Corporate and business Law

Report
Topic: Partnership Act [1932]
Name: Ausaf Ali (20319)
Umar Bin Mazhar
Zuhair
Bilal
Course Instructor: Sir Mansoor Ali Shahani

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 Partnership act 1932
Definition
Partnership is the relation between persons who have agreed to share the profits of a business
carried on by all or any of them acting for all. Persons who have entered into partnership with
one another are called individually “partners” and collectively “a firm” and the name under
which their business is carried on is called the “firm name”. [Sec 4]

Essential elements of a partnership

Association of two or more persons
The partnership is an association between two or more persons and all persons must be
competent to contract. Thus, there can be no partnership consisting of a single individual. If the
number gets reduced to one, for any reason, it ceases to be a partnership. The partnership Act
does not say anything about the maximum number of partners. But Companies Ordinance fixes
the following maximum numbers:
 In case of a partnership firm carrying on banking business maximum number is 10.
 In case of a partnership firm carrying on any other business maximum number is 20.
 In case of a partnership firm of professional persons maximum number may exceed 20.

Agreement
A partnership is a contractual agreement between the partners. This agreement may be express
(whether written or oral) or implied. The written agreement is known as ‘partnership deed’. In
Pakistan partnership arises from contract and not from status such as, (Joint Family Business)
operation of law inheritance, or succession.
A partnership deed usually sets out the following:
 Firm name
 Place or principal place of business of the firm
 Names of any other places where the firm carries on business
 The date when each partner joined the firm
 Number of partners
 Names in full and permanent addresses of partners
 Duration of partnership (if any)
 Purpose of the partnership
 Rights and duties of the partners.
 Amount of capital that each partner should put into the business, and keep in the business
until the partner retires or the partnership is dissolved.

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In Pakistan, if the partnership agreement does not specify what the rights or duties of the partners
should be in particular circumstances, the rules set out in the Partnership Act 1932 are assumed
to apply. These are the ‘default rules’ in the absence of anything else.
This means that if a partnership exists but does not have a written agreement, it will be assumed
(unless there is evidence to suggest otherwise) that the rules of the partnership agreement are
those contained in the Partnership Act.

Carrying on business
To constitute a partnership, the parties must have agreed to carry on a business. Where there is
no business to be done, there can be no question of partnership. Business here includes any
lawful trade, occupation and profession. An agreement to carry on business at a future time does
not result in partnership unless that time arrives and the business is commenced. If the purpose is
to carry on some charitable work it will not be a partnership.

Sharing of profits
The next essential element of partnership is that there must be an objective to make profit. The
partners may agree to share profits in any manner they like. The sharing of profits is a prima
facie evidence and not a conclusive evidence of partnership. Partners may share it equally or in
any other proportion. Further, it is not necessary that the partners should agree to share losses. It
must be noted that even though a partner may not share in the losses of the business, yet his
liability towards outsiders shall be unlimited.

Mutual agency
There must exist a mutual agency relationship among partners. Mutual Agency relationship
means that each partner is both an agent and a principal. Each partner is an agent in the sense that
he has the capacity to bind other partners by his acts done. Each partner is principal in the sense
that he is bound by the acts of other partners.
Following two important features of the partnership need to be understood.
 A partnership does not have a legal personality. Unlike a company, it is not a legal
person. A third party entering into business transaction with a partnership does not have a
contractual agreement with the partnership; the contractual agreement is between the
third party and all the partners as individuals.
 Partners in a partnership do not have limited liability, and are personally liable for any
liabilities of the partnership business that the partnership cannot pay.

Types of partnership
Partnership-at-will
Where no provision is made between the partners for the duration of their partnership, or for the
determination of their partnership, the partnership is called partnership at will. In such
partnership there is no provision as to when the partnership will come to an end. Any partner is
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free to dissolve the partnership by giving a notice in writing to all other partners of his intention
to dissolve the firm. The firm is dissolved as from the date mentioned in the notice as the date of
dissolution or if no date is mentioned as from the date of the communication of the notice.
[Section 7 and 43]

Particular partnership
Where a partnership is created for any particular adventure or undertaking or for a specific time
period it is called a particular partnership. Such partnership comes to an end on the completion of
venture or on the expiry of the period.

Types of partners
Actual or ostensible partner
A partner who is actively engaged in the conduct of a business is called actual or ostensible
partner. Such a partner is an agent of all other partners for the purposes of the business of the
firm. He can bind himself and other partners for the acts done in the ordinary course of the
business.

Sleeping or dormant partner

A sleeping partner is not known as such as a partner to third parties dealing with the firm. He
may or may not take active part in the conduct of the business of the firm.

Nominal partner
A partner who does not contribute any capital or share in profits, but lends his name to the firm is
called a nominal partner.

