The Indian Partnership Act

Relation of Partners with One Another

All partners are free to form their own terms and conditions with respect to functioning in their partnership deed. The Indian Partnership Act, 1932 has also prescribed provisions to govern their relationship inter se (amongst them), and these provisions are applicable if no such deed exists. Let us take a look at the duties and the rights of partners.

Right to Determine Relationship

Partners can determine their mutual rights and duties by a contract called partnership deed, which determines aspects of general administration, such as which partner will do what work, what will be their share in profits, etc. It may be varied by express or implied consent of all the partners.

Such deed can be expressly made or implied by a course of dealing. For example, if one partner checks accounts of the firm daily and others do not object, his conduct will be presumed to be a right of all partners in the absence of a written partnership deed between them. So they can themselves determine the rights of partners.

Relation of Partners: Rights of Partners, Duties of Partners

Agreement in Restraint of Trade is Valid

Section 27 of the Indian Contracts Act, 1872 declares contracts in restraint of trade as void. All agreements restraining exercise of a lawful profession, trade or business are invalid.

Section 11 of Partnership Act, however, states that partners can validly levy such a restraint on each other, but such restraint must be provided for under the partnership deed. Partners can use this agreement to prohibit each other from carrying on any business other than that of the firm.

Browse more Topics under The Indian Partnership Act

Rights of Partners Inter Se

Partners can exercise the following rights under the Act unless the partnership deed states otherwise:

  1. Right to participate in business: Each partner has an equal right to take part in the conduct of their business. Partners can curtail this right to allow only some of them to contribute to the functioning of the business if the partnership deed states so.
  2. Right to express opinions: Another one of the rights of partners is their right to freely express their opinion. Partners, by a majority, can determine differences with respect to ordinary matters connected with the business. Each partner can express his opinion to decide such matters.
  3. Right to access books and accounts: Each partner can inspect and copy books of accounts of the business. This right is applicable equally to active and dormant partners.
  4. Right to share profits: Partners generally describe in their deed the proportion in which they will share profits of the firm. However, they have to share all the profits of the firm equally if they have not agreed on a fixed profit sharing ratio.
  5. Right to be indemnified: Partners can make some payments and incur liabilities through their decisions in the course of their business. They can claim indemnity from each other for these decisions. Such decisions must be taken in situations of emergency and should be of such nature that an ordinarily prudent person would resort to under similar conditions.
  6. Right to interest on capital and advances: Partners generally do not get an interest on the capital they contribute. In case they decide to take an interest, such payment must be made only out of profits. They can, however, receive interest of 6% p.a. for other advances made subsequently towards the business.

Duties of Partners inter se

Now that we have seen the rights of partners let us see the duties the Act has prescribed,

  1. General duties: Every partner has the following general duties like carrying on the business to the greatest common good, duty to be just and faithful towards each other, rendering true accounts, and providing full information of all things affecting the firm. etc
  2. Duty to indemnify for fraud: Every partner has to indemnify the firm for losses caused to it by his fraud in the conduct of business. The Act has adopted this principle because the firm is liable for wrongful acts of partners. Any partner who commits fraud must indemnify other partners for his actions.
  3. Duty to act diligently: Every partner must attend to his duties towards the firm as diligently as possible because his not functioning diligently affects other partners as well. He is liable to indemnify others if his willful neglect causes losses to the firm.
  4. Duty to use the firm’s property properly: Partners can use the firm’s property exclusively for its business, and not for any personal purpose, because they all own it collectively. Hence, they must be careful while using these properties.
  5. Duty to not earn personal profits or to compete: Each partner must function according to commonly shared goals. They should not make any personal profit and must not engage in any competing business venture. They should hand over personal profits made to their firm.

Effect on Rights and Duties after a change in Firm

The nature of the existing relationship between partners will be affected whenever there is a change in the firm’s constitution. Such changes occur in the following situations:

  1. Change in constitution of the firm due to incoming or outgoing or partner(s);
  2. Expiry of the pre-determined term of the firm; and
  3. Carrying out of additional business undertakings than originally agreed upon.

Mutual rights and duties of the partners will continue to be the same as they existed prior to such changes, but partners can change this by making a fresh partnership deed.

Solved Examples for You

Question: Aman and Priya started a partnership firm for which they contributed capital of Rs. 1 lakh and Rs. 50,000 each. Aman wants interest on his capital as he has contributed more. Can he ask for such interest?

Answer: Interest is payable on capital only if the deed states so. Aman cannot claim an interest in the absence of a deed.

Question: A dispute arose between Aman and Priya with respect to sharing of profits. Aman demands equal profits, but Priya wants more as she works longer hours than him. Who is correct?

Answer: Profits must be shared in accordance with the ratio agreed upon by them in their deed. They can change this ratio with mutual acceptance. However, they are both entitled to equal share if no such deed exists.

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