Introduction
In order to learn the rights and liabilities of partners in a partnership firm, it is important to lay down a foundation on the basics of partnership, which is a special contract in itself.
Need and essentials for the special contracts
A contract for a special objective, a particular purpose, and also sealed, contrary to the written or oral contract is a special contract. These contracts lay down clearly the duties and rights of the parties that they have to reciprocate in order to preclude themselves from committing a breach of contract and fulfill the objective of the contract. These contracts are express and explicit and the nuances of which can be dealt with only if the application of common law principles are done and the nature of the transaction is read.
The need for special contracts arises due to the drawbacks in a common contractual agreement as its ambit is wider and ambiguous than the special contracts and this will give scope for breaches. As the world is becoming globalized, the need for special contracts increases. The special contractual situations do not help in laying out the precise points and resolving disputes but also helps in strengthening the contracts of such nature in the future.
The law dealing with special contracts can be divided into two kinds- the one dealing with property transactions and the one with special emphasis on personal relationships. Commonly known special contracts are bailment, agency, pledge, indemnity and guarantee.
The essentials of the special contracts, says without going has to comply with the basic essentials of an ordinary contract but the tweak comes in the purpose of the contract and the details attached in the contract.
In short, the special contracts are necessary for fulfilling the purpose which an ordinary contract cannot do otherwise.
Definition of Partnership
Section 4 of the Indian Partnership Act, 1932 defines partnership to be:
‘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’.
The people who are involved in the partnership are independently called ‘partners’, jointly ‘firm’ and the name with which they carry out a business is called a ‘firm name’.
Since there are different explanations and definitions of partnership given by various scholars and other state’s statutes dealing with partnership, the drafters of the act sought to stick to the definition as it is comprehensive and acts as a good director throughout the act and makes sure it does not slip out of its position.
The definition contains all the essentials laid by Lindley, sharing of losses being an exception. As this may prove to be contrary to the sharing of profits, the lawmakers decided to exclude it but still takes the course to treat the sharing of losses as a legal consequence, as an outcome of the partnership.
Significance of Partnership and the Partnership Deed
The very essence of partnership is to eliminate the voids and limitations caused by the Indian Contract Act and the legislations dealing with sole proprietorship. In the first regard, the partnership settlement works in the capacity of a special contract while in the second case, it acts as a better substitute for the existing business models.
First, partnership brings people together, thereby filling the areas of expertise and inexperience by complementing each other. A partner may be good at capital management while the other will be good at administration and another may not be active but can provide with capital etc. In these circumstances, the individuals themselves cannot run businesses efficiently as they fall back on their respective elements. Here is where a partnership comes in and plays a significant role by completing each other’s requirements. The partnership proves to be efficient and significant by doing the following:
- The partners work as a team. Therefore, the risk of loss-bearing is equal unless otherwise specified in the deed. The liability of owning up for the mistakes is on everyone as the partners act on behalf of each other There is mutual agency.
- With respect to decision making, the partners discuss and deliberate before they come to a conclusion and in the course, it gives birth to many ideas.
A partnership deed is an instrument by which the partners come to an agreement and this lays out the details with respect to rights, duties, profit sharing ratio, capital investment requirements, nature of business, names involved, etc. This provides more detail and precision to the partnership model in action. These are the merits of a partnership deed:
- It lays out the respective rights, duties and liabilities of partners.
- It prevents disputes between/among partners as it serves as the code of referral for dispute resolution.
- It gives delegation of duties, whereby no confusion with regard to the duties of the partners may arise.
- The deed, at times even specifies if a remuneration is to be given to the partners in the course of the employment.
Relations of Partners within Themselves
The relations that the partners share with each other is fiduciary. As the maxim societatis
contractibus fides exuberet explains, the partnership thus created out of a deed, creates a relationship which gives birth to obligations and in the nature of trust. They do not have the relationship that is shared by a debtor-creditor because everyone is solely and mutually responsible for each other.
