Partnership act 1932

1. lntroduction
There are twofundamental principleswhichgovernthe relationof partnerstoone another.The first
principle providesthatall the partnersina partnershipfirmare free toforman agreementwithregard
to theirmutual rightsandduties. However,thereare certaindutiesmentionedinThe IndianPartnership
Act, 1932 whichcan notbe alteredbyenteringintoanagreementtothe contrary.Section11 of the Act
givesstatutoryrecognitiontothisprinciple.
The secondprinciple isof fundamentalnature.Itprovidesthatthe relationof partnerstoone anotheris
of the utmostgoodfaith.It providesthateverypartnerisanagentof eachother,therefore,the contract
enteredbyone of the partnerswill bindall the partners.Thus,the relationof partnerstoone anotheris
basedon mutual trustand confidence.The principleisrecognizedbySection9of the Partnership Act.
Dutiesof Partners
All the dutiesof partnersemerge fromthe secondprinciple i.e.the relationof partnerstoone anotheris
of utmostgoodfaith.
Followingare the dutiesof partners:
1.Duty to act in goodfaith
2.Duty notto compete
3.Duty to be diligent
4.Duty to indemnifyforfraud
5.Duty to rendertrue accounts
6.Duty to properlyuse the propertyof the firm
7.Duty notto earn personal profits
Duty to act ingood faith
Section9 of the act providesthatitis the dutyof partnersto act for the greatestcommonadvantage of
the firm.Therefore,the partnershouldworktosecure maximumprofitsforthe firm.A partnershould
not secure secretprofitsatthe expense of the firm.
In Bentleyv.Craven,there wasapartnershipina sugarrefineryfirm.One of the partnerswasskilledin
buyingandsellingsugar.Therefore,he wasentrustedwiththe taskof buyingandsellingsugar.
However,the partnersoldthe sugarfromhis ownstockand thus,gainedprofit.Whenthe partners
discoveredthisfact,theybroughtanactionto recoverprofitsearnedbythe partner.Itwas heldbythe

2. court that the partnercan notmake secretprofitsandtherefore,the firmwasheldentitledforprofits
earnedbythe partner.
The duty continuestoexistevenafterthe partnershiphasceasedtoexist.The partnersowe the dutyto
legal representativesof the partneraswell asthe formerpartner.
Duty notto compete
Section16 (b) of the act providesthatif the partnermakesa profitbyengagingina businesswhichis
similartoor competingwiththe firm,thenthe partnershouldaccountforsuch profits.
 In PullinBihari Royv.MahendraChandraGhosal,[2] there wasa partnershipforbuyingand
sellingof the salt.One of the partnerswhile buyingthe saltforthe firm, boughtsome quantity
of saltfor himself andthengainedprofitbysellingitonhispersonal account.He washeldto be
liable toaccountto hisco-partnersforthe profitsearned.
However,apartnercan carry on anybusinesswhichisoutside the scope of the businessof the firm.
 The duty can be alteredbythe partnershipdeed.The partnersmayenterintoanagreement
which allowsapartnerto carry the businesscompetingwiththe businessorcanrestrictthe
partnerfrom carryingany businessotherthanthatof the firm.Section11 providesthatsuchan
agreementwill be validandcannot be consideredasa restraintintrade.
 If a personbreachessuchagreementandcarriesona personal businesswhichnotcompetingto
the businessof the firmthensucha partner will notbe liable toaccountforthe profits,buthis
co-partnerscan applyfordissolutionof the partnership.
Duty to be Diligent
Section12 (b) providesthata partneris boundto diligentlyattendhisduties.Section13(f) statesthat a
personshouldindemnifythe firmforanylosscausedto the firmbecause of hiswilful neglect
A partnercannot be made liable formere errorsof judgmentoracts done ingood faith.
 In Cragg v.Ford, [3] there wasa partnershipbetweenthe plaintiff andthe defendant.The
defendantwasthe managingdirectorof the firmandtherefore,the conductof dissolutionwas
leftonhim.Plaintiff advisedthe defendanttodisposeof certainbalesof cotton.However,the
defendantsaidthatthe same wouldonlybe done afterthe dissolution.Meanwhile,the pricesof
cotton fell andverylessamountwasrealizedbysellingthe cottonascomparedto whichcould
have beenotherwiserealized.
 An actionforindemnityunderthisheadcanbe broughtonlybythe firmor partnersonbehalf of
the firm.A partnercan not bringan actionfor indemnityinhispersonalcapacity.
Duty to indemnifyforfraud
 Section10 of the IndianPartnershipAct,1932, providesthatif a lossiscausedto the businessof
the firmbecause of the act of the partnerthenhe shall indemnifyhisco-partnersforsuchloss.
 The purpose of thissectionisto induce partnerstodeal fairlyandhonestlywiththe customers.

