Relation of Partners with one Another :- Rights and Duties of Partners in a Partnership Firm

Introduction

Partnership firms in India are governed by the Indian Partnership Act 1932. Partnership is a special kind of Contract. Section 4 of the Indian Partnership Act 1932 defines the term "Partnership" as the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Persons who have entered into a partnership with one another are called individually as, “partners” and collectively “a firm”, and the name under which their business is carried on is called the “firm name”.

Relation of Partners with One Another 

The mutual relations between the partners of a firm come into existence through an agreement between all the said partners. Partners can determine their mutual rights and duties by a contract called partnership deed, which largely determines the aspects of general administration, such as which partner will do what work, what will be their share in profits, etc. The partnership deed may be varied by express or implied consent of all the partners. Such a deed can be expressly made or be implied by a course of dealing. 

The fundamental principles that govern the relation of partners with one another are that all the partners are free to form their own terms and conditions with respect to the functioning of the partnership deed. However, there are certain specific duties mentioned in the Indian Partnership Act 1932 which can not be altered by entering into an agreement to the contrary. The second principle which is of utmost importance in a partnership is that the relation of partners to one another is of the utmost good faith. It provides that every partner is an agent of each other, therefore, the contract entered by one of the partners will bind all the partners. Thus, the relation of partners to one another is based on mutual trust and confidence.

Rights and Duties of Partners in a Partnership Firm

According to section 11 of the Indian Partnership Act 1932, The Partners in a Partnership Firm can Determine their mutual rights and duties by a contract called partnership deed which determines the general working such as which partner will do what work, what will be their share in profits, etc. 

Rights of Partners Inter Se

The Partners in a Partnership firm can exercise all the following rights unless the partnership deed states otherwise

1)Right to Participate in business: -According to section 12(a) of the Indian Partnership Act 1932, every partner has an equal right to take part in the conduct of the business. If the management power of a particular partner is interfered with and the individual has been wrongfully precluded from participating, the Court of Law can intervene under such circumstances and provide a remedy by way of injunction. This right can be curtailed by the provisions of the agreement. Thus, allowing only a few partners to actively participate in the functioning of the business. This right should only be used by the partners for promoting the business of the partnership firm and not for damaging the business and goodwill.

In the case of Suresh Kumar Sanghi v. Amrit Kumar Sanghi¹, a partner, in order to undermine the position of the managing partner, wrote to the principals to not supply motor vehicles to the partnership firm and to the banker’s to not to honour the cheques of the firm. The Delhi High Court in this case provided for an injunction against the partner expressing that the partner’s act was to damage the business of the partnership firm.

2)Right to be consulted or the Right to Express Opinion:-Another right is the 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. This right is conferred by section 12(c) of the Indian Partnership Act. However, if there is a dispute related to the Fundamental matter of the business of the firm i.e. the nature of the business then the consent of each and every partner is required. For Example: If a minor is to be included as a beneficiary in a partnership or change in the nature of business then the consent of all the partners is required.

3)Right to Inspect books and accounts of the firm: -According to section 12 (d) of the Indian Contract Act each and every partner regardless of being an active or a sleeping partner of the firm has a right to have access and to inspect and copy any books of the firm i.e. trial balance, profit and loss account and balance sheet of the firm. However, this right must be exercised bonafide. For Example: If a dormant partner wants to sell his shares to a co-partner and appoints an expert to inspect the account and his share in the firm then, co-partners cannot object to the same. For raising a valid objection the co-partners should provide for reasonable grounds such as protection of trade.

A partner can exercise this right by himself or by his agent. In case of death of any partner, right to access, inspect, and to obtain a copy of books of accounts would be available to the legal heirs or the legal representative or duly authorized agent of the deceased partner.

4)Right to remuneration: - According to Sec.13(a) of the Indian Partnership Act 1932, no partner of the firm is entitled to receive any remuneration along with his share in the profits of the business by the firm as a result of taking part in the business of the firm. Although, this rule may always vary by an express agreement, or by a course of dealings, in which case the partner will be entitled to remuneration.

5)Right to share Profits: - According to Sec .13 (b)  of the Indian Partnership Act, 1932 partners are entitled to share all the profits earned in the business equally. Similarly, the losses sustained by the partnership firm is also equally contributed. Partners generally describe in their partnership deed the proportion in which they will share the 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.

In the case of Mansha Ram v. Tej Bhan², where there was no satisfactory evidence to show that in what proportion the partners were to divide the remuneration. It was decided by the Punjab and Haryana High Court that the partners were entitled to an equal share of profits irrespective of the fact that they had been paid separately and that they had done unequal work.

6)Right to be Indemnified: - According to Sec.13(e) all the partners of the firm have the right to be repaid by the firm in respect of the payments made and the liabilities incurred by him in the ordinary and proper conduct of the business of the firm. The right is also available 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. The right to be Indemnified is not lost with the dissolution of the firm. The settlement of accounts is also not important to indemnify the partner.

For Example -There was a partnership between A, B, C, and D. The firm has incurred a debt of ₹2,00,000 from the bank. A paid the debt in the name of the firm. In this case, A is entitled to be indemnified from his co-partners.