Rights and Duties of Partners
Rights of partners inter se
The partners have certain inter se, even if the deed is non-existent.
- Right to take part in the management[1]
Every partner has the right to take part in the organizational and managerial decisions of the firm as they are placed in equal footing. However, the partner can opt-out from this according to circumstances, for example, a sleeping partner does not involve himself much management of the firm although he has the choice.
- Right to be consulted[2]
Every partner must be consulted before any decision is taken up. In the case of a conflict, the majority decision will be held and acted upon. But, this can only happen in the cases of low value. However, with respect to important policy decisions, the partners must come to a unanimous consensus[3].
- Right to access records
The partners can access the records and browse them through for their personal reference. They also can make copies of the records for their perusal.
- Right to a share in profits
The partners can avail profits in the previously decided profit sharing ratio during the institution of partnership, when a partnership deed is drafted. However, in the absence of a partnership deed, the profits are to be shared equally among the partners.
- Right to interest on capital
The partner who provides and introduces a capital inflow of a particular inflow as a part of his duty, is entitled to an interest on capital at 6% p.a[4]
- Right to indemnity [5]
The partner who indemnifies in the ordinary course of business or in special circumstances, like in the case of protecting the firm from a problem caused suddenly or in the case of an emergency, the partner is entitled to a right to indemnity.
- Right to own partnership property jointly[6]
Every asset held in the firm belongs to each of the partners and at the time of dissolution, these assets are realized and the proceeds are divided among them. This is only with respect to the property used for the purposes exclusively for the running and management of the partnership business.
- Right to act in emergency
In the light of prudence, all acts done by the partners in case of an emergency is acceptable and each partner is entitled to act that way as there is an underlying presumption that the partners always act in the best interests of the firm
- Right to say in the introduction of new members[7]
Every partner has the right to introduce partners into the firm and every other partner has the right to dissent to this introduction or prevent that member from being a partner in the firm. But, express clauses in the deed can limit this right of partners.
- Right to retire[8]
Every partner can retire with the consent of his fellow partners, following the due process as prescribed in the deed and by giving due notice to his fellow partners expressly delivering the intention to quit the firm.
- Right to not be expelled[9]
No partner can be expelled from the firm by the majority partners as they all have a right to continue in the firm in a dignified manner. However, one exception could be expulsion citing the maintenance of goodwill of the firm i.e in good faith of the company.
- Right to carry on another business[10]
A partner who has retired can take up another business which can be competitive by the may not use the name of the previous firm and talk of himself to be a part of the business
Duties of Partners inter se
- Duty to manage the business to the best interests of the firm
The partner cannot undertake the business for his personal benefit but for the best interests of the business as he is bound to do so.
One partner cannot gain at the expense of another partner, without his full consent and knowledge[11]
In Dennison vs. Fawcett,[12] a partner made an outsider who had no privity to the business, buy the business and since, the partner was not acting in good faith of the business, he was held to be liable.
- Duty to be faithful, fair and just
Good faith is expected from every partner to every partner. If a partner acts against the faith of the partner, it is necessary to prove that the partner who acted against his partner acted in favor of the firm and must prove this.
Lindley states this: “The utmost good faith is due from every member of a partnership towards every other member; and if any dispute arises between partners touching any transaction by which one seeks to benefit himself at the expense of the firm, he will be required to show, not only that he has the law on his side, but that his conduct will bear to be tried by the highest standard of honor”.
Liabilities of Partners
Like every right is backed by a duty, in a partnership model, every right is backed by a liability as the partner is expected to be held responsible for certain contingencies that may arise out of his act or the act of his partners, as the partners are jointly and severally responsible for each other. This section will deal with the general liabilities of the partners involved in the partnership set up as given in the Indian Partnership Act, 1932 and a special partnership statute- Limited Liability Partnership Act, 2008
General Liabilities
- Liability to carry on the business, keeping in mind the common goal and objective of the business
The partner is required to keep in mind the common intention behind carrying on their legal business with his fellow partners, as they all got into the partnership agreement with a common objective. The partners are hence required to be true to this motive
- Liability to disclose accounts[13]
The partner undertaking the business or actively managing the business has to reveal the accounts and full information of all the activities that are affecting the business for the sake of the business as well as to maintain credibility among the partners.
