Mutual Duties, Rights and Liabilities of Partners in the Absence of Partnership Agreement

The duties, rights and liabilities of partners in the conduct and management of the affairs of the partnership are contained in its partnership deed. However, if on any point, the deed is silent, then the relevant rule of the Partnership Act, 1932, will apply.

In the absence of a written partnership agreement, the mutual rights and duties of partners shall be governed by the Partnership Act which isas follows.

General Duties of Partners

Partnership Act describes the general duties of partners as under:

“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 the true accounts and full information of alt things affecting the firm to any partner or his legal representative”.

All the duties of partners arise from the principle of goods faith which is to be all and end all of a partnership. These duties as described n Section 9, 10, 12 and 13 of Partnership Act are described as follows:

(a) Duties of a Partner

I. Co Advantage

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 the true accounts and full information of all the things affecting in the firm any partner or his legal representative.

2. Indemnity

partner shall compensate the firm for any loss caused to it by his fraud in the conduct of the business of the firm.

3. Loss Caused by Willful Neglect

The Act provides that 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.

4. Due Diligence

Every partner shall attend honestly and carefully to his duties in the conduct of business.

5. Provision of Information

is the duty of the partners to give full information about the affairs of the firm to one another.

(b) Rights of a Partner

According to Section 12 and 13 of the Partnership Act, the rights of a partner are as follows:-

1. Right to Take Part in The Management

A partner has a right to take part in the management of a business subject to the agreement.

2. Expression of Opinion

A partner has a right to express his opinion before the matter is decided, but no. change may be made in the nature of a business without the consent of all the partners.

3. Inspection of Books

A partner has a right to inspect and copy any of the books of the firm.

4. Right to Be Indemnified

A partner has the right to be compensated by the firm in respect of expenses incurred by him or any losses suffered by h in the conduct of his business.

5. Right to Continue

partner has the right to continue in the business unless he is expelled according to the provisions of Deed and in good faith.

6. Use of Property

The partner has the right to see and ensure that the property of the firm is held and used exclusively for the purpose of the business.

7. Sharing of Profit/Loss

Every partner shall have an equal share in profits/loss in a business, unless otherwise mentioned in partnership deed.

8. Interest on Capital

A partner is entitled to receive interest at the rate of 6% per annum on the excess money supplied over his capital.

9. Right to Retire

A partner has the right to retire according to the provisions of agreement or with the consent of the other partners.

(c) Liabilities of a Partner

According to Section 13(c) of the Partnership Mt subject to contract between the partners, the obligations of a partner are as follows.

1. Joint Liability

Since every partner is the agent of the firm for the purpose of carrying on the business, he is, therefore, jointly and separately liable for all business debts of the firm.

2. Liability of a New Partner

A new partner cannot be held responsible for the loss or claim the share of profit before his date of admission.

3. Property of The Deceased

The property of the deceased cannot be held liable for any obligation incurred by the firm after his death.

4. Liability of Retiring Partner

retiring partner is liable for the debts of the firm incurred before the date of his retirement.

5. Competitive Business

A partner cannot engage h in any business in competition with the business of the firm. If he does so, he is liable to surrender the profits to the firm of which he is a partner.

6. 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.

By Denice Gierach

 As published in the Naperville Sun – July 15, 2007, Beacon News 9/23/07

When a business is new and the prospect of potential success is in the air, life looks and feels good.  Just as in a marriage, partners do not go into a partnership assuming that either the partnership will fail or they will need to “divorce” their partner.  If the parties follow their attorney’s advice, they may have a written partnership agreement to guide and control the termination of the departing partner’s interest in the partnership. 

Even if the partnership has such a written agreement, many of these partnership agreements will not cover the situation where the parties cannot stand each other and cannot agree.  This may be caused by dashed hopes of success, differences in lifestyles, or decisions on employees.  As in the case of a marriage, it may be caused by one partner working outside of the partnership relationship or disagreements on spending or revenue producing in the business.  Sometimes one partner brings in all the income and the other partner does all the work.  This can be a source of friction between the parties where the parties just want to split.  How is this done, though, when neither party wants to leave?

One way is to have one partner make an offer to the other partner which is at a price that he or she can be bought out and conveying to the other partner he or she is willing to be either a buyer or seller and then allowing the other partner decide which he or she would prefer.  Such offer can contain terms such as installment payments (if the offer is not for cash), interest rate or amount on the obligation, security for the loan, to name a few. 

Other considerations may include whether the departing partner should sign a non-compete agreement to preclude the departing partner from starting the same business again and going after the partnership’s customers.  This type of agreement must be reasonable in scope and time frame, but may provide that the departing partner may not call on or sell to the partnership’s customers and prospects where written quotes were sent out by the partnership for a period of one or two years.  It may also be written to preclude the departing partner from operating or working for a business in the immediate geographic vicinity as the partnership is located.  The type of business, the permanency of the customer and the amount of time and money that the partnership invests to obtain the customers will dictate what type of agreement is appropriate.

Then, there is the debt.  Many times the partners obtain a loan from the bank and have to sign a personal guaranty.  Any offer should include a method whereby the departing partner is released by the bank from this debt.  The offer should also include an indemnity, whereby the departing partner will no longer be liable for the debt of the partnership after the date of split.  A “hold harmless” provision would also be beneficial so that in the event that a creditor was successful in obtaining a judgment against the departing partner, that the remaining partner would pay the amount of any such judgment and make the departing partner “whole.”

If the offer is accepted, it should be drafted in the form of a contract where all of the relevant provisions are set forth.  If the offer is not responded to, the other partner cannot force the offering partner to later be a buyer or a seller.  If the matter later ends up in court as the partners have not resolved their partnership breakup, a court would probably look at this offer as a positive position and may even use the offer to establish a benchmark for the appropriate price of the interest in the partnership.

Hopefully, the use of this technique will allow a smooth separation and divorce which will allow the departing partner to pursue a new business future.  This result is certainly preferable over years of constant conflict which can adversely affect the long term value the business.