Mutual Rights and Duties of Partners (Section 24, Schedule I)

The internal life of a limited liability partnership is built on a single organising idea: freedom of contract, backed by a statutory safety net. Section 23 of the Limited Liability Partnership Act, 2008 declares that the mutual rights and duties of the partners inter se, and between the LLP and its partners, are governed by the LLP agreement; where that agreement is silent on any matter, the First Schedule steps in to supply a default rule. Section 24 then deals with the moment a partner exits that web of rights and duties. For the judiciary and CLAT-PG aspirant, this triad — Section 23, the First Schedule, and Section 24 — is where the LLP departs decisively from the Indian Partnership Act, 1932 while quietly borrowing its fiduciary DNA. This chapter unpacks each clause, ties it to verified authority, and shows how courts read silence in an LLP agreement.

The statutory scheme: Section 23 as the gateway

Section 23 is the doorway to the entire law of partner relations in an LLP. Sub-section (1) provides that, save as otherwise provided by the Act, the mutual rights and duties of the partners of an LLP, and the mutual rights and duties of the LLP and its partners, shall be governed by the LLP agreement between the partners or between the LLP and its partners. The drafting deliberately privileges contract: the partners are free to design their own internal constitution, subject only to the mandatory provisions of the Act itself.

Sub-section (2) requires the LLP agreement and any changes made in it to be filed with the Registrar in the prescribed form, manner and fee — the mechanism by which the private bargain acquires a public footprint (this is developed in our chapter on the LLP agreement). Sub-section (3) recognises pre-incorporation agreements: an agreement in writing made before incorporation between the subscribers to the incorporation document may impose obligations on the LLP, provided it is ratified by all the partners after incorporation. Sub-section (4) is the pivot of this chapter: in the absence of agreement as to any matter, the mutual rights and duties shall be determined by the provisions relating to that matter set out in the First Schedule. The First Schedule is therefore not a substitute constitution but a gap-filler, operating clause-by-clause wherever the agreement is silent.

Contract is supreme; the Schedule is a gap-filler

The relationship between Section 23 and the First Schedule is one of primacy and subsidiarity. The agreement governs; the Schedule fills gaps. Crucially, the gap-filling operates matter-by-matter, not all-or-nothing. If an LLP agreement deals with profit-sharing but says nothing about admission of new partners, the agreement's profit clause prevails while paragraph 7 of the First Schedule (unanimous consent for new partners) silently governs admission. There is no requirement that an LLP have a written agreement at all; many small LLPs operate entirely on the statutory default, in which case the whole of the First Schedule applies as if it were their agreement.

This architecture mirrors the company-law principle that a registered constitutional document overrides inconsistent private arrangements. In V.B. Rangaraj v. V.B. Gopalakrishnan, AIR 1992 SC 453, the Supreme Court held that a private agreement among shareholders restricting share transfer was unenforceable where it conflicted with the company's articles of association, because the articles bind the members as the governing instrument. The same logic informs the LLP: the filed agreement, not a side understanding, defines the partners' rights, and where the agreement is silent the statute — not informal practice — supplies the rule. Compare the position under the general partnership regime discussed in our introduction to the LLP Act.

Equal sharing of capital, profits and losses (Schedule I, para 2)

Paragraph 2 of the First Schedule provides that all the partners of an LLP are entitled to share equally in the capital, profits and losses of the LLP. The striking feature is that, in default, sharing is equal regardless of the actual capital each partner contributed. A partner who put in 90 per cent of the capital and a partner who put in nothing share profits and losses equally unless the agreement says otherwise. This is a powerful incentive to draft an express profit-sharing clause, and most LLP agreements do exactly that.

