Relation of Partners in A Partnership
Relation of Partners in A Partnership
Relation of Partners in A Partnership
UnderIndianPartnershipAct1932
If fiduciary relationship means anything I cannot conceive a stronger case of fiduciary relations than that which exists between partners. Their mutual confidence is the life blood of the concern. It is because they trust one another that they are partners in the first place; it is because they continue to trust one another that the business goes on. (BaconVCinHelmorevSmith)
ImranRashidDar
12/10/2013
By
Submitted to:
Showkat Sir
Contents
Partnership: .................................................................................................... 2 Rights and Duties of partners: ................................................................. 3 1. Right to take part in business [S. 12(a)]: ............................................. 4 2. Majority rights or Right to express opinion [S. 13(c)]: ...................... 5 3. Right to have access to books of the firm. [Section 12(d)) ...... 7 4. Right to share profits [Section 13(b)] ............................................. 7 5. Right to interest on capital and advances [Section 13(c) & (d)] ................................................................................................................. 8 6. Right to indemnity [Section 13(e)] ................................................... 9 7. Right to remuneration [S. 13(a)]..................................................... 10 Duties of a Partner: ................................................................................ 11 Liabilities of a Partner to Third Parties:......................................... 14
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Partnership:
An association of two or more persons engaged in a business enterprise in which the profits and losses are shared proportionally. According to section 4 of the Partnership Act of 1932, "Partnership is defined as the relation between two or more
persons who have agreed to share the profits according to their ratio of business run by all or any one of them acting for all".
The Common law definition of a partnership is generally stated as "an association of two or more persons to carry on as co-
evidence of a partnership. If, however, a person receives a share of profits as repayment of a debt, wages, rent, or an annuity, such transactions are considered "protected relationships" and do not lead to a legal inference that a partnership exists.
the concern. It is because they trust one another that they are partners in the first place; it is because they continue to trust one another that the business goes on. The statutory rights of partners can be enumerated as under: 1. Right to take part in business [S. 12(a)] 2. Majority rights [S. 13(c)] 3. Access to books [S. 12(d)] 4. Right to indemnity [S. 13(e)] 5. Right to profits [S. 13(b)] 6. Right to interest on capital [S. 13(c) and (d)] 7. Right to remuneration [S. 13(a)]. In Short, the Partnership Deed contains the mutual rights, duties and obligations of the partners, in certain cases, the Partnership Act also makes a mandatory provision as regards to the rights and obligations of partners. When there is no Deed or the Deed is silent on any point, rights and obligations as provided in the Partnership Act shall apply.
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In Suresh Kumar v Amrit Kumar , The Delhi High Court issued an injunction against a partner who, in order only to undermine the position of the managing partner, wrote to the principals of the firm not to supply motor vehicles and to the bankers not to honour the firm's cheques.
In this connection Lord Eldon observed, "I call that the act of all, which is the act of the majority, provided all are consulted, and the majority are acting bona fide, meeting not for the purpose of negativing, what anyone have to offer, but for the purpose of negativing, what, when they met together, they may, after due consideration, think proper to negative: For a majority of the partners to say, 'We do not care what one partner may say, we, being the majority, will do what we please, is, I apprehended, what this Court will not allow.' The power of the majority has to be exercised in good faith. If, for instance, the majority of the partners decide to expel a partner without sufficient cause, the expulsion would be set aside." When the matter is not an ordinary or a routine matter but is of fundamental importance, consent of all the partners is needed. Admission of a new partner to the firm or a change in the nature of the business are the matters of this nature. The partnership deed may, however, provide that in all matters majority opinion shall prevail. The manner in which majority powers should be exercised was explained in Blisset v Daniel: The plaintiff was working in partnership with certain persons. It was proposed to appoint one of the partner's son as a comanager of the firm. The plaintiff objected. The aggrieved father complained to his partners behind the back of the plaintiff and persuaded them to sign and serve upon the plaintiff a notice of expulsion. This was done in the exercise of a power which authorised a majority to expel any partner without giving any reason. The plaintiff contested the validity of the expulsion and it was set aside. The court pointed out that powers are given to the majority so that in case of need they may be exercised in good 6 | Page
faith for the benefit of the firm. It is no doubt for the partners to decide what is in the interest of the firm but they must do so in good faith. Majority powers should not be used for base or unworthy purposes or merely to injure a co-partner.
