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RELATIONS OF PARTNERS TO ONE ANOTHER

Table of Contents

(S. 9 TO 17).

QUESTION BANK.

Q.1. Discuss the rules relating to the rights, duties and obligations of partners interse. Nov. 04.

Q.2. State briefly the rights and obligations of a partner after dissolution of partnership. Apr. 04.

Q.3. Enumerate briefly the rights and duties of a partner.

Q.4.Define partnership. Explain the rights and duties of partner in partnership business. Apr.2010

SHORT NOTES.

Rights and duties of partners.
Goodwill. Apr. 05.

SYNOPSIS.

MUTUAL RELATIONS: –

II DUTIES OF PARTNERS: –

Duty of good faith (S.9):-
Duty to render true accounts and full information (S. 9):-
Duty to indemnify for fraud (S.10):-
Duty to act with due diligence (S. (12 (b) and 13(f)):-
Duty to contribute losses (S. 13 (b)): –
Duty regarding proper use of firm property (S. 15): –
Duty to account for personal profits (S. 16(a)): –
Duty not to compute (S. 16(b)): –
Joint and several liability (S. 25): –

III. RIGHT OF PARTNERS (S. 12 & 13): –

Right to take part in the business (S. 12(a)): –
Majority Rights (S. 12(c)): –
Right to have access to the books. (S. 12(d)): –
No right to remuneration (S. 13 (a))
Right to profit (S. 13(b)): –
Right to interest (S. 13(c) and (d)): –
Right to indemnity (S. 13 (e)):-
RIGHTS AND DUTIES OF PARTNERS, IN CASE OF CHANGE IN THE FIRM OR ITS BUSINESS (S.17)
A) Change in firm: –
B) Continuance of firm after expiry of its term: –
C) Where firm carried out additional undertakings:-
PROPERTY OF THE FIRM (S.14):-

What constitutes partnership property: –

Goodwill: –

I. MUTUAL RELATIONS[1]: –

There are two fundamental principles that govern the relations of partners with one another (i.e. inter se). The first principle gives the partner the freedom to decide their mutual rights and duties by their own voluntary agreement. S. 11 of the Act gives effect to this principle. S. 11 provide that the mutual rights and duties of the partners of a firm may be determined by the contract between the partners, and such contract may be express or implied (from a course of dealing). Such a contract may be varied by consent of all the partners.

The second principle is that the relations of partners to one another are based on the principle of good faith.

9 provides that the partners are bound to be ‘just and faithful to each other’. This duty cannot be excluded by any agreement to the contrary. These principles of ‘just and faithfulness’ are enshrined in the Partnership Act and run through various rights and duties of the partners with each other. Ss. 9 to 17 deal with the reciprocal rights and duties of the partners.

II. DUTIES OF PARTNERS: –

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

Following are the duties of partners to each other.

1. Duty of good faith[2] (S. 9):-

9 of the Act provides that the partners are bound to carry on the business of the firm, to the greatest common advantage, to be just and faithful to each other. Thus, all the endeavours of a partner must be done to secure a maximum profit for the firm. The fiduciary relationship exists between them.

In Bentley V. Craven[3]

Facts: – A partner in a firm of sugar refiners who had great skill in buying 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 prices and thus made a considerable profit. When his co-partners discovered this, they brought an action for an account of the profit.

The court held that the firm is entitled to the profit.

2. Duty to render true accounts and full information[4] (S. 9):-

9 also imposes upon the partner a duty to render true accounts and full information of all things affecting the firm to any partner or his legal representative. This duty is also based on utmost good faith among them.

3. Duty to indemnify for fraud[5] (S. 10):-

Every partner is under a duty to indemnify the firm for any loss caused to it by its fraud in conducting the firm’s business. This is because the partners are expected to deal honestly with the firm’s customers.

4. Duty to act with due diligence[6] (S. (12 (b) and 13(f)):-

12 (b), Cast duty on every partner to attend diligently to his duties in the conduct of the firm’s business. This section is supplemented by S. 13 (f), which provides that the partner shall indemnify the firm for any loss caused to it by his willful neglect in the conduct of the firm’s business. So if any partner acts negligently, thereby causing the firm to suffer, it is liable to make that loss good to the firm.

5. Duty to contribute losses[7] (S. 13 (b)): –

In the absence of a contract to the contrary, the partners must contribute equally to the firm’s losses. Normally, a partnership deed provides for the ratio of sharing profits and losses.