Partner in profits only

A partner may agree that a partner shall get a share of the profits only and that he shall not be
liable to contribute towards the losses. But for third parties he is liable for all the debts of the
firm.

Sub-partner
When a partner agrees to share his profits derived from the firm with a stranger, that stranger is
known as a sub-partner.

Silent partner
Those who by agreement with other partners have no voice in the management of the partnership
business. They share profit and losses, are fully liable for the debts of the firm and may take
active part in the conduct of the business.

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Difference between a partnership firm and a joint stock company
S.no. Partnership firm Joint stock company

1 Formation It is created by law.

It is created by an agreement alone.
2 Registration Registration is compulsory.
Registration is optional.
3 Legal entity It is a separate entity or an artificial person
It is not a separate legal entity distinct from it members.
4 Nature of liability It has limited liability i.e. liability is
Partners have joint and several liability restricted to the amount of capital
i.e. unlimited liability.
5 Perpetual succession A joint stock company continues to exist
A firm is dissolved on the death or irrespective of death or insolvency of its
insolvency of a partner. It has no members or directors.
perpetual succession
6 Agency Directors are agent of the company.
A partner is an agent of the firm for the Shareholders are not agents.
purpose of business of the firm.
7 Transfer of interest There is no such restriction for transfer of
A partner cannot transfer his interest shares.
without getting consent from other
partners.
8 Number of persons Minimum one person can carry single
Minimum two competent to contract member company and no limit on
persons are required and a maximum of shareholders for a public company.
20 persons can carry partnership other
than banking business
9 Management All shareholders cannot take part in the
All partners can take part in the management.
management.

RELATIONS OF PARTNERS TO ONE ANOTHER

General duties of partner
Duty to be just and faithful
An ideal partnership is one where there is mutual trust and confidence, and spirit of helpfulness
among partners. As such every partner must be just and faithful to his co-partners. He must
observe utmost good faith and fairness towards other partners of the firm. [Section 9]

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Duty to carry on business to the greatest common advantage
Every partner is bound to carry on the business of the firm to the greatest common advantage. It
implies that every partner must use his knowledge and skill for the benefit of the firm and not for
his personal gain. He must conduct the business with the best of his ability and secure maximum
benefits of the firm. [Section 9]
Duty to render true accounts
Every partner must render true and proper accounts to his co-partners. It implies that each
partner must be ready to explain the accounts of the firm and produce vouchers in support of the
entries. No partner should think of making a secret profit at the expense of the firm. [Section 9]
Duty to provide full information
A partner must give full information to the other partners, in relation to everything affecting the
partnership. [Section 9]
Duty to indemnify for loss caused by fraud
Every partner shall indemnify means (compensate) the firm for any loss caused to it by his fraud
in the conduct of the business of the firm. [Section 10]
Duty to be liable jointly and severally – unlimited liability
Every partner is liable jointly with all the other partners and also severally means separately, to
third parties for all acts of the firm done while he is a partner. The third party may take legal
action for non-payment of a debt or losses incurred as a result of a breach of contract against:
 all the partners jointly, or
 Any individual partner.
The liability of all the partners is not only joint and several but is also unlimited. [Section 25]
Duty to act within authority
Every partner is bound to act within the scope of his actual or apparent authority. Where he
exceeds the authority conferred on him and the firm suffers a loss he shall have to compensate
the firm for any such loss, unless the other partners ratify i.e. accept such acts. [Section 19]

Qualified duties of partner

Duty to attend diligently to his duties
Every partner is bound to attend diligently to his duties in the conduct of the business. A partner
is not entitled to receive remuneration for taking part in the conduct of the business. [Section 12]
Duty to contribute to the losses
The partners are bound to contribute to the losses sustained by the firm. An agreement to share
profits may imply an agreement to share losses also. [Section 13]

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Duty to indemnify for willful neglect
Every partner is under a duty to indemnify the firm for any loss caused to it by his willful neglect
(i.e. failure to perform a duty or to do something which the partner should have done) in the
conduct of the business of the firm. [Section 13]
Duty to use firm’s property exclusively for the firm
It is the duty of every partner to use the property of the firm exclusively for the purposes of the
business. No partner should use partnership property for his personal benefit. [Section 15]
Duty to account for personal profits derived
A partner must ‘account to the firm’ for any benefit obtained, without the consent of the other
partners, from any transaction involving the partnership, the partnership property, the partnership
name or the partnership’s business connection. In other words, if a partner uses the partnership
property, name or business connections to make a secret profit (a personal profit that the other
partners do not know about), the other partners can claim those profits for the partnership.
[Section 16(a)]
Duty not to compete with the business of the firm
Similarly, if a partner competes in business (as in the case of personal profit) with the
partnership, without the consent of the other partners, he is liable to account to the partnership
for all the profits that he earns from the competing business. [Section 16(b)]
Duty not to assign his interest
No partner can assign or transfer his partnership interest to any other person so as to make him a
partner in the business without the consent of all other partners. He can, however, assign his
share of the profit and his share in the assets of the firm but the transferee shall not have any
right to interfere in the conduct of the business during the continuance of the firm. [Section 29]