The default of equality descends from classical partnership law and the principle, captured in Cox v. Hickman, (1860) 8 HLC 268, that the receipt of a share of profits is the hallmark of the partner relationship even though, as the House of Lords clarified, profit-sharing alone is not conclusive of partnership — the true test being mutual agency, the relation of principal and agent between the partners. While Cox v. Hickman concerned whether creditors taking profits became partners, its enduring contribution is the recognition that profit participation is central to, yet not decisive of, the partner relationship, a distinction the LLP Act preserves by separating the right to share profits (a default, displaceable rule) from the status of being a partner.

Mutual indemnity: paragraphs 3 and 4

Two reciprocal indemnities sit at the heart of the First Schedule. Paragraph 3 obliges the LLP to indemnify each partner in respect of payments made and personal liabilities incurred by him (a) in the ordinary and proper conduct of the business of the LLP, or (b) in or about anything necessarily done for the preservation of the business or property of the LLP. This is the partner's shield: a partner who, acting properly, incurs expense or liability for the firm can recover it from the LLP.

Paragraph 4 runs the other way: every partner shall indemnify the LLP for any loss caused to it by his fraud in the conduct of the business of the LLP. The asymmetry is deliberate — the LLP indemnifies for proper conduct, but the partner indemnifies the LLP only for fraud, reflecting the limited-liability bargain that ordinary errors of judgment do not expose a partner personally, whereas fraud always does. This dovetails with the broader liability scheme analysed in our chapter on designated partners and their liabilities, where fraud under Section 30 carries personal and criminal consequences.

Right to manage and the no-remuneration default (paras 5 and 6)

Paragraph 5 confers on every partner the right to take part in the management of the LLP. Unlike a company, where management vests in directors, the default LLP is partner-managed: each partner is, in principle, both an owner and a manager. Paragraph 6 then provides that no partner shall be entitled to remuneration for acting in the business or management of the LLP. In default, therefore, management is a right but not a paid office; a partner who wishes to draw a salary for managerial work must secure an express clause to that effect.

This default rests on the same footing as Section 13 of the Indian Partnership Act, 1932, under which a partner is not entitled to remuneration for taking part in the conduct of the business absent contrary agreement. The rationale is that a partner already participates in profits; paying a separate salary out of the common fund would, in default, prejudice the others. Where an LLP wishes to professionalise management it typically appoints designated partners and provides for their remuneration in the agreement — a structure explained in our note on designated partners.

Admission of a new partner: the unanimity rule (para 7)

Paragraph 7 provides that no person may be introduced as a partner without the consent of all the existing partners. This is the doctrine of delectus personae — the right to choose one's associates — carried into LLP law. Because the partners are bound to one another by mutual agency and fiduciary obligation, the law presumes that no one can be forced into partnership with a stranger against his will. The consent required is unanimous, not merely a majority.

The contrast with paragraph 8 (ordinary matters by majority) is instructive: routine business decisions yield to the will of the majority, but the composition of the partnership itself — who is admitted — requires everyone's agreement. This protects each partner's most fundamental interest, the identity of those who can bind the firm and share its profits. In practice, LLP agreements frequently modify this rule, allowing admission by a special majority or by the designated partners, but in the absence of such a clause the statutory default of unanimity controls absolutely.

Decision-making: majority rule, change of business, and minutes (para 8 and 9)

Paragraph 8 sets the default voting rule: any matter or issue relating to the LLP shall be decided by a resolution passed by a majority in number of the partners, and for this purpose each partner shall have one vote. Two consequences follow. First, voting is by number of partners, not by capital share — a partner with a tiny stake has the same single vote as one with a large stake. Second, the proviso to paragraph 8 carves out an exception: no change may be made in the nature of the business of the LLP without the consent of all the partners. Changing what the firm actually does is too fundamental to be left to a bare majority.

Paragraph 9 imposes a record-keeping discipline: every LLP shall ensure that decisions taken are recorded in the minutes within thirty days of taking such decisions, and the minutes shall be kept and maintained at the registered office of the LLP. This converts the partners' deliberations into a documented governance trail, important both for internal accountability and for evidentiary purposes if a dispute later arises. The interplay of unanimity (paras 7 and the proviso to 8) and majority (the body of para 8) is a favourite examination point: structural changes need consensus, day-to-day matters need only numbers.

