Rights and Duties of Partners in Partnership act 1932

 Mutual Relation

Two fundamental principles govern relations of partners to one another. The first principle gives the partner the freedom to settle their mutual rights and duties by their own voluntary agreement. The statement of duties and rights should be prefaced with the contents of Section 11 which gives freedom to partners, subject of course. to the provision of the Act, to determine their mutual rights and duties by their own agreement. 

Section 11: Determination of rights and duties of partners by contract between the partners - Subject to the provisions of this Act, the mutual rights and duties of the partners of a firm may be determined by contract between the partners, and such contract may be expressed or may be implied by a course of dealing. 

Such contract may be varied by consent of all the partners, and such consent may be expressed or may be implied by a course of dealing. 

Agreement in restraint of trade - Notwithstanding anything contained in Section 27 of the Indian contract Act, 1872, such contracts may provide that a partner shall not carry on any business other than that of the firm while he is a partner. 

The second principle of high importance is that relations of partners to one another are based upon the fundamental principle of absolute good faith. Every partner is an unlimited agent of his co-partners for all matters connect with the business and, therefore, has the power to bind them into any amount of liability. Mutual trust and confidence among the partners, therefore, becomes a necessary condition of their relations. Section 8 gives statutory recognition to this principle by providing that "partners are bound..... to be just and faithful to each other...."

The duties of partners which emerge from the provisions in the chapter of mutual relations can be briefly enumerated thus : 

1. Section 9 - Duty of absolute good faith;
2. Section 16(b) - Duty not to compete;
3. Section 12(b) and 13(f) -  Duty of due diligence; 
4. Section 10 - Duty to indemnify for fraud;
5. Section 9 - Duty to render true accounts;
6. Section 15 and 16(a) - Proper use of property;
7. Section 16 - Duty to account for personal profits;

The statutory rights of partners can be enumerated as under: 

1. Section 12(a) - Right to take part in business;
2. Section 12(c) - Majority rights;
3. Section 12(d) - Access to books;
4. Section 13(e) - Right to indemnity;
5. Section 13(b) - Right to profits;
6. Section 13(c) & (d) - Right to interest on capital;
7. Section 13(a) - Right to remuneration; 

Duties of partners

All the duties of partners emerge from this overriding principle of good faith.

1) Duty of Absolute Good Faith 

Section 9 : General duties of partners - Partners are bound to carry on the business of the firm to the greatest common advantage, to be just and faithful to each other, and to render true accounts and full information of all thing affecting the firm to any partner or his legal representative.

Thus, all the endeavours of a partner must be to secure a maximum profit for the firm. He should not try to make secret profit for himself at the expense of the firm.  

2) Section 9 : Duty to Render True Accounts

Partners are bound to each other by the principle of utmost good faith (uber-rimae fidei). This entails a duty of the partners towards each other to make a full and frank disclosure of facts affecting of the firm. In partial recognition of this principle Section 9 makes it a duty of the partners to render true accounts to every other partner. It says that partners are bound....to render true accounts and full information of all things affecting the firm to any partner or his legal representative.

Case - Law v. Law : A partner had sold his shares in the assets of the firm to his co-partner and discovered subsequently that material information had been concealed from him. He would have been entitled to set aside the sale but for the fact that with knowledge of the concealment and without insisting upon full disclosure, he entered into an agreement to modify the original bargain.

Where no such fraud or concealment was involved and the accounts were settled on the basis of compromise by approximately and roughly allocating  the assets to different partners, the settlement was not allowed to be reopened simply because some matter escaped consideration. The court found that the matter which escaped consideration was of no consequence to the firm. 

3) Section 10 : Duty to indemnify for fraud

Section 10 : Duty to indemnify for loss caused by fraud - Every partner shall indemnify the firm for any loss caused to it by his fraud in the conduct of the business of the firm.

Case: Campbell v Campbell - One of the partner of a distillery(a place where alcohols are produced.), who did not take part in the conduct of business, had to pay penalties which were levied upon the firm in the consequence of purchase of illicit whiskey. The purchases were effected by the managing partners and the plaintiff partner had no knowledge of them. They were held liable jointly and severally to indemnify him against the amount so paid and interest on it. It was immaterial that the loss was caused acts of illegal nature, for the plaintiff had not taken any part in them, nor had done anything which could be regarded as acquiescence, knowledge or consent.

3) Section 12(b) and 13(f) : Due diligence 

Section 12(b) declares that every partner is bound to attend diligently to his duties in the conduct of the business. In other to supplement this provision Section 13(f) provides: a partner shall indemnify the firm for any loss caused to it by his wilful neglect in the conduct of the conduct of the business of the firm.

Negligence means absence of care according to circumstances and "wilful-negligence" has been described as "culpable negligence". If a partner is guilty of this degree of negligence and consequently the firm suffers a loss, he would be bound to indemnify the firm for the same. But he will not be liable for "mere errors of judgement", or for facts done in good faith. 

Case: Cragg v. Ford - The plaintiff and the defendant were in business in partnership. There business was in dissolution. The defendant being the managing partner, the conduct of dissolution was left to him. He was advised by the plaintiff to dispose of certain bales of cotton which constituted a part of the company's assets. But the defendant said that,  that should be done at the end of the dissolution. By that time prices of cotton went down materially and the goods realised much less than they would have done otherwise. The question was whether this loss was due to the "wilful neglect" of the defendant. The court held that it was not. The defendant had no reason to anticipate the sudden fall in prices.

4) Section 15:  Proper Use of Property

Section 15 : Application of the property of the firm - Subject to contract between the partners, the property of the firm shall be held and used by the partners exclusively for the purpose of the business.