6. Duty regarding the proper use of the firm property (S. 15): –

15 cast duty upon partners to use the firm’s property exclusively for the purpose of the firm’s business.

Therefore, no partner should use the firm’s assets for any personal purpose.

7. Duty to account for personal profits[8] (S. 16(a)): –

It is the duty of every partner to use the firm’s property strictly and solely for the firm’s purposes. If a partner uses a joint property for any private purpose, he must account for the personal profits he earned and compensate the firm for any damage to the property done by such use.

8. Duty not to compete[9] (S. 16(b)): –

16(b) makes it the partner’s duty not to carry on any business similar to or in competition with the firm’s business. If the partner does so, he is bound to pay the firm all profits he made in that business.

This section is an exception to the general rule enumerated in S. 27 of the Indian Contract Act, which provides that an agreement restricting trade is void.

However, by agreement, the partners may alter the provisions relating to carrying on trade themselves.

9. Joint and several liabilities[10] (S. 25): –

By virtue of S. 25 of the Act, every partner is liable jointly with all other partners and severally (single) for all the acts of the firm done whilst he is a partner. E.g. the Firm owes Rs.1lakh to the creditors, and there are five partners. Their liability is joint in the sense each is liable (in the absence of the contract to the contrary) to Rs.20 000/- each. If one becomes insolvent without payment, the remaining four will have to pay Rs25.000/- each.

III. RIGHTS OF PARTNERS (S. 12 & 13): –

The mutual rights and duties of the partners depend upon the provisions of their agreement. However, subject to their agreement, the Act confers the following rights upon all partners.

1. Right to take part in the business (S. 12(a)): –

Every partner has the right to participate in the conduct of the firm’s business. The privilege of participation in business must be used to promote the firm’s interest and not to damage it.

2. Majority Rights[11] (S. 12(c)): –

When every partner has a right to participate in a firm’s business and to be consulted on forming a business policy, this may give rise to differences of opinion among them. Therefore, S.12 (c) provides that the majority of the partners may decide such differences of opinion. The majority of partners will prevail.

3. Right to have access to the books of account (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 through an agent, but either can be restrained from using the knowledge, thus gained, against the firm’s interest.

4. No right to remuneration (S. 13 (a))

Unless otherwise agreed, partners are not entitled to receive salary or remuneration for participating in the conduct of the firm’s business.

5. Right to profit (S. 13(b)): –

Unless otherwise agreed, partners are entitled to share equally in the profit earned by the firm. Similarly, they are bound to contribute equally to the losses sustained in the course of the firm’s business.

6. Right to interest (S. 13(c) and (d)): –

Unless agreed, Partners are not entitled to any interest on their contribution provided into a firm’s capital. But if partners agree to receive interest on such subscribed capital, such interest shall be payable only out of profits earned by the firm (S. 13 (c). But if any partner has advanced, for the purpose of the firm’s business, a sum of money beyond the capital he has agreed to subscribe is entitled to interest on such advance at the rate of 6 per cent per annum S.13(d)).

7. Right to indemnity (S. 13 (e)):-

13(e) provides the right of indemnity to the partner. These indemnities are of two kinds. In the first place, a partner is entitled to recover any damage caused “in the ordinary and proper conduct of the business”. The second kind of indemnity is recoverable when the partner has done an act involving expenditure to protect the firm’s property.

In Mansha Ram V. Tej Bjan[12]

Held: – It is necessary that the partner concerned should have acted as a reasonable person.

IV. RIGHTS AND DUTIES OF PARTNERS IN CASE OF CHANGE IN THE FIRM OR ITS BUSINESS (S.17):-

17 Provides the effect on mutual rights and duties of partners in the following circumstances, namely;
A) Change in the firm.
B) Continuance of the firm after the expiry of its term.
C) When the firm carries out additional undertakings.

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) Continuance of firm after the expiry of its term: –

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 of the term. So far as such, rights and duties may be consistent with the incidents of partnership at will.

So after the expiration of the term of its continuation, if the firm continues its business, the mutual rights and duties of partners remain the same, but such a firm becomes a partnership at will, and the rights and duties of partners remain subject to such firm.

C) Where the firm carries out additional undertakings:-

Where a firm constituted to carry out one or more adventures or undertakings (business) carries out other adventures or undertakings, the mutual rights and duties of the partners in respect of the other adventures or undertakings remain the same as those in respect of the original adventures or undertakings.

