Lesson 7 PARTNERSHIP (Continued)

Lesson 7

PARTNERSHIP (Continued)

What is Partnership Agreement?  Discuss important points of this document.  Discuss its

contents.

PARTNESHIP AGREEMENT

Partnership deed or agreement is a document in which the relations of partners with one

another are clearly written.  It is the most important document of partnership, which includes

the terms and conditions related to partnership and the regulations governing its internal

management and organization.  It may be oral or written.  But it is necessary to have the

agreement in writing.

DEFINITION

“Partnership deed or agreement is a document which includes the terms and

conditions related to the partnership; and regulations governing its internal management and

organization.”

PROVISIONS

Following are the important provisions of partnership deed:

1. Date

Date of starting the business should be written in it.

2. Name of the Business

Name of the firm under which the business is to be conducted should be written in it.

3. Nature of Business

Nature of business to be conducted by the partners should be mentioned.

4. Location of Business

Location of business, i.e. where it is to be operated, should be written in it.

5. List of Partners

List of partners, their names, addresses and other particulars should be mentioned.

6. Duration of partnership

Duration of partnership, whether it is for a definite period of time or indefinite period of time,

should be written.

7. Dealing Bank

The name of dealing bank should be written in it.

8. Division of Work

Division of work among the partners, for the management of the firm, should be written clearly

in it.

9. Deficiency of Capital

How the deficiency of capital should be covered at the time of insolvency of any partner must

be clearly stated.

10. Total Capital

Total capital of the firm and share of each partner in the capital should be mentioned in it.

11. Additional Capital

How further capital, if necessary, should be introduced; must be mentioned in it.

12. Amount of Drawings

The amount, which each partner would be allowed to withdraw, in anticipation of profit, should

be clearly stated.

13. Amount of Salary

The amount of salaries payable to the partners should be written in it.

14. Amount of Profit

The fixation of the amount of profit payable to any partner, other than the salary, should be

mentioned in it.

15. Arbitration

In case of dispute, provisions for arbitration should also be available.

16. Rules of Admission and Retirement

Rules regarding admission and retirement of partners should be clearly written.

17. Period of Accounts

Period, after which final accounts are to be prepared, should be written in it.

18. Rights and Duties of Partners

There should also be the provisions of rights and duties of each partner.

19. Witness

The witness of agreement provisions should be mentioned.

20. Ways of Dissolution

The ways, under which the firm may be dissolved, should also be written in it.

CONCLUSION

The above mentioned points are not included in the final list of the clauses.  Any clause, which

is mutually agreed to be accepted by the partners, can be included in the agreement.  If the

deed is silent on any point, then provisions of Partnership Act, 1932, should be applied.

What are the rights, duties and liabilities of a partner in the absence of partnership

agreement?

INTRODUCTION

A partnership agreement may contain special provisions regarding the rights, duties and

liabilities of the partners.  But in the absence of such an agreement the rules laid down in the

Partnership Act, 1932, are applicable.

What is Partnership Deed?

“Partnership deed or agreement is a document which includes the terms and

conditions related to the partnership; and regulations governing its internal management and

organization.”

RIGHSTS OF PARTNERS

Section 123 and 13 of Partnership Act, 1932, describe the following rights of the partners:

1. Rights of Participation

Every partner has a right to take part in the conduct of the business.

2. Right of share in Profits

All the partners are entitled to share the profits of the firm equally.

3. Right to Exercise Power

To protect the firm from loss, every partner has a right to use his power.

4. Right of Existence

A partner cannot be expelled by any other partner from the business.  Every partner has a

right to live in the business.

5. Right of Retirement

Every partner has a right to retire from the firm after serving a notice.

6. Right of Inspection

Every partner has a right to check the accounts of the business.

7. Right of Salary

A partner has a right to demand for the salary, for performing his duties in the management of

the business.

8. Indemnify the Expense

A partner has a right to be indemnified by the firm, in respect of any payment made by him in

the ordinary course of business, or in an emergency, for the purposes of protecting the firm

from loss.

9. Issue of Receipt

A partner has a right to collect the debts of the firm and to issue the receipts.

10. Interest on Capital

If a partner make any advance in addition to the amount of his capital, he will be entitled to

receive interest at the rate of 6% per annum.

11. Participation in the Management

A partner has a right to participate in the management of the firm.

12. Right to Use the Property

Every partner has an equal right to use the firm’s property exclusively the purpose of

partnership.

13. Right to Act as an Agent

Every partner has a right to act as an agent on behalf of the remaining partners.

DUTIES OF PARTNERS

According to section 9 of Partnership Act, 1932, the general duties of the partners are as

follows:

“Partners are bound to carry on the business of the firm to the greatest common

advantage, to be just and faithful to each other and to render true accounts, and to

provide full information about the things affecting the firm, to any other partner or to

their legal representatives.”

1. Utmost Good Faith

Every partner is bound to give true and full information under the principle of “utmost good

faith”.  All the partners should be just and faithful to one another.

2. Maximum Common Benefit

It is the duty of the partners to work for the maximum common benefit.

3. Maintenance of True Accounts

Every partner should prepare the true account of the firm for other partners.

4. Use of Powers within Limit

It is the duty of the partner that he should use his powers within the limits, delegated by the

firm.

5. Use of Property

It is the duty of a partner that he must not use the property of the firm for his personal interest

or benefit.