Duty to use property for firm purposes - The section makes it a duty of the partners that the property of the firm shall be held and used by them exclusively for the purposes of the firm. Even if the section had not so provided, a joint property, being the nature of a trust, has always to be used for the purposes of the trust. No partner should, therefore, use the assets of the firm for any of his personal purposes. Any such exploitation will render the partner accountable to the firm for any private advantage obtained by him. He shall also be responsible to indemnify the firm for damages, if any, thereby caused to its assets.

Nature of liability for misappropriation - The failure of a partner to submit an account of his doings in reference to the firm may make him liable to an action, but not to a charge of criminal misappropriation of property.

6) Section 16 : Duty to Account for Personal Profits

Section 16 : Personal profits earned by partners - Subject to contract between the partners - 

    (a) If a partner derived any profit for himself from any transaction of the firm, or from the use of the property or business connection of the firm or the firm-name, he shall account for the profit and pay it to the firm;

    (b) If a partner carries on any business of the same nature as and competing with that of the firm, he shall account for and pay to the firm all profits made by him in that business.

Information received as partner - The duty of a partner as to the exploitation of information received by him as a partner was thus stated in Anas v Benham. "If a member of a partnership firm avails himself of information obtained by him in the course of the transaction of partnership business, or by reason of his connection with the firm, for any purpose within the scope of the partnership business, or for any purpose which would compete with the partnership business, he is liable to account to the firm for any benefit he may obtain from the use of such information; but if he uses the information for purposes which are wholly without the scope of the partnership business, and not competing with it, the firm is not entitled to an account of such profits."

On the facts of the case the partner in question was held to be not liable to account because the business of the company into which he jumped was that of shipbuilding whereas his firm was that of ship-brokers.

7) Section 16(b) : Duty Not to compete 

Section 16(b) makes it the duty of partners not carry on any business similar to or in competition with the business of the firm and, if a partner does this, he is bound to pay to the firm all profits made by him in that business.

(b) if a partner carries on any business of the same nature as and competing with that of the firm, he shall account for and pay to the firm all profits made by him in that business.

Case: Pulin v. Mahendra - A partnership was found between certain persons for importing salt from foreign countries and to resell the same in Chittagong. One of the partners, while operating to buy salt for the firm, brought some quantity for himself and resold on his personal account. He was held liable to account for this profit to his co-partners, as the opportunity to make it came his way while he was on the business of the firm. A partner may, however, carry on any personal work which is out of the scope of the partnership firm.

Rights of Partners

1) Section-12(a) :  Right to take part in business 

Section-12(a). Every partner has the right to take part in the conduct of the business of the firm.

The privilege of participation in business must be used for promoting the interest of the firm and not for damaging it. The Delhi High Court issued an injunction(an official order given by a court, usually to stop someone from doing something) against a partner who, in order to undermine the position of the managing partner, wrote to the principal of the firm not to supply motor vehicles and to the bankers not to honour the firm's cheque. Partnership agreements usually provide for the exclusive of this right in the case of some partners.

2) Section 12(c) : Majority Rights

When every partner has the right to be consulted in the formulation of the business policy, differences of opinion among the partners may arise. How such differences are to be resolved? Section 12(c) provides the answer.

Section-12(c). Any difference arising as to ordinary matters connected with the business may be decided by a majority of the partners, and every partner shall have the right to express his opinion before the matter is decided, but no change may be made in the nature of the business without the consent of all the partners;

3) Section-12(d) : Access to Books

Section 12(d). Every partner has a right to have access to and to inspect to and to inspect and copy any of the books of the firm.

A partner may exercise this right himself or by an agent, but either can be restrained from making use of the knowledge thus gained against the interest of the firm. A partner can have the accounts inspected through an agent and need not to do it personally. 

4) Section 13(a) - Right to Remuneration 

Unless otherwise agreed, partners are not entitled to receive salary or remuneration for taking part in the conduct of the business. Section 13(a) so provides.

The partnership agreement may, however, provide for the payment of remuneration to working partners. But even so a firm cannot be regarded as an employer of a partner. A contract of service stipulated two different persons whereas a firm and its partner are one and the same thing. The so-called remuneration paid to the partners is in reality a distribution of profits. Even where a partner render extraordinary services, in the absence of agreement, he cannot claim remuneration for such services.

5) Section 13(b) - Right to Profit

Partners are equally entitled for the profits earned by the firm. Similarly, partners are bound to contribute equally in the losses sustained in the course of the business of the firm. This would be so even where there is disproportionate capital contribution or some of the partners render extraordinary services.

"Whether therefore, partners have contributed money equally or unequally, whether they are or are not on a party as regard skills, etc, whether they have or have have not laboured equally for the benefit of  the firm, their shares will be considered as equal, unless some agreement to the contrary can be shown to have been entered into."

6) Section 13(c) and (d) Right to Interest

If a partner has advanced, for the purposes of the firm business, a sum of money beyond the capital he has agreed to subscribe, he is entitled to interest on the advance at the rate of 6 percent per annum.

Unless otherwise agreed, partners are not entitled to any interest on their contributions to the capital. Even where a partner is given the right to receive interest on his subscribed capital, such interest shall be payable only out of profits. Section 13(c) so provides.

Such interest ceases to run from the date of dissolution.

7) Section 13(e) : Right to indemnify

The right to recover indemnity from the firm is provided in Section 13(e) :

Section 13(e). The firm shall indemnify a partner in respect of payments made and liabilities incurred by him -

(i) in the ordinary and proper conduct of the business, and

(ii) in doing such act, in an emergency, for the purpose of protecting the firm from loss, as would have been done by a person of ordinary prudence, in his own case, under similar circumstances.

Thus, the Act provides for two kinds of indemnity. in the first place, a partner is entitled to recover from the firm any expenses incurred by him "in the ordinary and proper conduct of the business". These words.

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.