3.  Illustration:A,B,C,and D enteredintoapartnershipforthe bankingbusiness.A committed
fraudof ₹ 30,000 againstone of the customers.Asa result,all the co-partnersi.e.B,C,and D
were heldliable.Here,A isboundtoindemnifythe firmforthe losscausedtothe firmbecause
of fraudcommittedbyhim.
 The liabilitytoindemnifyforfraudcannotbe excludedbyenteringintoanagreementtothe
contrary.Because enteringintoanysuchagreementisopposedtopublicpolicy.
Duty to rendertrue accounts:
 Section9 of the Act,providesthatthe partnersare boundto disclose andprovide full
informationaboutthe thingsthataffectthe firmtoany partneror his legal representatives.This
meansthat a partnershouldnotconceal thingsfromotherco-partnersinrelationtothe
businessof the firm.
 Everypartnerhas the right to accessthe accountsof the firm.
 In Law v.Law, it was heldbythe court that if a partneris inpossessionof some extra
informationthenhe isboundtodeliverittothe co-partners.If the partnerentersintoa
contract withotherco-partnerswithoutfurnishingthemthe material detailswhichisknownto
himbut nothis co-partnersthensucha contract is voidable.
Duty to properlyuse the propertyof the firm:
 Section15 of the act, providesthatpropertyof the firmshouldbe heldandusedbythe firm
onlyforthe businessof the firm.
 A partnercan not make use of the propertyforhispersonal purpose andif doesso, thenhe will
be accountable to all the co-partners.He couldbe made liable forthe lossescausedbecause of
any suchuse.
 Thisduty can be avoidedbyenteringintoanagreementtothe contrary.
Duty to accountfor personal profits:
 Section16 of the PartnershipAct,providesthat:
If a partnermakesthe use of the propertyof the firmand earnsprofitout of it,thenhe should
account forthe property.Thisdutyarisesbecause of the fiduciaryrelationshipbetweenthe
partners.
 Illustration:A,B,and C were partnersina firm.Goods were suppliedtoapersonD. D paid some
extracommissiontoA,forusinghisinfluence todeliverthe goodstoD. Here,A has the duty
towardsthe co-partnersto accountfor the commission.

4.  If a partnerentersintoa businesswhichiscompetingwiththe businessof the firmthenthe
partnershouldaccountfor the profitearnedfromanysuch business.
 Illustration:A,B,andC were partnersinthe businessof sale of bottles.Bstartedto carry on the
same businessandstartedtoinfluence the customerstobuythe bottle fromhimratherthan
the firm.Here,B has a duty toaccount for the profitsearnedfromthe business.
However,acompetingbusinesscanbe carriedout afterthe dissolutionof the partnership.The
firmhas the rightto put reasonable restrictionsoncarryingthe competingbusinessbythe ex-
partnerssuch as,any reasonable time forwhichthe ex-partnerscan'tcarry the competing
businessorthe geographical limitswherehe can'tcarry the business.
 Thisis nota compulsorydutyandthus,can be avoidedbyenteringintoanagreementtothe
contrary.
Rightsof Partners:
Mutual Rightsof the partnersgenerallydependuponthe provisionsof the agreement.But
subjecttotheiragreement,the law confers followingrightsonpartners:
1. Right to take part inthe conductof the business
2. Right to be consulted
3. Right to accessand inspectbooks
4. Right to indemnity
5. Right to share profits
6. Right to Interest
7. Right to remuneration
1.rightto take part inthe conduct of the business
 Section12 (a) of the act, providesthateverypartnerhasa rightto take part in the conduct to
the businessof the firm.

