PARTNERSHIP LAW IN INDIA:
Partnership in India is governed by The Indian Partnership Act, 1932 which defines the terms and conditions of partnership in India. The important aspects related to the Partnership in India are as under:
Section 4 defines the word partnership; the salient features associated there are as under:
• A formal or written agreement not necessary for starting a partnership.
• A deed of partnership may be prepared by the intending partners if they so desire which is always advisable.
• Contribution of capital or money by Partners not necessary in partnership, the participation of the partners can be in other forms also or he may become a working partner only.
• Devolution of business is only under the condition when the same has been mentioned in the partnership deed; if it is not mentioned then the partnership will stand dissolved after death of partner.
• Jointer venture is a form of joint enterprise. A joint venture in India can be time bound, or work specifically and is based on the mutual contribution and mutual control of management and expectation of profit.
• Nature of business is not defined but the practical aspect of business is taken and it is understood that any work done for earning profit is business.
• Sharing of profit is one of the important ingredients of a partnership however the sharing of loss is not essential in the partnership and it can be only done on the basis of the understanding or written agreement.
• Mutual agency implies that any of the partners or all the partners represent each other individually as well as collectively through the partnership.
Section 6 of the Indian Partnership Act deals with the nature of partnership between the partners. It considers the following grounds for determining the nature of the partnership:
• Supremacy of parties’ intention
• Persons sharing profits without being partners are considered to be partners.
• Joint owners sharing gross returns are also considered and treated as partners.
• Lender of money receiving profits is also treated as partners.
• Servant or agent receiving profits are also treated as partners.
• Widow or child of deceased partner is liable to be treated as partner by virtue of their position.
• Seller of goodwill will also be treated as partner in some cases.
• Maximum number of partners for a partnership is 10 for any banking partnership firm and 12 for any other kind of firm however there is a relaxation for the number of partners for professionals like lawyers, surveyors, chartered accountants etc.
• Firm name is an important aspect and the name of the firm should be decided by taking proper care and should at least resemble the nature of business in which the firm is engages.
• Partnership and co ownership of a property are entirely two different aspects; any co ownership can not be treated as a partnership. The partnership can only with the consent of the partners in the manner prescribed under law.
PARTNERSHIP AND JOINT FAMILY: A joint family is by operation of law however a partnership is by operation of choice of the partners hence both of them are different and distinct.
PARTNERSHIP AND COMPANY are two distinct bodies. A partnership is a collection of two or more persons whereas a company is a collection of several persons. A company is a distinct legal entity however a partnership is not a distinct legal entity.
DURATION OF FIRM: The duration of a partnership can be of the following types:
i. It can be a Partnership at will
ii. It can remain in perpetuity if no time fixed
iii. It can remain in continuation after expiry of term of the partnership if the business is continued even after the expiry of the fixed term as stated in the partnership.
iv. Fixed duration is necessary for certainty in the partnership.
v. Limited Partnership has now been introduced in Indian since 2008 wherein the liability of the partner is limited only upto the capital invested and his role prescribed.
Section 11 governs the mutual relations between the partners, it also determination of rights and duties of partners by contract between the partners
Section 9 deals with the duties of partners, the said duties of the partners can be as under:
i. Duty of good faith
ii. Duty to attain greatest common advantage
iii. Some Aspects of Fiduciary Obligation
iv. Need for amendment
v. Duty not compete
vi. Transactions in Rivalry with Firm
vii. Restriction on carrying on any other Business
viii. Due diligence
ix. Duty to indemnify for fraud
x. Duty to indemnify for loss caused by fraud
xi. Duty to render true accounts
xii. Proper use of property
PARTNERSHIP BY MUTUAL CONSENT AND AGREEMENT
Two fundamental principles govern relations of partners to one another. The first principle gives the partners 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, subjects, of course, to the provisions of the Act, to determine their mutual rights and duties by their own agreement. Certain duties, as stated in the chapter, are of compulsory nature and, therefore, cannot be altered by an agreement to the contrary. But, subject to that, the partners can settle their rights and obligations inter se by their own contract.
