The present article discusses the rights and duties of partners in a partnership firm. It also discusses the relation of partners to one another and the impact of change in the firm on mutual rights and duties of partners and then provides a suitable conclusion at the end.
I. Rights of Partners
The partners in a partnership firm hold together mutual rights which are governed as per the agreed provisions of the contract agreement. Subject to the contract agreement between partners, the law confers certain rights on them. The essential rights of partners are listed below:
- Right to take part in the conduct of the business
- Right to be consulted
- Right to access and inspect books
- Right to indemnity
- Right to share profits
- Right to Interest
- Right to remuneration
Let’s discuss each of the mentioned rights in detail:
1. Right to take part in the conduct of the business
Section 12(a) of the Partnership Act provides that every partner in a partnership firm has a right to take part in the business conduct of the firm. However, the right is not absolute and can be altered or curtailed by changing the provisions of the agreement, which will allow only a few partners to have active participation in the functioning of their business. The purpose of granting this right to the partners is that they will use it in the promotion of their business and not to damage it.
In the case of Suresh Kumar Sanghi v. Amrit Kumar Sanghi[1], one of the partners undermined the position of the managing partner in the firm and wrote to the banker to not honour the cheques of the firm and to the principal not supply motor vehicles to the firm. The Delhi High issued an injunction against the partner saying that his act was to damage the business of the firm.
2. Right to be consulted
Section 12(c) of the act provides for the right of partners to be consulted to resolve any dispute arising from the ordinary course of business by majority opinion. Before the matter is decided, every partner shall have the right to express their opinion. However, the dispute is related to the fundamental matter of the conduct of the business i.e. the nature of the firm’s business then the consent of each partner is required.
3. Right to access and inspect books
Section 12(d) of the partnership act provides the rights of the partners to access, inspect, and copy books. Partners can exercise the right to access and inspect themselves by themselves or by his agent but the information gained must not be used against the firm’s interests.
4. Right to indemnity
Section 13(e) provides for the rights of the partners to get indemnified under two circumstances. Firstly, a partner is entitled to recover for any incurred expenses by him in the ordinary and proper conduct of the business of the firm. When a partner incurs expenses in an emergency with an aim to facilitate or protect the business from loss; provided that the partner must have acted in a reasonable and prudent manner.
This right to indemnity is not lost with the firm dissolution but settlement of account becomes crucial in that situation in order to indemnify the partner. The rationale behind this provisionary right is to reduce the burden of expenses that shall not be borne only by a single partner.
5. Right to share profits
Section 13(b) of the act provides that each partner in a firm is entitled to an equal share in profit and losses incurred in the conduct of the business of the firm. The right of the partners to share profits is not affected by the fact that certain partners have an unequal contribution in the firm, have laboured unequally or possessed different skills.
The Punjab and Haryana High Court has held that partners are entitled to share equal profits irrespective of the fact that they had been paid separately and have done unequal work.[2] However, the right to share profits equally can be altered by entering into an agreement to the contrary.
6. Right to Interest
Every partner has a right to interest on capital and interest on advances as mentioned under Article 13(c) and Article 13(d) respectively. It’s to note that if there’s an express agreement that allows interest on capital then such an interest will be paid only out of the profits of conduct of the business. Interest on capital can’t be provided to the partners unless there’s an express agreement or a usage to the effect, because a partner is deemed to be an adventurer rather than the firm’s creditor.
The provision for interest on advances states that a partner is entitled to the interest of 6% per annum for the advance made by him to the firm beyond the capital he had agreed to subscribe. Notably, the dissolution of the firm doesn’t impact the existence of Interest on advances until paid but interest in the capital which ceases to exist.
7. Right to remuneration
No partner in a partnership firm is entitled to claim remuneration for taking part in the business conduct of the firm.[3]However, the remuneration can be provided to some of the partners along with their share in profits if those concerned partners have entered into an agreement to that effect or when such remuneration is payable under the continued usage of the partnership firm.
II. Duties of Partners
There are various duties of partners, which mostly emerge from the second fundamental principle that the relation of partners to another is of utmost good faith. Some of the essential duties of partners are given as below:
- Duty to act in good faith
- Duty not to compete
- Duty to be diligent
- Duty to indemnify for fraud
- Duty to render true accounts
- Duty to properly use the property of the firm
- Duty not to earn personal profits
1. Duty to act in good faith
It is the duty of each partner in a partnership firm to act for the greatest common advantage of the firm.[4]The duty to act in good faith continues to exist even after the partnership has ceased to exist. Partners should work with the objective to secure maximum profits and not to secure secret profits at the expense of the firm. The partners owe the duty to the legal representatives of the co-partners as well as the former partner.
