Legal actions to take when your business partner cheats

Last Updated at: Mar 25, 2020
Legal actions to take when your business partner cheats
There are times in business when one of the partners cheats the other. In such a situation, you must connect with consultants who can help in resolving business disputes. Ending up a partnership may invite animosity and also loss of the company’s asset, and hence, you must choose the right consultant who will help you in making the right decision.


A partnership is formed when two or more persons join together and agree on common grounds to do business and to also share profits and losses. This type of business relationship could be between person to person or business to business and person to business. As per the Indian Partnership Act, the agreement is compulsory and may not be in writing however a written one is more beneficial as it helps in taking legal action if there is a breach of the contract. It is also important for a company to be registered. In the case of the unregistered firm, it cannot sue its partners or other persons. If anyone of the partner breaches the agreement the other partners can take legal action against him.

If the business partner is found committing a fraudulent act, which may involve embezzlement or transfer of business assets for his own use; engagement in revealing the intellectual property of the business or stops performing his obligations, legal actions can be taken against him.

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Things to be done during such an instance:

Collecting evidence:

The partner who has cheated cannot be directly expelled from the business or the others cannot dissolve the firm. Mere suspicion cannot be enough for filing a suit against him. First, the business partner has to collect the evidence against the cheating partner for his act of violation of the agreement. Once it is confirmed, all the cash transactions involving the partner need to be stopped immediately.

Filing a suit:

For filing a suit, it has to be proved that the particular business partner is untrustworthy and could harm the business with his fraudulent act. The evidence collected has to show that the accounting errors like missed entries in an accounting book, credit list mismatch etc along with the proof of withdrawal receipt he made through credit/ debit card, cash register entries. Apart from the fraud in money, if the partner reveals the details or secret of the firm to the other third party, he would have committed a breach of trust and the other person can sue for the breach of trust. Generally, a criminal suit will be filed under Sec 420 of IPC, if the partner commits cheating, or acted dishonestly and also under Sec 406 of IPC for criminal breach and also a civil suit for recovery of money and will be arrested and penalized under the respective section.

Seeking compensatory damages:

If the partnership agreement includes the compensatory damages clause, then the partner, who breached the agreement, has to compensate for the money he has agreed to. If the amount is not mentioned, the court will determine the amount to be compensated. In case if the court finds the clause invalid, then the court will award damages to the firm.

Settlement between the partners:

If the partner found the other cheating, they may sit for negotiation and settle the problems, thereby restoring the business relationship between them. After the negotiation is done, the settlement agreement should be drafted binding the terms and conditions and should be duly signed by the partners. This might reduce the time of the court and also reduces the legal cost.

Dissolution of partnership firm:

If the partner found the other partner is cheating, he may dissolve the firm. First, he should send the notice to the partner of his willingness to dissolve the firm. The court may order for the dissolution under Section 44 of Indian Partnership Act. If the firm is dissolved, the partner will be held liable to the third parties for the actions done.