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Rights and Duties of Partners Inter Se under Indian Partnership Act, 1932

Duties of Partners

  1. Duty to act in good faith

    The partners must act in good faith for the greater common advantage. The partner has to work for more profit for the company. The partner should not receive secret profits at cost. A partner must provide real accounts and complete information on all matters affecting the company to any partner or his legal representative. This is an absolute condition and it is not possible for any partner to contract himself even by an agreement with other partners. Destiny continued even after the partnership ceased. The partners are indebted to the ex-partner along with the legal representatives of the partner.[i]

    Bentley v. Craven [ii]
    In this case, there has a partnership in a sugar refining company. One of the partners specializes in buying and selling sugar. Therefore, he was entrusted with the task of buying and selling sugar. However, the partner sold the sugar from his own stock and thereby made a profit. When the partners discovered this fact, they took action to recoup the profits the partner had earned. The court held that the partner could not make any secret profits and company is entitled to recover the secret profits earned by that partner.
  2. Duty to Render true accounts

    According to this act, the partners are committed to disclosing and providing complete information about matters affecting the organization to any partner or his or her legal representatives. The partner should not hide things from other co-partners regarding the business of the company. Each and every partner can access the accounts of the company.[iii]

    Law v. Law [iv]
    In this case, the court held that if a partner had any additional information, he would be obligated to provide it to the co-partners. If the partner enters into an agreement with the other co-partners, such agreement shall not be made unless the details of the material known to him are given to his partners.
     
  3. Duty to Indemnify for fraud

    If there is any loss in the business of the company due to the action of the partner, he must pay compensation to his partner for such loss. The reason for this duty is to make partners to deal with costumers honestly and fairly. Conversely, the liability to indemnify for fraud is not excluded by entering a contract. Because entering any such agreement is against public policy. This provision is absolute. This is not subject to terms of contract between partners. The provision in the partnership deed that exempts a particular partner from liability for damages caused by his fraud is invalid and will not be enforced.[v]

    For Example:
    A, B, C, D entered into a partnership for the manufacturing business. A committed fraud of Rs.1 Lakh. Consequently, all co-partners i.e., B, C and D are responsible. Here, Company A must pay compensation for damage caused to the company due to fraud.
     
  4. Duty not to compete

    This act states that if a partner makes a profit by participating in an equivalent or competing business with the company, the partner must account such profits. However, the partner can pursue any business outside the business scope of the company. The duty can be changed by the deed of partnership. Partners can enter into an agreement that allows the partner to pursue a business that competes with the business or restricts the partner from conducting business other than the company. (Section 11 of Indian Contract Act). If a person violates such agreement and conducts a personal business that does not compete with the business of the company, such partner is not liable to calculate profits, but his co-partners may apply to terminate the partnership.[vi]

    Pullin Bihari Roy v. Mahendra Chandra Ghosal [vii]
    In this case, there is a partnership for buying and selling salt. One of the partners, when buying salt in the company, made a profit by buying some salt for himself and then selling it in his personal account. He is accountable to his associates for the profits he makes.
     
  5. Duty to be Diligent

    A partner must be diligent in his duties. For mere errors of judgment or acts done in good faith, a partner cannot be made liable.[viii]

    Cragg v. Ford [ix]
    There is a partnership between the plaintiff and the defendant. The defendant is the managing director of the company and, therefore, the conduct of the termination is left to him. Plaintiff advised the defendant to dispose of some bales of cotton. However, the respondent said that the same would happen after the cancellation. Meanwhile, cotton prices fell and a much lower amount was realized by selling cotton.

    Action for indemnity may be brought only on behalf of the company or partners. The partner cannot take an action for indemnity in his personal capacity.
     
  6. Duty to properly use the property of the firm

    This act states that the property of the company should be owned and used by the company only for the business of the company. If a partner does not use the property for his personal benefit and does so, he is liable to all co-partners. May make him liable for damages caused by such use. This duty can be avoided by entering an agreement to the contrary.[x]
     
  7. Duty to account for personal profits

    If a partner uses the company's property and makes a profit from it, he must account for the property. This duty arises due to the fiduciary relationship between the partners.[xi]

    For Example: A, B and C are partners in an organization. Goods were delivered to one person D. D paid some extra commission to A for using his influence to deliver the goods. Here, A has the responsibility to account the commission towards the co-partners.

