Rights of Minors in a Partnership Firm

Introduction

A partnership firm is a business arrangement where two or more people agree to share the profits and losses of a business. However, under the Indian Contract Act, any agreement entered into by a minor (someone below 18 years of age) is considered void or invalid. This raises the question – can a minor be part of a partnership firm?

The Indian Partnership Act, 1932 provides certain provisions that allow minors to be admitted to the benefits of an existing partnership firm, albeit with some limitations on their rights and liabilities. Let’s understand this in detail.

Who is a Minor?

As per the Indian Majority Act, 1875, any person who has not completed 18 years of age is considered a minor. Minors are generally not competent to enter into contracts or binding agreements due to their assumed lack of maturity and understanding required for such acts.

Minors Cannot be Full Partners

Section 30 of the Indian Partnership Act clearly states that a minor cannot be a full partner in a partnership firm. This is because being a full partner requires entering into a contractual agreement, which a minor cannot do.

The Supreme Court in Sanyasi Charan Mandal v. Krishnadhan held that a minor cannot be part of the group of persons that constitute a “firm” under Section 4 of the Act, as a minor is incapable of entering into a contract under Section 11 of the Indian Contract Act.

However, the law provides a way for minors to be admitted to the benefits of an existing partnership with the consent of all the partners of the firm.

Admission of Minors to Benefits of Partnership

The key points regarding the admission of a minor to the benefits of a partnership are:

1. There must be an existing partnership firm. A minor cannot form a new partnership.
2. The admission of the minor must be with the consent of all the adult partners of the firm.
3. There cannot be a partnership consisting entirely of minors.
4. An agreement must be executed between the guardian of the minor and the existing partners regarding the minor’s admission.

In Commissioner of Income Tax v. Dwarkadas & Co., the court held that any partnership deed going beyond Section 30 and making the minor personally liable for losses cannot be considered valid.

Rights of a Minor Admitted to Partnership Benefits

1. Right to Share Profits: The minor is entitled to receive an agreed share of the profits of the firm. However, the minor cannot be made liable for any losses incurred by the firm.
2. Right to Access Accounts: The minor, or their guardian, has the right to inspect and obtain copies of the accounts of the partnership firm. However, this right does not extend to accessing any trade secrets or confidential information as held in Oswal Fertilizers v. Commissioner of Income Tax.
3. Right to Sue for Accounts: Section 30(4) of the Act allows the minor to sue the partners for an account of their share of the property, profits or any other benefit receivable from the firm. However, this right can only be exercised after severing ties with the firm as held in Commissioner of Income Tax, West v. Khetan and Co.
4. Rights upon Attaining Majority: Within six months of attaining the age of majority (18 years), the erstwhile minor has to decide whether they want to become a full partner in the firm or opt-out. Failure to give public notice of their decision within this period will automatically make them a full partner. 
5. If the person elects to become a partner, their share and rights in the firm’s property and profits will remain the same as they were when they were a minor as held in Bhogilal v. Commissioner of Income Tax.
6. If the person decides not to become a partner, their rights and liabilities remain limited to those applicable when they were a minor, up until the date of giving public notice. After serving the notice, they are no longer liable for the firm’s acts but can still claim their share of profits and property from the firm.
7. The Supreme Court in Shivgouda Rajiv Patil v. Chandrakant Neelkanth Sedlage held that a minor admitted to partnership benefits cannot be held personally liable for insolvency of the firm occurring after they attain majority.

Limitations on a Minor’s Rights

While the minor enjoys certain rights related to the partnership firm, there are some key limitations:

1. Cannot Legally Form a Partnership: Two or more minors cannot form a new partnership firm together as they lack the legal capacity to enter into contracts as held in Banka Mal Lajja Ram & Co v. Commissioner of Income Tax Delhi.
2. No Management Rights: A minor admitted to the benefits of a partnership does not have any rights in the management or administration of the firm. 
3. No Personal Liability for Losses: The minor cannot be held personally liable for any losses or debts incurred by the partnership firm during the period of their association.
4. Limited Right to Sue: The minor’s right to sue is limited to claiming their share of profits, property or other benefits from the firm, and cannot extend to other aspects of the firm’s operations or management.

Conclusion

Therefore, The Indian Partnership Act allows for the inclusion of minors in partnership firms, albeit in a limited capacity, to safeguard their interests. The provisions strike a balance between protecting the minor’s rights and ensuring that they are not unduly burdened with liabilities arising from the partnership’s actions. Proper adherence to these provisions can enable minors to benefit from the profits of a business while still being shielded from its potential downsides. The case laws cited provide judicial interpretation and guidance on the practical application of these provisions.

Contributed by-

Saachi Minocha

National Law University, Jodhpur (2023-28)