All the person who enters into a partnership has some rights and duties/obligations. out of these rights of partners, some are expressed in the partnership Act 1932 and some are dependent on the agreement ( partnership deed) between the partners.
Are you are a partner of any partnership firm? or looking to enter into or create a partnership firm then this post is for you. here we discuss step by step the rights and duties of partners, rights of partner after dissolution. but before explain various right and obligation of partners we have to the meaning of partnership first.
Meaning of partnership
It is basically a relation between tow or more persons who join hands to farm a business organisation with the objective of earning profit. the person who join hands are individually called as ‘Partners’ and collectively a ‘Firm’. the name under which business is carried on is called ‘Firm name’
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Rights of partners under the partnership act
Right to participate in the conduct of the Business (Section 12(a))
Section 12(a) of the Act state that, every partner /partners of the partnership firm have a right to take part in the business conduct and management of the firm. If any partner creates any barrier for other or others partner then the arrived partner can sue in the court of law.
Many times some people enter into a partnership firm to invest money and not for inter into business conduct of the firm. This type of partner is called a sleeping partner. But it does not mean that sleeping partner can’t take part in the business conduct of the firm of or any other active partner or partners can stop them to enter into the business conduct of the firm.
In a partnership firm, no partner can get ultimate power to conduct and management of the affairs of the firm or exclude one or any partner to participate in the conduct of the business.
Right to express opinions (Section 12(c))
Every partner of the partnership firm is free to put his point of view and express his opinion in each and every business decision. One of the most important rights of partners is right to agree or disagree on any business proposal.
In partnership, every business decision and proposal can be accepted or reject on voting ratio. If the majority of partner vote in the favour of the proposal then proposal will be accepted.
However it is totally dependent on the nature of business, type of proposal, impact on profit, capital investment etc. that which type of majority needed for the approval of the proposal. (Absolute or ordinary)
Rights of partners to access books and accounts (Section 12(d))
Every partner of the firm whether he is an active partner or sleeping partner, is entitled to access, inspect and take a copy of books of account.
In the event of the death of a partner, his heir or legal representative or their duly authorised agent shall have a right to access and to inspect and take a copy of any of the books of account of the firm.
Right to share profits (Section 13(b))
Section 13(b) of the act state the rights of partners that every partner of a partnership firm is entitled to share the firm profit. In case of loss sustained by a firm, losses will also be bear by all partners.
Generally, profit share ratio is mentioned in the partnership deed by but if the profit-sharing ratio does not mention in the partnership deed then it will be in equal ratio.
There is no certain proportion in which partner share the profit and contribute to the capital if the partnership deed includes profit sharing ratio.
Right to interest on capital (Section 13(c))
Although any partner of the partnership firm is not entitled to receive remuneration.
However, if the partnership deed has any provision to pay interest on capital then partners are entitled to receive interest on capital. Interest on capital will always be provided out of the profit of the firm.
Right to interest advances (Section 13(d))
If a partner or partners makes an advance to the firm in addition to the capital, it is called advance/loan. Here Partnership Act clearly distinct advance form loan. Load is a subsequent contribution made by a partner in addition to capital.
A partner which provide loan or advance to the partnership firm is entitled to receive interest at the rate of 6% per annum. In respect of capital, generally partners are not entitled to receive interest but they can receive if partnership deed includes any provision in this regard.
Right to be indemnified (Section 13(e))
Every partner of the firm is entitled to get indemnified by the firm in respect of any payment made and liability accrued by the partner in the ordinary course of business. However, the partner must be authorised to make these payments or these payments must be of emergency nature.
Here the intention of making these payments should be to protect the firm from loss or for the best benefit of the partnership firm.
Right to prohibit the admission of a new partner (Section 31)
As per the provision of the contract act, 1932 no person shall be entitled to enter into the firm without the consent of all partners.
Here in this regard, we should further read section 80 of this act, section 80 state that person who is introduced as a new partner shall not be liable for any act done by old partners in the past.
Here section 30 of the act says that, if the person who is introduced as a partner is a minor then he can be partner only for share profit of the firm and not for losses.
Right to retire (Section 32(1))
Section 32(1) describes the following ways in which partner can be retired-
A partner can withdraw himself from the partnership firm and get retired with the consent of all the partners.
Retirement will proceed in accordance with the expressed agreement (partnership deed), if there is an agreement in the partnership deed.
In case of partnership at will, then the partner can be retired by giving notice to the rest of the partners.
However, the retiring partner shall be liable for his the entire act done before in the capacity of a partner, unless all three party namely (retiring partner himself, other partners and third-party) discharger the retiring party from his liability.
Right not to be expelled (Section 33)
A partner cannot be expelled firm the firm by any type of majority. But yes if partnership deed conferred the power of expulsion then the partner can be expelled in good faith of partnership firm.
