Authority, duties and rights of partners; dissolution
Every partner is an agent of the firm for its ordinary business and owes utmost good faith. A firm dissolves by agreement, notice, events or court order.
Authority of partners
Every partner is an agent of the firm and of the other partners for the partnership business. An act done by a partner in the usual course of the firm's business binds the firm, unless the partner had no authority and the outsider knew this, or did not know or believe he was a partner. This is implied authority. In a trading firm it usually covers buying and selling goods, receiving payments and giving receipts, employing staff, borrowing for the business and drawing or accepting cheques and bills in the firm's name. It usually does not cover giving a guarantee in the firm's name, referring a dispute to arbitration, or binding the firm by a deed.
Duties of partners
| Duty | Meaning |
|---|---|
| Utmost good faith | Be just and faithful to each other in all partnership matters |
| True accounts and information | Give true accounts and full information on anything affecting the firm |
| Account for private profits | Any benefit from the firm's transactions, name, property or connections belongs to the firm |
| Not to compete | A partner who runs a competing business without consent must hand its profits to the firm |
| Care and diligence | Attend to the business with reasonable care |
| Use firm property for the firm | Partnership property is held and used only for the firm's business |
Rights of partners (unless the agreement says otherwise)
- Share equally in capital and profits, and contribute equally to losses.
- Indemnity for payments and liabilities properly incurred in the ordinary business.
- Interest on advances made beyond the agreed capital.
- No interest on capital, and no salary for working in the business.
- Take part in the management of the business.
- No new partner can be admitted without the consent of all partners.
- Ordinary matters are decided by majority; a change in the nature of the business needs everyone's consent.
- Inspect and copy the partnership books.
Dissolution of a partnership
| Mode | Examples |
|---|---|
| By agreement | All partners agree to end the firm |
| By expiry or completion | A fixed term ends, or the single venture is completed |
| By notice | Any partner gives notice to end a partnership at will |
| By death or bankruptcy | Of any partner, unless the agreement provides otherwise |
| By illegality | The business becomes unlawful |
| By the court | Permanent incapacity or unsound mind of a partner; misconduct harming the business; persistent breach of the agreement; business can only run at a loss; just and equitable grounds |
Worked example: settling accounts on dissolution
Anil and Bimal share profits 3 : 2 and dissolve their firm. The assets are sold for Rs. 1,200,000. Outside creditors are owed Rs. 500,000. Anil has lent the firm Rs. 100,000. Capitals: Anil Rs. 300,000, Bimal Rs. 200,000. How is the cash paid out?
- Cash from the sale of assets: Rs. 1,200,000.
- 1. Pay outside creditors first: 1,200,000 − 500,000 = Rs. 700,000 left.
- 2. Repay partners' advances (Anil's loan) before capital: 700,000 − 100,000 = Rs. 600,000 left.
- 3. Repay capital: 300,000 + 200,000 = Rs. 500,000; 600,000 − 500,000 = Rs. 100,000 surplus.
- 4. Share the surplus 3 : 2. Anil: 100,000 × 3/5 = Rs. 60,000. Bimal: 100,000 × 2/5 = Rs. 40,000.
- Check: 500,000 + 100,000 + 500,000 + 60,000 + 40,000 = Rs. 1,200,000.
Creditors Rs. 500,000; Anil Rs. 460,000 (loan 100,000 + capital 300,000 + surplus 60,000); Bimal Rs. 240,000 (capital 200,000 + surplus 40,000). Total Rs. 1,200,000.
In a family textile business in Pettah run as a partnership, a partner who orders stock from a supplier binds the whole firm, even if the other partners did not know. If he secretly runs a competing shop, he must hand those profits over to the firm.
Short answer: “What is meant by the implied authority of a partner?” The power of every partner, as agent of the firm, to bind it by acts done in the usual course of its business.
Structured question: “State the rights of partners in the absence of an agreement.” Equal share of profits and losses; indemnity; interest on advances; no interest on capital or salary; management; consent for new partners; majority for ordinary matters; inspect books.
Essay: “Explain the duties of partners and the ways in which a partnership may be dissolved.” Explain mutual agency, then the duties (good faith, accounts, private profits, non-competition, care); then dissolution by agreement, expiry, notice, death or bankruptcy, illegality and court order; add the order of settlement.
Settlement order on dissolution: C-A-C-S: Creditors, Advances by partners, Capital, Surplus in profit ratio.