Introduction
What happens when you enter into a partnership without a partnership deed?- In the absence of a partnership deed in written form, you might suffer losses of some benefits that can be eligible as a partner of the partnership firm.
So, it is always advisable for you, if you want to enter into a partnership, make sure to prepare a partnership deed in writing form. One notable thing you need to know is that an oral partnership is also valid, and there is no mandatory requirement to register a partnership firm in India.
But that may harm your legal rights when any dispute arises during the partnership business. But it does not mean no legal remedies are available to protect your rights. This article discusses what happens if an absence of a partnership deed between the firm’s partners.
In the absence of a partnership agreement, how are mutual relations between the partners governed?
In case there is the absence of a partnership deed, you still have some of the remedies available, which are governed according to provisions of the Indian Partnership Act of 1932. The article discusses what standard rule will apply when no partnership deed is available.
Generally, the partnership deed is signed by persons who want to enter the partnership business. They all mutually agree on the terms and conditions of the firm’s business. The partnership business is governed under the Indian Partnership Act.
That Act also specifies the firm partners’ rights, duties, and responsibilities. That Act’s provisions protect the partner’s legal rights and obligations. However, the partners are free to modify or change their part of the obligation and terms and conditions with mutual understanding and the consent of the other partners.
The partners have no restrictions regarding managing their contractual rights, duties, obligations, and responsibilities under the Indian Partnership Act. But, sometimes, provisions of the Act are not legally binding on the partners when they make any contrary provisions. With the consent of other partners, the firm’s partners can modify the terms and conditions either verbally or in writing.
Which provision of the Indian Partnership Act governs during the absence of a partnership deed?
A partnership deed includes all aspects of the partners of the firm. Like whatever they mutually agree on terms, conditions, rights, duties, obligations, responsibilities, etc. However, If the partners do not create a partnership deed, the question that comes to our mind is- If there is a lack of a partnership deed or absence of a partnership agreement, what remedies will help the firm’s partners protect their rights in the business?
As we refer to the provisions of the Indian Partnership Act,1932. the following requirements are available;
It is advisable to do a partnership deed because it is a legal document that helps the partners sort out unnecessary misunderstandings if any arise among them. Also, due to a written partnership deed, the partners can efficiently resolve their disputes without approaching a court of law. In the written partnership deed, partners can enter the interest clause; however, if the partners do not create a partnership agreement or deed, in that case, the firm’s partners are eligible for interest on loans and advances, and their ratios of profit will be equal. But, one notable thing we should note is that they are not entitled to salary and commission from the firm.
Interest on capital
The interest on capital will be paid to the partner if the firm business earns profit, but that should be a particular clause mentioned in the partnership agreement. Such interest on capital will not be paid to the partner in the event of a loss. That’s why if the partnership deed is not in writing, the firm’s partners are not entitled to receive interest.
Interest on drawings
No interest will be charged from the partner on drawing whatever they make.
Salary and commission to the partner
Without specified in the partnership deed, the firm’s partner is not entitled to any salary or commission from the firm business.
Interest on Loan
The firm’s partners are entitled to receive an interest rate of 6 % on the money they lend as a loan to the firm.
The Ratio of Profit Sharing
No matter how much capital is contributed by the partner in an individual capacity of the firm business. Each partner of the firm receives an equal part of the profit of the firm’s business.
Conclusion
As mentioned earlier, these provisions are applicable in the absence of a partnership deed. No matter how much capital they contribute to the firm’s business, the profits and losses are equally shared. If the partner did any work, they are not entitled to a salary or commission. However, according to the provisions of the Indian Partnership Act of 1932, in the absence of a partnership agreement, the partners are allowed a 6% interest in the case of an advance or loan given by the partner to the partnership firm.
Also Read:
What is a partnership deed? (know the meaning, content, future, and Importance of partnership deed)
What are the Pros and Cons of a Partnership?
Types of Partners in the Partnership Firm under the Partnership Act.