Introduction
The Indian Partnership Act, 1932 contains provisions that govern the relation of partners to one another. The partners of a partnership firm can draft their terms and conditions with respect to their duties, roles and responsibilities in a partnership deed. In the absence of a partnership deed, the provisions given under the Indian Partnership Act are applicable. Let’s understand the duties and responsibilities of the partners in a partnership firm.
Relation of Partners with One Another
Although the partners are free to form a partnership agreement that defines their rights and duties, there are certain rights and duties given under the Indian Partnership Act, 1932, that cannot be altered by the partners entering into an agreement to the contrary (Section 11). Since all the partners are agents in a partnership firm, they must act in good faith with each other. Any contract that is binding on one partner is binding on the other partners as well (Section 9, Indian Partnership Act, 1932).
Rights of Partners Inter-se (with one another)
The partners in a partnership firm can exercise the following rights unless the partnership deed states otherwise:
Right to Participate in Conducting the Business
Section 12(a) of the act states that the partners of a firm have a right to participate in the activities/business of the firm. Through a provision in the agreement, this right can however be curtailed, allowing only some partners to participate actively in the business.
Right to have access to the Books and Accounts of the Firm
The partners, both dormant and active partners, have an equal right to inspect and copy the books of accounts of the firm.
Right to Express Their Opinions
All the partners of the firm are entitled to express their opinions. Any decision pertaining to the business can be taken based on a majority view.
Right to Profit Sharing
The partnership deed states the profit sharing ratio of the partners. In the absence of the same in the deed, the partners have a right to share the profits of the firm equally.
Right to Indemnification
The partners of a partnership firm have a right to be indemnified against any payments made or any liabilities incurred by any of them in the course of business. Such a decision or act must be considered reasonable under the normal course of business.
Right to Interest on Capital
The partners of a firm can take a 6% interest on any advances made by them to the firm. They are not entitled to any interest on the capital contribution made by them but in case they wish to take an interest in the capital, they can do so from the profits of the firm.
Duties of the Partners Inter-se
The partners of a firm must act in good faith with each other and this bestows certain duties on them:
Duty to Act in Good Faith -Section 9
The partners are expected to perform their general duties in good faith for the greatest common advantage of the firm and to be faithful to each other.
Duty to Render True Accounts- Section 9
The partners must not conceal any information regarding the business from the other partners. It is the duty of every partner to render true accounts of the firm and provide full disclosure regarding the business of the firm.
Duty to Act Diligently- Section 12 (b)
Every partner of the firm must act diligently. Any wilful neglect by any partner makes them liable to indemnify the other partners for any losses incurred (Section 13 (f)).
Duty to Indemnify for Fraud- Section 10
All the partners of a firm have a duty to indemnify the firm for any losses caused by their wrongful actions or fraud committed by them. Since the firm is held liable for the actions of the partners, the partners must indemnify each other for any losses caused.
Duty to not Compete- Section 16 (b)
The partners must not make any profits by undertaking any competing business. Any such profits made by them must be accounted for to the firm.
Duty Regarding the Property of the Firm
The partners must use the property of the firm only for the purpose of the business of the firm. It must not be used for a personal purpose since the property is collectively owned by all the partners and the firm.
The Duties of the Partner
The following are the duties of a partner
One must always act in good faith.
One must be diligent
One must not compete
One must always render true accounts.
One must use the property of the firm properly.
One must not earn personal profits
One must indemnify any fraud.
FAQs on Relation of Partners to One Another: Legal Provisions
1. What are the key rights of a partner in a firm if there is no Partnership Deed?
In the absence of a Partnership Deed, the Indian Partnership Act, 1932, grants several fundamental rights to every partner. These rights ensure fair and equitable relations among them. Key rights include:
- Right to Participate: Every partner has the right to take part in the conduct of the business.
- Right to be Consulted: Partners have the right to be consulted and express their opinion before any matter is decided. Ordinary matters are decided by a majority, but changes in the nature of the business require the consent of all partners.
- Right to Access Books: Every partner can access, inspect, and copy any of the firm's books of accounts.
- Right to Share Profits Equally: Regardless of their capital contribution, all partners are entitled to share profits equally.
