The Indian Partnership Act, 1932 contains provisions that govern the relation of partners to one another. The partners of a partnership firm can draft their terms and conditions with respect to their duties, roles and responsibilities in a partnership deed. In the absence of a partnership deed, the provisions given under the Indian Partnership Act are applicable. Let’s understand the duties and responsibilities of the partners in a partnership firm.
Although the partners are free to form a partnership agreement that defines their rights and duties, there are certain rights and duties given under the Indian Partnership Act, 1932, that cannot be altered by the partners entering into an agreement to the contrary (Section 11). Since all the partners are agents in a partnership firm, they must act in good faith with each other. Any contract that is binding on one partner is binding on the other partners as well (Section 9, Indian Partnership Act, 1932).
The partners in a partnership firm can exercise the following rights unless the partnership deed states otherwise:
Right to Participate in Conducting the Business
Section 12(a) of the act states that the partners of a firm have a right to participate in the activities/business of the firm. Through a provision in the agreement, this right can however be curtailed, allowing only some partners to participate actively in the business.
Right to have access to the Books and Accounts of the Firm
The partners, both dormant and active partners, have an equal right to inspect and copy the books of accounts of the firm.
Right to Express Their Opinions
All the partners of the firm are entitled to express their opinions. Any decision pertaining to the business can be taken based on a majority view.
Right to Profit Sharing
The partnership deed states the profit sharing ratio of the partners. In the absence of the same in the deed, the partners have a right to share the profits of the firm equally.
Right to Indemnification
The partners of a partnership firm have a right to be indemnified against any payments made or any liabilities incurred by any of them in the course of business. Such a decision or act must be considered reasonable under the normal course of business.
Right to Interest on Capital
The partners of a firm can take a 6% interest on any advances made by them to the firm. They are not entitled to any interest on the capital contribution made by them but in case they wish to take an interest in the capital, they can do so from the profits of the firm
The partners of a firm must act in good faith with each other and this bestows certain duties on them:
Duty to Act in Good Faith -Section 9
The partners are expected to perform their general duties in good faith for the greatest common advantage of the firm and to be faithful to each other.
Duty to Render True Accounts- Section 9
The partners must not conceal any information regarding the business from the other partners. It is the duty of every partner to render true accounts of the firm and provide full disclosure regarding the business of the firm.
Duty to Act Diligently- Section 12 (b)
Every partner of the firm must act diligently. Any wilful neglect by any partner makes them liable to indemnify the other partners for any losses incurred (Section 13 (f))
Duty to Indemnify for Fraud- Section 10
All the partners of a firm have a duty to indemnify the firm for any losses caused by their wrongful actions or fraud committed by them. Since the firm is held liable for the actions of the partners, the partners must indemnify each other for any losses caused.
Duty to not Compete- Section 16 (b)
The partners must not make any profits by undertaking any competing business. Any such profits made by them must be accounted for to the firm
Duty Regarding the Property of the Firm
The partners must use the property of the firm only for the purpose of the business of the firm. It must not be used for a personal purpose since the property is collectively owned by all the partners and the firm.
Q1. What is the role of the Partnership Deed in a Partnership Firm?
Ans. The partnership deed defines the roles and duties of the partners pertaining to the general administration and operation of the firm. It gives them the right to determine relationship inter-se. These include aspects like profit sharing, the roles of each partner, etc. This deed can be altered through the express or implied consent of the partners. Section 11 of the Partnership Act states that partners can be restrained from carrying on a business similar to the business of the partnership but such a clause must be expressly stated in the partnership deed.
Q2. What is the effect on the rights and duties after a change in the Firm?
Ans. In case of a change in the constitution of a partnership firm, the rights and duties of the partners are also affected. These changes occur in the following situations:
The predetermined term of the partnership has expired
There is a change in the constitution of the firm because of the entry/exit of a partner
Addition of business undertakings other than those originally agreed upon
Any changes in the partnership and any effects of the same on the rights and duties of the partners must be incorporated in the partnership deed.