    Example 2: A, B, C partners in the bottle sales business. B began to pursue the same business and began to influence customers to buy the bottle from him rather than from the company. Here, B is responsible to account the profits earned from the business.

    However, competitive trading can take place after the partnership is terminated. The company has the right to impose reasonable sanctions on ex-partners to carry on competing business, and ex-partners may not pursue competing business or geographical constraints at any reasonable time.

    This duty is not compulsory. This can be avoided by entering into an agreement to the contrary.[xii]
     

Rights of Partners - Rights of Partners inter se

Partners may exercise the following rights under the Act if the partnership deed does not specify:

The conduct of Business

  1. Right to take part in the conduct of Business

    All the partners of a partner company have the right to participate in the business conducted by the company, because the partnership business is the business of the partners, and their management powers are generally coexisting. If the management power of a particular partner interferes and the person is wrongly excluded from participation, the court may intervene in such circumstances. The court may restrain the other partner from doing so by prohibition.

    Other remedies include a suit for termination, a suit for accounts without termination and a partner who mistakenly loses the right to participate in management. The previously mentioned provisions of the law apply if there is no existing agreement contrary to the partners. It is common to find a term in partnership agreements that gives only a limited power of management to a particular partner or partnership control with one or more partners to exclude others.

    In such a case, the court is generally reluctant to interfere with the management of such a partner (s) unless there is evidence that something was done illegally or breached trust in the partners.[xiii]

    In Suresh Kumar Sanghi v. Amit Kumar Sanghi [xiv] case, in order to undermine the position of the managing partner, A partner wrote a letter to the principals asking not to supply the company's motor vehicles and banker not to honour the company's cheques.”. The High Court of Delhi issued a restraining order against the partner, saying the partner's action was to damage the company's business.
     
  2. Right to be consulted

    When any kind of difference arises between the partners of the company with respect to the business of the firm, it is determined by the majority views of the partners. Every partner in the organization has the right to express his or her opinion before making a decision. However, there can be no such changes as the business of the organization without the consent of all the partners involved. As a general rule, the opinion of most partners is prevalent. However, the majority rule does not apply when there is a change as an organization. In such cases, the unanimous consent of the partners is required.

    For Example: If a minor has to be included as a beneficiary then the consent of all the partners is required.[xv]
     
  3. Right of Access to books

    Each partner of the organization, regardless of active or sleep partner, has access to any books of the partner company. The Partner reserves the right to examine and obtain a copy thereof if necessary. However, this right must be exercised by Bonafide.[xvi]

    For Example: If a dormant partner wants to sell his shares to a partner and hires an expert to examine the account and his stake in the company, the partners will not object the same. Partners must provide reasonable grounds such as trade protection to object.

Mutual Rights

  1. Right to Remuneration

    No partner is entitled to receive any pay in addition to his partner among the profits of the company for participating in the business of the company. But this rule will always be there. Express may vary by agreement or by transaction, in which case the partner will be eligible for reward. Therefore, the partner can get paid even in the absence of a contract, such a reward is paid for the continued use of the company. In other words, where it is customary for a partner to pay a wage for running the business of a company that he can do for himself claim it even when there is no agreement for the same payment. It is common for partners to agree that the managing partner will receive more than his or her share, salary, or commission for the difficulties he encounters while running the company’s business.[xvii]

    For Example: There is an organization with active and dormant partners. In such a case, the partners may enter into an agreement with the active partners entitling the active partners to receive a certain amount as salary.
     
  2. Right to share profits

    Partners are entitled to share equally all the profits earned in the business. Similarly, the risks to the partner company also contribute equally. The partner must confirm the amount of the share by inquiring whether there is an agreement on that behalf among the partners. If there is no agreement, the burden of proving that the share of the profit is equal and the shares are unequal may be assumed to fall on the party making the same allegations. There is no correlation between the ratio in which the partners share the profits and the percentage they contribute to the capital of the partner company. [xviii]

    Mansha Ram v. Tej Bhan [xix]

    In this case, there is no satisfactory evidence to show what proportion the partners are in to divide the wage. The Haryana and Punjab High Courts are entitled to share equally benefits even if the partners are paid separately and do unequal work.
    • However, the right to share profits equally can be changed by concluding an agreement against the partners. Therefore, the partners can settle the share of the profits or agree to pay through the salary rather than the profits.
       
