the constitution of the firm".
THE INDIAN PARTNERSHIP ACT 1932 DOES NOT ANYWHERE SPEAK ABOUT SURETY BY A FIRM TO A THIRD APARTY INCL. BANK ETC...
BUT MAY I HOPE THAT THE ABOVE DETAILS IN MY REPLY WILL HELP YOU TO DECIDE AS TO HOW THE LIABILITY IS SETTLED TO THE THIRD PARTY.
R.V.RAO

kumar arumugam

kumar arumugam (Expert)
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05 December 2007 thank you, Mr.R.V.Rao Sir

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