BCOM 1st Year Partnership Account Long Question Answer Notes

(a) in the ordinary and proper conduct of the business and 

(b) in doing such act, in an emergency, for the purpose of protecting the firm from loss, as would be done by a person of ordinary prudence in his own case, under similar circumstances. 

Duties of Partners: For the sake of clarity, we shall be studying the duties of partners intere-se under the following two heads: – 

I. Absolute Duties

These duties are imposed by law and are not subject to a contract to the contrary. Being mandatory in nature, these duties are applicable to all partnership and cannot be varied by agreement among the partners. The following are the absolute duties of partners:

1. Duty to Carry on the Business to the Greatest Common Advantage (Sec. 9): Every partner is bound to carry on the business of the firm to the greatest common advantage. It implies that every partner must use his knowledge and skill for the benefit of the firm and not for his personal gain. He must conduct the business with the best of his ability and secure maximum benefits for the firm.

2. Duty to be Just and Faithful Inter-se (Sec. 9): An ideal partnership is one where there is mutual trust and confidence and spirit of helpfulness and goodwill among the partners. As such every partner must be just and faithful to his co-partners. He must observe utmost good faith and fairness towards other partners of the firm.

3. Duty to Render True Accounts (Sec. 9): Every partner must render true and proper accounts to his co-partners. It implies that each partner must be ready to explain the accounts of the firm and produce vouchers in support of the entries. No partner should think of making a secret profit at the expense of the firm.

4. Duty to Provide Full Information (Sec. 9): Every partner must give full information of all things affecting the firm to his co-partners. A partner, being an agent of other partners, must not conceal any information concerning the firm from the other partners by reason of the law of agency as well. Law of agency provides that knowledge to the agent is deemed to be knowledge to the principal.

5. Duty to Indemnify for Loss Caused by Fraud (Sec. 10): A partner can cause loss to the firm by his neglect or want of skill or omission or fraud while acting in the ordinary course of business. The general practice is that where a partner acts bonafide the loss caused by his neglect or want of skill or omission is borne by the firm. But when the loss is caused by fraud committed against a third party by a partner, the same must be recovered from the guilty partner and cannot be shared among all the partners. Section 10 gives statutory recognition to this rule and provides that ‘Every partner must indemnify the firm for any loss caused to it by his fraud in the conduct of the business of the firm. The object of this provision is to discourage partners to deal fraudulently in the conduct of the business.

6. Duty to be Liable Jointly and Severally (Sec. 25): Every partner is liable, jointly with all the other partners and also severally, to third parties for all acts of the firm done while he is a partner. The liability of all the partners is not only joint and several but is also unlimited. Thus if a firm fails to pay creditor, he may at his discretion bring an action against some or all the partners for the whole amount

7. Duty not to Assign his Interest (Sec. 29): No partner can assign or transfer his partnership interest to any other person so as to make him a partner in the business without the consent of all other partners. He can, however, assign his share of the profit and his share in the assets of the firm but transferee shall not have any right to interfere in the conduct of the business.

II. Qualified Duties

Qualified duties are those which depend upon the contract between the partners and it is only the absence of a contract to the contrary that these duties, as laid down by the Partnership Act, are

aplicable. In other words, the partners are free to vary these duties by mutual agreement, express or implied and if the partnership agreement is silent then only the duties contained in the Partners Art will be the duties of the partners. Subiect to contract between the partners prescribes the following duties of partners inter-se:

1 Duty to Attend Diligently to his Duties (Sec. 12 (bll: Every partner is bound to attendo to his duties in the conduct of the business.

2. Duty to work Without Remuneration (Sec. 13 (a)]: A partner is not entitled to receive remuneration for taking part in the conduct of the business.

3: Duty to Contribute to the Losses (Sec. 13 (bll: The partners are bound to contribute equally to the losses sustained by the firm, irrespective of the amount of capital contribution by each one of them.

4. Duty to Indemnity for Wilful Neglect (Sec. 13 (f)]: Every partner is under a duty to indemnify the firm for any loss caused to it by his wilful neglect in the conduct of the business of the firm. The expression ‘Wilful neglect means the failure to perform a duty, or to do something which a partner ought to have done, intentionally and deliberately. An act done in good faith and bonaride or a mere error of judgement cannot be termed as wilful neglect.

5. Duty to Use Firm’s Property Exclusively for the Firm (Sec. 15): It is the duty of every partner to use the property of the firm exclusively for the purposes of the business. No partner should use partnership property for his personal benefit.

