Relations of Partners to one another | Law of Contracts - CLAT PG PDF Download

Exceptions to the Principle of Holding Out [Sections 28(2) and 34] 

 1. Death of a Partner: 

• If a partner passes away and the firm continues to use their name in the partnership, the deceased partner's estate or legal representatives cannot be held responsible for the firm's actions taken after the partner's death.
• A public notice announcing the partner's death is not necessary.

 2. Insolvency of a Partner: 

• The estate of an insolvent partner is not liable for the firm's actions occurring after the date of the insolvency adjudication order (as per Section 341).
• A public notice of a partner's insolvency is also not required.

 Position of Minor as a Partner 

 1. Legal Status of Minors: 

• According to Section 11 of the Indian Contract Act 1872, a minor is not capable of entering into a contract. Any agreement involving a minor is considered void from the beginning, as established in the case of  Mohni Bibi v. Dharamdas Ghosh  .
• Since partnership is based on an agreement, a minor cannot legally enter into a partnership agreement.

 2. Rights of Minors in Partnership: 

• While a minor cannot be a promisor in a contract, they can be a promisee or a beneficiary. Section 30 of the Indian Partnership Act, 1932, states that a minor may be admitted to the benefits of partnership with the consent of all existing partners.
• This provision entails three key conditions:
•  i) Existence of Partnership:  A partnership must already be in place before a minor can be admitted as a partner.
•  ii) Mutual Consent:  All partners must mutually agree to admit the minor.
•  iii) Benefits of Partnership:  A minor can only be admitted to the benefits of partnership, not to the liabilities.

 3. Legal Precedents: 

• In the case of  Shivaram v. Gourishankar  , the court ruled that it is not possible to have a partnership composed entirely of minors or a partnership with one major and all other minors.

Rights and Liabilities of a Minor Partner before Attaining Majority

 Rights 

•  Profit and Property Sharing:  A minor partner has the right to share the profits and property of the firm according to the agreement.
•  Access to Accounts:  He can access, inspect, and copy the firm's accounts. However, this right does not extend to books other than account books.
•  Legal Action for Profits:  A minor partner can file a lawsuit for his share of profits or property if he is not receiving his due share. This right can only be exercised when he decides to sever ties with the firm.

 Liabilities 

•  Extent of Liability:  A minor partner is liable only to the extent of his share in the profits and property of the firm. He is not personally liable to third parties.
•  Insolvency:  A minor partner cannot be declared insolvent upon the firm's insolvency. His share will vest in the Official Receiver or Official Assignee.

Rights and Liabilities of a Minor Partner upon Reaching Majority 

According to  Sections 30(5), (6), and (7)  of the relevant legal framework, a minor partner has specific rights and liabilities when they reach the age of majority or become aware of their admission to the benefits of the firm.

 Exercising the Option to Become a Partner 

• Within six months of reaching majority or gaining knowledge of being admitted to the benefits of the firm, the minor partner must decide whether to become a partner.
• This decision is communicated through a public notice within the six-month period.
• If the minor partner fails to give notice, they are automatically considered a partner after the six months.

 When the Minor Partner Chooses to Become a Partner 

•  Personal Liability:  The partner becomes personally liable to third parties for all acts of the firm from the date of admission to the benefits of the partnership.
•  Share in Property and Profits:  The partner's share in the property and profits of the firm remains the same as it was when they were a minor.

 When the Minor Partner Chooses Not to Become a Partner 

•  Rights and Liabilities:  Until the public notice is given, the minor's rights and liabilities remain unchanged.
•  Liability for Firm's Acts:  The minor's share is not liable for any acts of the firm conducted after the public notice.
•  Right to Sue:  The minor is entitled to sue the partners for their share of the property and profits in the firm.

Mutual Rights and Duties of Partners 

The mutual rights and duties of partners are governed by:

•  The Partnership Agreement 
•  The Partnership Act 

 Mandatory Duties of Partners 

 Sections 9 and 10 

•  Carry on the business  to the greatest common advantage.
•  Be just and faithful  to each other (act in good faith).
•  Render true accounts  and full information to any partner or their legal representative.
•  Indemnify the firm  for losses caused by fraud in the conduct of the business.

