UNIT 2: RELATION OF PARTNERS

Right of Partners
The mutual rights of partners depend upon the provisions of the partnership agreement. However, subject
to an agreement between the partners; the law confers the following rights upon all the partners:

1. Right to take part in the conduct of business: Sec 12(a)

It is the right of every partner to take part in the management of the business. This right is available to all
the partners. This is, however, subject to contract between the partners i.e., the partners may provide, by a
contract, that this right shall not be available to some partners.

2. Right to be consulted: Sec. 12(c)

It is also the right of every partner to be consulted in all matters affecting the business of the firm.
Moreover, every partner also has the right to express his opinion before any decision is taken by the other
partner.
In case of difference of opinion, matter will be settled in following way:
a) In case of Routine Matters: It shall be determined by the view of majority. But majority must act
in good faith means every partner must be consulted before it.
b) In case of Fundamental Matters: where there is change in the nature of firm the Unanimous
consent is needed.
3. Right to access books and accounts: Sec12(d)
Every partner has the right to examine all the records, books and accounts of the firm. Moreover, he can
also have the copy of such accounts etc. This right must however be exercise bona fide.

4. Right to remuneration: Sec 13(a)

Generally, the partners are not entitled to receive any remuneration for taking part in the conduct of the
business of the firm. However, the partnership agreement may expressly provide for the payment of
remuneration to working partners.
Note:
The payment of remuneration to a working partner does not make partner an employee of the firm. The
reason being that the firm and its partners are one and the same thing, and the firm is not a separate legal
entity.

5. Right to share profits: Sec. 13 (b)

Every partner has the right to have equal share in the profits of the firm. However, the partners may also
agree to share the profits in different proportions. No agreement between the partners can restrict this right.

6. Right to interest on capital and on advance:

Right to interest on capital Sec 13(c)): Ordinarily, the partners have no right to receive any interest on
their contribution towards the capital. However, the partnership agreement may provide that the partners
shall be entitled to interest on capital at a certain rate. It may, however, be noted that where such interest is
to be paid, it shall be paid only out of profit.
Right to interest on advances Sec13(d): Where in addition to the contribution towards the capital,
a partner also advances a sum of money for the purpose of the business of the firm; he is
entitled to interest on such advance at the rate of 6% per annum. Such interest on advance is
payable even if the firm suffers loss.
7. Right to indemnity: Sec 13(e)
The partner of a firm has a right to be indemnified i.e., the right to recover expenses incurred and payments
made by him in the following two circumstances.
 a. Expenses incurred in the ordinary course of business
b. Expenses incurred in an emergency by him in order to protect the property of the firm
from a loss threatened by an emergency.

8. Right to use the partnership property:

It is the right of every partner to use the partnership property but it should be used exclusively for the
purpose of the partnership business.

9. Right to be consulted at the time of admission of a new partner:

It is the right of every partner to be consulted at the time of admitting a new partner in the firm.

10. Right to retire from the firm:

It is the right of every partner to retire from firm, if he finds it difficult adjusts with the other partners.

11. Right not to be expelled:

Every partner has the right to continue in the firm and he cannot be expelled from it by the other partners.
However, the partners may enter into a contract providing for the expulsion of a partner by majority of the
partners. But the power of expulsion must be exercised in good faith:

12. Right to dissolve the firm:

A partner has the right to dissolve the partnership with the consent of all partners. But where the
partnership is at will the firm may be dissolved by any partner giving notice in writing to all other partners
of his intention to dissolve the firm.

Duties of Partners
Following are the duties of partners towards one another.
1. General Duty of good faith:
It is the foremost and important general duty of the partners. Every partner should act in good faith,
and he should be just and faithful in his dealings with the other partners. Good faith requires that a
partner should not deceive the other partners by concealment of material facts e.g. a partner should not
try to make secret profits, for himself, at the expense of the firm.
2. Duty to carry on the firm business to the greatest common advantage:
Every partner is bound to carry on the business of the firm to the greatest common advantage. He
must use his knowledge and skill for the common benefit of the firm. And he should not make any
personal or private profits.
3. Duty to render true accounts:
It is another duty of every partner that he should keep proper accounts, and render correct and true
accounts of partnership.
4. Duty to give full information:
It is also the duty of every partner that he should give full information of all things affecting the firm,
to his co-partners. Thus, if a partner is in possession of more information about the affairs and assets
of the firm, he should not conceal that from the other partners.
5. Duty to indemnify for loss caused by fraud:
It is the duty of every partner to make good the loss suffered by the firm due to his fraud. Thus, if
some loss is caused to the firm due to the fraud of a particular partner, the firm has the right to recover
the loss from the same partner. It is an absolute duty and cannot be excluded by an agreement to the
contrary. However, the firm shall remain liable to the third parties for fraud of its partners.
6. Duty to attend diligently:
 It is the duty of every partner that he should diligently (i.e., carefully) attend to the affairs of the
business of the firm. If a partner does not attend diligently the business of the firm, and the firm
suffers a loss due to his ‘willful neglect’, then he is bound to make compensation to the firm.
7. Duty to share losses:
It is the duty of every partner to share equally the losses suffered by the firm. However, this duty is
subject to an agreement to the contrary i.e., the partners may agree to share the losses in different
proportions. However this duty might be restricted by way of an agreement.