Section 11. Determination of rights and duties of partners by contract between the partners:(1) 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 maybe expressed or may be implied by a course of dealing. Such contract may be varied by consent of all the partners, and such consent maybe expressed or may be implied by a course of dealing.
Determination by contract
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 al maters connected 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 9 gives statutory recognition to this principle by providing that “partners are bound… to be just and faithful to each other”…. This duty cannot be excluded by any agreement to the contrary. Commenting upon his fiduciary obligation Bacon VC observed in Helmore v Smith:
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 to another that the business goes on.
The duties of partners in terms of The Partnership Act:
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(f)]
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]
The statutory right 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)].
DUTIES OF PARTNERS
All the duties of partners emerge from this overriding principle of good faith. The following are some them:
1. Duty of good faith [S. 9]
Section 9 enunciates the general duties of partners thus:
Section9. General duties of partners: Partners are bound to carry on the business of the firm to the greatest common advantage, to be jus and faithful to each other, and to render true accounts and full information of all things affecting the firm to any partner or his legal representative.
Duty to attain greatest common advantage
Thus all the endeavors of a partner must be to secure a maximum profit for the firm. He should not try to make a secret profit for himself at the expense of the firm. Bentley v Craven is an outstanding illustration.
A partner in a firm of sugar refiners, who had great skill in buying sugar at the right time, was entrusted to buy sugar for the firm. He supplied sugar from his personal stock, which he had bought earlier when the prices were low. He charged the prevailing market price and thus made a considerable profit. When his co-partners discovered this, they brought an action for an account of the profit. The firm was held entitled to that profit. Similarly, where a partner, authorized to sell a joint property for 60,000 sold it to a company, in which he had a large interest, for a much higher price and concealed the excess price, he was held bound to share it with his co-partner. Where a partner derives any profit from any transaction of the firm, or from the use property or business connection of the firm or the firm name, he is bound to hand over that profit to the firm. This is, however, subject to a contract to the contrary.
Some Aspects of Fiduciary Obligation
A number of aspects of partner’s fiduciary obligation have fond their way into the provision of the Act, for example, the duty not to draw any exclusive advantage by the use of the partnership property or information, the duty not to draw any benefit by engaging into transactions in rivalry with the firm; the duty not to divert the business opportunities of the firm to is own advantage and the duty no to cause any damage to the business, property or goodwill of the firm.
Need for amendment
Looking at the importance attached to the duty of good faith, it has been suggested “that if the Act is to be amended the duty of good faith should be expressly se out: without prejudice to the generality of the overriding duty there should be an express duty to work full time I the business on all normal working days”.
2. Duty not to compete [S. 16(b)]
Section 16(b) makes it the duty of partners not to 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 the business.
(b) if a partner carried 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 profit made by him in that business.
Transactions in Rivalry with Firm
The principle is well established by the authorities that “a partner is not to derive any exclusive advantage by engaging in transactions in rivalry with the firm”. Thus where a firm is constituted to supply goods of a certain kind, a partner cannot carry on a personal business of supplying the same stuff. It is also well established that “a partner is not allowed in transacting the partnership affairs to carry on for his own sole benefit any separate trade or business which, were it not for his connection with the partnership, he would not have been in a position to carry on”. Pulin v Mahendra is an illustration of application of these principles.
A partnership was founded 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, ought some quantity for himself and resold on his personal account.
He was held liable to account for this profit to his co-partners; 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 outside the scope of the partnership business. Aas v Benham is an illustration of this principle.
A partner in a firm of ship-brokers helped the formation of company for building ship. In so doing he used information which he had acquired as a member of the firm. He received remuneration for his services and subsequently joined the company as a director at a salary. He was used for an account of these earnings.
But was held not liable as the formation of a company and the business of a shipbuilding company were something entirely beyond the scope of the partnership.
Similarly, a partner in the business of manufacturing salt was held not to be guilty of competing with the firm by taking interest in the business of distribution of salt. Where a partner bought on behalf of the firm some of the assets of a company and incidentally also bought I his own name some plots of land belonging to the same company, he was held to be not accountable. The purchase of plots was not within the scope of the partnership business.
