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Sample partnership deed and drafting concerns ( Video- Web access only)

 

Rights that may be created or varied by contract

 

Apart from certain statutory rights (given below), there is nothing to prevent the partners from imposing other liabilities on, or creating other rights for themselves. The additional rights and duties of a partner vis-à-vis the other partners are determined by the terms of the contract, subject to the provisions of the Act.

 

Understanding default rules under the Partnership Act

While most of these rights are allowed to be created by contract among the parties, there are still some statutory provisions, which serve as backups, in cases where the contract itself is silent on the point. Thus, most of the rights in the Act are “subject to contract between the partners”. 

Therefore, they can be excluded or modified by such a contract between the partners, which is very important from the perspective of drafting a partnership deed. These rights are listed below:

1. Through such agreement, partners may restrain the ability of the partner to engage in business activities other than those of the partnership firm.

2. Every partner has the right to take part in the business of the firm.

3. Differences that arise in ordinary business affairs of the firm may be decided through majority. However, the nature of the business may change by the consent of all the partners.

4. Every partner is to do, diligently, his duties in the conduct of the business.

5. The heirs/legal representatives of the partner have the right to inspect the accounts of the firm in case of her death.

6. 
Remuneration (other than profit share) for participating in business: The partner is not entitled to remuneration (salary, etc.) merely for being a part of the business.

7. Profit
-sharing: If the partnership deed does not specify any ratio for the sharing of profits, they will be shared equally between all partners, even if the various partners have contributed capital in a different ratio.

8. Interest on Capital:
 Any interest payable on capital deposited by a partner would be payable from the profits alone. Further, if a partner deposits capital beyond her agreed share, then the rate of interest payable would be 6% p.a.

9. 
Indemnity: The firm would indemnify the
partner with respect to payments made and liabilities incurred by him/her in the ordinary and proper conduct of the business, and those acts which are required as a result of an emergency situation, for the purpose of protecting the partnership from loss. The yardstick on which the actions would be measured is that of “a person of ordinary prudence”, who would have done the same action in a similar situation.

The partner will also be required to indemnify the firm for any loss caused to it by her willful neglect in the conduct of the business of the firm.

 

10. Capital of the firm: The capital of the firm comprises of those properties, rights and interests that are a part of the firm for the course of its business. As per Section 14 of the Partnership Act, it includes all property, rights and interest in property that is:

  • originally brought into the stock of the firm, or
  • subsequently acquired, by purchase or otherwise, by or for the firm for the purposes and in the course of the business of the firm, and includes also the goodwill of the business. Properties acquired with money of the firm are considered to be the firm’s property, unless a contrary intention appears in the contract.

Provisions which cannot be varied by a partnership deed

Irrespective of the partnership deed, the Partnership Act prescribes certain duties to the partners of the firm, which cannot be modified by a partnership deed. The duties that cannot be modified even by agreement are listed below:

1. To carry out the business of the firm to the greatest common advantage: All actions of the partners should be in the best interest of the firm.

2. To be just and faithful to each other: Therefore, it would be a violation of the partnership agreement for one partner to start a competing business, when the original partnership is still subsisting.


3. Render accounts: To render true accounts and full information of all things that affect the firm.
4. Duty of one partner to indemnify the others for loss resulting from fraud caused by her: This is restricted to fraud in the course of the business of the firm, and not other actions of the partner.

5. Duty to account : Partners must ensure that they accrue no personal profit (s.16). If any partner, in violation of this general duty, derives any profit from:

  1. a transaction of the firm
  2. the use of the property of the firm
  3. business connection of the firm
  4. the firm-name
  5. performing any activity of the same nature, or one that competes with the business of the firm, then the partner will be required to account for that profit, and to pay to the firm all those profits made in such manner.

Questions

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