The recent High Court decision in Kotak v Kotak highlights the issue of bank mandates signed by one party in the context of a partnership.
In this case the partnership had entered into a series of loan agreements with the bank and had signed a bank mandate that specifically required all the Partners’ signatures.
It was alleged that one of the loan agreements was entered into whilst one of the Partners was out of the country. That particular Partner argued that the agreements were only binding on the partnership if they had been signed by both Partners and in this case neither had been signed by him.
Evidence emerged that one of the Partner’s signatures had been applied to the loan documents by members of his family with his alleged authority.
This case raises an important technical issue. Even if one of the Partner’s signatures had been forged the Partnership may be liable to the bank and be bound by the other Partner’s signature. Section 5 of the Partnership Act 1980(the Act) provides that each Partner is an agent of the firm and his other Partners for the purposes of the business of the Partnership and every Partner who does any act for carrying on in the usual way of business carried on by the firm will bind the firm and his Partners.
When reaching a decision the court considered whether it was the lender’s intention to provide for a mode of acceptance which would remove the protection of the mandate and section 5 of the Act. The court did not think that it was the lender’s intention to do.
The decision in this case emphasises the importance of taking advice before signing facility documents and knowing exactly what you are signing up to. In order to mitigate such risks Partners should ensure that they have internal procedures in place to avoid one Partner binding the Partnership.