(..7 b..)
RELATIONS OF PARTNERS TO ONE ANOTHER
(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.
1. Rights and duties of partners.
2. Goodwill. Apr. 05.
SYNOPSIS.
I. Mutual Relations Inter Se
1. The First Principle (Freedom of Contract):
2. The Second Principle (Utmost Good Faith):
II. Duties of Partners
1. Duty of Utmost Good Faith (Section 9)
2. Duty to Render True Accounts and Full Information (Section 9)
3. Duty to Indemnify for Fraud (Section 10)
4. Duty to Act with Due Diligence (Sections 12(b) and 13(f))
5. Duty to Contribute to Losses (Section 13(b))
6. Duty Regarding the Proper Use of Firm Property (Section 15)
7. Duty to Account for Personal Profits (Section 16(a))
8. Duty Not to Compete (Section 16(b))
9. Joint and Several Liability (Section 25)
III. Rights of Partners (Sections 12 & 13)
1. Right to Take Part in the Business (Section 12(a))
2. Majority Rights (Section 12(c))
3. Right to Access Books of Account (Section 12(d))
4. No Right to Remuneration (Section 13(a))
5. Right to Profits (Section 13(b))
6. Right to Interest (Sections 13(c) and (d))
a. Interest on Capital (Section 13(c)):
b. Interest on Advances (Section 13(d)):
7. Right to Indemnity (Section 13(e))
IV. Rights and Duties in Case of Change in the Firm (Section 17)
A) Change in the Constitution of the Firm
B) Continuance of the Firm After Expiry of its Term
C) Carrying Out Additional Undertakings
V. Property of the Firm (Section 14)
A. What Constitutes Partnership Property?
B. Landmark Judgments on Section 14:
C. Goodwill
D. Rights and Restrictions on Goodwill Sale
E. Agreement in Restraint of Trade
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I. Mutual Relations Inter Se
There are two fundamental principles that govern the relations of partners with one another (inter se).
1. The First Principle (Freedom of Contract): Gives partners the absolute freedom to determine their mutual rights and duties by their own voluntary agreement. Section 11 of the Indian Partnership Act, 1932 gives statutory effect to this principle. It provides that the mutual rights and duties of the partners of a firm may be determined by a contract between them. Such a contract may be either express or implied (inferred from a consistent course of dealing). Furthermore, such a contract may be varied at any time with the consent of all partners.
2. The Second Principle (Utmost Good Faith): Mandates that the relations of partners to one another are based on the foundational doctrine of utmost good faith (uberrima fides).
Section 9 provides that partners are legally bound to be "just and faithful to each other." This core fiduciary duty cannot be excluded or waived by any agreement to the contrary. These principles of justice and faithfulness are enshrined throughout the Partnership Act and run as a common thread through various rights and duties of the partners. Sections 9 to 17 of the Act comprehensively deal with these reciprocal rights and duties.
II. Duties of Partners
All duties of partners organically emerge from the bedrock principle of good faith. Below are the statutory duties of partners toward each other:
1. Duty of Utmost Good Faith (Section 9)
Section 9 of the Act provides that partners are bound to carry on the business of the firm to the greatest common advantage and to be just and faithful to each other. Thus, all endeavors of a partner must be directed towards securing the maximum benefit and profit for the firm rather than personal gain. A profound fiduciary relationship exists among them.
Bentley v. Craven (1853) 18 Beav 75
Facts: A partner in a sugar refining firm possessed specialized skill in buying sugar at advantageous rates. He supplied sugar to the firm from his personal stock, which he had bought earlier when prices were low. He charged the firm the prevailing market price and consequently made a considerable personal profit. Upon discovery, his co-partners brought an action for an accounting of those profits.
Held: The court held that the firm was fully entitled to the profits made by the partner, as he had breached his fiduciary duty to act for the greatest common advantage of the firm.
2. Duty to Render True Accounts and Full Information (Section 9)
Section 9 additionally imposes an absolute duty upon every partner to render true accounts and full information on all matters affecting the firm to any other partner or their legal representatives. This duty is non-delegable and stands firmly on the requirement of absolute transparency.
3. Duty to Indemnify for Fraud (Section 10)
Every partner is under a statutory duty to indemnify the firm for any loss caused to it by their fraud in conducting the firm's business. This is because partners are expected to deal honestly with the firm’s customers and each other. Since the firm is liable to third parties for a partner's fraud, the firm retains an absolute right to be indemnified by the defaulting partner.
4. Duty to Act with Due Diligence (Sections 12(b) and 13(f))
Section 12(b) casts a duty on every partner to attend diligently to their duties in the conduct of the firm's business. This provision is supplemented by Section 13(f), which dictates that a partner must indemnify the firm for any loss caused to it by their willful neglect in the conduct of the business. Consequently, if a partner acts with gross negligence or willful disregard, causing financial or reputational injury to the firm, they are personally liable to make good that loss.