8. Duty to use firm property exclusively for firm: (Sec-15)

It is the duty of every partner to use the partnership property exclusively for the business of the firm.
Thus, the partners should use the partnership property for the firm’s business only. This duty is also
subject to an agreement to the contrary.

9. Duty to account for personal profits: (Sec.-16)

This duty is based on the principle of good faith, which requires that a partner shall not make personal
profits at the expense of the firm. If a partner makes personal profits in any of the following ways, he
must give account of those profits and pay back the same to the firm:
a) Personal profits from any transaction of the firm.
b) Personal profits from the use of the property of the firm.
c) Personal profits from the business connection of the firm.
d) Personal profits from the use of the name of the firm.

However, the above duty is subject to a contract between the partners i.e., by a contract, the partners
may allow, all or any of them to earn personal profits by using firm name, property etc. or allow any
of them to carry on any business whether or not competing with the business of the firm.

10. Duty to act within authority:

It is the duty of every partner that he should act within the scope of actual or implied authority.

PROPERTY OF THE FIRM

Section 14 of the Partnership Act provides: Subject to contract between the partners, the
property of the firm includes:

1) All property and rights and interest in property

 Originally brought into the stock of the firm, or
 Acquired, by purchase or otherwise, by or for the firm,
 Or for the purposes and in the course of the business of the firm, and
2) Includes also the goodwill of the business. “Goodwill may be defined as the value
of the reputation of a business house in respect of profit expected in future over and
above the normal level of profit earned by an undertaking to the same class of business.

THE AUTHORITY OF A PARTNER:

Partner to be agent of the firm (Sec-18): “Subject to the provisions of this Act, a partner is the
agent of the firm for the purposes of the business of the firm.” He has character of both a
principal and an agent.
Authority: Authority means the right of a partner to bind the firm by his own acts. The authority
of a partner to act on behalf of the firm can be divided into two categories:

a) Express authority: The authority which is expressly given to a partner by the agreement of
partnership is called “Express authority”. The firm is bound by all acts done by a partner.

b) Implied authority Sec19: Authority of a partner to bind the firm arising by implication of law is
called his implied authority if the act of a partner is done

(i) To carry on in the usual way,

(ii) The act must relate to a matter which is within the scope of the business of the firm,
(iii) And the act is in the name of the firm,
(iv) Or in any manner expressing or implying an intention to bind the firm, and
(v) Done by him in his capacity as partner.

If the partnership be of a general commercial nature, following acts are within implied authority:

(i) Buy or sell or pledge goods on account of the partnership

(ii) Buy good for firm and Incur normal expenses.
(iii) Borrow money and pay debts on account of the partnership
(iv) Drawing, making, signing, endorsing, accepting, transferring, and discounting any
negotiable instruments.

Limitations of Partner’s Implied Authority: In the absence of any usage or custom of trade to the
contrary, the implied authority of a partner does not empower him to

(a) Submit a dispute relating to the business of the firm to arbitration,

(b) Open a banking account on behalf of the firm in his own name,
(c) Compromise or relinquish any claim or portion of a claim by the firm,
(d) Withdraw a suit or proceeding filed on behalf of the firm,
(e) Admit any liability in a suit or proceeding against the firm,
(f) Acquire immovable property on behalf of the firm.
(g) Transfer immovable property belonging to the firm, or
(h) Enter into partnership on behalf the firm.

Alteration of Authority:
The partners in a firm may, by contract between the partners, extend or restrict the implied authority of any
partner. (Sec.-20
 Authority in an emergency (Sec.21)
A partner has authority, in an emergency, to do all such acts for the purpose of protecting the
firm from loss as would be done by a person of ordinary prudence, in his own case, acting
under similar circumstances, and such acts bind the firm.

 Admission/Representation by a partner: (Sec.-23)

An admission or representation made by a partner concerning the affairs of the firm is evidence
against the firm, if it is made in the ordinary of course of business. An admission or
representation by a partner will not however, bind the firm if his authority is limited on the
point and other party knows of the restriction.
  Notice to the Acting Partner : (Sec- 24)
Notice to a partner who habitually acts in the business of the firm of any matter relating to the
affairs of the firm operates as notice to the firm, except in the case of a fraud on the firm
committed by or with the consent, of that partner. It must be received by a working partner
and not by sleeping partner.

