You might be aware that one of the forms in which business can be carried on is partnership, where two or more persons join together to form a partnership and run the business. In order to govern and guide partnership, the Indian Partnership Act,1932, was enacted.
The law relating to partnership in India which is contained in Indian Partnership Act is concerned partly with the rights and duties of partners between themselves and partly with the legal relations between partners and third persons.
MUTUAL RIGHTS AND DUTIES OF PARTNERS- The mutual relations of the partners of the firm come into existence by an agreement between the partners, giving rise to mutual rights and duties of the partners. Sections 9 to 17 of the Indian Partnership Act, 1932 lays down the provisions governing the mutual relations of the partners. The Indian Partnership Act, 1932 has also prescribed provisions to govern their relationship inter se, and these provisions are applicable if no such deed exists. Let us discuss duties of the partners first.
Duties of Partners under Indian Partnership Act
GENERAL DUTIES OF PARTNERS (SECTION 9):
There are three sub sections of section 9 which provides three different duties of the partners.
Sub-section 1 of section 9 provides that it is the duty of partners to act for the greatest common advantage of the firm. Therefore, the partner should work to secure maximum profits for the firm. A partner should not secure secret profits at the expense of the firm.
There was a partnership in a sugar refinery firm. One of the partners was skilled in buying and selling sugar. Therefore, he was entrusted with the task of buying and selling sugar. However, the partner sold the sugar from his own stock and thus, gained profit. When the partners discovered this fact, they brought an action to recover profits earned by the partner. It was held by the court that the partner cannot make secret profits and therefore, the firm was held entitled for profits earned by the partner.
Sub-section 2 of section 9 provides that it is the duty of the partners to be just and faithful to each other.
Sub-section 3 of section 9 provides that the partners are bound to disclose and provide full information about the things that affect the firm to any partner or his legal representatives. This means that a partner should not conceal things from other co-partners in relation to the business of the firm.
It was held by the court that if a partner is in possession of some extra information then he is bound to deliver it to the co-partners. If the partner enters into a contract with other co-partners without furnishing them the material details which is known to him but not his co-partners then such a contract is voidable.
DUTY TO INDEMNIFY FOR LOSS CAUSED BY FRAUD (SECTION 10):
Every partner shall indemnify the firm for ant loss caused to it by his fraud in the conduct of the business of the firm. The liability to indemnify for fraud cannot be excluded by entering into an agreement to the contrary because entering into any such agreement is opposed to public policy.
DUTY TO BE DELIGENT [SECTION 12(b)]
Every partner is bound to act diligently.
And section 13(f) states that a person should indemnify the firm for any loss caused to the firm because of his wilful neglect in the conduct of the business of the firm. Although a partner cannot be made liable for mere errors of judgment or acts done in good faith.
There was a partnership between the plaintiff and the defendant. The defendant was the managing director of the firm and therefore, the conduct of dissolution was left on him. Plaintiff advised the defendant to dispose of certain bales of cotton. However, the defendant said that the same would only be done after the dissolution. Meanwhile, the prices of cotton fell and very less amount was realised by selling the cotton as compared to which could have been otherwise realised.
NOTE: An action for indemnity under this head can be brought only by the firm or partners on behalf of the firm. A partner cannot bring an action for indemnity in his personal capacity.
DETERMINATION OF RIGHTS AND DUTIES OF PARTNERS BY CONTRACT BETWEEN THE PARTNERS (SECTION 11):
All partners are free to form their own terms and conditions with respect to functioning in their partnership deed. These are governed by the existing contract between them which may be expressed or implied by the course of dealing.
Sub-section (1) of section 11 provides that, subject to the provisions of the Act, the mutual rights and duties of the partners of a firm may be determined by contract between the partners and such contract may be express or may be implied by a course of dealing. It further provides that the mutual rights and duties which may have been agreed upon between the partners may be subsequently varied by the consent of all the partners and such consent may be expressed or may be implied by a course of dealing. This section incorporates the general principle that the mutual rights and duties of the partners may be determined by a contract between themselves.
They may themselves decide that how much investment or labor is to be put by whom, or whether a partner will be entitled to any remuneration, apart from sharing the profits, or what will be the profit-sharing ratio, etc.
Sub-section (2) of section 11 clearly provides that, notwithstanding anything contained in section 27 of the Indian Contract Act, the contract between the partners may provide that a partner shall not carry on any business other than that of a firm while he is a partner.
Although according to section 27 of the Indian Contract Act, agreement in restraint of trade is void, but such an agreement entered into between the partners as stated above will be valid.