5. Duty to Contribute to Losses (Section 13(b))
In the absence of a contract to the contrary, partners must contribute equally to the losses sustained by the firm. While a partnership deed normally outlines a specific ratio for sharing profits and losses, the statutory default rule mandates equal liability if the deed is silent.
6. Duty Regarding the Proper Use of Firm Property (Section 15)
Section 15 explicitly casts a duty upon partners to hold and use the property of the firm exclusively for the purposes of the firm's business. No partner has the right to utilize the firm's assets, funds, or property for any personal purpose or private enjoyment.
7. Duty to Account for Personal Profits (Section 16(a))
If a partner derives any personal profit from any transaction of the firm or from the use of the property, business connection, or business name of the firm, they must account for that profit and pay it over to the firm. For instance, if a partner utilizes joint property for a private venture, they must account for the personal profits earned and compensate the firm for any damage caused to the property.
8. Duty Not to Compete (Section 16(b))
Section 16(b) mandates that if a partner carries on any business of the same nature as, and competing with, that of the firm, they must account for and pay to the firm all profits made in that competing business.
a. Exception to Public Policy: This section serves as a statutory exception to the general rule enumerated in Section 27 of the Indian Contract Act, 1872, which declares agreements in restraint of trade void.
b. However, by mutual agreement under Section 11(2), partners may validly restrain each other from carrying on any business other than that of the firm while they remain partners.
9. Joint and Several Liability (Section 25)
By virtue of Section 25 of the Act, every partner is liable jointly with all other partners, and also severally (individually), for all acts of the firm done while they are a partner.
Example: If a firm owes ₹1,00,000 to creditors and there are five partners, their liability is joint and several. While creditors can sue any single partner for the full ₹1,00,000, internally each is liable for ₹20,000 (in the absence of a contract to the contrary). If one partner becomes insolvent and cannot pay, the remaining four must absorb the deficit, paying ₹25,000 each to satisfy the external debt.
Ashutosh v. State of Rajasthan & Others (2005) 7 SCC 308
The Supreme Court of India reaffirmed the unwavering principle of partner liability. The Court held that a partner acts as an agent of the firm and is both jointly and severally liable for its debts. Accordingly, a decree obtained against a partnership firm can be validly executed against the separate, personal property of an individual partner, ensuring that creditors are fully protected against evasive maneuvers.
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III. Rights of Partners (Sections 12 & 13)
While the mutual rights of partners depend primarily on the provisions of their partnership deed, the Act confers the following default rights upon all partners, subject to any contract to the contrary:
1. Right to Take Part in the Business (Section 12(a))
Every partner has an inherent right to participate actively in the conduct and management of the firm's business. This privilege of participation must be exercised in a manner that promotes the firm's interest and not to its detriment.
2. Majority Rights (Section 12(c))
When partners exercise their right to participate, differences of opinion may naturally arise regarding ordinary business policies. Section 12(c) resolves this by providing that any difference arising as to ordinary matters connected with the business may be decided by a majority of the partners. However, no fundamental change in the nature of the business can be made without the unanimous consent of all partners.
3. Right to Access Books of Account (Section 12(d))
Every partner has an absolute right to access, inspect, and copy any of the books of the firm. A partner may exercise this right personally or through an authorized agent. However, the partner or agent can be restrained by an injunction if they attempt to utilize the knowledge so gained maliciously against the firm's interests.
4. No Right to Remuneration (Section 13(a))
Unless explicitly agreed upon in the partnership contract, a partner is not entitled to receive a salary, commission, or remuneration for participating in the conduct of the firm's business. The law presumes that their share of profits is the sole reward for their labor.
5. Right to Profits (Section 13(b))
Subject to any contract to the contrary, partners are entitled to share equally in the profits earned by the firm, and are correspondingly bound to contribute equally to the losses sustained.
6. Right to Interest (Sections 13(c) and (d))
a. Interest on Capital (Section 13(c)): Partners are generally not entitled to interest on the capital subscribed by them. However, if an agreement provides for interest on capital, such interest is payable only out of the profits earned by the firm.
b. Interest on Advances (Section 13(d)): If a partner advances an amount to the firm for business purposes beyond the capital they agreed to subscribe, they are legally entitled to receive interest on such an advance at the statutory rate of 6 percent per annum, regardless of whether the firm makes a profit or a loss.
7. Right to Indemnity (Section 13(e))
Section 13(e) provides that the firm shall indemnify a partner in respect of payments made and liabilities incurred by them:
a. In the ordinary and proper conduct of the business; and
b. In doing an act in an emergency for the purpose of protecting the firm from loss, provided they acted as a person of ordinary prudence would act under similar circumstances in their own case.
