Banking · Principles of Lending and Partnership Accounts
A partnership firm named 'Agro-Tech Solutions', consisting of four partners (A, B, C, and D), has been operating a successful cold-chain business for five years. The firm has a Cash Credit limit of 10 crore secured by the hypothecation of stocks and a Term Loan of 5 crore for refrigeration units. In November 2025, Partner D, who was the primary managing partner, passed away suddenly. The Partnership Deed is silent on whether the firm continues after the death of a partner. At the time of D's death, the Cash Credit account was overdrawn by 2 crore. The remaining partners, A, B, and C, want to continue the business and have requested the bank to allow them to operate the existing account to pay off urgent suppliers. They also want to induct D's son, E, as a new partner. Simultaneously, the bank discovers that Partner A has privately mortgaged his individual share of the partnership property to a private moneylender for a personal debt. Furthermore, the firm has requested a new Bill Discounting facility of 2 crore to manage a large order from a retail giant. Based on the Indian Partnership Act 1932 and the principles of Lending, which of the following describes the correct legal and operational procedure the bank must follow?
- 1The bank should allow the induction of E and automatically transfer all liabilities to him without requiring a new partnership deed or fresh documentation.
- 2The bank should immediately recall the entire loan of 15 crore because a partnership firm cannot survive with only three partners.
- 3The bank must stop operations in the existing account to fix the liability of the deceased partner D's estate and open a new account for the reconstituted firm to avoid the application of the Rule in Clayton's Case.✓
- 4The bank should allow A, B, and C to continue operating the account normally as the firm is a separate legal entity that does not cease to exist upon the death of a partner.
Correct answer
The bank must stop operations in the existing account to fix the liability of the deceased partner D's estate and open a new account for the reconstituted firm to avoid the application of the Rule in Clayton's Case.
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