6. Duty to Account for Personal Profits Derived [Sec. 16 (a)]: 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 must account for that profit and pay it back to the firm.

7. Duty not to Complete with the Business of the Firm [Sec. 16 (b)]: A partner must not carry on any business which is similar to or likely to compete with the business of the firm. If he does that, he is bound to account for and pay to the firm all profits made by him in that business. A partner may, however, carry on a non-competing business and may retain the profits of that business to himself.

Q.3. What are the different modes in which a firm may be dissolved? 

Ans. Modes of Dissolution of a Firm: A firm may be dissolved in any one of the following ways:

1. By Agreement (Sec. 40): A firm may be dissolved with the consent of all the partners or in accordance with a contract between the partners. Partnership is created by contract, it can also be terminated by contract.

2 Ry Notice (Sec. 43): Where the partnership is at will, the firm may be dissolved by any partner giving notice in writing to all the other partners of his intention to dissolve the firm. A notice of dissolution once given cannot be withdrawn without the consent of other partners (Jones vs. Lloyd), The firm is dissolved as from the date mentioned in the notice as the date of dissolution or, if no date is so mentioned, as from the date of the communication of the notice.

3. On the Happening of Certain Contingencies (Sec. 42): Subject to contract between the partners, a firm is dissolved:

(a) if constituted for a fixed term, by the expiry of that term; 

(b) if constituted to carry out one or more adventures or undertakings, by the completion thereof: 

(c) by the death of a partner and 

(d) by the adjudication of a partner as an insolvent.

The partnership agreement may provide that the firm will not be dissolved in any of the aforementioned circumstances. Such a provision is valid.

4. Compulsory Dissolution (Sec. 41): A firm is compulsorily dissolved under any of the following circumstances: (a) When all the partners or all the partners but one are adjudged insolvent or (b) when some event has happened which makes it unlawful for the business of firm to be carried on or for the partners to carry it on in partnership (e.g. when any partner, who is a citizen of a foreign country becomes an alien enemy because of the declaration of war between his country and India). Where however, a firm is carrying on more than one adventures or undertakings, the illegality of one or more shall not of itself cause the dissolution of the firm in respect of its lawful adventures or undertakings

5. Dissolution by the Court (Sec. 44): Dissolution of a firm by the court is necessitated when there is a difference of opinion between the partners regarding the matter of dissolution. For example, where one of the partners has become insane, some of the partners may be willing to continue the firm and share profits with the insane partner, while the other partners may be insisting on the dissolution of the firm. Obviously in these circumstances intervention by the court becomes necessary. On receiving the petition for the dissolution of the firm the court is not bound to decree dissolution and it enjoys complete discretion in the matter. It may or may not order for the dissolution of the firm depending upon the merits of each case.

Section 44 enumerates the various grounds on which a petition may be made to the court for the dissolution of the firm. The section lays down that at the suit of a partner, the court may dissolve a firm on any of the following grounds:

(a) Insanity: When a partner becomes insane. In this case the section permits not only any of the partners but also the next friend of the insane partner to file the suit for dissolution of the firm.

(b) Permanent Incapacity: When a partner, other than the partner suing, becomes permanently incapable of performing his duties as partner.

(c) Misconduct: When a partner, other than the partner suing, is guilty of misconduct, which is likely to affect prejudicially the carrying on of the business of the firm. It is not necessary that the misconduct which is made the ground of dissolution should be connected with partnership business. Conviction for travelling without ticket or the adultery by one partner with another partner’s wife are good grounds for the dissolution of the firm. Under this clause the suit cannot be brought by the guilty partner for that would allow him an excuse for getting a firm dissolved at his will.

(d) Persistent Breach of Agreement: When a partner, other than the partner suing, commits frequently breaches of the partnership agreement or otherwise, so conducts himself in matters relating to the business that other partners find it impossible to carry on the business in partnership with him. Taking away the books of accounts, using firm’s money for his private debts, continuous quarrelling with other partners are good grounds for the dissolution.

(e) Transfer of Interest: When a partner, other than the partner suing, has transferred the whole of his interest in the firm to a third party or has allowed his share to be sold in execution of a decree. Transfer or assignment of partner’s interest does not by itself dissolve the firm. But the other partners may apply to the court to dissolve the firm if such a transfer occurs.

(f) Continuous Losses: When the business of the firm cannot be carried on except at a loss.

(g) Just and Equitable: When on any other ground the court considers it just and equitable that the firm should be dissolved, e.g. if partners are not on speaking terms.