 General Duties of Partners 

•  Attend diligently  [Section 12(b)]: Every partner must attend carefully to their duties in the business.
•  No remuneration  [Section 13(a)]: A partner is not entitled to receive payment for participating in the business.
•  Equal contribution to losses  [Section 13(b)]: Partners must share losses equally.
•  Indemnify the firm  [Section 13(f)]: Partners must compensate the firm for losses due to their willful neglect, which is more than just negligence.
•  Use of firm's property  [Section 15]: Partners must use the firm's property solely for business purposes.
•  Account for personal profits  [Section 16(a)]: Partners must report and pay to the firm any personal profits from transactions involving the firm or its property.
•  Account for profits from competing business  [Section 16(b)]: Partners must report and pay all profits from any competing business.

 Rights of Partners 

The rights of partners, as outlined in the Act, can be modified through an agreement among the partners. Unless stated otherwise, every partner has the following rights:

 (a) Right to Participate in Business Management [Section 12 (a)]: 

• Every partner has the right to be involved in the management of the business.

 (b) Right to Express Opinion [Section 12(c)]: 

• Partners can express their opinions before decisions are made.
• Decisions, except for changing the nature of the business, can be made by a majority of partners.
• Changing the nature of the business requires unanimous consent.
• For example, admitting a new partner or changing the business's nature.
• The majority's power must be exercised in good faith.
• If the majority expels a partner without a valid reason, the expulsion can be overturned.

 (c) Right to Access Firm's Books [Section 12(d)]: 

• Partners have the right to access, inspect, and copy the firm's books.
• This right can be exercised personally or through an agent.

 (d) Right to Share Profits [Section 13(b)]: 

• Partners generally share profits and losses equally.
• If there is no agreement on profit sharing, it is presumed to be equal.
• The burden of proving unequal shares lies with the party claiming it.

 (e) Right to Receive Interest on Capital from Profits [Section 13(c)]: 

• Interest on capital subscribed by a partner is payable only out of profits if specified in the partnership deed.
• Generally, interest on capital is not allowed unless agreed upon.
• Partners are considered adventurers, not creditors, regarding their capital contributions.
• Interest on capital is permitted if there is an express agreement, partnership practice, trade custom, or statutory provision.

 (f) Right to Claim Interest on Advances [Section 13(d)]: 

• Partners can claim interest on advances made to the firm at 6% per annum.
• Interest on advances is payable regardless of profits or losses.
• Partners are not entitled to interest after the dissolution date unless agreed otherwise.

 (g) Right to Indemnification [Section 13(e)]: 

• Partners can recover payments and liabilities incurred in the ordinary course of business or in emergencies to protect the firm, provided they acted prudently.

 (h) Right to Prevent New Partner [Section 31]: 

• Partners can prevent the introduction of a new partner without unanimous consent.

 (i) Right to Retire [Section 32]: 

• Partners can retire with the consent of all other partners or by giving notice in writing in a partnership at will.

 (j) Right Not to Be Expelled [Section 33]: 

• Partners cannot be expelled by a majority unless authorized by the partnership agreement and done in good faith.

 (k) Right to Compete [Section 36(1)]: 

• Outgoing partners can start a competing business and advertise it, but cannot use the firm's name, represent the firm, or solicit its customers.

 (l) Right to Subsequent Profits [Section 37]: 

• Outgoing partners or their estates can claim a share of subsequent profits or interest at 6% per annum on their share in the firm's property until accounts are settled.

 (m) Right to Dissolve the Firm [Section 40]: 

• Partners can dissolve the partnership with mutual consent.
• In a partnership at will, any partner can dissolve by giving written notice to the others.

 Conditions for Expulsion: 

• Approval by the majority of partners.
• Exercise of expulsion in good faith without personal animosity.
• Opportunity for the concerned partner to make a representation.