Duty to render true accounts and full information (para 10)

Paragraph 10 obliges each partner to render true accounts and full information of all things affecting the LLP to any partner or his legal representatives. This is the informational backbone of the fiduciary relationship: partners cannot make informed decisions, or police one another's conduct, unless each is candid about the firm's affairs. The duty is positive — a partner must volunteer material information, not merely answer questions truthfully when asked.

The provision is the LLP analogue of Section 9 of the Indian Partnership Act, 1932, which casts on every partner the duty to be just and faithful to the other partners and to render true accounts and full information of all things affecting the firm. The cases on partnership uberrima fides illuminate its reach. In Helmore v. Smith, (1886) 35 Ch D 436, Bacon V.C. observed that if fiduciary relation means anything, he could not conceive a stronger case of fiduciary relation than that which exists between partners, the mutual confidence being the very life-blood of the firm. Concealment of material facts from a co-partner is therefore a breach of paragraph 10 and of the underlying duty of good faith.

Duty to account for private profits and competing business (paras 11 and 12)

Paragraphs 11 and 12 codify the no-profit and no-conflict limbs of the partner's fiduciary duty. Paragraph 11 requires every partner to account to the LLP for any benefit derived by him without the consent of the LLP from any transaction concerning the LLP, or from any use by him of the property, name or business connection of the LLP. Paragraph 12 requires a partner to account for, and pay over to the LLP, all profits made by him in a business of the same nature as, and competing with, the LLP, carried on without the consent of the LLP.

The classic authority is Bentley v. Craven, (1853) 18 Beav 75. Craven, a partner in a sugar-refining firm and its buyer, bought sugar cheaply and resold it to the firm at the market price, pocketing the difference without disclosure. The court held that he was bound to account to the firm for the secret profit; it was no defence that the other partners could not themselves have obtained the discount, because the partner had made a profit out of his position and must surrender it. These paragraphs are the statutory descendants of that rule and of Section 16 of the Indian Partnership Act, 1932, which obliges a partner to account for private profits and for profits of a competing business. A partner who diverts an LLP opportunity to himself is squarely within paragraphs 11 and 12.

No expulsion without express power; disputes to arbitration (paras 13 and 14)

Paragraph 13 provides that no majority of the partners can expel any partner unless a power to do so has been conferred by express agreement between the partners. The default position is therefore against expulsion: a partner cannot be ejected by the others, however numerous, unless the agreement specifically grants an expulsion power. Even where the power exists, it must be exercised in good faith and for the benefit of the firm; a purported expulsion driven by bad faith or collateral purpose is liable to be struck down, applying the same good-faith standard that pervades paragraphs 10 to 12.

Paragraph 14 channels internal disputes to arbitration: all disputes between the partners arising out of the LLP agreement which cannot be resolved in terms of such agreement shall be referred for arbitration as per the provisions of the Arbitration and Conciliation Act, 1996. This statutory steer towards arbitration reflects the legislative preference for keeping partnership quarrels out of crowded civil courts and resolving them through a confidential, party-chosen forum. Because the First Schedule itself is a deemed term of the relationship in the absence of agreement, paragraph 14 can operate as a default arbitration clause even where the partners never drafted one.

Section 24: when a partner ceases to hold his interest

Section 24 governs the exit point of the mutual-rights web. Sub-section (1) allows a person to cease to be a partner in accordance with an agreement with the other partners, or, in the absence of such agreement as to cessation, by giving notice in writing of not less than thirty days to the other partners of his intention to resign. Sub-section (2) lists automatic events of cessation: a person ceases to be a partner on his death or the dissolution of the LLP, if he is declared to be of unsound mind by a competent court, or if he has applied to be adjudged an insolvent or is declared insolvent.