6. Provide all Information

It is the duty of the partner that he must provide all the necessary information about the

business to other partners.

7. Profit should be paid to the Firms

If a partner earns profit through any source of the firm.  It should be paid to the management of

the firm.

8. Distribution of Loss

In the absence of agreement, each partner should pay the loss equally.

9. Compensation of Loss

If a partner commits a fraud with his co-partners, he must compensate the loss.

10. To be Sincere and Careful

Every partner must be sincere, careful and faithful to other partners.  He should discharge his

duties very fairly.

11. To Maintain the Secrecy of the Firm

It is the duty of a partner that he should maintain the secrecy of the business from outsiders.

12. To Abide by the Decisions

A partner should abide by the decisions made by the majority of the partners.

13. Not to Enter into a Private Agreement

A partner must not enter into private agreement with a customer of the firm.  If he does so, it is

his duty to share his profit with his co-partners.

14. Not to Use the Firm’s Name

A partner is not allowed to use the firm’s name and property for the satisfaction of his personal

need.  If he does so and gets profit out of it, he must share it with his co-partner.

LIABILITIES OF PARTNERS

Generally, the liability of a partner is unlimited.  Thus, each partner is liable not only to the

extent of his share in partnership, but his personal property is also used up to clear the debts

unless the proves that his liability is limited to the extent of his share in the assets of the firm.

According to section 13 (c) of Partnership Act, 1932, subject to contract between the

partners, the liabilities of a partner are as follows:

1. Joint liabilities of Partners for all Debts

Every partner is liable, jointly with all other partners for all acts and debts of the firm.

2. Liability of New Partner

A new partner is liable for all the acts of a firm, which are performed after he becomes a

partner.

3. Liability of Retired Partner

A retired partner is not responsible for any act of the firm after the date of his retirement.

4. Liability of Deceased Partner

If a partner dies and the firm suffers losses, then the property of the deceased partner cannot

be held liable for any payment.

5. Liability of an Expelled Partner

An expelled partner is not liable to suffer the losses and pay the debts of the firm, which arise

after his expulsion from the firm.

6. Liability of Fraud

If any partner commits a fraud, then partners are also equally liable with him, for it.

7. Liability of Insolvent Partner

The firm is not liable for any transaction of the insolvent partner, after the date of his

insolvency is declared by the court.

8. Liability due to Willful Negligence

A partner is liable to make good the losses, arising due to his willful negligence.

9. Share in Loss

In case of loss, all the partners will have to bear the loss equally.

10. No Private use of Property

A partner cannot use the property of the firm or its goodwill for his private gains.  If he does so,

he is liable to surrender the profits, so earned, to the firm.

DISSOLUTION OF FIRM

According to Section 39 of Partnership Act, 1932:

“The dissolution of partnership among all the partners of firm is called dissolution of

firm.”

Explanation

It means that dissolution of firm includes the dissolution of partnership.  But when partnership

is dissolved, firm may or may not be dissolved; because business may be conducted by the

surviving partners on the retirement, death or insolvency of any partner.

MODES OF DISSOLUTION OF FIRM

According to partnership Act, 1932, the dissolution of firm may take place through following

ways:

1. Dissolution by Agreement

2. Dissolution by Notice

3. Compulsory Dissolution

4. Contingent Dissolution

5. Dissolution by Court

DISSOLUTION BY AGREEMENT

A firm may be dissolved with the consent of all the partners or in accordance with the contract

made between the partners.

DISSOLUTION BY NOTICE

In case of partnership at will, the firm may be dissolved by any partner, serving a notice in

writing, of 14 days, to all the other partners of his intention to dissolve the firm.  The firm is

dissolved as from the date mentioned in the notice.

COMPULSORY DISSOLUTION

Following are the causes of compulsory dissolution of firm:

1. Insolvency

Insolvency of all the partners or any one partner may become the cause of compulsory

dissolution.

2. Unlawful Business

The firm is dissolved if its business becomes unlawful.

CONTINGENT DISSOLUTION

A partnership firm may be dissolved due to the following reasons:

1. Expiry of Period

If a firm is established for a fixed period, then it will be dissolved after the expiry of period.

2. Completion of Particular Venture

A firm may be dissolved after the completion of particular venture, for which it is formed:

3. Death of a Partner

A partnership firm may also dissolve with the death of a partner.

4. Insolvency

Insolvency of a partner also serves as a notice for dissolution of firm.

DISSOLUTION BY COURT

The court may dissolve a firm due to the following reasons:

1. Case of Unsound Mind

A partnership firm may be dissolved by the order of court, if any partner becomes of unsound

mind.

2. Case of Incapable Partner

A partnership firm may be dissolved by the order of court if any partner permanently become

incapable of performing his duties.

3. Case of Misconduct

A partnership firm may be dissolved if a partner is found guilty of misconduct in affairs of

business.

4. Transfer of Interest

A partnership firm may be dissolved if any partner transfers his share of interest to other

persons, without the consent of existing partners.

5. Breach of Agreement

A partnership firm may be dissolved if any partner commits a breach of agreement.

6. Assurance of Loss

Court may dissolve a partnership firm if the business of that firm is suffering from continuous

loss.

7. Others Reasons

The court has the right to accept or reject the application of dissolution.  The just and equitable

reason is determined by the court.