Effect of Absence of a Partnership Deed under the Indian Partnership Act, 1932
A Partnership Deed is a legal document that defines the rights, duties, and responsibilities of partners in a partnership firm. However, when there is no written Partnership Deed, the provisions of the Indian Partnership Act, 1932 automatically govern the partnership.
Key Provisions in the Absence of a Partnership Deed
1. Profit and Loss Sharing
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As per Section 13(b) of the Indian Partnership Act, profits and losses will be shared equally among all partners, irrespective of their capital contribution or involvement in business operations.
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This may create disputes, especially if one partner contributes significantly more than the others.
2. Interest on Capital
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No interest is paid on the capital contributed by partners unless there is an agreement stating otherwise.
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If the firm incurs a loss, no interest will be provided to any partner.
3. Interest on Drawings
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Partners will not be charged interest on the money they withdraw from the firm for personal use.
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However, if a Partnership Deed is in place, it can specify the interest rate on drawings.
4. Salary and Commission to Partners
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Partners are not entitled to any salary, commission, or remuneration for their work unless explicitly mentioned in a written agreement.
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This may be a disadvantage for working partners who actively manage the business.
5. Interest on Loan Given by Partners
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If a partner provides a loan to the firm, he/she is entitled to 6% per annum interest on the loan amount.
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This is applicable even in the absence of a Partnership Deed and is governed by Section 13(d) of the Partnership Act.
6. Decision-Making and Management
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All partners have equal rights in decision-making and business management.
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Every partner can participate in business operations unless otherwise agreed upon.
7. Rights of Partners
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Each partner has the right to access all books of accounts and records of the firm.
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Every partner is considered an agent of the firm and can act on its behalf.
8. Unlimited Liability
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The personal assets of partners can be used to settle business debts and liabilities.
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Unlike Limited Liability Partnerships (LLP), there is no protection for personal assets in case of legal action or insolvency.
9. Dissolution of the Firm
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The firm automatically dissolves if a partner dies, becomes insolvent, or decides to leave, as there is no agreement for continuity.
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If a written agreement exists, it can specify how the firm will continue in such cases.
Why is a Partnership Deed Important?
A written and registered Partnership Deed provides clarity and avoids conflicts among partners. It helps in:
✔ Defining profit-sharing ratios
✔ Preventing disputes by clearly outlining roles and responsibilities
✔ Facilitating bank transactions and loan approvals
✔ Avoiding legal complications and misunderstandings
If you need help in drafting a Partnership Deed in Delhi, Saptax Hub LLP offers expert assistance in partnership registration and compliance!