- Liability to indemnify[14]
If a partner causes a fraud in the business and in the course, causes a loss to the business, he will have to indemnify the firm.
Also, if the loss is caused due to his carelessness or negligence, he will have to indemnify the firm for the same. [15]
- Liability to attend diligently[16]
Every partner is liable to attend to the business diligently and has to work in its best interests and is not entitled to get any salary for any of these acts of his, unless otherwise specified in the deed.
- Liability to share losses
In the case of no deed, the liability to share losses will fall equally on the shoulders of all the partners in the firm and will pay the compensation to the firm equally.
- Liability to account for profits
The partner will account for and pay the profits earned in his personal capacity in the course of undertaking the partnership business.
Also, if the partner is undertaking another business of his own, which happens to be of the same nature, he is to account for and pay the profits earned to the partnership[17].
- Liability of non-transfer of partnership interest
The partner cannot transfer his rights of partnership in a firm to another person as his rights are non-transferrable. If done, the action will not be sustained and the partner will be held liable. [18]
Limited Liability Partnership Act, 2008
Limited Liability Partnership Act, 2008 is a revolutionary act that started off by limiting the liabilities a partner has. By this act, the established LLP is a body corporate [19] and has many features that are distinct to it.
- LLP is a body corporate[20]
The LLP is a body corporate that is distinct from its partners and has a separate legal entity.
- Perpetual succession
The LLP can continue functioning as a body corporate even after the firm undergoes special circumstances- reconstitution of firm, entry and exit of partners, insolvency of partners, death of partners etc.
- The partners do not have a mutual agency
The acts of one partner do not bind the other and the partners are not jointly liable for the wrongs of the other.
- LLP Agreement
Instead of a partnership deed, there is an agreement in the absence of which, the act governs the LLP.
- Limited Liability
The partners are not unlimitedly liable for their co-partners but their liability is restricted to the amount they agreed to contribute and to undertake.
- Conversion to LLP
This act allows any enterprise-company, firm, or public listed corp. To convert to an LLP after complying to the factors necessary
- There is a common seal for the LLP
Conclusion
The rights, liabilities, and duties of the partners in the firm only determine the functions to be undertaken by the partners in the firm. All these factors, when complied with make the management functioning smoother and helps the firm earn profits. Ultimately, the good faith of the company supersedes the other aspects and the partners must keep in mind this before any move. This project sought to look at the rights, liabilities, and duties of the partners in the most simplest and comprehensive sense and hopes this aim of the researcher is fulfilled.
References:
[1] Section 12(a) of the Indian partnership act, 1932
[2] Bilsset vs. Daniel (1853) 10 Hare 493
[3] Section 12(c) of the Indian partnership act, 1932
[4] Section 12(d) of the Indian partnership act, 1932
[5] Section 12(c) (i) and (ii) of the Indian partnership act, 1932
[6] Section 14 of the Indian partnership act, 1932
[7] Section 23(i) of the Indian partnership act, 1932
[8] Section 32(f) of the Indian partnership act, 1932
[9] Section 33(1) of the Indian partnership act, 1932
[10] Section 36(1) of the Indian partnership act, 1932
[11] Section 29 of the Indian partnership act, 1932
[12] Dennison vs. Fawcett, (1958) CLY 868
[13] Section 9 of the Indian partnership act, 1932
[14] Section 10 of the Indian partnership act, 1932
[15] Section 13(i) of the Indian partnership act, 1932
[16] Section 12(b) of the Indian partnership act, 1932
[17] Section 16(b) of the Indian partnership act, 1932
[18] Section 29(i) and (ii) of the Indian partnership act, 1932
[19] Section 3 of the Limited Liability partnership Act, 2008
[20] Ibid 19
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