Understanding when partners must surrender private profits to the firm and their liability in competing business activities.
Partner Liability Flowchart
Does NOT apply if partner informs and gets consent from all partners
Rule 1: Competing Business
Rule 2: Using Firm's Resources
Introduction to Partner Liability
In a partnership, partners have a duty to act in the best interest of the firm. When a partner makes private profits without informing other partners, special rules apply regarding liability.
Rule 1: Competing Business
If a partner carries on any business that competes with the firm's business without consent of other partners:
Profits to Firm
The partner must give all profits from the competing business to the firm.
Example 1: A, B, and C run a computer shop. A secretly opens another computer shop nearby. A must give all profits from the second shop to the firm.
Example 2: X, Y run a bakery. X starts selling cakes online without telling Y. X must give all online cake profits to the bakery firm.
Example 3: Partners run a laundry service. One partner starts a dry cleaning service next door. All dry cleaning profits go to the laundry firm.
Losses to Self
The partner must bear all losses from the competing business personally.
Example 1: A opens a competing restaurant that loses money. A cannot share these losses with the firm - must pay from own pocket.
Example 2: Partner starts competing transport business that fails. The partner alone bears all losses.
Example 3: Secret competing business causes debts. Only the partner who started it is responsible for paying those debts.
Rule 2: Profit from Firm's Transaction
If a partner earns profit from any transaction of the firm or from use of the firm's property or business connection:
Profits to Firm
The partner must give all profits to the firm
Example 1: A partner uses firm's customer list to get personal orders. All profits from those orders go to the firm.
Example 2: Partner uses firm's truck for personal delivery business. All delivery profits go to the firm.
Example 3: Partner gets discount from supplier because of firm's reputation, uses it for personal gain. Savings must be given to firm.
Losses to Self
The partner must bear all losses from such transactions personally.
Example 1: Partner uses firm's contacts for personal deal that loses money. Partner alone bears the loss.
Example 2: Partner uses firm's warehouse for personal storage that gets damaged. Repair costs are partner's personal expense.
Example 3: Partner uses firm's name for personal loan that defaults. Only that partner is liable for repayment.
Important Points to Remember
When Rules Don't Apply
These rules do NOT apply if:
- Partner informs other partners about the business
- All partners agree to the competing business
- Partnership deed allows such activities
Practice MCQs with Solutions
Test your understanding with these multiple choice questions:
Correct Answer: A must give all profits to the firm
When a partner carries on competing business without consent, Section 16(a) of Partnership Act requires them to give all profits to the firm. This prevents partners from making secret profits at the firm's expense.
Correct Answer: R bears the loss personally
Under Section 16, when a partner makes personal profit using firm's property, they must give profits to the firm. If there's a loss, the partner bears it personally since it was a secret personal transaction.
Correct Answer: M must give ₹10,000 to the firm
This falls under Section 16(b) - profit from use of firm's business connection. Since the customer usually deals with the firm, M used the firm's connection for personal gain. All such profits belong to the firm.
Correct Answer: When all partners are informed and agree
The key condition for these rules is that the profit is made "without the consent of the other partners." If all partners are informed and agree, the partner can keep the profits or share as agreed.
Correct Answer: It depends on whether businesses compete for same customers
Competing business means any business that competes with the firm's business. If office supplies and furniture are sold to same customers (like offices), it could be competing. The test is whether it affects the firm's business opportunities.
Key Takeaways
Duty of Partners
Partners must act with utmost good faith. No secret profits allowed from competing business or firm's transactions.
Profit & Loss Rule
All private profits go to firm. All losses from private business stay with the partner.
Consent Matters
Rules apply only when partners act without informing others. With consent, different arrangements can be made.
Partnership Deed
A well-drafted partnership deed can modify these rules. Always have a written agreement!