This duty is, however, subject to variation by the partnership deed. By their agreement, the partners may allow all or any of them to carry on any business whether competing or not. Contrarily, the deed may restrain the partners from carrying on any personal business whatsoever. For Section 11 clearly provides that the partner’s agreement may provide that a partner shall not carry on any business other than that of the firm while he is a partner.
Restriction on carrying on any other Business
Ordinarily this kind of agreement, being in restraint of trade, is void under Section 27 of the Contract Act. But Section 11 expressly declares that such an agreement shall be valid, “notwithstanding anything contained in Section 27 of the Contract Act, 1872”.
If a partner carries on any personal business in breach of this kind of agreement, he may not be liable to account for his profits, but his co-partners may apply under Section 44(d) for dissolution of the firm on the ground of persistent breach of agreement.
3. Due diligence [Ss. 12(b) and 13(f)]
Section 12(b) declares that every partner is bound to attend diligently to his duties in the conduct of the business.
In order to supplement this provision Section 13(f) provides that a partner shall indemnify the firm for any loss caused to it by his willful neglect in the conduct of the business of the firm.
“Negligence” means absence of care according to circumstances and “willful 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 judgment”, or for acts done in good faith. A problem of this kind arose in Cragg v Ford.
The plaintiff and the defendant were in business in partnership. Their 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 immediately certain bales of cotton which constituted a part of the company’s assets. But that time prices of cotton went down materially and the goods realized much less than they would have done otherwise.
The question was whether this loss was due to “willful neglect” of the defendant. The court held that it was not. The defendant had no reason to anticipate the sudden fall in prices.
The principle of this case has been followed by the Patna High Court in Sasthi Kenkar v Man Gobinda.
In a suit for dissolution of a partnership and accounts, the defendants, who were managing partners, were charged with negligence and contribution was claimed for the losses. The alleged negligence was that they failed to sue certain firms for the price of coal supplied and consequently one of the claims became time-barred and another was lost due to the debtor’s insolvency.
They were held liable for the claim which had become time-barred. For the other claim the court held that the firm was an old customer and the defendants themselves learned it too late that it had become insolvent.
An action for indemnity can be brought against a partner only by the firm or by the other partners on behalf of the firm, but not by a partner in his individual capacity. Rejecting a suit of this kind by a partner, the Allahabad High Court observed that Section 13 does not contemplate a suit by one partner for damages against another partner. The liability of a partner is to the firm and not to one particular partner.
4. Duty to indemnify for fraud [S. 10]
Section10. 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.
The section is another aspect of the basic duty of partners to conduct themselves fairly and honestly both towards their co-partners and persons dealing with the firm. Where a partner falters from the path and loss is caused to the firm, he will be exclusively liable fore the same. That is what is meant by saying that he must compensate or indemnify the firm against any loss caused by his own breach of duty. The purpose of the rule is to induce partners to deal honestly with the customers of the firm. If, for example, a partner, in the ordinary course of the business of the firm, commits a fraud upon a customer of the firm, for which the firm, including the innocent partners, has been held liable, the firm may recover indemnity from the partner guilty of the fraud. The liability for fraud cannot be excluded by any agreement to the contrary, for it would be opposed to public policy to exempt a person from the consequences of his own fraud. The Scottish case of Campbell V Campbell furnishes a good illustration. One of the partners of a distillery, who did not take part in the conduct of the business, had to pay penalties which were levied upon the firm in consequence of the purchase of illicit whisky. The purchases were affected 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 by acts of illegal nature, for the plaintiff had not taken any part in them, or done anything which could be regarded as acquiescence, knowledge or consent.
5. Duty to render true accounts [S. 9]
Partners are bound to each other by the principle of utmost good faith. This entails a duty of the partners towards each other to make a full and frank disclosure of facts affecting the affairs of the firm. In partial recognition of this prinf9ple Section 9 makes it a duty of the partners to render true accounts to every other partner.
Partners are bound to render true accounts and full information of all things affecting the firm to any partner or his legal representative.
If a partner is in possession of more information about the affairs and assets of the firm, he should not conceal that from his co-partners. And if, without furnishing that information, he makes a contract with his co-partners, the contract is voidable. This principle was laid in Law v Law.
A partner had sold his share in the assets of the firm to his co-partner and discovered subsequently that material information had been concealed form 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.
