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IAI Actuarial Core Principles · Business Management · Separate legal personality, directors' duties, shareholders and partnerships

Ravi and Sunita are partners in a Chennai trading firm with no written agreement on how disputes are resolved or on interest on capital. Ravi contributed more capital than Sunita. Sunita asks that Ravi be paid 12% interest on his excess capital before profits are split. Under the default rules of the Indian Partnership Act, 1932, what is the position?

No interest on capital is payable unless the partners have agreed it. The Partnership Act's default rule gives no entitlement to interest on capital, and where interest is agreed it is paid only out of profits, so Ravi has no claim here.

  1. AInterest on capital is payable at 12% as a market norm
  2. BInterest on capital is payable only if the court declares it to be fair
  3. CInterest on capital is payable at 6% a year, taken from profits only
  4. DNo interest on capital is payable unless the partners have agreed to itCorrect
  5. Interest is payable at the bank rate and ranks as a business expense

Explanation

Under the default rules, absent a contract to the contrary, partners are not entitled to interest on capital. Where interest is agreed, it is payable only out of profits. Because nothing was agreed, Ravi has no claim, and Sunita's request lacks a legal basis.

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