4. Raju, a partner of a firm, borrows money on his own credit by giving his own promissory note for the same, but he subsequently uses the proceeds of the note in the partnership concern of his own free will without any reference to the lender to do so. Is the firm liable for the loan?

1. Facts of the Case

• Raju, a partner in a firm, borrows money from a third party (the lender).
• He borrows the amount on his own credit and executes a promissory note in his own name—not in the firm’s name.
• Later, Raju uses the borrowed money for the business purposes of the partnership firm, but he does so voluntarily, without informing or obtaining consent from the lender that the money would be used for the firm.
• A dispute arises when the lender seeks repayment and claims that the firm is liable for the loan since the money was ultimately used in the partnership business.

2. Issues in the Case

1. Whether the firm can be held liable for the amount borrowed by Raju on his personal credit.
2. Whether the application of borrowed money for the firm’s business, without the lender’s knowledge or consent, makes the firm responsible for repayment.
3. Whether Raju’s borrowing falls within his implied authority as a partner under the Indian Partnership Act, 1932.
4. Whether the firm’s liability arises when one partner borrows for personal credit but later uses the funds in the partnership concern.

3. Legal Principles Covered

a) Partner’s Implied Authority

• Under Section 19(1) of the Indian Partnership Act, 1932,
  “The act of a partner which is done to carry on, in the usual way, business of the kind carried on by the firm binds the firm.”
• However, this implied authority applies only when the partner acts in the firm’s name or on its behalf, and not in his individual capacity.
• Borrowing money is an act within the ordinary course of business only if done in the firm’s name and for the firm’s benefit.

b) Acts Done Beyond Implied Authority

• Section 19(2)(b) specifies that a partner has no implied authority to: “make, draw, accept, endorse or sign a negotiable instrument in his own name on behalf of the firm.”
• Therefore, a promissory note signed in the partner’s personal name does not bind the firm.
• The firm cannot be held liable unless the act was authorized or ratified by the other partners.

c) Use of Borrowed Money for Firm’s Purposes

• The mere application of borrowed funds to the firm’s business does not create firm liability when:
  1. The borrowing was made on the partner’s personal credit, and
  2. The lender was unaware that the money was intended for the firm.
• The liability of the firm depends on whether the loan was made to the firm, not how the money was subsequently used.
• Case Reference:
  • Partnership Firm of M/s. V.K. Kurian v. CIT (1962) AIR SC 818 — held that when a partner borrows in his own name and uses funds for the firm without the lender’s knowledge, the firm is not bound.
  • Smith v. Winter (1830) 4 M. & P. 569 — a firm is not liable where a partner borrows money personally and later applies it to firm use without the lender’s consent.

d) Principle of Consent and Notice

• For the firm to be liable, the lender must have intended to give the loan to the firm, and the partner must have borrowed as an agent of the firm.
• Without such notice or consent, the firm cannot be held responsible for the personal borrowing of a partner.

4. Possible Judgement

• The court would likely hold that the firm is not liable for the loan taken by Raju.
• Reasons:
  1. Raju borrowed the money in his own name and on his personal credit, not as an agent of the firm.
  2. The promissory note was executed by him personally, showing no intention to bind the firm.
  3. The lender did not advance the money to the firm, nor was there any agreement or communication that the money was to be used for partnership purposes.
  4. The subsequent use of funds in the firm’s business without the lender’s knowledge does not change the legal character of the transaction.
• Hence, the firm cannot be made liable, and the responsibility to repay remains solely with Raju, who executed the promissory note.

Final Decision:

The borrowing being on Raju’s personal credit, the firm is not liable for the debt.
The lender’s remedy lies only against Raju personally, not against the partnership firm or its other partners.

Supporting Law:

• Indian Partnership Act, 1932 – Sections 18, 19, and 22
• Negotiable Instruments Act, 1881 – Section 26 (relating to authority and liability on promissory notes)

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