proportion will be 2/4 : 1/4 : 1/4. According to Section 13(b), in the absence of any such agreement, the partners are to share the profits equally and also to contribute equally to the losses sustained by the firm and not in the proportion in which various partners contribute capital (Mansha Ram v Tej Bhan). In Robinson v Anderson, two solicitors were jointly retained to defend certain actions and there was no satisfactory evidence to show in what proportion they were to divide their remuneration. It was held that they were entitled to share it equally although they had been paid separately and had done unequal amount of work. If any partner alleges that their shares are unequal, he has to prove an agreement to that effect. Since every partner is entitled to share the profits, no other remuneration, as a general rule, is to be paid to a partner for the management of the firm's business. The rule contained in this regard in Section 13(a) is that a partner is not entitled to receive remuneration for taking part in the conduct of the business, unless otherwise agreed. Thus, it is only if the partners so agree a partner may be entitled to additional salary, commission, etc. for the efforts made by him in running the business of the firm.
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Sometimes over and above the capital subscribed by the partners, the firm may need extra money. In case a partner makes any payment or advance beyond the amount of capital he has agreed to subscribe, he is entitled to interest thereon at the rate of six per cent per annum, according to Sec. 13(d). So far as interest on capital contribution is concerned, it ceases to run from the date of dissolution (Somasundaran v S. Chettiar).
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He worked beyond the limits of the partnership colliery without proper inquiry as to limits and had acted with gross negligence and recklessness in continuing his working after notice and without consulting his partner, when it was evident that his right to work in the disputed area was extremely doubtful. The second kind of indemnity is recoverable when a partner has done an act involving expenditure in order to protect the property of the firm from a loss threatened by an emergency. It is necessary that the partner concerned should have acted as a reasonable person would have acted in his own case. Proof of actual loss attributable to the conduct of a partner is necessary and not merely one which is imagined or notional (T.B. Mody v Ghanshyam J. Sanghrajka). The right to indemnity is not lost by the dissolution of the firm and it also does not matter that there is or has been no settlement of accounts (Sadhu Narayana Aiyangar v Ramaswami).
A partner is not entitled to receive remuneration for taking part in the conduct of the business.
The partnership agreement may, however, provide for the payment of remuneration to the working partners (Garwood's Trusts, re). But even so a firm cannot be regarded as an employer of a partner. A contract of service stipulates two different persons whereas a firm and its partners are one and the same thing. The so-called remuneration paid to the partners is in 10 | P a g e
reality a distribution of profits (C.V. Mulk v CIT (Ag)). It has been observed that in the United States, Great Britain and Australia, a partner is not treated as an employee of his firm because he receives a wage or remuneration for work done for the firm. Even where a partner renders extraordinary services, in the absence of an agreement, he cannot claim remuneration for such services (Shelat Bros v Nanalal Harilal Shelat). The Sind High Court acted upon the same principle in a case where a licensed business was being managed by an agent under the supervision of the licensed partner and the other unqualified partner was doing nothing. Even so no remuneration was allowed to the qualified partner (Hassanand Jethanand v Bassarmal). Aston JC captured points from different cases: It is well known principle that under ordinary circumstances the contract of partnership excludes any implied contract for payment for services (Thompson v Williamson). In the absence of an agreement one partner cannot charge his co-partners with any sum for compensation in the form of salary or otherwise (Whittle v M'Farlane), even where the services rendered by the partners were exceedingly unequal (Webster v Bray).
