Chapter 12: Relations of Partners to One Another-Theory

Question 1

List down mutual rights of partners.(10 points) (Can be modified by agreement between partners)

Answer 1

1. Right to take part in the conduct of the business.
2. Right to be consulted.
3. Right of access to books or accounts.
4. Right to share profits equally.
5. Right to receive interest on capital.
6. Right to receive interest on advance.
7. Right to be indemnified.
8. Right of outgoing partner.
9. Variation in partnership.
10. Rights of partners after a change in firm.

Question 2

Under mutual rights of partners. Describe.
1. Right to take part in the conduct of the business.

Answer 2

Every partner has a right to take part in the conduct of the business, irrespective of the amount of capital contribution. However, if a partner wishes, he may agree not to participate in business.

Question 3

Under mutual rights of partners. Describe.
2. Right to be consulted.

Answer 3

Every partner has a right to be consulted before deciding any matter.
However, decisions are taken on the basis of majority of votes.

Question 4

Under mutual rights of partners. Describe.
3. Right of access to books or accounts.

Answer 4

Every partner has a right to have access, to inspect and copy any of the books of the firm.

Question 5

Under mutual rights of partners. Describe.
4. Right to share profits equally.

Answer 5

Every partner is entitled to share profits equally unless agreed otherwise.

Question 6

Under mutual rights of partners. Describe.
5. Right to receive interest on capital.

Answer 6

A partner is entitled to receive interest on capital only if:
- Agreed between partners and
- Firm earns profit.

Question 7

Under mutual rights of partners. Describe.
6. Right to receive interest on advance.

Answer 7

A partner is entitled to receive interest on loans or advances given to firm @ 6% p.a or as agreed (whether firm earns profit or loss).

Question 8

Under mutual rights of partners. Describe.
7. Right to be indemnified.

Answer 8

A partner shall be reimbursed if he incurs expenses for firm:
- In the ordinary and proper conduct of the business and
- In an emergency to protect from loss (as would be done by person of ordinary prudence).

Question 9

Under mutual rights of partners. Describe.
8. Right of outgoing partner.

Answer 9

If a partner retires or dies and his account is not settled, he (or his legal representatives) has option to claim one of following (until his account is settled):
1. Interest @ 6% p.a. on his capital balance or
2. Proportionate share in profits earned after his retirement/death.

Question 10

Under mutual rights of partners. Describe.
9. Variation in partnership.

Answer 10

Partnership contract can be varied with the consent (express or implied) of partners.
For example, consent of all partners is required in following cases:
- To change nature of business.
- To change constitution of partnership (i.e. to add new partner).
- To change profit and loss sharing ratios.

Question 11

Under mutual rights of partners. Describe.
10. Rights of partners after a change in firm.

Answer 11

If a change occurs in a firm, the mutual rights and duties of the partners remain same as they were before the change, (unless agreed otherwise)
e.g. in following situations:
(i) Change in constitution of firm (introduction of a partner or retirement of a partner).
(ii) A firm created for a fixed term, but carries on business after that term.
(iii) A firm carries on additional venture or undertaking.

Question 12

Define “Absolute/general/mandatory duties of partners”.

Answer 12

These duties are imposed by law and cannot be modified by agreement between partners.

Question 13

List down Absolute/General/Mandatory duties of Partners. (8 Points)

Answer 13

1. Duty to be liable jointly and severally (i.e. unlimited liability)
2. Duty to act within authority.
3. Duty in case of emergency.
4. Due to carry on business to the greatest common advantage.
5. Duty to be just and faithful.
6. Duty to provide true accounts.
7. Duty to provide full information.
8. Duty to indemnify for fraud.

Question 14

Under Absolute/General/Mandatory duties of Partners, elaborate.
1. Duty to be liable jointly and severally (i.e. unlimited liability)

Answer 14

Each partner has unlimited liability for all acts of the firm done when he is a partner.
Third party can take legal action for full recovery of a debt against any or all partners.

Question 15

Under Absolute/General/Mandatory duties of Partners, elaborate.
2. Duty to act within authority.

Answer 15

Every partner shall act within his actual authority. If a partner exceeds his authority and firm suffers loss, he shall compensate loss unless other partners ratify.

Question 16

Under Absolute/General/Mandatory duties of Partners, elaborate.
3. Duty in case of emergency.

Answer 16

In an emergency situation, a partner has duty to save firm from loss and to do all acts which are necessary. He can even exceed his authority to save firm from loss.