  3. Interest Rights

    Interest on Capital
    Generally, a partner is not entitled to claim the interest on capital. He/ She can entitle the interest on money (capital) only when the following conditions are satisfied:
    1. Express Agreement thereto effect, or the practice of specific partnership or
    2. any commercial practice to that effect; Or
    3. a legal provision that qualifies for such interest.[xx]

      Interest on Advances:

      Suppose a partner gives an advance to the company in addition to the amount of capital he owes, in which case the partner is entitled to receive interest at the rate of 6% per annum.

      Note: It should be noted that interest on the capital ceases after the liquidation of the company, but interest remains on the advance until it is paid. Therefore, the termination of a company has no effect on the interest on the advance.[xxi]

      For example: If a person invests Rs.1 lakh in his partnership firm and deposits Rs. 1,20,000 as advance he will receive interests of profit on Rs.1 lakh and 6% interest on Rs.1,20,000 per year.
       
  4. Right to Indemnity

    Indemnity means promise to make good the loss.

Right to Indemnified:

Each partner has the appropriate claim compensation from the company (or the company is seeking compensation). This right is available for the management of the business and against payments made in emergencies to protect the company from losses. A partner can be compensated for the payment he made in normal and proper business behavior for things that a normal and prudent person does in times of emergency.

The Company reserves the right to pay compensation to each partner in respect of payments and obligations made by an individual in an emergency to protect the Company in addition to the normal and proper conduct of the Company's business. If the prudent person has such payments, liability and action, in such circumstances, in his own case, any loss incurred or incurred. [xxii]

Right to indemnify the firm:

A partner must intentionally pay compensation to the company for any loss due to willful negligence in the business conduct of the company.

For Example:
A company took a debt of Rs.5 lakhs from the bank. A, B, C and D are partners of the company. D paid the debt of Rs.5 lakhs (company’s debt) to the bank. Now, D can entitle to indemnified from his partners A, B and C.

Thomas vs. Atherton [xxiii]
In this case, there is a dispute between the two companies over their boundaries. A partner of a company who trespasses the border by violating rules, was asked to pay compensation. He paid compensation and asked for indemnity from the company for the compensation paid. The court held that the plaintiff (partner) was not entitled to indemnity because trespass is not connected with the business.

End-Notes:
  1. Section 9 of the Indian Partnership Act, 1932
  2. (1853) 18 Beav 75
  3. Section 9 of the Indian Partnership Act, 1932
  4. (1905) 1 Ch 140 (CA)
  5. Section 10 of the Indian Partnership Act, 1932
  6. Section 16(b) of the Indian Partnership Act, 1932
  7. AIR 1921 Cal 722
  8. Section 12(b) of the Indian Partnership Act, 1932
  9. 62 ER 889
  10. Section 15 of the Indian Partnership Act, 1932
  11. Section 16 of the Indian Partnership Act, 1932
  12. https://accountlearning.com/11-important-duties-of-a-partner-in-a-partnership/
  13. Section 12(a) of the Indian Partnership Act, 1932
  14. AIR 1982 Del 131
  15. Section 12(c) of the Indian Partnership Act, 1932
  16. Section 12(d) of the Indian Partnership Act, 1932
  17. Section 13(a) of the Indian Partnership Act, 1932
  18. Section 13(b) of the Indian Partnership Act, 1932
  19. AIR 1958 P&H 5
  20. Section 13(c) of the Indian Partnership Act, 1932
  21. Section 13(d) of the Indian Partnership Act, 1932
  22. Section 13(e) of the Indian Partnership Act, 1932
  23. (1878) 10 Ch. D. 185
Written By: Ginka Kalyan, 2nd year student, Damodaram Sanjivayya National Law University, Visakhapatnam.

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