DUTY TO SHARE LOSSES [SECTION 13(b)]:
All partners are liable to contribute equally to the losses sustained by the firm.
DUTY TO USE THE PROPERTY OF THE FIRM PROPERLY (SECTION 15):
This section provides that property of the firm should be held and used by the firm only for the business of the firm.
A partner cannot make use of the property for his personal purpose and if he does so, then he will be accountable to all the co-partners. He could be made liable for the losses caused because of any such use. Although this duty can be avoided by entering into an agreement to the contrary.
DUTY TO ACCOUNT FOR THE PROFIT (SECTION 16):
Basically, Section 16 runs in two parts. If a partner derives any profits for himself from any transaction of the firm or derives any profit from the use of property or business connection of the firm or the firm name then he shall account for that profit and pay it to the firm. If a partner carries on any business of the same nature as of the firm and competing with that of the firm then he shall account for and pay to the firm all profits made by him in that business.
NOTE: This duty arises because of the fiduciary relationship between the partners.
Rights of Partners under Indian Partnership Act
Now let’s discuss the rights of the partners in the partnership firm under the Indian Partnership Act. Mutual Rights of the partners generally depend upon the provisions of the agreement. But subject to their agreement, the law confers following rights on partners:
RIGHT TO TAKE PART IN THE CONDUCT OF THE BUSINESS [SECTION 12(a)]:
Every partner has the right to take part in the business of the firm. This is because partnership business is a business of the partners and their management powers are generally coextensive.
NOTE: The above-mentioned provisions of law will be applicable only if there is no contract to the contract between the partners.
A partner in order to undermine the position of the managing partner wrote to the principals to not supply motor vehicles to the firm and to the banker’s to not to honour the cheques of the firm. The Delhi High Court provided an injunction against the partner saying that the partner’s act was to damage the business of the firm.
RIGHT TO BE CONSULTED [SECTION 12(c)]:
This section provides for resolving disputes relating to the ordinary course of business between the partners by the majority. It states that every partner shall have the right to express an opinion before the matter is decided.
NOTE: The aforesaid majority rule will not apply where there is a change in the nature of the firm. In such a case, the unanimous consent of the partners is needed.
RIGHT TO ACCESS TO BOOKS [SECTION 12(d)]:
Every partner whether active or sleeping is entitled to have access to any of the books of the firm and to inspect and take out of copy thereof.
NOTE: None of them (any partner) is authorised to use the gained information against the interest of the firm.
RIGHT TO REMUNERATION [SECTION 13(a)]:
This section provides that no partner in a firm is entitled to claim remuneration for taking part in the conduct of business. However, the remuneration can be provided to certain partners along with the share in profits if they have entered into an agreement to that effect or when such remuneration is payable under the continued usage of the firm.
The assessed firm is engaged in the business of trading in cotton and food grains. In respect of previous year relevant to the assessment year 1997-98, the firm paid remuneration of Rs. 2,53,000 to Sri Ch. Ekambaram who served as a working partner representing his HUF. Remuneration paid to working partneras authorized by the partnership deed is allowable whereas in the instant case, Ch. Ekambaram is not a partner in his individual capacity and hence he cannot be treated as a working partner. The audit party was of the opinion that remuneration paid to the working partner is not allowable as deduction.
RIGHT TO SHARE PROFITS [SECTION 13(b)]:
The partners are entitled to share the profits and losses equally. Right to share profits is not affected by the fact that the partners have contributed unequally in the firm, possess different skills, have laboured unequally in the firm.
Where there was no satisfactory evidence to show that in what proportion the partners were to divide the remuneration. It was held by the Punjab and Haryana High Court that the partners were entitled to share equal profits irrespective of the fact that they had been paid separately and had done unequal work.
RIGHT TO INTEREST ON CAPITAL [SECTION 13(c)]:
A partner is generally not entitled to claim on the capital. But if there is an express agreement between partners that allows interest on capital then, such an interest will be paid only out of the profits of the firm. Interest is not provided to the partner on capital except when there is an express agreement or a usage to the effect, because a partner is deemed to be an adventurer rather than the creditor.
RIGHT TO INTEREST ON ADVANCES [SECTION 13(d)]:
Taking the earlier provision, a little forward section 13(d) provides that a partner is entitled to get the interest of six percent per annum for the advances made by him to the firm beyond the capital he had agreed to subscribe.
RIGHT TO BE INDEMNIFIED [SECTION 13(e)]:
This section provides the right to indemnity under two circumstances.