Duties of a Partner:
The duties of partners which emerge from the provisions of the chapter can be briefly enumerated thus: 1. Duty of absolute good faith [S. 9] 2. Duty not to compete [S. 16(b)] 3. Duty of due diligence [Ss. 12(b) and 13(/)] 4. Duty to indemnify for fraud [S. 10] 5. Duty to render true accounts [S. 9] 6. Proper use of property [S. 15 and S. 16(a)] 7. Duty to account for personal profits [S. 16] 11 | P a g e
Every partner is bound to carry on the business of the firm to the greatest common advantage. In other words, the partner must use his knowledge and skill in the conduct of business to secure maximum benefits for the firm.
ii. To be just and faithful to each other:
Every partner must be just and faithful to other partners of the firm. Every partner must observe utmost good faith and fairness towards other partners in business activity.
iii. To render true accounts:
Every partner must render true and proper accounts I his copartners. Each and every entry in the books must be supported by vouchers and di explanations if demanded by other partners.
iv. To provide full information:
Every partner must provide full information of activities affecting the firm to the other co-partners. No information should be concealed, kept secret.
v. To attend diligently to his duties:
Every partner is bound to attend diligently to duties in the conduct of the business of the firm.
vi. To work without remuneration:
A partner is not entitled to receive any kind remuneration for taking part in the conduct of the business. But in practice, the working partners are generally paid remuneration as per agreement, so also commission in some case.
vii. To indemnify for loss caused by fraud or willful neglect:
If any loss is caused to the firm because of a partner's willful neglect in the conduct of the business or fraud commit by him 12 | P a g e
against a third party then such partner must indemnify the firm for the loss.
viii. To hold and use partnership property exclusively for the firm:
The partners must hold and use the partnership property exclusively for the purpose of business of the firm not for their personal benefit.
ix. To account for personal profits:
If a partner derives any personal profit from partnership transactions or from the use of the property of the firm or business connection the firm or the firm's name, he must account for such profit and pay it to the firm.
x. Not to carry on any competing business:
A partner must not carry on competing business to that of the firm. If he carries on and earns any profit then he must account for the profit made and pay it to the firm.
xi. To share losses:
It is the duty of the partners to bear the losses of the firm. ' partners share the losses equally when there is no agreement or as per their profit share ratio.
xii. To act within authority:
Every partner is bound to act within the scope of authority. If he exceeds his authority and the firm suffers from any loss, he shall have compensate the firm for such loss.
xiii. Duty to be liable jointly and severally:
Every partner is jointly and individual liable to the third parties for all acts of the firm done while he is a partner.
xiv. Duty not to assign his interest:
A partner cannot assign or transfer his partner interest to an outsider so as to make him the partner of the firm without the consent of other partners. However, he can assign his share of 13 | P a g e
the profit and his share in the assets the firm where the assignee shall not be entitled to interfere in the conduct of the business
Every partner is jointly and severally liable for all acts of the firm done while he is a partner. Because of this liability, the creditor of the firm can sue all the partners jointly or individually.
ii. Liability of the firm for wrongful act of a partner:
If any loss or injury is caused to any third party or any penalty is imposed because of wrongful act or omission of a partner, the firm is liable to the same extent as the partner. However, the partner must act in the ordinary course of business of the firm or with authority of his partners.
iii. Liability of the firm for misutilisation by partners:
Where a partner acting within his apparent authority receives money or property from a third party and misutilises it or a firm receives money or property from a third party in the course of its business and any of the partners misutilises such money or property, then the firm is liable to make good the loss.
iv. Liability of an incoming partner:
An incoming partner is liable for the debts and acts of the firm from the date of his admission into the firm. However, the incoming partner may agree to be liable for debts prior to his admission. Such agreeing will not empower the prior creditor to sue the incoming partner. He will be liable only to the other copartners.
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A retiring partner is liable for the acts of the firm done before his retirement. But a retiring partner may not be liable for the debts incurred before his retirement if an agreement is reached between the third parties and the remaining partners of the firm discharging the retiring partner from all liabilities. After retirement the retiring partner shall be liable unless a public notice of his retirement is given. No such notice is required in case of retirement of a sleeping or dormant partner.
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