Rights and Duties of Partners inter se

What is Partners inter se?

Meaning of Partners inter se: – The phrase is used to distinguish rights or duties between two or more parties from their rights or duties to others. It provides that every partner is an agent of each other, therefore, the contract entered by one of the partners will bind all the partners. Thus, the relation of partners to one another is based on mutual trust and confidence. The Indian Partnership Act, 1932 has also prescribed provisions to govern their relationship inter se (amongst them), and these provisions are applicable if no such deed exists. The principle is recognised by Section 9 of the Partnership Act.

All partners are free to make their own terms and conditions regarding the functioning of their partnership deed. The Indian Partnership Act, 1932 also laid down provisions to govern (among them) the separation of their relations, and these provisions do not apply if there is no such deed.

Rights and Duties of Partners inter se

What is Partnership?

Meaning of Partnership: – Partnership is a special kind of Contract. Section 4 of the Indian Partnership Act 1932 defines “Partnership“. “Partnership” is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.

Meaning of Partners: – Persons who have entered into partnership with one another are called individually, “partners” and collectively “a firm”, and the name under which their business is carried on is called the “firm name”.

Right to Determine Relationship

Meaning of Partnership Deed: – Partners have the right to determine their mutual rights and duties by a contract called a partnership deed, which sets out aspects of general administration, such as which partner will work, what their share in the profits will be, etc. This can be varied by implied or express consent of partners.

Such deed can be made expressly or impliedly by the dealing. For example: – if one partner examines the accounts of the firm daily and others do not object, his conduct will be considered the right of all partners in the absence of a written partnership between them. So they can determine the rights of the partners themselves.

Rights of Partners Inter Se

Partners have these rights under the Indian Partnership Act, 1932 unless stated under the partnership deed: –

  1. Right to participate in business [Section 12(a)]: – Each partner has equal right to participate in the running of his business. If the partnership deed states, that only some of the partners can exercise this right to contribute to the functioning of the business. Case law: – Suresh Kumar Sanghi vs. Amit Kumar Sanghi
    • Facts of the case: – A partner wrote to principals not to supply motor vehicles to the firm and to the banker not to honor the firm’s checks in order to undermine the position of the managing partners.
    • Judgement of the case: – The Delhi High Court granted injunction against the partner, stating that the partner’s act is to harm the business of the firm.
  1. Right to express opinion [Section 12(c)]: – One of the rights of the partners is that they can freely express their opinions. In the differences of opinion of the partners in matters related to the business, partners can come to a decision by the majority of votes. Each partner has the right to express his opinion in the decision of such matters. For example: – If a minor is to be included as a beneficiary in a partnership then consent of all partners is required.
  1. Right to access books and accounts [Section 12(d)]: – Each partner can inspect and copy books of business accounts. This right is equally applicable to active and passive partners. For example: – If an inactive partner wants to sell his shares to his co-partner and appoints an expert to inspect the account and its share, the co-partner cannot object to the same. To raise objections, co-partners should provide appropriate grounds such as protection of business.
  1. Profit Sharing Rights [Section 13(b)]: – Partners usually describe in their work the proportion in which they will share the profits of the firm. However, the partners have to share all the profits of the firm equally if they have not agreed to a fixed profit sharing ratio. Case laws: – Mansha Ram vs. Tej Bhan
    • Facts of the case: – There was no satisfactory evidence to show in what proportion the remuneration was to be divided among the partners.
    • Judgement of the case: – It was held by the Punjab and Haryana High Court that the partners were entitled to share the same benefits despite the fact that they were paid separately and did unequal work for the company.
  1. Right to interest on capital [Section 13(c)]: – The partner does not usually receive interest on the capital they contribute. If they decide to charge interest, such payments should be made out of profits only.
  1. Interest on advances [Section 13(d)]: – It states that a partner is entitled to an interest of six per cent per annum, which is given to the firm beyond the capital to which he had agreed to subscribe. For example: – ‘X’ invests 50,000 in a partnership firm and offers the 60,000 as an advance to the firm. In this case, ‘X’ will get interest on Rs. 50,000 which he had invested in the firm and will get interest of 6% on the advances he had made for the firm.
  1. Right to Compensation [Section 13(e)]: – Partners can make some payments and payments through their decisions during the course of their business. They can claim compensation from each other for these decisions. Such decisions should be taken in situations of emergency and should be of such a nature that generally prudent persons resort to similar circumstances. For example: – A company took a loan of 5 lakh rupees from the bank. There were four partners of the company ‘A’, ‘B’, ‘C’ and ‘D’. ‘D’ paid Rs. 5 lakh (loan of the company) to the bank. Now, ‘D’ may be entitled to get the compensation from his partners ‘A’, ‘B’ and ‘C’.

