Identify the recipient and the statutory branch
Section 27 of the Indian Partnership Act, 1932 requires the firm to make good the loss in either of two cases. The first is where a partner acting within apparent authority receives third-party money or property and misapplies it. The second is where the firm receives third-party money or property in its business and any partner misapplies it while it is in the firm's custody. Apply the route supported by the facts before calculating exposure.
Read the applicable text: Indian Partnership Act, 1932, sections 18–20 and 25–27.
Reconstruct authority and custody independently
Under sections 18–20, consider the partner's agency, the nature of usual firm business and any restriction. Retain how the firm dealt with that customer, including issued payment instructions, letterhead, prior collections and what the customer knew. Partners may restrict or extend implied authority by agreement. Under section 20, an act within implied authority can still bind the firm despite an internal restriction, unless the third party knows of the restriction or does not know or believe the person acting to be a partner. Assess apparent authority for section 27(a) on the evidence. For the second branch, follow the funds or property into the firm's business custody and identify when and how they were diverted.
Separate the customer's loss from other ledger issues
Prepare an item-by-item record of value or units received, authorised application, unaccounted balance, returns and relevant recoveries. Do not treat an unexplained bank reconciliation difference alone as proof of misapplication. Separate the customer's claim, the firm's position and any recourse against the partner. Under section 25, every partner is jointly with the other partners, and also severally, liable for acts of the firm done while that person is a partner. Section 26 addresses a partner’s wrongful act or omission in the ordinary course of business or with the other partners’ authority, where it causes loss or injury to a third party or incurs a penalty. Do not conflate these routes.
Keep the scope and response proportionate
This article deals with ordinary partnerships, not LLP liability. Obtain the account opening, receipt, inventory, instructions and authorisation trail before a legal conclusion. If fraud or another unlawful act is alleged, preserve evidence and assess the appropriate procedure separately. Do not charge the same shortfall to the customer and record it again as a distinct loss without basis.
Close the working against proven restoration
Record whether funds were repaid, goods returned, or amounts validly applied with the customer's authority. Where condition or valuation is disputed, distinguish physical quantity from the supported amount of loss. Maintain the status of each open item and keep an internal recovery from a partner separate from the evidence of loss made good to the customer.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Apparent authority collection
A partner receives ₹2.4 lakh from a customer on the assumed apparent-authority facts. ₹1.5 lakh is validly applied and ₹0.9 lakh diverted. Before recoveries, the unexplained diverted amount is ₹90,000.
Illustrative example 2: Firm receipt followed by diversion
The firm receives ₹3 lakh in its business account, and ₹80,000 is diverted while in firm custody. A ₹20,000 restoration credited to the customer leaves ₹60,000 in the supported working.
Illustrative example 3: Custody goods
A firm receives 120 items and returns 95; 10 are properly used as authorised. Fifteen are unresolved. At an evidenced illustrative ₹800 per item, the amount under review is ₹12,000 before separate valuation or damage issues.
Illustrative example 4: Split two customers
One confirmed shortfall is ₹45,000 and another is ₹28,000. A ₹15,000 restoration belongs to the first. Outstanding exposures are ₹30,000 and ₹28,000, totaling ₹58,000.
Illustrative example 5: Internal recovery does not establish customer restoration
A partner pays ₹25,000 to the firm against a ₹70,000 shortfall. If the customer has received only ₹10,000, its outstanding loss working is ₹60,000, subject to the legal facts and any other valid application.
Illustrative example 6: Avoid repeated bank lines
Two ledger reports show the same ₹34,000 transfer, and there is a separate ₹16,000 diversion. The distinct amounts total ₹50,000 rather than ₹84,000.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Confirm entity form | Partnership deed and registration evidence |
| 2 | Identify the third party and receipt | Bank or property receipt records |
| 3 | Check authority at receipt | Instructions and customer-facing evidence |
| 4 | Test business custody | Firm accounts and custody trail |
| 5 | Identify the misapplication | Transactions and authorisation exceptions |
| 6 | Measure the underlying loss | Units, value and authorised applications |
| 7 | Trace repayments and returns | Customer evidence and dates |
| 8 | Separate internal recourse | Partner account and recovery record |
| 9 | Review alternative liability routes | Legal analysis of the actual facts |
| 10 | Sign off outstanding exposure | Customer-by-customer reconciliation |
Sixteen practitioner FAQs
1. Does section 27 apply to LLPs as stated here?
This article addresses ordinary partnerships under the 1932 Act.
2. Is every payment to a partner covered?
Prove the relevant statutory branch, including apparent authority where applicable.
3. What if the firm received the property directly?
Review the second branch and custody at misapplication.
4. Can a partner's private receipt automatically bind the firm?
No. Examine capacity, authority and the transaction evidence.
5. Does an internal prohibition settle apparent authority?
Consider the firm's conduct and the third party's knowledge.
6. Can section 27 cover physical property?
Yes, as well as money.
7. Does an unexplained difference establish liability?
First determine receipt, diversion and resulting loss.
8. Should authorised use be counted as diversion?
No. Record it separately with evidence.
9. What if goods are returned damaged?
Separate quantity restored from remaining supported loss.
10. Can recovered money reduce the outstanding amount?
Trace who received it and its allocation.
11. Does a repayment to the firm discharge the customer claim?
Do not assume so; check the actual application or restoration.
12. Is section 26 the same provision?
It concerns wrongful acts on its own statutory conditions.
13. Does section 25 matter?
It addresses partner liability for acts of the firm; review its application separately.
14. Can one bank transaction be counted twice?
No. Match references before aggregating.
15. What if the diversion date is disputed?
Keep dated custody and bank records and flag unresolved facts.
16. What is the core evidence for closing the file?
Proof of receipt, authority or custody, loss and actual restoration.