In the case of Bentley v. Craven[5] there was a partnership in a sugar refinery firm where one of the partners was skilled in buying and selling sugar so he was entrusted with a similar task in carrying out the business. When the entrusted partner sold sugar from his own stock, he gained profit and when this matter was discovered by other partners, they brought an action against the first partner to recover the profits earned by him. The court observed that the partner in a partnership firm can’t make secret profits and finally held that the firm was entitled to profits earned by one of the partners.
2. Duty not to compete
If the partner makes a profit by getting engaged in a business similar to or competing with the partnership firm, then the partner should account for such profits. This duty not to compete by the partners can be altered by the partnership deed where the partners enter into an agreement, allowing the other partner to carry on with the competing business or can restrict the partner from carrying any business other than that of the firm. Such an agreement through a partnership deed will be deemed valid and can’t be considered as a restriction of trade.[6]
If a partner breaches such agreement and carries on a personal business which is not competing to the business of the firm, then such a partner will not be held liable to account for the profits incurred, but his co-partners have the scope to apply for dissolution of the partnership. However, a person can carry on any business which is outside the scope of the firm’s business.
3. Duty to be diligent
A partner in a firm is bound to diligently attend his duties[7] and should indemnify the firm for any loss caused to the firm because of his/her willful neglect[8]. The duty of the partner to be diligent doesn’t extend over to the acts done in good faith or in mere errors of judgment. It is to note that an action for indemnity can be brought only by the firm or its partners on behalf of the firm. A partner can’t bring an action for indemnity under this head in his personal capacity.
In Cragg v. Ford[9], the plaintiff and defendant were in a partnership firm where the defendant was the MD of the firm and therefore the conduct of dissolution was left on him. The plaintiff in this case advised the defendant to dispose of certain cotton bales, to which the defendant denied and said the same would only be done after the dissolution of the firm. Meanwhile, cotton prices fell and quite less amount was realized after the sale of the cotton as compared to what could have been otherwise realized with an on-time sale. In this case, the court didn’t hold the partner liable on account of an act done in good faith and that it’s a mere error of judgment.
4. Duty to indemnify for fraud
Section 10 of the Partnership act provides that if a loss is caused to the business of the partnership firm because of the act of any partner then that partner shall indemnify others for such loss. The provision entails that the partners deal with the customers fairly and honestly. However, the duty to indemnify for fraud can’t be excluded by entering into an agreement to the contrary because entering into any such agreement would be opposed to public policy.
5. Duty to render true accounts
Section 9 of the Partnership Act states that all the partners in a firm are bound to provide full disclosure of information about things that affect the firm or any partner or his legal representatives. The provision provides that a partner shouldn’t conceal things from its co-partners in relation to the business of the firm. It is the right of the partners to have access to the accounts of the firm and it is the duty of the partners to render true accounts.
In Law v. Law[10], the court held that if a partner is in possession of extra information then he is bound to disclose it to his co-partners. If the partner enters into an agreement with other co-partners without furnishing them the material details which are only known to him, then such an agreement is voidable.
6. Duty to properly use the property of the firm
The property of a partnership firm should be held and used by the firm only for business purposes.[11] No partner can make use of the firm’s property for his personal use and if he does so, then will be held accountable to all the co-partners and for the losses incurred, if any. This duty to properly use the firm’s property can be avoided by entering into an agreement to the contrary.
7. Duty not to earn personal profits
Section 16 of the act provides that, if a partner makes use of the firm’s property and earns profit out of it, then he should account for the property. There is a duty of every partner to not earn personal profits out of the property of the firm. This duty arises because of the existence of a fiduciary relationship between the partners in a firm and is not compulsory, hence can be avoided by entering into a contrary agreement.
III. Conclusion
In a partnership, all the partners in a firm are free to form a contract agreement and mutually decide the mutual rights and duties of each partner. The relation of a partner to another in the partnership is of utmost good faith, therefore, its the duty of every partner involved to work for the greatest common advantage of the business and to work diligently, avoiding any apprehended losses to the firm.
Mutual rights of the partners generally depend upon the provision in the agreement, but in case there’s no explicit agreement, certain rights are conferred on the partners which can be abrogated by entering into an agreement to the contrary. These rights and duties of the firm do not get affected due to any change in the constitution of the firm or if the partnership is continuing even after the expiry of the term for which it was constituted.
[1] AIR 1982 Del 131.
[2] Mansha Ram v. Tej Bhan, AIR 1958 P&H 5.
[3] Section 13(a), Indian Partnership Act, 1932.
[4] Section 9, Indian Partnership Act, 1932.
[5] (1853) 18 Beav 75.
[6] Section 11, Indian Partnership Act, 1932.
[7] Section 12(b), Indian Partnership Act, 1932.
[8] Section 13(f), Indian Partnership Act, 1932.
[9] 62 ER 889.
[10] (1905) 1 Ch 140 (CA).
[11] Section 15, Indian Partnership Act, 1932.
