Partnership Firm

Rights and Duties of a Partner in a Partnership Firm – An Overview

calendar20 Jan, 2023
timeReading Time: 8 Minutes
Rights and Duties of a Partner in a Partnership Firm - An Overview

It is crucial to first understand the concept of a partnership in order to understand the obligations and privileges of a partner.

The term ‘partnership’ has been elaborated under Section 4 of the Indian Partnership Act of 1932. The act states that- “A partnership is a relationship between the persons who have agreed to share the profits and losses of a business carried on by all the partners/any one of them.” 

Simply described, a partnership is a legally binding business arrangement involving two or more individuals who function as co-owners and split equally the company’s assets and liabilities. Each partner is accountable for the other’s behaviour (s).

A partnership is simpler and less expensive to start up than other company arrangements, and it has less reporting obligations. Each partner pays tax on their portion of the partnership’s revenue, and the partnership files a tax return each year.

The advantages of a partnership include the power of combined knowledge, skills, experience, and connections, as well as access to a larger quantity of cash through pooled capital and expanded borrowing capacity. Additionally, a partnership enables the confidentiality of the partners’ commercial dealings (certain documents do not need to be made available for public inspection).

Provisions governing the relationships between partners are included in the Indian Partnership Act of 1932. In a partnership deed, the partners of a partnership business can specify the terms and circumstances pertaining to their obligations, roles, and responsibilities. The provisions listed under the Indian Partnership Act are applicable in the absence of a partnership deed. Let’s examine the obligations and liabilities that the partners in a partnership firm have.

A Relationship between the Two Partners

Two fundamental ideas control the partnership between partners. According to the first rule, each participant in a partnership business is free to determine their own rights and responsibilities. However, by concluding a contract to the contrary, some responsibilities set out in The Indian Partnership Act of 1932 cannot be altered. Section 11 of the Act officially acknowledges this concept. The second concept is basic in nature. It mandates that partners’ interactions with one another be conducted in the finest manner possible. As a result, every agreement established by one partner also binds the other partners since it specifies that each partner is the other’s agent. Thus, the basis of a partnership relationship is mutual certainty and trust.

What Are The Different Duties Performed By A Partner In A Partnership?

Here are the different duties that a partner has to perform as per the Indian Partnership Act of 1932:

  • Duty To Act In Good Faith

According to Section 9 of the Partnership Act, partners have a responsibility to act in the company’s best interest. Therefore, the partner should try to ensure that the company makes the most money possible. A partner shouldn’t make unreported gains at the expense of the company.

In the case of Bentley v. Craven (1853), there was a partnership in a sugar refinery firm. One of the partners was an expert in sugar purchasing and selling. He was given the responsibility of purchasing and selling sugar as a result. However, the partner made money by selling the sugar from his own stock. When the partners realised this, they filed a lawsuit to recoup the earnings the partner had made. The partner cannot generate secret profits, the court said, and the firm is therefore entitled to the profits made by the partner.

Even after the partnership is no longer in existence, the obligation still exists. The partners owe an obligation to the partner’s legal representatives as well as the former partner.

  • Duty To Compensate For Fraud

According to Section 10 of the Indian Partnership Act of 1932, if a partner’s action results in a loss to the firm’s business, he is required to reimburse his fellow partners for that loss. The goal of this section is to encourage partners to engage fairly and honestly with customers.

As an example, A, B, C, and D formed a partnership in the banking industry. A committed a scam of Rs. 30,000 against one of the clients. As a result, all three co-partners, B, C, and D, were consequently held accountable. In this case, A is required to reimburse the business for any losses incurred as a result of the fraud that was committed by him.

By signing a contract that states otherwise, the obligation to compensate for fraud cannot be eliminated. Because engaging in such a contract would be against public policy.

  • Duty to Be Diligent

Section 12(b) requires a partner to diligently carry out their duties. A person must indemnify the company in accordance with Section 13(f) for any damages brought on by his deliberate carelessness.

  • Duty To Treat The Company’s Assets With Care

According to Section 15 of the Act, the Firm shall hold and use the Firm’s property only in furtherance of the Firm’s business.

A partner is not allowed to utilise the property for personal gain; if he does, the other partners will hold him responsible. He might be held accountable for any damages brought on by such a use.

By engaging into an agreement to the contrary, this obligation may be avoided.

  • Duty To Account For Personal Profits

According to Section 16 of the Partnership Act, if a partner uses company property and gains money off of it, he must account for the property. This duty comes as a result of the partners’ fiduciary relationship.

Illustration: A, B, and C were business partners. To D, who received goods, they were given. D gave A an additional commission in exchange for leveraging his connections to get the products delivered to D. In this case, A has a responsibility to account for the commission to the co-partners.

If a partner starts a business that is in competition with the firm’s business, the partner must report the profit from any such business.

As an example, A, B, and C collaborated on the sale of bottles. B began operating the same business and persuaded people to purchase the bottle from him rather than the company. In this case, B has a responsibility to account for the company’s profits.

However, upon the collapse of the partnership, a rival firm may be operated. The company has the power to impose reasonable limitations on the conduct of the former partners’ competing businesses, such as reasonable time periods during which they are prohibited from conducting such businesses or geographic restrictions on their operations.

  • Duty To Act Diligently: 

Each partner must perform his or her responsibilities to the firm as diligently as possible because failing to do so will have an impact on the other partners. If his deliberate negligence causes losses to the company, he is responsible for compensating others.