Question 17

Under Absolute/General/Mandatory duties of Partners, elaborate.
4. Due to carry on business to the greatest common advantage.

Answer 17

Every partner shall use his knowledge and skill for the benefits of firm and should not work for his personal gains.

Question 18

Under Absolute/General/Mandatory duties of Partners, elaborate.
5. Duty to be just and faithful.

Answer 18

Every partner shall be just and faithful to other partners.

Question 19

Under Absolute/General/Mandatory duties of Partners, elaborate.
6. Duty to provide true accounts.

Answer 19

Every partner shall provide true and proper accounts to their partners (or their legal representatives), explain accounts and provide vouchers in support of entries.

Question 20

Under Absolute/General/Mandatory duties of Partners, elaborate.
7. Duty to provide full information.

Answer 20

Every partner shall render full information of all things affecting the firm to other partners. If a partner earns secret profit by hiding any information, he will return it to firm.

Question 21

Under Absolute/General/Mandatory duties of Partners, elaborate.
8. Duty to indemnify for fraud.

Answer 21

Every partnership shall indemnify the firm for any loss caused to it by his fraud in the conduct of the business of the firm.

Question 22

Define “qualified duties of partners”.

Answer 22

These are the duties which can be changed by partners through agreement.

Question 23

List down Qualified duties of partners. (7 Points)

Answer 23

1. Due to the use firm’s property exclusively for the firm.
2. Duty not to engage in competing business.
3. Duty not to assign/transfer his interest.
4. Duty to contribute to the losses.
5. Duty to indemnify for willful neglect
6. Duty to perform diligently his duties.
7. Duty to work without remuneration.

Question 24

Under Qualified duties of partners, elaborate.
1. Duty to the use firm’s property exclusively for the firm. (3 Points)

Answer 24

Firm’s property should be used exclusively for the purpose of business.
No partner should use firm’s property for personal benefit.
If partner uses firm’s property, name or connection and obtain some benefit/profit, he must return that benefit profit.

Question 25

Under Qualified duties of partners, elaborate.
2. Duty not to engage in competing business. (2 Points)

Answer 25

Unless agreed otherwise:
- A partner can do any other business, but
- Cannot do similar or competing business.

Question 26

Under Qualified duties of partners, elaborate.
3. Duty not to assign/transfer his interest.

Answer 26

A partner cannot assign or transfer his partnership interest to any other person, except with consent of all partners.

Question 27

Under Qualified duties of partners, elaborate.
4. Duty to contribute to the losses. (2)

Answer 27

Every partner is liable to share losses equally unless agreed otherwise.
An agreement to share profit implies sharing of loss too.

Question 28

Under Qualified duties of partners, elaborate.
5. Duty to indemnify for willful neglect

Answer 28

Every partner must indemnify firm for any loss caused to firm by his willful neglect in conduct of business.

Question 29

Under Qualified duties of partners, elaborate.
6. Duty to perform diligently his duties.

Answer 29

Every partner has duty to attend his duties diligently in the conduct of the business (except silent/sleeping partner).

Question 30

Under Qualified duties of partners, elaborate.
7. Duty to work without remuneration.

Answer 30

A partner should not take any remuneration for taking part in conduct of the business.

Question 31

Exam tip-Different terms.
1. Profit and loss sharing ratio.
2. Profit sharing ratio.
3. “Losses” and “Liability”

Answer 31

1. Profit and loss sharing ratio:
   It is the ratio by which partners will share profit and losses.
2. Profit sharing ratio:
   It is the ratio by which partners will share profits.
   - If profit sharing ratio is not agreed, it will be equal.
   - If loss sharing ratio is not agreed, it will be same as profit sharing.
3. “Losses” and “Liability”:
   Both are different concepts. A partner may not share losses, but he will share unlimited liability e.g.
   - A minor/transferee shares losses, but does not share unlimited liability.
   - A “Partner-in-profits only” does not share losses, but shares unlimited liability.

Question 32

List down all things included in “Property of Partnership/Firm”. (4 Points)

Answer 32

Property of the firm includes:
1. All property originally brought into the common stock of the firm.
2. All rights or interest in the property originally so brought.
3. All property purchased or otherwise acquired by the firm or for the firm and all rights and interest in any property so acquired.
4. Goodwill of the business of the firm.
5. Any property purchased with partnership money will be deemed to be partnership money unless any contrary intention appears.
(Legal ownership of property does not matter in determining partnership property.)