- A partner is entitled to recover for any expenses incurred by him in the ordinary and proper conduct of the business.
- When a partner has incurred expenses in an emergency in order to protect the firm from loss; provided that the partner must have acted in a reasonable manner.
NOTE: The right to be Indemnified is not lost with the dissolution of the firm.
RIGHT TO STOP ADMISSION OF A NEW PARTNER (SECTION 30)
Every partner has the right to prevent the introduction of a new partner in the firm without the consent of all the existing partners.
RIGHT TO RETIRE [SECTION 32 (1)]:
Every partner has the right to retire with the consent of all the other partners and in the case of a partnership being at will, by giving notice to that effect to all the other partners.
RIGHT NOT TO BE EXPELLED (SECTION 33):
Every partner has a right to continue in the partnership. He cannot be expelled from the firm by ant majority of the partners unless conferred by partnership agreement and exercised in good faith and for the benefit of the firm.
RIGHT TO DISOLVE THE FIRM (SECTION 40):
A partner has a right to dissolve the partnership with the consent of all partners.
It becomes important to determine the property of the firm as opposed to the personal property of partners. For example, when the partnership is dissolved then the debts are first paid out of the property of the firm. So, for this and several other purposes it is important to clarify which property is partnership property.
Section 14 provides what shall constitute the partnership property. The partners can explicitly mention in the contract that what will be the partnership property. Hence, Section 14 will apply only in the cases when there was no agreement between the partners stating that what would be the partnership property.
Partnership property is nothing but the joint property of all the partners, however, none of the partners can personally claim the property.
PROPERTY BROUGHT IN ORIGINALLY: The property of the firm includes all property, rights, and interests which were originally brought into the stock of the firm by the partners at the commencement of the business.
NOTE: When one of the partners brings his personal property for the purpose of the partnership, he loses his personal rights over it. He will only get the share of profits which may be agreed by the partners.
Since a firm has no legal existence, the partnership property will vest in all the partners and in that sense every partner has an interest in the property of the partnership. During the subsistence of the partnership, however, no partner can deal with any portion of the property as his own nor can he assign his interest in a specific item of property of any one.
GOODWILL: Goodwill of the firm is treated as the property of the firm. Goodwill is nothing but the reputation of the firm. When a partner buys the firm, he is entitled to the goodwill as well.
PROPERTY BROUGHT SUBSEQUENTLY: When a property is subsequently brought for the purposes of the firm or in the ordinary course of the business, then it would constitute the property of the firm. Any property bought by the firm’s money will be the property of the firm.
APPLICATION OF THE PROPERTY OF THE FIRM (SECTION 15):
Subject to contract between the partners, the property of the firm shall be held and used by the partners exclusively for the purpose of the business.
RIGHTS AND DUTIES OF THE PARTNERS AFTER A CHANGE IN THE CONSTITUTION OF THE FIRM (SECTION 17):
Before going into rights and duties, we should first know how a change may take place in the constitution of the firm. It may occur in one of the four ways; Where,
- A new partner/partners come in,
- Some partner/partners go out,
- The partnership concerned carries on business other than the business for which it was originally formed,
- The partnership business is carried on after the expiry of the term fixed for the purpose.
Section 17 lays down the rule, Where-
- Change occurs in constitution of a firm- The mutual rights and duties remain the same as they were immediately before the change.
- Firm constituted for a fixed term but continues to carry on business- The mutual rights and duties remain the same as the were before the expiry of the term.
- Firm constituted to carry out certain adventures but carries out other adventures- The mutual rights and duties of the partners in respect of the other adventures are the same as those in respect of the original adventures.
In a partnership, the partners are free to form an agreement and decide the mutual rights and duties. Mutual rights of the firm generally depend upon the provisions of the agreement but, there are certain rights which are conferred by the act in the case when there is no explicit agreement between the partners.
 Bentley v. Craven (1853).
 Law v. Law (1905).
 Cragg v. Ford (1842).
 Section 16(a)
 Section 16(b)
 Suresh Kumar Sanghi v. Amrit Kumar Sanghi (1982).
 Assistant commissioner of income tax v. Laxmi Sailaja Traders (2004).
 Mansha Ram v. Tej Bhan, 1957.
 Malabar Fisheries Co, Calcutta vs Commissioner of Income Tax, 1979
Author Details: Ayushi Saraswat. (Final year LLB Student at Y.C. LAW COLLEGE, Pune, Maharashtra).