6. Proper use of property [S. 15]
Section15. Application of 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 business of the firm. Even if the section had not so provided, a joint property, being the nature of a trust, is 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 damage, 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 property of the firm may make him liable to an action, but not to a charge of criminal misappropriation of property. The reasons were stated by the Supreme Court in Velji Raghavji v State of Maharashtra. The appellant was the working partner of affirm. It was agreed among the partners that he should carry on the work of realizing the dues of the partnership. On the allegation tha6 he misappropriated certain sums and also failed to deposit in the bank some collections he was convicted for the offence of criminal breach of trust under Section 409 IPC. The Supreme Court acquitted him. Even if there was a mandate to the appellant with respect to some dues to collect and deposit them in bank, failure to do so would not constitute the offence, as the appellant was also authorized by the other partners to spend the money for business of the partnership. The appellant would not also be guilty of dishonest misappropriation of property under Section 403 of the Code, because he had undefined ownership along with the other partners over all the assets of the partnership and as such owner, in whatever intention he used the property, he would not be liable for misappropriation.
This does not, however, amount to saying that partner can never be guilty of misappropriation or breach of trust in relation to the partnership property. Where the ingredients of the offence are satisfied, penal consequences may follow notwithstanding that the person concerned was a partner and the property concerned was that of his firm. Thus, in a subsequent case on the subject, the Supreme Court, not having the facts before it whether the requirements of the offence were present or not, refused to quash misappropriation proceedings started against a partner in the trial court. Ray J expressed the opinion that though the appellant denied that there was any special entrustment of any property or that he was holding any property in a fiduciary capacity; it was neither possible nor desirable to express any opinion on the merits of such plea. “It is not possible to do so because the facts are not in possession of the court and furthermore the facts cannot be before the court without proper investigation and enquiry.”
7. Duty to account for personal profits [S. 16]
Section16. Personal profits earned by partners: Subject to contract between the partners:-
(a) if a partner derives 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.
It is the duty of every partner to use the property of the firm strictly and solely for the purposes of business of the rim. If a partner uses a joint property for any private purpose, he must, in the first place, account for the advantages gained from such use and, secondly compensate the firm for any damage to or depreciation of the property done by such use. In Gardner v M’Cutcheon:
The captain of a ship, which was owned by him and his co-partner, made considerable profit by making certain contracts, while the ship was operating under charter parties.
He was held liable to account for such profit.
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 Aas v Benham:
If a member of partnership firm avails him self 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 which would 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 outside the scope of the partnership business, and not competing with it, the firm is not entitled to an account of such profit.
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.
To the same effect is Coffey’s Registered Design, re. The firm was trading in home brewing materials. It was buying and selling products manufactured by others. It was not manufacturing such products itself. A partner of his own initiative developed a design for a container for brewing beer. He was allowed to enjoy the benefits of his invention and not to share them with his co-partners because his invention had nothing to do with the scope of the partnership business.
RIGHTS OF PARTNERS
Mutual rights and duties of partners depend upon the provisions of their agreement. But subject to their agreement the law confers the following rights upon all partners.
1. Right to take parting business [S. 12(a)]
Every partner has a 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 inte4rest of the firm and not for damaging it. 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. Partnership agreements usually provide for the exclusion of this right in the case of some partners.
2. Majority rights [S. 12(c)]
When every partner has the right to be consulted in the formulation of 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 maybe made in the nature of the business without the consent of all the partners.
Resolving Differences of Opinion
A difference of opinion may relate either to—(1) an ordinary matter, or (2) a fundamental matter.
If the partners are divided overran ordinary matter connected with the business, the same maybe settled by a majority of the partners. But every partner shall be given the right to express his opinion before the matter is decided. All maters arising in connection with the execution of the agreed business of the firm fall in this category and may be carried through by majority opinion. Where the partners were divided over the question of the introduction of a partner’s son into the business with a view to his learning the business, it was held that the difference related to an ordinary matter of business and, therefore, majority opinion should prevail. But where the difference of opinion relates to mater of fundamental importance, consent of all the partners becomes necessary. Fundamental matters include the question of any alteration of, or addition to, the firm and the admission of a new partner. 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 sons as a co-manager 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 authorized 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 power as given to the majority so that in case of need they may be exercised in good 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.