Duties of Partners inter se

  1. General Duties: – Each partner has the following common duties such as taking the business to the greatest good, being fair and dutiful to each other, rendering true accounts and providing complete information of everything that affects the firm, etc.
  1. Duty to Compensate for Fraud [Section 10]: Every partner to indemnify the firm for losses caused by the fraud in the conduct of business. The Act has adopted this principle because the firm is liable for the wrongful actions of the partners. Whichever partner commits fraud, may indemnify the other partners for his actions. For example: -‘A’, ‘B’, ‘C’ and ‘D’ partnered for banking business. ‘A’ committed fraud of ₹ 30,000 against one of the customers. Consequently, all co-partners i.e. ‘B’, ‘C’ and ‘D’ were held liable. Here, ‘A’ is obliged to compensate the firm for the losses suffered by the firm due to the fraud committed by him.
  1. Duty to work diligently [Section 12(b)]: – Each partner should participate in their duties with as much diligence as possible, as his or her diligence also affects the other partners. He is liable to compensate others if his wrong will causes damage to the firm. Case laws: – Cragg vs. Ford
    • Facts of the case: – There was a partnership between the plaintiff and the defendant. The managing director of the firm was defendant and, therefore, the conduct of dissolution of the firm was left to him. The plaintiff advised the defendant to dispose of a few bales of cotton. However, the defendant stated that this would be done only after the dissolution. Meanwhile, cotton prices fell and by selling Cotton Company get very less amount of money.
    • Judgment of the case: – In this case, the court held that an action for compensation under this head can only be brought on behalf of the firm or by the partners. A partner cannot take any action to compensate in his personal capacity.
  1. Duty to use the firm’s assets properly [Section 15]: Partners can use the firm’s assets exclusively for their business and not for any personal purpose, as they all adopt it collectively. Therefore, they should be careful when using these properties.
  1. Duty to earn or compete for personal gains [Section 16(b)]: – Each partner must act in accordance with commonly shared goals. They should not make any personal profit and should not engage in any competitive business venture. They should hand over the personal profits made to their firm.
  1. Duty to act in good faith [Section 9]: – It is the duty of the partners to act for the greatest general benefit of the firm. Therefore, the partner must work to secure maximum profit for the firm. At the expense of the whole firm, a partner should not secure his personal profits. Case laws: – Bentley vs. Craven
    • Facts of the case: – There was a sugar refinery partnership firm. One of the partners of the firm was skilled in buying and selling sugar. Therefore, he was tasked to buy and sell sugar. However, the partner sold sugar from his own stock and thus, earned a profit. When the partners came to know of this fact, they took an action to recover the profits earned by the partner.
    • Judgement of the case: – It was held by the court that the partner could not make secret profit and, therefore, the firm was held entitled for profit earned by the partner.
  1. Duty to render true accounts [Section 9]: – Partners are obliged to disclose and provide complete information about things affecting the firm to any partner or its legal representatives. This means that partners will not hide things from other co-partners in relation to the firm’s business. Case laws: – William Law vs. James Law
    • Facts of the case: – William Law and James Law were two partners in a manufacturing business. James was an active partner and William agreed to sell his share worth $ 10,000 to James. After the sale of the shares, William found out that James had not disclosed all of the partnership assets to William and that his shares were worth more than $ 10,000.
    • Judgement of the case: – It was held by the court decided that James had breached his duty of disclosure of all the information. As, if a partner is in possession of some additional information he is bound to give it to the co-partners and the partner does not disclose additional information to the co-partners then in such a case the contract will be voidable.

Impact on rights and duties of Partners after changes in firm

Whenever there is a change in the constitution of the firm, the nature of the existing relationship between the partners will be affected. Such changes can occur in the following situations: –

  • Changes in the constitution of the firm due to incoming or outgoing or partner (s);
  • Expiration of the firm’s predetermined period; and
  • Carrying out additional business ventures than originally agreed.

The mutual rights and duties of the partners will remain the same as they have already decided earlier before such changes, but the partners can change this by making a new partnership deed.

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