- Right to Interest on Advances: If a partner provides a loan or advance to the firm beyond their capital, they are entitled to receive interest at 6% per annum.
2. What are the primary duties of a partner as per the Indian Partnership Act, 1932?
The relationship between partners is built on trust, which imposes several duties. According to the Indian Partnership Act, 1932, every partner has a duty to:
- Act in Good Faith: To carry on the business for the greatest common advantage and be just and faithful to each other.
- Render True Accounts: To provide full information and true accounts of all things affecting the firm to any partner or their legal representative.
- Indemnify for Fraud: To compensate the firm for any loss caused by their fraud in the conduct of the business.
- Not Compete: To not carry on any business that competes with the firm's business. If they do, they must account for and pay to the firm all profits made from it.
- Use Firm Property Properly: To use the firm’s property exclusively for the purposes of the business.
3. What is the role and importance of a Partnership Deed in defining the relationship between partners?
A Partnership Deed is a crucial legal document that outlines the terms and conditions governing the relationship between partners. Its primary importance is to minimise disputes by clearly defining the rights, duties, and liabilities of each partner. It acts as the foundational agreement, covering key aspects like:
- Profit and loss sharing ratios.
- Interest on capital and drawings.
- Salaries or commissions payable to partners.
- The roles and responsibilities of each partner.
- Procedures for admission, retirement, or death of a partner.
While not legally mandatory to be in writing, a registered Partnership Deed provides legal backing and clarity, overriding the default provisions of the Partnership Act, 1932, where desired.
4. How are profits and losses shared among partners in the absence of a specific agreement?
If the Partnership Deed is silent on the profit-sharing ratio or if no deed exists, Section 13(b) of the Indian Partnership Act, 1932, applies. According to this provision, all partners are entitled to share profits equally. Similarly, they must also contribute equally to the losses sustained by the firm. This rule applies regardless of the amount of capital contributed by each partner or the level of their involvement in the business.
5. Why is the relationship between partners described as one of 'mutual agency'?
The relationship between partners is described as one of mutual agency because each partner acts as both an agent and a principal simultaneously. As an agent, a partner can bind the other partners through their actions in the ordinary course of business. As a principal, each partner is bound by the actions of the other partners. This core principle means that an act of one partner is considered an act of the entire firm and all its partners, making them jointly liable to third parties.
6. What is the legal distinction between a partner's personal property and the firm's property?
The distinction is critical for determining ownership and liability. Firm's property, as defined under Section 14 of the Partnership Act, includes all property originally brought into the firm's stock, acquired for the firm, or purchased with the firm's money. This property must be used exclusively for the firm's business. In contrast, personal property belongs to a partner in their individual capacity. A partner cannot use the firm's property for personal benefit, and their personal property cannot be used to settle the firm's debts until the firm's assets are exhausted.
7. Can a partner run a business that competes with the firm's business?
No, a partner cannot run a competing business without the consent of the other partners. Section 16(b) of the Act imposes a duty not to compete. If a partner violates this duty and carries on a business of the same nature as and competing with that of the firm, they are liable to account for and pay to the firm all profits they made in that business. This ensures that a partner's personal interests do not conflict with their duty to the firm.
8. What happens to the partners' rights and duties when the firm's constitution changes?
When there is a change in the constitution of a firm, such as the admission of a new partner, retirement of an existing partner, or expiry of a fixed term, the mutual rights and duties of the partners in the reconstituted firm remain the same as they were immediately before the change. This is applicable as far as may be, unless a new agreement is made to the contrary. For example, the profit-sharing ratio will need to be re-established and agreed upon by all partners of the newly constituted firm.
9. How does the principle of 'utmost good faith' govern all interactions between partners?
The principle of utmost good faith (uberrima fides) is the foundation of a partnership. It mandates that partners must be absolutely honest, transparent, and loyal to one another and the firm. This principle is embedded in Section 9 of the Act, which requires partners to act for the greatest common advantage, render true accounts, and provide full information on all matters affecting the firm. Any secret profit, conflict of interest, or concealment of information is a direct violation of this fundamental duty.
