In a landmark ruling that could have wide-reaching implications for how banks interact with partnership firms, the Supreme Court of India has clarified the scope of individual partners’ authority in operating partnership bank accounts, reinforcing the need for express authorization in financial matters.

The ruling came in a case involving a dispute between a nationalized bank and a former partner of a dissolved firm, where the partner alleged unauthorized withdrawals and breach of fiduciary duties by the remaining partners. The Court held that unless explicitly provided for in the Partnership Deed or authorized through a resolution recorded in writing, no individual partner can unilaterally bind the firm in high-value financial transactions with third parties, including banks.

A three-judge bench led by Justice A.M. Khanwilkar emphasized that banks must verify the internal authorization mechanisms of partnership firms before allowing significant account operations, such as issuing cheques, securing overdraft facilities, or changing nominee or signatory details. The Court also ruled that banks may be held liable for negligence if they facilitate such transactions without confirming the authority of the acting partner.

“The principle of mutual agency in a partnership must operate within clearly defined boundaries,” the judgment noted. “Financial decisions impacting the firm as a whole must be supported by formal consent from all partners or as laid out in the governing deed.”

Legal experts say the ruling places a greater onus on banks to conduct due diligence and on firms to maintain up-to-date partnership agreements with explicit clauses detailing banking authority. It also encourages the adoption of internal governance structures and documentation practices within partnership firms to avoid disputes and operational interruptions.

Banking institutions have been advised to update their protocols for onboarding partnership firms and processing partner instructions. Meanwhile, law firms expect an increase in requests from clients to revise existing Partnership Deeds in line with the judgment.

The decision is seen as a significant step toward balancing the principles of operational flexibility in partnerships with the need for fiduciary safeguards in banking relationships.