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Partnership Deed – Clauses & Legal Importance

Introduction

Partnership is based on an "Agreement." While an oral agreement is valid, it is practically useless if a dispute arises. Hence, partners usually form a written document known as the Partnership Deed (or Articles of Partnership). It serves as the constitution for the firm.

1. What is a Partnership Deed?

A Partnership Deed is a written agreement signed by all the partners and stamped according to the Stamp Act. It defines the rights, duties, and liabilities of the partners.

Purpose:

  • To avoid future misunderstandings.
  • To serve as evidence in a court of law.
  • To regulated the conduct of business.

2. Contents (Clauses) of the Deed

A standard deed contains:

  1. General Details: Name of Firm, Nature of Business, Address.
  2. Capital Contribution: How much capital each partner brings (Fixed or Fluctuating).
  3. Profit Sharing Ratio (PSR): The ratio in which P&L will be shared.
  4. Interest on Capital (IoC): Is it allowed? If yes, at what rate?
  5. Salary/Commission: Is any working partner entitled to salary?
  6. Interest on Drawings: Rate to be charged on money withdrawn by partners.
  7. Goodwill Valuation Method: During admission/retirement.
  8. Dispute Settlement: Arbitration clause.

3. Rules Applicable in the ABSENCE of Partnership Deed

This is the Most Important topic for exams. If there is NO Deed, or if the Deed is SILENT on a specific point, the provisions of Section 13 of the Indian Partnership Act, 1932 apply.

ItemRule (If Deed is Silent)
Profit Sharing RatioEqual (Irrespective of capital).
Interest on CapitalNot Allowed.
Interest on DrawingsNot Charged.
Salary / CommissionNot Allowed to any partner.
Interest on LoanAllowed @ 6% p.a. (Charge against profit).
Admission of New PartnerAll existing partners must agree (Unanimous Consent).

Case Study: "The Greedy Partner"

Scenario: A and B are partners. A contributes ₹10 Lakhs and B contributes ₹1 Lakh. There is NO Partnership Deed.

  1. A demands interest on capital @ 10% because he invested more.
  2. A demands profit ratio of 10:1 based on capital.
  3. B demands interest on a loan of ₹50,000 he gave to the firm.

Solution (As per Act 1932):

  1. Interest on Capital: A's claim is Rejected. (No deed = No Interest).
  2. Profit Ratio: A's claim is Rejected. Profits must be shared Equally (1:1).
  3. Interest on Loan: B's claim is Accepted. He is entitled to 6% p.a. interest on the loan.

Exam Notes: Writing the Answer

Question: "What are the rules applicable in the absence of a Partnership Deed?" (5 Marks)

Model Answer:

Provisions of Section 13 (Indian Partnership Act, 1932): In the absence of a written agreement, the following rules apply:

  1. Profits/Losses: Shared Equally by all partners.
  2. Interest on Capital: No interest is allowed on partners' capital.
  3. Interest on Drawings: No interest is charged on drawings.
  4. Remuneration: No salary or commission is paid to any partner for conducting business.
  5. Interest on Partner's Loan: Allowed at 6% per annum. Note that this is a charge against profit (must be paid even in loss).

Summary

  • Deed: Written Agreement. Not mandatory but desirable.
  • Registration: Optional (but unregistered firms have disabilities).
  • Silent Deed: PSR = Equal. No Salary. No IoC.
  • Loan: Only Interest on Loan (6%) is allowed absent a deed.

Quiz Time! 🎯

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