Mansha Ram v. Tej Bhan [AIR 1958 Punj 5]
The Court clarified that to claim indemnification for emergency expenditures, it is a prerequisite that the partner concerned must have acted as a reasonable, prudent person would have acted under identical circumstances.
IV. Rights and Duties in Case of Change in the Firm (Section 17)
Section 17 provides for the preservation of the mutual rights and duties of partners under specific constitutional transitions, categorized into three distinct circumstances:
A) Change in the Constitution of the Firm
Where a change occurs in the constitution of a firm (e.g., through the introduction of a new partner, retirement, or death), 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 the Firm After Expiry of its Term
Where a firm constituted for a fixed term continues to carry on business after the expiration of that term, the mutual rights and duties of the partners remain unchanged, so far as they are consistent with the incidents of a partnership at will.
C) Carrying Out Additional Undertakings
Where a firm constituted to carry out one or more specific adventures or undertakings subsequently engages in other adventures or undertakings, the mutual rights and duties of the partners in respect of the new ventures remain identical to those governing the original undertakings.
V. Property of the Firm (Section 14)
Theoretically, a partnership firm lacks a distinct, separate legal personality apart from its partners—unlike a registered company, which is an independent artificial legal person. Consequently, a partnership firm cannot hold or own property in its own collective name. The "property of the firm" is legally understood as the joint estate of all the partners.
Despite being a joint estate, it is treated separately in accounting and law so that no individual partner can claim an exclusive personal ownership right over any specific item within it during the subsistence of the partnership. Determining what constitutes firm property is crucial during the dissolution of the partnership or for enforcing accounts against personal usage.
A. What Constitutes Partnership Property?
The partners must determine by agreement what shall be the firm's property. In the absence of an explicit contract, Section 14 lays down rules for ascertaining the partners' intentions. The property of the firm includes:
1. All property, rights, and interests in property originally brought into the common stock of the firm by the partners;
2. Property 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
3. The Goodwill of the firm.
4. Presumption of Source of Funds: Unless a contrary intention appears, property acquired with money belonging to the firm is deemed to have been acquired on behalf of the firm.
5. Mere Usage vs. Ownership: The mere fact that property belonging to an individual partner is used for the firm's business does not automatically transform it into firm property. It remains individual property unless an intention to bring it into the common stock of the firm is established.
B. Landmark Judgments on Section 14:
1. Addanki Narayanappa & Anr. v. Bhaskara Krishtappa & Ors. [AIR 1966 SC 1300]
In this seminal judgment, a Constitution Bench of the Supreme Court analyzed the concept of partnership property. The Court ruled that since a firm has no independent legal existence, the partnership property vests collectively in all the partners. During the subsistence of the partnership, no partner can point to any specific part of the asset as their own. A partner’s right is only to get a share of the profits from time to time, and upon dissolution, to receive a share of the surplus assets remaining after satisfying all liabilities.
Indian Kanoon
2. Mohd. Laiquiddin & Ors. v. Kamala Devi Misra (Dead) by LRs (2010) 2 SCC 407 The Supreme Court held that the property brought in by a partner as their contribution to the firm becomes the joint property of all partners. The Court reiterated that under Section 14, property acquired with firm money is deemed firm property unless a contrary intention is expressly shown.
C. Goodwill
"Goodwill" is an intangible commercial asset representing the value of a business's reputation, connections, and brand value built up over years of honest work or financial investment. It signifies the competitive advantage and potential of future profits that a successor inherits.
Section 55 provides for the sale of a firm's goodwill upon its dissolution. The goodwill may be sold either separately or along with the remaining assets of the firm.
D. Rights and Restrictions on Goodwill Sale
Where the goodwill of a firm is sold post-dissolution, any partner of the dissolved firm may carry on a business competing with that of the buyer and may advertise such business. However, subject to a contract to the contrary, the partner is strictly prohibited from:
a. Using the old firm name;
b. Representing themselves as carrying on the business of the old firm; or
c. Soliciting the custom of clients/customers who dealt with the firm prior to its dissolution.
E. Agreement in Restraint of Trade
Upon the sale of goodwill, a partner may enter into an agreement with the buyer promising not to carry on a similar business within a specified period or local limits. Provided such restrictions are reasonable, the agreement is fully valid and is saved from being declared void under Section 27 of the Indian Contract Act, 1872.
Jennings v. Jennings (1898) 1 Ch 378
Facts: A partnership between two partners was dissolved on the condition that one partner would take over the entire assets of the firm. The dissolution deed made no explicit mention of the "goodwill." Later, the retiring partner attempted to solicit the customers of the old firm.
Held: The Court held that the goodwill inherently passed to the partner who retained the assets. Consequently, the retaining partner was granted an injunction to restrain the departing partner from canvassing or soliciting the customers of the old firm.
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