V. PROPERTY OF THE FIRM (S.14):-

Theoretically, a partnership firm doesn’t have a separate legal personality apart from its partners, like a company, which is a legal person; therefore, unlike the company, a partnership firm is not capable of owing any property on its own name and, therefore so-called property of the firm is nothing but the joint estate of all the partners. Even though it is the joint estate of all partners, it is kept so separate that none of the partners can claim any personal ownership over any item of it.

For several purposes, like the dissolution of the partnership and the use of partnership property by the partner for his own interest, it becomes necessary to determine the joint property of the partners. In other words, the firm’s property is to be separated from the partner’s personal property.

What constitutes partnership property: –

The partners must determine by their agreement what shall be the firm’s property. S. 14 lays down rules for ascertaining the partners’ intention for this purpose.

14 provides that the property of the firm includes: –
i) All property and rights and interests in a property originally brought into the stock of the firm or
ii) Acquired by purchase or otherwise, by or for the firm or for the purpose and in the course of the business of the firm, and

iii) Goodwill of the firm.

Unless a contrary intention appears, property (and rights and interests in the property) acquired with money belonging to the firm are deemed to have been acquired for the firm (also held In Mohd. Laiquiddian v. Kamaladevi Mishra (2010 (2) SCC 407)

The mere fact that the property belonging to one partner is used for the firm’s business does not become the firm’s property. But, if there is anything to show the intention of the partners to make it so, then it will become the firm’s property.

Goodwill[13]: –

“Goodwill” is the benefit arising from a firm’s business connections. Goodwill is a commercial term signifying the value of the business in the hands of a successor. Goodwill is the “whole advantage, of reputation and connection of firm, which may have been built up by years of honest work or gained by the lavish expenditure of money”.

So, goodwill is the sum total of the name, fame, reputation, and business connections earned or acquired by the firm through honest work done or services provided for years to its clients or customers, etc. A business’s goodwill is an intangible asset.

55 provides for the sale of a firm’s goodwill upon its dissolution. The firm’s goodwill may be sold either separately or along with its other property.

Where the goodwill of the firm is sold after the dissolution of a firm, any partner of the dissolved firm may carry on a business competing with that of the buyer of such goodwill and also may advertise such business (subject to the agreement in contrary) he may not-

A) Use the firm name,
B) Represent himself as carrying on the business of the firm or
C) Solicit the customs which were dealing with the firm before its dissolution.

Upon the sale of a firm’s goodwill, any partner may agree with the buyer that such partner will not carry on any business similar to that of the firm within the specified period or within specified limits. The reasonable restrictions imposed in that respect do not make such an agreement void under S.27 of the Indian Contract Act 1872.

In Jennings V. Jennings[14]

Facts: Where the partnership between two partners was dissolved on the condition that one of them would take over the assets, with no mention of goodwill.

The Court held that goodwill went to the partner retaining the assets, and he could restrain the other partner from canvassing the customer of the old firm.

*****

[1] भागिदारांचे आपापसातील संबंध. [भागीदारों के बीच संबंध।]

[2] सद्भावनेचे कर्तव्य किंवा प्रामाणिकपणाचे वर्तन [अच्छा विश्वास या ईमानदार आचरण का कर्तव्य।]

[3] 1853.

[4] सत्य हिषेब व पूर्ण माहिती देण्याचे कर्तव्य [सही हिसाब और पूरी जानकारी देना कर्तव्य है।]

[5] फसवणुकीने झालेले नुकसान भरपाई करुन देणे. [धोखाधड़ी के कारण हुए नुकसान के लिए मुआवजा।]

[6] मेहनतीने कार्य करण्याचे कर्तव्य. [लगन से काम करना कर्तव्य है।]

[7] तोटा वाटून घेण्याचे कर्तव्य. [घाटे को साझा करने का कर्तव्य।]

[8] व्यक्तीगत फायदयाचा हिषोब देणे. [व्यक्तिगत लाभ की गणना।]

[9] स्पर्धा न करण्याचे कर्तव्य. [प्रतिस्पर्धा न करना कर्तव्य है।]

[10] एकत्र व व्यक्तीगत जबाबदारी. [सामूहिक और व्यक्तिगत जिम्मेदारी।]

[11] बहुमताचा अधिकार [बहुमत का अधिकार]

[12] (AIR 1958 Punjab 5)

[13] लैकिक मुल्य किंवा धंदयाचा नावलैकिक. [व्यावयासिक मूल्य या व्यवसाय का नाम।]

[14] (1898).