3. Access to books [S. 12(d)]
Every partner has a right to have access to and to inspect and copy any of the books of the firm.
A partner may exercise this right himself or by 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 do it personally. For example, where a sleeping partner wanted to sell his interest to the other partners and authorised an expert valuer to inspect accounts to ascertain the value of his interest, it was held that the other partners could not object to it, unless they could show some reasonable grounds for their objection such as, for example, protection of trade secrets. The right to inspect papers, however, does not include the right to carry them, without the consent of the other partners, to any other place than the registered office of the company.
4. Right to indemnity [S. 13(e)]
The right to recover indemnity from the firm is provided in Section 13(e) of the Act in the following words:
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 be done by a person of ordinary prudence, in his own case, under similar circumstances.
Two Kinds of Indemnity
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 constitute an important condition of this right and were explained in Thomas v Atherton.T, the managing partner of a colliery, received notice from L, an adjoining owner that the working was being carried on beyond the boundary. T insisted that he was entitled to the disputed ground, and carried on his working. The matter, having been referred to arbitration, he was held liable to pay 6000 as damages for the trespass. His claim for contributions from his co-partners failed as the loss was not suffered in the ordinary and proper conduct of the business.
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.
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.
5. Right to profits [S. 13(b)]
Unless otherwise agreed, partners are entitled to share equally in the profits earned by the firm. Similarly, they are bound to contribute equally in the losses sustained in the course of the business of the firm. This would be so even where thee it 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 parity as regards skill, etc., whether they have or 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”. 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.
6. Right to interest [S. 13(c) and (d)]
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 six per cent per annum.
13(d) A partner making, for the purposes of the business, any payment or advance beyond the amount of capital he has agreed to subscribe, is entitled to interest thereon at the rate of six per cent 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 in the following words:
13(c) Where a partner is entitled to interest on the capital subscribed by him, such interest shall be payable only out of profits;
So far as interest on capital contribution is concerned, it ceases to run from the date of dissolution.
7. Right to remuneration [S. 13(a)]
Unless otherwise agreed, partners are not entitled to receive salary or remuneration for taking par in the conduct of the business. Section 13(a) so provides:
A partner is not entitled to receive remuneration for taking parting the conduct of the business.
The partnership agreement may, however, provide for the payment of remuneration to the working partners. 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 things. The so-called remuneration paid to the partners is in reality a distribution of profits. 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. 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. 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. 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, even where the services rendered by the partners were exceedingly unequal.
CONTINUANCE OF THE PARTNERSHIP [S. 17]
Where a partnership is created for a fixed period or for a particular business, it should natu4rally come to an end on the expiry of such period or on the completion of such business. But what often happens is that the partners continue the firm without any new agreement. Section 17 is enacted to meet such cases. Its essence is that the firm shall continue, as far as applicable, on the same terms and conditions as if no change has come in them.
Section17. Subject to contract between the partners—
(a) Rights and duties of partners after a change in the firm:- Where a change occurs in the constitution of a firm, the mutual rights and duties of the partners in the reconstituted firm remain the same as they were immediately before the change, as far as may be;
(b) After the expiry of the term of the firm: Where a firm constituted for a fixed term continues to carry on business after the expiry of that term, the mutual rights and duties of the partners remain the same as they were before the expiry, so far as they may be consistent with the incidents of partnership at will; and
(c) And where additional undertakings are carried out:- Where a firm constituted to carry out one or more adventures or undertakings carries out other adventures or undertakings, the mutual rights and duties of the partners in respect of the other adventure or undertakings are the same as those in respect of the original adventures or undertakings.
Mutual rights and duties of partners will remain the same after a change in the firm. The following three kinds of change, as contemplated by Section 17, do not affect mutual rights and duties, unless they are altered by agreement.
Section15. Application of the property of the firm
The partner of the firm has the duty to use Property for Firm Purposes only and is also liable to any fraudulent act done with regard to the property of the partnership.