What Are The Rights Given To A Partner In A Partnership?

All the partners of a partnership firm can exercise the following rights as per the Indian Partnership Act of 1932: 

  • Right To Take Part In The Conduct Of The Business

Every partner has the right to participate in how the firm does business, according to Section 12(a) of the Act.

The terms of the agreement have the power to limit this right. Consequently, only a select few partners will be able to actively contribute to the management of the company.

The partners should not misuse this privilege to harm the company’s operations but rather to advance it.

In the case Suresh Kumar Sanghi v. Amrit Kumar Sanghi (1982), a partner wrote to the principals in order to weaken the managing partner’s position and to the bankers in order to tell them not to honour the firm’s checks.

The partner was given an injunction by the Delhi High Court because the partner’s actions were causing the firm’s operations to suffer.

  • Right To Be Consulted

According to Section 12(c), disagreements between partners involving the regular conduct of business must be settled by majority vote. Every partner is given the freedom to voice their opinions before a decision is made, according to the clause.

The majority decision will be followed, for instance, if there is disagreement among the partners on whether to introduce one of the partners’ sons to learn business.

The agreement of each partner is necessary, nevertheless, if the disagreement relates to a fundamental aspect of the firm, such as its essence.

As an illustration, all partners must agree if a minor is to be named as a beneficiary of a partnership.

  • Right To Access, Inspect And Copy Books

Partners have the right to view, inspect, and copy account books under Section 12(d) of the Act.

A partner may use this privilege on his or her own or through an agency, but neither one is permitted to exploit the information obtained against the firm’s interests.

Co-partners cannot object if an inactive partner wishes to sell his shares to a co-partner and hires an expert to go at his financial records and his ownership stake in the company.

The co-partners must have justifiable justification, such as trade protection, for objecting.

  • Right To Be Indemnified

The partners have the right to indemnification under Section 13(e). A partner is entitled to reimbursement for any costs he incurs within the regular and correct operation of the firm.

An example would be the partnership of A, B, C, and D. The bank owes the company a debt of 2,00,000 in total. In the company’s name, A paid the loan. B is entitled to compensation from his co-partners in this situation.

Whenever a partner has expended costs in a crisis to shield the company from harm; provided, the partner must have done reasonably.

The right to indemnification does not end with the firm’s demise. Furthermore, it is not necessary to settle the finances in order to defend the partner.

This entitlement is justified on the grounds that it is unfair for one partner to bear all of the costs associated with supporting a partnership.

  • Right To Share Profits

According to Indian Partnership Act Section 13(b), partners are entitled to an equal split of earnings and losses.

The partners’ unequal labour, distinct skill sets, and contributions to the business have no bearing on their right to share in the profits.

In Mansha Ram v. Tej Bhan (1957), there was insufficient proof to establish how the partners were to share the compensation. The Punjab and Haryana High Court ruled that regardless of the fact that they were paid differently and performed unequal work, the partners were entitled to an equal share of the profits.

The partners may, however, modify the entitlement to an equal division of earnings by negotiating a different arrangement. As a result, the partners might agree on a fixed profit split or to be given a salary instead of profits.

  • Right to Interest

Interest on Capital: According to Section 13(c), a partner normally does not have a claim on the capital. However, if there is a written agreement between the partners that permits interest on capital, then such an interest will only be paid from the firm’s earnings. Because a partner is considered to be an adventurer rather than the creditor, interest is not granted to the partner on capital unless there is an express agreement or usage to that effect.

Interest on Advances: According to Section 13(d), a partner is entitled to interest at a rate of 6% annually for any advances he makes to the company over and above the capital he has committed to subscribe.

Example: A person X invests 50,000 in a partnership firm and gives the company 60,000 in advance. In this instance, X will earn interest on the company’s profits for the $50,000 he put in the business as well as 6% interest on any advances he made to the business.

It should be emphasised that while interest on advances lasts until they are paid, interest on capital ends when a business dissolves. Therefore, the Interest on Advances is unaffected by the dissolution of a business.

  • Right To Remuneration

No partner in a firm has the right to make a claim for compensation for participating in business operations, according to Section 13(a). However, if some partners have engaged into an agreement to that effect or when such compensation is due under the continuous use of the business, it may be given to them together with their share of profits.

As an illustration, consider a company with both active and inactive partners. In this situation, the partners might come to an agreement giving the active partners the right to a certain amount of compensation.

Effect on Rights and Duties after a Change in Firm

Any time the firm’s constitution is altered, it will have an impact on the nature of the partners’ current relationship. These alterations take place in the following scenarios:

  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.

The partners’ respective rights and obligations will remain the same as they were previous to the revisions, but they can alter this by creating a new partnership agreement.

Conclusion

We have been exposed to the idea of partnership for a long time. In the past, two or more individuals would collaborate and work toward a common goal. However, the modern partnership of today is quite different from that of 20 years ago.

Before 1932, Sections 239 to 266 of Chapter XI of the Indian Contract Act of 1872[1] provided more detail on the fundamentals of partnerships. The Indian Partnership Act of 1932 was enacted as a result of the government seeing the need to pass a distinct law as trade and commerce in India grew over time, and individuals began using partnerships as a method of conducting business.

A contract known as a partnership deed, which specifies features of general administration, such as who will perform what job and what will be their share of the profits, can be used by partners to define their joint rights and obligations. It is subject to change with the express or implicit approval of all partners.

Read Our Article: What Is Amendment In LLP Agreement: Rights And Duties Of Partners

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