7) Right to Interest

Interest on Capital: -Section 13(c) of the Indian Partnership Act provides that a partner is generally not entitled to claim on the capital. But if there is an express agreement between partners of the firm that allows interest on capital then, such interest will have to be paid only out of the profits of the firm. 

Interest on Advances: -Section 13(d) of the Indian Partnership Act states that a partner is entitled to an interest of six percent per annum for the advances that are made by him to the firm beyond the capital that he had agreed to subscribe in the firm.

For Example:-  If a person X, invests ₹50,000 in a partnership firm and provides ₹60,000 to the firm as advance. In this case, X will receive interest from the profits of the firm for ₹50,000 which he had invested in the firm and will get 6% interest on the advances that were made by him to the firm. It must be noted that the interest in capital ceases after the dissolution of the firm, but the interest on advances exist until it is paid. Thus, the dissolution of a firm has no impact on the Interest on Advances.

8)Right to stop the admission of a new partner:- According to section 31 of the Indian Partnership Act, all the partners of the partnership firm have the right to prevent the introduction of a new partner in the firm without the consent of all the existing partners.

9)Right to Retire:- According to Section 32(1), every partner of a partnership firm has the right to withdraw from the business with the consent of all the other partners. In the case the partnership is formed at will, this right may be exercised by giving a notice to that effect to all the other partners.

10) Right not to be expelled:- According to section 33, Every partner of a partnership firm has the right to continue in the business. A partner cannot be dismissed from the firm by any majority of the partners unless conferred by a partnership agreement and exercised in good faith and for the advantage of the partnership firm.

With these Rights, the partners are also imposed with some duties 

Duties of Partners inter se

1) Duty to carry on business for common advantage:-Section 9 of Indian Partnership act provides that Partners are bound to carry on the business of the firm to the greatest common advantage, and to be just and faithful to each other.

In the case of Bentley v. Craven³, there was a partnership in a sugar refinery firm. One of the partners of the firm was skilled in buying and selling sugar. Therefore, he was entrusted with the important task of buying and selling sugar. However, the partner sold the sugar from his own stock and thus, gained a profit out of the sale. When the partners discovered this fact, they brought an action to recover the profits earned by the partner. It was held by the court that the partner can not make secret profits and therefore, the firm was held entitled to the profits earned by the partner.

2) Duty to render true accounts:-According to Section 9 of the Indian Partnership Act, 1932 It is the Duty of the Partner to render true accounts and give full information of all things affecting the firm to any partner, his heir or legal representative.

In the case of  Law v. Law⁴, it was held by the court that if a partner is in possession of some extra information of things affecting the firm then he is bound to deliver it to the co-partners in the firm. If the partner enters into a contract with other co-partners without furnishing them the material details which are known to him but not to his co-partners then such a contract is voidable.

3) Duty to indemnify for loss caused by fraud:-According to Section 10 of the Indian Partnership Act, Every partner shall indemnify the firm for any loss caused to it by his fraud in the conduct of the business of the firm. The purpose of this section is to induce partners to deal fairly and honestly with the customers. For e.g. If A, B, C, and D entered into a partnership for the banking business. A committed fraud of ₹30,000 against one of the customers. As a result, all the co-partners i.e. B, C, and D were held liable. Here, A is bound to indemnify the firm for the loss caused to the firm because of fraud committed by him.

4)Duty to be Diligent:-Section 12(b) provides that a partner is bound to diligently attend his duties. 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 case of Cragg v. Ford⁵, where 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 realized by selling the cotton as compared to which could have been otherwise realized.

5)Duty to properly use the property of the firm:-Section 15 of the Indian Partnership Act provides that property of the firm should be held and used by the firm only for the business of the firm.

6)Duty to account for personal profits:-Section 16 of the Partnership Act, provides that If a partner makes the use of the property of the firm and earns profit out of it, then he should account for the property. This duty arises because of the fiduciary relationship between the partners.

For e.g. If A, B, and C were partners in a firm. Goods were supplied to a person D. D paid some extra commission to A, for using his influence to deliver the goods to D. Here, A has the duty towards the co-partners to account for the commission.

7) Duty not to compete:- Section 16(b) of the act provides that if the partner makes a profit by engaging in a business that is similar to or competing with the firm, then the partner should account for such profits.

Other Duties

• Subject to the contract, all the partners are bound to conduct the business without any remuneration.
• Partners are required to mandatorily obtain the consent of all the partners in case the partner is willing to transfer his/her rights and interest to another person.
• The partners have to work within his/her assigned authority. No partner is allowed to perform outside his/her authority.

References

1)    AIR 1982 Del 131

2)    AIR 1958 P&H 5

3)    (1853) 18 Beav 75

4)    (1905) 1 Ch 140 (CA)

5)    62 ER 889

6)    The Indian Partnership Act 1932

7)    https://blog.ipleaders.in/relation-of-partners/

8)    https://www.indiafilings.com/learn/rights-and-duties-of-partners-in-a-partnership-firm/