Section16. Personal profits earned by partners of the partnership firm should be accounted for in the partnership only. It is the duty of the partner not to use Firm Property for Private Business. It is also the duty of the partner to share the information received
Information received as partner is also the information of the partnership and be shared with the partners.
Section12. RIGHTS OF PARTNERS
i. Right to take part in business
ii. Majority rights
iii. Access to books
iv. Right to indemnity
v. Right to profits
vi. Right to interest
vii. Right to remuneration
Section 17. Continuance of the partnership under the following conditions is possible.
i. Change in constitution
ii. After expiry of term
iii. Where additional undertakings are carried out
Section14. Partnership property
Partnership not being a distinct juristic person can not hold property in its name and all the partners have common right over the property of the partnership. It is to be used for the purposes of the furtherance of the partnership business only.
Section14. The property of the firm
i. Property Originally Brought in including good will, trade mark etc become the property of the partnership
ii. Property Subsequently Acquired remains the property of the partnership
iii. Partner’s property in Firm’s Use becomes the property of the firm for the user however at the time of distribution the real intention is to be seen.
iv. Trade Marks become the common property of the partnership if intended to be used commonly.
v. Partner’s House Property in Firm’s Use is a matter to be determined by the facts and circumstances and the terms and conditions attached therein.
vi. Partner’s Personal License can be used by the partnership if no such embargo is attached to the license itself.
vii. Partner’s Tenancy Rights becomes the rights of the partnership
viii. Conversion of Joint into Separate Property when the property has been purchased from the funds of the partnership and is being given to any partner.
SECTION 25. LIABILITY OF PARTNERS FOR ACTS OF FIRM- Every partner is liable, jointly with all the other partners and also severally, for all acts of the firm done while he is a partner. It stipulates that the partner can be sued individually as well as jointly for the acts of the partnership.
Section 18. Partner to be agent of the firm for the purposes of business. The firm is thus bound by the acts of the partner. IT is thus treats as the implied authority of the partner on behalf of the partnership.
Section 19. Implied authority of the partner as agent of the firm enables him to do the acts and deeds on behalf of the partnership which are considered for the business of the partnership. The partnership is bound by such acts and deeds done by the partner on behalf of the partnership.
In a joint Venture the partner has no implied authority to act unless specifically empowered by the firm.
Legal Proceedings- the partner can institute and defend legal proceedings on behalf of the partnership.
Where Scope of Authority Specified for the partner then he can act only within that scope as determined for him.
Criminal prosecution for dishonour of cheques can be initiated against those partners who are substantially involved with the business and the issuance of the said cheque.
Partner Acting in Self-interest
Instruction to firm’s banker
Restrictions on implied authority
Authority in emergency
Section 21. Partner’s authority in an emergency
Mode of exercising authority
Section 22. Mode of doing act to bind firm
Admission by a partner
Section 23. Effect of admissions by a partner
Effect of notice to a partner
Section24. Effect of notice to acting partner
LIABILITY FOR TORTS AND OTHER WRONGS
Section26. Liability of the firm for wrongful acts of a partner
Wrongful act in ordinary course of business
LIABILITY FOR MISAPPROPRIATION
Section27. Liability of firm for misapplication by partners
Apparent Authority and Ordinary Course of Business
LIABILITY FOR HOLDING OUT
Section28. Holding out
1. Representation
2. Knowledge of representation
Application of the doctrine to retirement cases
(a) Deceased Partner
(b) Insolvent Partner
(c) Dormant Partner
TRANSEFEREE OF PARTNER’S INTEREST
Section29. Right of transferee of partner’s interest
Transferee does not become partner by itself
MINOR AS PARTNER
Section30. Minors admitted to the benefits of partnership
Incapacity for being full-fledged Partner
Admission to Benefits and Rights
No Personal Liability during Minority
Option on attaining Majority and Liability
INCOMING PARTNER
Mode of admission
Section31. Introduction of a partner
Liability of new partner
OUTGOING PARTNER
Section32. Retirement of a partner
Modes of retirement
(a) By Consent
(b) By Agreement
(c) By Notice
Section7. Partnership at will
(d) By Insolvency
Section34. Insolvency of a partner
(e) By Death
Section35. Liability of estate of deceased partner
(f) By Expulsion
Section33. Expulsion of a partner
Power of Expulsion to be provided
Limitation for Instituting Proceedings
Liability of retired partner
Liability for Acts done before Retirement
Liability for Acts done after Retirement
RIGHTS OF OUTGOING PARTNER:
1. Right to Compete
Section36. Rights of outgoing partner to carry on competing Business.
