RIGHTS & LIABILITIES OF PARTNERS AFTER CHANGE IN FIRM

INTRODUCTION

According to Section 4 of the Indian partnership Act 1932, a firm is the collective name of people who have entered into the partnership with one another to carry on a business together. It is not a legal entity like a company, it is a group of individual partners. 

These partners enter into a partnership to carry out the business together and generate profits from the same. The generation of profits is a very essential element of a partnership. It was in the case of Mollow, March & Co. vs Court of Wards[1]. That it was held that the right to participation in profits is a strong test of partnership. And there maybe cases where a simple participation in profits there is a presumption, not of law, but of fact that there is a partnership. 

PROFITS EARNED BY PARTNERS

According to Section 16 of the Indian partnership Act 1932, the personal profits earned by partners is as - subject to the contract between the partners,-  

1. If a partner derives any profit for himself from any transaction of the firm, or from the use of the property or business connection of the firm or the firm name, he shall account for that profit and pay it to the firm.
2. If a partner carries on any business of the same nature as and competing with that of the firm, he shall account for and pay to the firm all of the profits made by him in that business.

This means that the profits generated by the partners in a partnership will be accounted to the firm. 

These profits are to be the profits of the firm in two cases. When the partner uses the property of the firm or the connection of the firm in order to generate profit. And secondly, when the partner carries on the same nature of business as that of partnership and uses the goodwill of the partnership in order to generate profits. Such profits will be rightfully accounted and payed to the partnership firm. 

These are thus one of the most important duties of the partners in a firm along with the liabilities mentioned in the section 13 of the Indian Partnership Act 1932 which gives the partners right to share the profits equally and be equally liable to losses sustained by the firm. 

Cases

In the case of Pulin Bihari Roy vs Mahendra Chandra Ghosal[2], the partners were involved in the Salt business. The inspection of the account highlighted the inequality in the proportion of salt taken by each set of partners on their own account for sale by them to their own customers as opposed to the joint sale of salt by the joint firm.

The court held that the separate transactions by the some of the partners in the salt bond partnership was precisely of the same nature as business carried on by the partnership and thus there was a breach of duty of the partners about not carrying on the business in the same field of competition as stipulated by the section 16 of Partnership Act 1932.

Personnel benefits from same business-

In the case of Y. Venkanna Chowdry vs G. Lakshmidevamma[3] the court held that "the relationship of a partner with another partner in a given case may be fiduciary. In another case, it may not be. It is presumed that when a partner transacts a business for and on behalf of the partnership he does so for himself as well as for other partners and all the benefits of any such transaction ensure for all the partners."[4]

However in the case of Aas vs Benham[5], Benham was a partner in a ship broking company whose main function was negotiations between shipbuilders and government. He had been approached to seek advice by a shipbuilding company while acting on the behalf of the firm. Through this he discovers something and acts on that information and subsequently makes profits out of that information for himself. 

The court held that Benham is not liable to the firm for the profit he made out of any exclusive transaction which is not linked to the firm. This was because advising ship companies was not the part of the firm's business. Even though he learned this information while on the firm's business he owes no fiduciary duty to his partners and thus does not have to account for his profits. 

Separate accounts-

In the case of Lachhman Das vs Mt. Gulab devi[6], the plaintiff has claimed the property in inheritance of her deceased husband which he owned jointly with seven others, who are defendants. They have claimed that the said property included in the plaint is partnership property and that the plaintiff was not entitled to get a decree without instituting the suit for an account and a share of the profits of the partnership. 

The court held that shares in the property as well as shares in a business are different. This makes it important that the accounts of the two are not amalgamated and to be kept separately. 

RIGHTS AND DUTIES OF PARTNER AFTER THE CHANGE IN THE FIRM 

The changes in the firm can occur in many ways such as when a partner retires and a new partner is introduced or when the partnership expires but the partners continue to work beyond that partnership period. Also when the firm carries out some new and additional adventures and undertakings. All these ways the circumstances in the partnership changes but the rights and duties of the partners remain the same. This has been codified under the section 17 of Indian Partnership Act 1932.

According to section 17 of the Indian Partnership Act 1932 the rights and duties of partners as subject to the contract between the partners-

1. After a change in the firm- where are change occurs in the constitution of a firm, the mutual rights and duties of partners in the reconstituted form remains the same as they were immediately before the change, as far as may be;
2. After the expiry of the term of the firm, and- where a firm constituted for a fixed term continues to carry on business after the expiry of that term, the mutual rights and duties of the partners remain the same as they were before the expiry, so far as they may be consistent with the incidents of the partnership at will, and;
3. Where the additional undertakings are carried out- where a firm constituted to carry out one or more adventures or undertaking carries out other adventures or undertakings, the mutual rights and duties of the partner in respect of the other adventures on the undertakings are the same as those in respect of the original adventures or undertakings.

So the change in firm occurs in three ways-

• By the change in constitution of the firm. When a partner is retired or added, the mutual rights and duties of all partners remain the same as originally. 
• By the expiry of the term of the partnership. A partnership is carried out for a fixed period of time but if partners continue to act upon the business even after term ends, the rights and duties will all remain the same.
• It can be by carrying out the additional undertakings. When there has been an addition to the business of the firm and new undertakings or adventures are being taken, the rights and liabilities of the partners will remain the same for the new undertakings as well. 

CONCLUSION

Partnerships are the joint ventures by the partners to carry out the business together and subsequently derive profits from that business. The partners have equal rights in the profits and liabilities in case of loss of Partnership. Duty to account to partnership in case of profits derived using its name and assets is very important. And in case of changes in the partnership, the duties and rights of partners remain the same as original.

[1] (1872) LR 4 PC 419

[2] (1921) 34 Cal CJ 405

[3] AIR 1994 Mad 140

[4] Y. Venkanna Chowdry vs G. Lakshmidevamma, AIR 1994 Mad 140 on page 13 of Indian Partnership Act, 1932 bare act.

[5] (1891) 2 Ch 244

[6] AIR 1926 All 270