This rights of partners to expelled can be exercised in good faith only. Good faith means the act done to protect the integrity, understanding, profit and overall interest of all beneficiaries.
Right of outgoing partner to share profits (Section 37)
If any member of the partnership firm passed away or ceases to act as a partner, and rest of the partner still continue the partnership firm with the exiting assets of the firm without final settlement of books of account between existing and retiring partner or his legal heir.
In this case, the retiring partner or his legal heir or his legal representative has the choice either of the following till final settlement.
Interest @ 6% per annum on the balance amount.
Share in the profit earned proportionate to his amount outstanding to total capital.
Right to dissolve the firm (Section 40)
This is the rights of partners to dissolve the firm with the consent of all the partners accorded to the term of partnership deed. In case of partnership at will, any partner can dissolve the firm by giving notice of desolation of the firm to all the partners.
Right of carry on competing business (Section 36(1))
A retiring partner has a right to start and advertise a competing business with that of the firm. But he cannot do the following-
- Cannot use the firm name
- Represent himself as a partner of the old firm
- Cannot hook to the persons who were dealing with the firm before he get retired.
Duties/obligations of partners
Here are some duties/ obligation which every partner of the partnership firm must perform.
General duties of partner/partners (Section 9)
Every partner has general duties to carry on the business to the greatest common benefit of the firm. And duty to be just and faithful towards each other, provide a true and fair view of the account, and furnish full information of all the things affecting the firm, his partners, legal heir, and legal representative.
These duties are not specified in any deed of documents. Infect when two are more person come together to form a partnership firm then all partners are mutually agreed to perform these duties.
Duty to indemnify for loss to the firm (Section 10)
Every partner shall indemnify (make good the loss) the firm for any loss caused to it by his fraud in the conduct of the business of the firm.
Let’s simplify it
- It is the duty of every partner and partners collectively
- To carry on the business of the firm to the greatest common advantage (not individual advantage)
- To be just and faithful to each other
- And to render true accounts (books of account) and full information of all things affecting the firm to any partner, his heir or legal representative.
In the nutshell, because of the act of any individual partner, firm bear any loss, then that partner shall indemnify the firm.
Sleeping partners can file a suit for rendition (performance) of account. Here sleeping partner means a partner who, don’t have an active role in the performance in business conduct of partnership.
Example- Because the activity of ‘X’, ‘Y’ suffered any loss then it is the duty of ‘X’ to indemnify ‘Y’
Section 13(f): To indemnify for wilful neglect
A partner shall indemnify the firm for any loss caused to it by his willful neglect in the conduct of the business of the firm.
Every partner has a moral, legal and social responsibility to act for the best result of the firm and to carry on the business of the firm to the greatest common advantage.
If any partner does any act which is beyond to the moral, legal and social responsibility of the partner, in the conduct of the business of the firm, and which caused any loss to the partnership firm, then that partner shall indemnify the firm for loss.
Example:- X, Y and Z are three partners in the ‘XYZ’ partnership firm. ‘X’ have a responsibility to pay taxes on time, but ‘X’ spent the tax amount on his personal expenses. Due to late payment of tax, XYZ partnership firm got penalised by GST department.
Here this loss caused because of willful neglect of ‘X’. Since ‘X’ is responsible to indemnify the firm.
To attend duties diligently without remuneration (Section 13(a) & Section 12(b))
Section 13(a) of the Partnership Act, 1932; state that any partner of the partnership firm is not entitled to receive remuneration.
However, partners are entitled to receive interest on capital, interest on loan,
Section 12(b) of the Partnership Act, 1932; state that every partner must attend his duty diligently in the performance of the business.
So collectively we can say that every partner shall perform his duty without any remuneration.
Section 13(b): To share losses
As per the provision of section 13(b) of the Partnership Act, 1932; every partner of the firm has a duty to contribute to the loss accrued to the firm as well as entitled to share the profit of the firm.
Here profit and loss sharing ratio shall which is mention in the partnership deed. If any ratio is not mentioned in the partnership deed then the profit-sharing ration will we equal.
Duty to exclusive use of the firm’s property (section 15)
Section 15 of the act says that the property of the firm shall be used by the partners exclusively for the purpose of the business.
Example:- Car provided to the partner, can be used only for office use and not for use.
Personal profit earned by partners (Section 16(a))
If any partner earned any profit for himself from the use of the property of the firm or by any business transaction of the firm or by using firm goodwill of firm name, then he will be liable to return that profit to the firm.
Example:- Purchases manager of a firm earn commission on purchase of raw material. Here purchase manager will be responsible to pay back that commission to the firm.
Duty to pay back profits of competing business (Section 16(b))
Further subsection (b) of this section state that if the partner carries on the business of the same nature and competing with the firm as long as they are a partner of the firm, then he is liable to return that profit to the firm.