CAF-4 · Chapter 12
Relations of partners to one another MCQs with Answers
10 multiple-choice questions on Relations of partners to one another for CAF-4 Business Law Dynamics. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Which of the following is considered a 'mandatory' general duty of a partner that CANNOT be altered by an agreement among the partners?
- A) Duty to share losses equally.
- B) Duty to carry on business to the greatest common advantage and to be just and faithful.
- C) Duty to attend the office during standard business hours.
- D) Duty to invest equal capital.
Show answer & explanation
Answer: B) Duty to carry on business to the greatest common advantage and to be just and faithful.
Section 9 outlines mandatory duties that cannot be contracted out of: to carry on business to the greatest common advantage, to be just and faithful, and to render true accounts.
Question 2
Aftab, Badal, and Chand start a business. The agreement states only Aftab will manage the business, while Badal and Chand will be sleeping partners. Do Badal and Chand have the right to inspect the firm's books?
- A) No, because they are not active in management.
- B) Yes, every partner has a right to have access to and inspect any of the books of the firm.
- C) Only if Aftab grants them written permission.
- D) Only at the time of the dissolution of the firm.
Show answer & explanation
Answer: B) Yes, every partner has a right to have access to and inspect any of the books of the firm.
Regardless of whether a partner takes an active part in management or is a sleeping partner, every partner holds the statutory right to access, inspect, and copy the books of the firm.
Question 3
Adeel and Kashif are partners. Their agreement states they will share profits in a 3:2 ratio but is completely silent on how losses will be shared. In case of a loss, how should it be divided?
- A) Losses must be shared equally (1:1).
- B) Losses must be borne entirely by the partner who caused it.
- C) Losses will be shared in the same 3:2 ratio as profits.
- D) The firm must be dissolved immediately if a loss occurs.
Show answer & explanation
Answer: C) Losses will be shared in the same 3:2 ratio as profits.
If the partnership agreement specifies a profit-sharing ratio but is silent regarding losses, the law implies that the partners will share losses in the exact same proportion as they share profits.
Question 4
What is the general legal rule regarding a partner's entitlement to receive interest on the capital they have invested in the firm?
- A) They are entitled to interest at the standard bank rate.
- B) They are entitled to interest only if the firm makes a profit.
- C) No partner is allowed to receive any interest on capital unless it is specifically agreed upon.
- D) Active partners receive interest, but sleeping partners do not.
Show answer & explanation
Answer: C) No partner is allowed to receive any interest on capital unless it is specifically agreed upon.
As a general rule, a partner is not a creditor of the firm regarding their capital contribution. Therefore, no interest on capital is allowed unless there is an express agreement to the contrary.
Question 5
Tom secretly buys an item of equipment for Rs. 18,000 and then sells it to his own partnership firm for Rs. 30,000 without revealing he was the owner. What is Tom's liability when the other partners discover this?
- A) He must resign from the partnership immediately.
- B) He must account for and pay the secret profit of Rs. 12,000 to the firm.
- C) He is allowed to keep the profit since he acted as an independent seller.
- D) The firm must return the equipment to Tom.
Show answer & explanation
Answer: B) He must account for and pay the secret profit of Rs. 12,000 to the firm.
A partner has a fiduciary duty not to make a secret profit at the expense of the firm. If a partner makes a secret profit in a transaction with the firm, he must account for it and pay it to the firm.
Question 6
Irfan, a partner, buys a shop in his own name. He issues a cheque from the partnership account to pay for it, but debits his own capital account with the purchase price. Is this shop the property of the firm?
- A) Yes, because it was paid for using a firm cheque.
- B) Yes, because partners cannot own independent property.
- C) No, because by debiting his own account, he showed the intention of taking the money as a personal loan.
- D) Yes, until he pays back the amount with interest.
Show answer & explanation
Answer: C) No, because by debiting his own account, he showed the intention of taking the money as a personal loan.
Property bought with firm money is usually firm property. However, if a partner debits their own personal capital account for the purchase, it indicates they borrowed the money from the firm, making the property personal.
Question 7
Five partners are running a business importing washing machines. One partner wants to change the nature of the business and start importing electric cookers. Another partner objects. Can the business nature be changed?
- A) Yes, by a simple majority vote.
- B) Yes, because the new product is also an electronic item.
- C) No, the nature of the business can only be changed with the consent of all the partners.
- D) Yes, if the managing partner approves it.
Show answer & explanation
Answer: C) No, the nature of the business can only be changed with the consent of all the partners.
According to partnership law, no change may be made in the nature of the business without the unanimous consent of all the partners.
Question 8
Nadir, Rehan, and Saqib have a written agreement to share profits 50:25:25. For the last two years, they distributed profits 70:15:15 without any objection. In year three, Saqib demands they return to the 50:25:25 ratio. Can the ratio be enforced as 70:15:15?
- A) Yes, because past practice automatically overwrites the written agreement.
- B) No, the ratio of 70:15:15 cannot be permanently adopted without the mutual consent of all partners to amend the deed.
- C) Yes, because Nadir is the managing partner and has authority to change ratios.
- D) No, profit ratios can never be changed under any circumstances.
Show answer & explanation
Answer: B) No, the ratio of 70:15:15 cannot be permanently adopted without the mutual consent of all partners to amend the deed.
The rights and duties established by a contract can be varied by consent of all partners. Since Saqib is now objecting and relying on the written deed, the 70:15:15 variation lacks unanimous ongoing consent to be permanently binding.
Question 9
A partner commits a fraud in the ordinary course of the firm's business, resulting in a severe loss to a client. Who must ultimately bear the cost of this loss internally among the partners?
- A) The firm bears the loss collectively out of its capital.
- B) The partner who committed the fraud must indemnify the firm for the loss caused to it by his fraud.
- C) The client must bear the loss.
- D) Only the active managing partners bear the loss.
Show answer & explanation
Answer: B) The partner who committed the fraud must indemnify the firm for the loss caused to it by his fraud.
It is a mandatory duty under Section 10 that every partner shall indemnify the firm for any loss caused to it by his fraud in the conduct of the business.
Question 10
If a partner advances a loan to the firm beyond their agreed capital contribution, what is their right regarding interest on this advance?
- A) They are not entitled to any interest on advances.
- B) They are entitled to interest only if the firm generates a profit.
- C) They are entitled to interest at a statutory rate (often 6% p.a.) even if the firm suffers a loss.
- D) They can convert the advance into equity automatically.
Show answer & explanation
Answer: C) They are entitled to interest at a statutory rate (often 6% p.a.) even if the firm suffers a loss.
While interest on capital is not allowed unless agreed, a partner making an advance/loan beyond capital is statutorily entitled to interest (typically 6% p.a. under the Act), payable whether there are profits or not.