5.  Thisright can be curtailedbythe provisionsof the agreement.Thus,allowingonlyafew
partnersto activelyparticipate inthe functioningof the business.
 Thisright shouldbe usedbythe partnersfor promotingthe businessof the firmandnot for
damagingthe business.
 In SureshKumarSanghi v.AmritKumar Sanghi,[5] a partner in orderto undermine the position
of the managingpartnerwrote to the principalstonotsupplymotorvehiclestothe firmandto
the banker’stonot to honorthe checksof the firm.
 The Delhi HighCourt providedaninjunctionagainstthe partnersayingthatthe partner’sact was
to damage the businessof the firm.
2.Rightto be consulted:
 Section12 (c) providesforresolvingdisputesrelatingtothe ordinarycourse of business
betweenthe partnersbythe majority.Itstatesthateverypartnershall have the rightto express
an opinionbefore the matterisdecided.
 If for example,there isadifference inopinionamongthe partnersforintroducingthe sonof one
of the partnersforthe purpose of learningbusinessthenthe majoritydecisionwill prevail.
 However,if the dispute isrelatedtothe Fundamental matterof the businessi.e.the nature of
the businessthenthe consentof everypartnerisrequired.
 For Example:If a minoristo be includedasa beneficiaryinapartnershipthenthe consentof all
the partnersis required.
3.Rightto access,inspectand copy books:
 Section12 (d) of the act, providesthe righttopartnersto access, inspectandcopyaccount
books.
 A partnercan exercise thisrightbyhimselforbyhisagentbut none of themis authorizedtouse
the gainedinformationagainstthe interestof the firm.
 Example:If a dormantpartnerwantsto sell hissharesto a co-partnerandappointsan expertto
inspectthe accountand hisshare in the firmthen,co-partnerscannot objectto same.
 For raisingan objectionthe co-partnersshouldprovide reasonablegroundssuchasprotection
of trade.
4. Right to be Indemnified:

6.  Section13 (e) providesthe righttobe indemnifiedtothe partners.Thissectionprovidesthe
rightto indemnityundertwocircumstances:
 A partnerisentitledtorecoverforanyexpensesincurredbyhiminthe ordinaryandproper
conduct of the business.
 Illustration:There wasapartnershipbetweenA,B,C, and D. The firmhas incurreda debtof ₹
2,00,000 from the bank.A paidthe debtin the name of the firm.Inthiscase,B isentitledtobe
indemnifiedfromhisco-partners.
 Whena partner hasincurredexpensesinanemergencyinordertoprotectthe firmfromloss;
providedthatthe partnermusthave acted in a reasonable manner.
 The right to be Indemnifiedisnotlostwiththe dissolutionof the firm.Settlementof accountsis
alsonot importanttoindemnifythe partner.
 The rationale behindthisrightisthatthe burdenof expensesof helpingpartnershipshouldnot
be borne by a single partner.
5.Rightto share profits:
 Section13 (b) of the IndianPartnershipAct,providesthatthe partnersare entitledtoshare the
profitsandlossesequally.
 Rightto share profitsisnot affectedbythe factthat the partnershave contributedunequallyin
the firm,possessdifferentskills,have laboredunequallyinthe firm.
 In Mansha Ram v.Tej Bhan,[6] where there wasnosatisfactoryevidence toshow thatinwhat
proportionthe partnerswere todivide the remuneration.Itwasheldbythe PunjabandHaryana
HighCourt that the partnerswere entitledtoshare equal profitsirrespective of the factthat
theyhad beenpaidseparatelyandhaddone unequal work.
 However,the righttoshare profitsequallycanbe altered bythe partnersbyenteringintoan
agreementtothe contrary.Thus, the partnerscan fix the share of profitsoragree to be paid by
wayof salaryrather thanprofits.
6. Right to Interest:
 InterestonCapital:Section13 (c) providesthata partneris generallynotentitledtoclaimonthe
capital.But if there isan expressagreementbetweenpartnersthatallowsinterestoncapital
then,suchan interestwill be paidonlyoutof the profitsof the firm.Interestisnotprovidedto
the partneron capital exceptwhenthere isanexpressagreementora usage to the effect,
because a partnerisdeemedtobe an adventurerratherthanthe creditor.

7.  InterestonAdvances:Section13(d) statesthat a partner isentitledtothe interestof six percent
perannum forthe advancesmade byhimto the firmbeyondthe capital he had agreedto
subscribe.
 Illustration:A personX,invests₹ 50,000 ina partnershipfirmandprovides₹ 60,000 to the firm
inadvance.In thiscase,X will receiveinterestfromthe profits of the firmfor₹ 50,000 whichhe
had investedinthe firmandwill get6% interestonthe advancesmade byhimto the firm.
 It mustbe notedthatthe interestincapital ceasesafterthe dissolutionof the firm, butthe
interestonadvancesexistuntilitispaid.Thus,the dissolutionof afirmhas no impacton the
InterestonAdvances.
7.Rightto remuneration:
 Section13 (a) providesthatnopartnerin a firmisentitledtoclaimremunerationfortakingpart
inthe conductof business.However,the remunerationcanbe providedtocertainpartners
alongwiththe share in profitsif theyhave enteredintoanagreementtothateffector when
such remunerationispayableunderthe continuedusage of the firm.
 For Example,there isafirmconsistingof Active andDormantpartners.Insuch a case,the
partnerscan form an agreemententitlingthe active partnerstoreceive aparticularsumas
remuneration.