Agreements in restraint of trade
2. Right to Share Subsequent Profit
Section37. Right of outgoing partner in certain cases to share
Subsequent profits
REVOCATION OF CONTINUING GUARANTEE
Section38. Revocation of continuing guarantee by change in firm
Section39. Dissolution of a firm
MODES OF DISSOLUTION
1. By consent
Section40. Dissolution by agreement
2. By agreement
Reconstitution after Dissolution
3. Compulsory dissolution
Section 41. Compulsory dissolution
(a) Insolvency
(b) Illegality of Business
4. Contingent dissolution
Section42. Dissolution on the happening of certain contingencies
(a) Expiry of Term
(b) Completion of Business
(c) Death of Partner
(d) Insolvency of Partner
5. By notice
Section43. Dissolution by notice of partnership at will
Dissolution of Firm at Will
6. Dissolution by court
Section44. Dissolution by the court
Grounds of dissolution by court
(a) Insanity
(b) Permanent Incapacity
(c) Misconduct
(d) Persistent Breach of Agreement
(e) Transfer of Interest
(f) Perpetual Losses
(g) Just and Equitable
Right to Apply for Dissolution can be Excluded
Suit for Accounts without seeking Dissolution
Suit for Partition without Dissolution
Property Situate out of Territorial Jurisdiction of Court
CONSEQUENCES OF DISSOLUTION
Public notice and liability for acts done after dissolution
Section45. Liability for acts of partner done after dissolution
Public Notice of Dissolution
Where Public Notice not Necessary
Liability for Prior Acts
Prosecution for dishonour of cheque
Section46. Right of partners to have business wound up after dissolution
Right to demand winding up
Authority of partners in winding up
Section 47. Continuing authority of partners for purposes of winding up
Authority Continues for two Purposes
Liability to share personal profits
Section 50. Personal profits earned after dissolution
Section 46. Right of partners to have business wound up after dissolution
Application of Property
Order in which Property to be Applied
Section 49. Payment of firm debts and of separate debts
Modes of settlement of accounts
Section 48. Mode of settlement of accounts between partners
• Order of Application of Assets
• Subject to Agreement
• Advances and Loans by Partners
• Arbitration Award
• Right to Properties acquired with funds of Firm
• Assignment of partner’s share
Refund of premium
Section 51. Return of premium on premature dissolution
Section 52. Rights where partnership contract is rescinded for fraud or misrepresentation
• Admission of Partner on Payment of Premium
• Incoming Partner Induced by Fraud
• Where no Fraud or Misrepresentation Practiced
• Premature Dissolution of Firm for Fixed Term
Agreements in restraint of trade
Section 53. Right to restrain from use of firm name or firm property
Section 54. Agreements in restraint of trade
Agreement on dissolution or on its anticipation
Sale of Goodwill
Section 55. Sale of goodwill after dissolution
Rights of buyer and seller of goodwill
Agreement in restraint of trade
Concept of Goodwill
Rights and Duties of Parties on Sale of Goodwill
Involuntary Assignments
Modification by Agreement
Procedure of registration
Change of particulars
Section 60. Recording of alterations in firm name and principal place of business
Section 64. Rectification of mistakes
Section 65. Amendment of Registrar by order of Court
Section 66. Inspection of register and filed documents
Section 67. Grant of copies
Penalty for false particulars
Rules of evidence
Section 68. Rules of evidence
Proof of registration
Additional Evidence for Proof of Registration
Proof of being partner
EFFECTS OF NON-REGISTRATION
Section69. Effect of non-registration: Under this Act the registration of the partnership firm has been made optional however there are several benefits for a registered firm besides that there are several disadvantages attached to the unregistered partnership firm.
As a law firm in Delhi we provide all services related to formation of partnership in India and the Indian attorneys at our law firm are well versed with all aspects of the legal services pertaining to the formation of partnership in India.