The 30-day notice default in Section 24(1) is the cessation counterpart to Section 23(4): where the agreement is silent on how a partner may leave, the statute supplies a minimum notice period. This protects the remaining partners and third parties from abrupt, disruptive withdrawals. Note that an LLP, unlike a general partnership, enjoys perpetual succession — the departure, death or insolvency of a partner does not dissolve the entity — a feature explored in our chapter on the nature of an LLP as a body corporate.

Holding out and surviving obligations under Section 24(3) and (4)

Section 24(3) addresses the protection of third parties. Where a person has ceased to be a partner (the “former partner”), he is to be regarded, in relation to any person dealing with the LLP, as still being a partner unless the person dealing with the LLP has notice that he has ceased to be a partner, or notice of the cessation has been delivered to the Registrar. This is the LLP version of the holding-out principle: until the world is given notice, the former partner may continue to be treated as a partner for the purposes of the LLP's dealings, preventing silent exits that could prejudice creditors.

Section 24(4) makes clear that cessation does not, by itself, discharge the partner from any obligation to the LLP, to the other partners, or to any other person, which he incurred while being a partner. A partner cannot walk away from liabilities already incurred merely by resigning. Read together, sub-sections (3) and (4) ensure that exit is prospective in effect and properly publicised: a departing partner remains answerable for past obligations and continues to be exposed to outsiders until notice is given.

Settling the former partner's financial entitlement: Section 24(5) to (7)

Section 24(5) provides that, unless otherwise provided in the LLP agreement, on the cessation of a partner, the former partner or a person entitled to his share in consequence of death or insolvency is entitled to receive from the LLP an amount equal to the capital contribution of the former partner actually made to the LLP, and his right to share in the accumulated profits of the LLP, after the deduction of accumulated losses, as at the date he ceased to be a partner. This is the default buy-out formula: returned capital plus net accumulated profit share, computed as on the cessation date.

Section 24(6) qualifies the former partner's continuing relationship with the firm: a former partner or a person entitled to his share is not entitled to interfere in the management of the LLP. The exiting partner's stake converts into a financial claim, not a continuing governance right. Section 24(7) preserves the primacy of contract throughout — the entitlements in the section operate “unless otherwise provided in the LLP agreement” — so partners may design their own exit-valuation mechanism. This mirrors the Section 23(1) philosophy: agreement first, statute as fallback. For the deeper architecture of that agreement, see our chapter on the LLP agreement and the hub of LLP Act notes.

Exam synthesis: how to deploy this in answers

For the judiciary or CLAT-PG candidate, three relationships must be at your fingertips. First, the agreement-Schedule relationship: Section 23(1) makes the LLP agreement supreme and Section 23(4) makes the First Schedule a clause-by-clause gap-filler, so always begin by asking whether the agreement covers the matter in dispute. Second, the unanimity-majority axis within Schedule I: admission of partners (para 7) and change in the nature of business (proviso to para 8) need unanimous consent; expulsion (para 13) needs an express power; everything else falls to majority by head-count (para 8). Third, the cessation framework of Section 24: voluntary exit on 30 days' notice or by agreement (sub-section 1), automatic events (sub-section 2), holding-out protection (sub-section 3), surviving liability (sub-section 4), and the default buy-out with no management interference (sub-sections 5 to 7).

Anchor the fiduciary discussion with verified authority — Bentley v. Craven for accounting for secret profits, Helmore v. Smith for the strength of the partner fiduciary relation, and Cox v. Hickman for the agency-based test of partnership — and connect the contract-over-private-arrangement point to V.B. Rangaraj v. V.B. Gopalakrishnan. Throughout, remember the LLP's distinctive overlay: limited liability and perpetual succession mean that, unlike a general partnership, cessation of a partner neither ends the entity nor exposes the innocent partners to personal liability for ordinary business obligations.