CAF-4 · Chapter 13
Relations of partners to third parties MCQs with Answers
10 multiple-choice questions on Relations of partners to third parties for CAF-4 Business Law Dynamics. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
What is the foundational principle regarding a partner's relationship with third parties in the conduct of the firm's business?
- A) A partner acts strictly as an employee to third parties.
- B) A partner is the agent of the firm for the purposes of the business of the firm.
- C) A partner acts as an independent contractor.
- D) A partner is an invisible entity to third parties.
Show answer & explanation
Answer: B) A partner is the agent of the firm for the purposes of the business of the firm.
Under Section 18, a partner is the agent of the firm for the purpose of the business of the firm, binding the firm by acts done in the usual course of business.
Question 2
A minor, Sarah, is admitted to the benefits of a partnership firm. Which of the following accurately describes her liability for the debts of the firm while she is a minor?
- A) She is personally liable for all debts.
- B) She has absolutely no liability, and her share is immune.
- C) Her share in the property and profits of the firm is liable for the acts of the firm, but she is not personally liable.
- D) Her parents are personally liable on her behalf.
Show answer & explanation
Answer: C) Her share in the property and profits of the firm is liable for the acts of the firm, but she is not personally liable.
A minor admitted to the benefits of partnership is not personally liable for the firm's debts; however, their share in the firm's property and profits can be used to satisfy those debts.
Question 3
When a minor admitted to the benefits of a partnership attains the age of majority, what is the time limit for them to decide whether to become a full partner or leave the firm?
- A) One month
- B) Three months
- C) Six months
- D) Twelve months
Show answer & explanation
Answer: C) Six months
On attaining majority (or within six months of obtaining knowledge of their admission, whichever is later), the minor must give public notice within six months electing to become or not to become a partner.
Question 4
If a minor attains majority, elects to become a full partner in the firm, and gives public notice, from what date does their personal liability for the firm's past debts commence?
- A) From the date they attained majority.
- B) From the date of the public notice.
- C) Since the date they were initially admitted to the benefits of the firm.
- D) They are only liable for future debts, not past ones.
Show answer & explanation
Answer: C) Since the date they were initially admitted to the benefits of the firm.
If a minor elects to become a partner upon reaching majority, they become personally liable to third parties for all acts of the firm done since they were originally admitted to the benefits of partnership.
Question 5
Which of the following actions is a partner NOT empowered to do under their 'implied authority'?
- A) Buy movable goods for the business.
- B) Employ servants for the business.
- C) Transfer immovable property belonging to the firm.
- D) Receive payments of debts due to the firm.
Show answer & explanation
Answer: C) Transfer immovable property belonging to the firm.
A partner's implied authority does not extend to acquiring or transferring immovable property on behalf of the firm without express authorization from the other partners.
Question 6
Kamran, a partner, obtained a loan of Rs. 500,000 from a bank in the name of his trading partnership. He secretly used the money to pay for a personal family vacation. The firm later goes bankrupt. How is liability assigned for this bank loan?
- A) Only Kamran is liable because he misused the funds.
- B) All partners are jointly and severally liable for the repayment of the loan.
- C) The bank must write off the loan due to Kamran's fraud.
- D) The firm is liable for only 50% of the loan.
Show answer & explanation
Answer: B) All partners are jointly and severally liable for the repayment of the loan.
Because borrowing money is within the implied authority of a partner in a trading firm, the act binds the firm. Every partner is jointly and severally liable for acts of the firm done while they are a partner.
Question 7
Abid, a partner in FS, signs a contract with a third party. One month later, Haris joins FS as a new partner. Is Haris liable to the third party for the contract Abid signed?
- A) Yes, incoming partners are liable for all past debts.
- B) No, an incoming partner is not liable for acts of the firm done before he became a partner.
- C) Yes, if he invested capital equal to Abid's.
- D) Yes, but only for 50% of the liability.
Show answer & explanation
Answer: B) No, an incoming partner is not liable for acts of the firm done before he became a partner.
A person who is admitted as a partner into an existing firm does not thereby become liable to the creditors of the firm for anything done before he became a partner.
Question 8
If a partner retires from a firm but the firm continues its business, what must the retiring partner do to avoid liability for the firm's future transactions?
- A) Simply stop attending the office.
- B) Transfer their capital to another partner.
- C) Give a formal public notice of their retirement.
- D) Destroy their copy of the partnership deed.
Show answer & explanation
Answer: C) Give a formal public notice of their retirement.
A retiring partner continues to be liable to third parties for acts of the firm until a public notice is given of their retirement.
Question 9
Can a minor who is admitted to the benefits of a partnership sue the other partners for their share of the profits while they are still a minor and part of the firm?
- A) Yes, at any time.
- B) No, a minor can only sue for account or payment of their share when disconnecting their relationship with the firm.
- C) Yes, provided their guardian files the suit.
- D) No, minors are barred from courts completely.
Show answer & explanation
Answer: B) No, a minor can only sue for account or payment of their share when disconnecting their relationship with the firm.
The law limits litigation among partners. A minor cannot sue the partners for an account or their share of property/profits except when severing all ties with the firm.
Question 10
Under the principle of 'holding out', if a person who is not a partner verbally represents to a third party that they are a partner, and the third party gives credit to the firm based on this, what is the consequence?
- A) The representation is void because it wasn't written.
- B) The person is liable as a partner to that third party who gave credit on the faith of the representation.
- C) The actual partners are imprisoned for fraud.
- D) The third party loses the right to sue anyone.
Show answer & explanation
Answer: B) The person is liable as a partner to that third party who gave credit on the faith of the representation.
The doctrine of holding out (or estoppel) makes a person who represents themselves as a partner liable to anyone who provides credit to the firm relying on that representation.