 LIABILITY OF A FIRM AND PARTNERS TO THIRD PARTY (Sec. 25 to 27

This liability may be discussed under the following heads:

Liability for Wrongful Acts of a Partner

Liability for Misapplication of Money or
Contractual
Property by a Partner

For the acts Wrongful Act

of the firm Of partner within his authority
(i.e. acts of Wrongful
Wrongful Act of partner Act Where
is beyond his authority
moneyand Where
or other moneyhave
partner or ratified i
partners) of partner is property is property is
beyond his received by a received by the
authority partner and then firm and them
Firm is liable misapplied by misapplied by
(i.e. partners the same any of the
are jointly and partner partner
severally

liable)

Firm is liable Partner is Personally liable Firm is liable

Firm is always
liable for all
the acts of

RECONSTITUTION OF A FIRM

Transfer of Partner’s Interest ( Sec.29)

A partner can transfer his share only with the consent of other partners but the transferee thereby does not
become a partner of the firm. A transferee of a partner’s interest cannot do the following, during the
continuance of the partnership

(i) Interfere in the conduct of the business; or

(ii) Inspect or take a copy of accounts

On the dissolution of the firm, the transferee will be entitled,

(i) To receive the share of the assets of the firm to which the transferring partner was entitled,
(ii) For the purpose of ascertaining the share, he is entitled to an account as from the
date of the dissolution.
Introduction of a New Partner (Sec-31)
 A newly admitted partner is known as ‘incoming partner’.
 A new partner can be admitted into an existing firm in any of the following ways :
a) With the consent of all the partners.
b) In accordance with a contract already entered into between the partners for the admission
of a new partner.
 The liability of an incoming partner may be discussed as under :

1. Liability for the acts of the firm done before admission:

An incoming partner is not liable for the acts of the firm done before his admission
into the firm. Thus, he is not liable for the past debts of the firm.
2. Liability for the acts of the firm done after admission:
As a matter of fact, the liability of an incoming partner starts from the date of his
admission into the firm. Thus, he is liable for all the acts of the firm done after he
became a partner in the firm.
3. If the incoming partner specifically agrees to bear the past liabilities, then for past
liabilities he shall not be liable to third parties as he is a stranger to contract but he
shall be liable to other partners.

Retirement of a Partner (Sec.32)

 A partner may also retire from an existing firm. The partner who retires from an existing
firm is known as a ‘retiring partner’ or an ‘outgoing partner’.
 A partner may retire from the firm in anyone of the following three modes :
a) By consent. A partner may retire, at any time with the consent of all other partners.
b) By agreement. The partners may enter into an express agreement about the retirement
of a partner. In such cases, a partner may retire according to the terms of the
agreement.
c) By notice. In case of partnership at will, a partner may retire by given a written notice
of retirement to all other partners.
 The liability of a retiring partner may be discuss as under :
1. Liability for the acts of the firm done before retirement: A retiring partner continues to
be liable to third parties for the acts of the firm done before his retirement.
2. Liability for the acts of the firm done after retirement: A retiring partner also continues
to be liable to third parties for the acts of the firm done even after his retirement until a
public notice of his retirement is given This liability of a retiring partner is based on the
principle of ‘holding out’.
However a retired partner is not liable to any third party who deals with the firm without
knowing that he was partner.

Expulsion of a Partner: Sec-33)

A partner cannot be ordinarily expelled from the firm. However, in certain exceptional cases, he can be
expelled if the following conditions are satisfied:

1) The power of expulsion must be given in express contract between the partners.
 2) The power of expulsion should be exercised by majority of partners.
3) The power of expulsion should be exercised in absolute good faith.
The test of good faith includes three conditions:

(1) That the expulsion must be in the interest of the partnership

(2) That the partner to be expelled is served a notice to that effect
(3) That he was given an opportunity of being heard.
It these conditions are not fulfilled the expulsion is null and void and the expelled partner can demand re-
instatement in the firm. An expelled partner continues to be liable to third parties for the acts of the firm
done even after his retirement until a public notice of his retirement is given. The public notice can be
given either by the expelled partner himself or by the firm.

Insolvency of a Partner (Sec-34)

1) The partner declared an insolvent, ceases to be a partner on the date on which the order
of adjudication is made whether or not the firm is hereby dissolved.
2) The estate of the insolvent is not liable for any act of the firm after the date of the order
of insolvency.
3) The firm cannot be held liable for any acts of the insolvent partner after the date of the
order of insolvency.

Death of a Partner (Sec- 35)

1) The firm is automatically dissolved on the death of a partner. However, the partners may
specifically provide in their agreement that the firm shall not be dissolved, and the remaining
partners shall continue the firm’s business.
2) Where the firm is not dissolved by the death of a partner, the estate of a deceased partner is not
liable for any acts of the firm which are done after his death.
3) No public notice is required in case of death of a partner.

RIGHTS OF AN OUTGOING PARTNER:

The rights of an outgoing partner are as follows:

1) To carry on competing business : (Sec- 36)
An outgoing partner may carry on a business, but it can be restricted by an agreement
(below mentioned). However he cannot:
(a) Use the firm name.
(b) Represent himself as carrying on the business of the firm, or
(c) Solicit the customers of the old firm.
Restraint of trade agreement:
All partners may make an agreement with each other that on ceasing to be a partner he will not carry on
any business similar to that of the firm within a specified period or within specified local limits, such
agreement shall be valid if the restrictions imposed are reasonable (Sec 27 of the Indian Contract Act,)

2) To share subsequent profits: ( Sec-37)

Where any member of a firm has died or otherwise ceased to be partner and remaining partners carry on
the business of the firm with the property of firm without final settlement of accounts of outgoing partner
then, he has following rights:
1) Right of outgoing partner to share subsequent profit.
2) Right to claim interest @ 6%.