Indian Partnership Act
Mutual Rights and Liabilities: Section 13
What is a partner entitled to when the deed says nothing? Section 13 is the answer sheet. No remuneration for working. Profits and losses shared equally, whatever the capital. Interest on capital only out of profits, and only if agreed. Interest at six per cent on advances beyond capital, whether or not there are profits. An indemnity from the firm for proper payments and for emergency acts. And an indemnity to the firm for loss caused by wilful neglect. Every clause applies subject to contract, so the deed is what you read first.
The six default rules of Section 13, capital compared with an advance, and the two indemnities
1. The Six Clauses
Clause | The rule | Practical effect |
|---|---|---|
13(a): remuneration | A partner is not entitled to receive remuneration for taking part in the conduct of the business | A working partner gets nothing extra unless the deed provides a salary or commission; tax law also requires the deed for deduction |
13(b): profits and losses | Partners are entitled to share equally in the profits, and shall contribute equally to the losses | Equality applies even where capital contributions are unequal; any ratio may be agreed |
13(c): interest on capital | Where a partner is entitled to interest on the capital subscribed, such interest shall be payable only out of profits | No profits, no interest on capital, however the deed is worded, unless it clearly provides otherwise |
13(d): interest on advances | A partner making, for the purposes of the business, any payment or advance beyond the capital he agreed to subscribe is entitled to interest at six per cent a year | It is a loan to the firm, so interest runs whether or not there are profits |
13(e): indemnity by the firm | The firm shall indemnify a partner for payments made and liabilities incurred in the ordinary and proper conduct of the business, and in doing an act in an emergency to protect the firm from loss, as a person of ordinary prudence would in his own case | Covers ordinary business liabilities, and reasonable emergency action |
13(f): indemnity by the partner | A partner shall indemnify the firm for any loss caused to it by his wilful neglect in the conduct of the business | An error of judgment is not wilful neglect; deliberate or reckless disregard is |
2. Profits and Losses: Equality as the Default
§ Points that follow from Section 13(b) • Equal shares, unequal capital. In the absence of agreement, a partner who brings ninety per cent of the capital still takes an equal share of profits. This is why the deed must state the ratio. • Losses follow profits. Losses are contributed equally in the absence of agreement, and follow the agreed profit ratio where one is fixed, unless the deed says otherwise. • Sharing profits only. A partner may be excused losses by agreement between the partners; as against third parties he remains liable under Section 25, and must claim indemnity from his co-partners. • Capital losses. In the absence of agreement, deficiency of capital is borne in the profit-sharing ratio on settlement under Section 48. |
3. Capital and Advances Distinguished
Basis | Capital | Advance or loan |
|---|---|---|
What it is | What the partner agreed to bring into the firm | Money paid or advanced beyond that agreed amount |
Interest | Only if the deed provides, and then only out of profits: s. 13(c) | Six per cent a year by force of s. 13(d), profits or no profits |
On dissolution | Repaid after debts and advances, in the order in s. 48 | Repaid after outside debts, but before capital |
Character | A partner's stake in the firm | A debt owed by the firm to the partner |
4. The Firm's Indemnity: Section 13(e)
§ Two situations Ordinary and proper conduct. A partner who pays a supplier, discharges a firm liability, or incurs an obligation in the normal course of the business is indemnified by the firm. Emergency acts. A partner who acts in an emergency to protect the firm from loss is indemnified if he acted as a person of ordinary prudence would in his own case under similar circumstances, even if the act was outside his usual authority. Illustration. A partner who, on a fire breaking out at the godown, hires labour and transport at high rates to shift the stock acts in an emergency; the firm bears the cost. Limits. Payments that are not for the firm, or acts done improperly or outside the business, are not indemnified. |
5. The Partner's Indemnity: Section 13(f), with Section 10
Basis | Wilful neglect, s. 13(f) | Fraud, s. 10 |
|---|---|---|
What it covers | Loss caused by wilful neglect in the conduct of the business | Loss caused by the partner's fraud in the conduct of the business |
Subject to contract | Yes: the partners may agree otherwise | No: it cannot be excluded |
Standard | More than error of judgment; deliberate or reckless disregard of duty | Dishonesty |
Third parties | The firm answers to the outsider first, then recovers from the partner | Same; ss. 25 to 27 protect the outsider |
6. How to Use Section 13 in a Problem
i. Read the deed first. Every clause of Section 13 applies only where the contract is silent.
ii. Classify the money. Is it capital or an advance? That decides the interest question.
iii. Ask who benefited. Payments for the firm are indemnified; personal profits go back to the firm under Section 16.
iv. Ask how the loss was caused. Error of judgment falls on the firm; wilful neglect and fraud fall on the partner.
7. Frequently Asked Questions
Is a partner entitled to salary for working in the firm?
Not unless the partnership deed provides for it; Section 13(a) is the default rule.
How are profits shared when the deed is silent?
Equally, and losses are contributed equally, whatever the capital contributed, under Section 13(b).
What interest does a partner get on money advanced to the firm?
Six per cent a year under Section 13(d), payable whether or not the firm makes profits.
When must the firm indemnify a partner?
For payments and liabilities incurred in the ordinary and proper conduct of the business, and for acts done in an emergency as a person of ordinary prudence would do in his own case.