Rights of partner
Right to take part in the conduct of the business
Every partner irrespective of the amount of capital contribution has an inherent right to take part
in the conduct of the business of the firm. Although one may agree not to participate but right of
participation should be available to each partner. [Section 12]

Right to be consulted
Every partner has the right to be consulted before any matter is decided. Any difference arising
as to ordinary matters connected with the business may be decided by a majority of the partners
in good faith but no change may be made in the nature of the business without the consent of all
the partners. [Section 12]

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Right to have access to the books
Every partner has a right to have access to and to inspect and copy any of the books of the firm.
[Section 12]

Right to share the profits

In the absence of a contract to the contrary every partner has a right to share profits equally
earned by the firm. [Section 13]

Right to interest on capital

No partner is allowed to receive any interest on capital as a general rule because a partner is not a
creditor of the firm. Interest on capital is allowed only when agreed among the partners. Where a
partner is entitled to interest on the capital subscribed investment by him such interest will be
payable out of the profits, earned by the firm. [Section 13]

Right to interest on advances

Where a partner makes for the purpose of the business, any payment or advance beyond the
amount of capital he has agreed to subscribe, he is entitled to interest on it at the rate of 6% per
annum or as agreed upon. [Section 13]

Right to indemnity
Every partner has a right to claim indemnity from the firm in respect of payments made or
liabilities incurred by him:
 In the ordinary and proper conduct of the business and
 In doing such act, in an emergency, for the purpose of protecting the firm from loss, as
would be done by a person of ordinary prudence, in his own case, under similar
circumstances. [Section 13]

Right to retire
A partner has a right to retire.
 With the consent of all the partners or
 In accordance with an express agreement between the parties or
Where the partnership is at will, by giving notice in writing
to all the other partners of his intention to retire. [Section 32]

Right of outgoing partner to share in the subsequent profits

Where a partner has died or has ceased to be a partner by retirement, expulsion, insolvency or
any other cause, the surviving or continuing partners may carry on the business with the property
of the firm without any final settlement of accounts as between them and the outgoing partner. In
such a case in the absence of a contract to the contrary, legal representative of the deceased
partner or the outgoing partner, is entitled at his option to:
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  Such share of the profits as in proportionate to his share in the property of the firm or
 Interest at the rate of 6% on the amount of his share in the property of the firm. [Section
37]

RELATIONS OF PARTNERS TO THIRD PARTIES

Agent of the firm
A partner is the agent of the firm for the purpose of the business of the firm. [Section 18]

Authority of partners
The authority of a partner means the capacity of a partner to bind the firm by his act. Since the
partnership is not a legal person, a partner acts as an agent for the other partners. The authority of
a partner may be actual or implied.

Actual authority
The authority of each partner to take decisions for the business, and enter into transactions with
other parties, may be specified in the partnership agreement. Since the partnership agreement is a
contract, its terms are the terms of a contractual agreement between the partners.

Implied authority
The act of a partner done by him: [Section 19]
 As an agent of the firm
 In the course of business of the firm
 In the name of the firm, or in any other manner expressing an intention to bind the firm.
An authority to bind the firm is known as implied authority of a partner.
In a trading partnership, all the partners have the implied authority to borrow money on the credit
of the partnership, and a lender is under no particular obligation to investigate the purpose of the
loan. This means that unless a lender has knowledge that a partner does not have the actual
authority to borrow on behalf of the partnership, he can rely on the partner’s implied authority.
Every partner within the scope of his implied authority may bind the firm by the following acts:
 Buying and selling good, on behalf of the firm and giving valid receipts for them
 Receiving payments of the debts due to the firm and giving valid receipts or discharge for
them
 Contracting debts and paying debts on behalf of the firm
 Settling accounts with persons dealing with the firm
 Employing servants for the partnership of the firm
 Drawing cheques, accepting or endorsing bills of exchange and promissory notes in the
name of the firm
 Pledging movable property of the firm

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  Suing on behalf of the firm and defending suits in the name of the firm

Restrictions on the implied authority of a partner

Following acts are not included in the implied authority of a partner unless there is any usage or
custom of trade: [Section 19(2)]
 Arbitration Submit : A dispute relating to the business of the firm to arbitration
 Bank account: Open a banking account on behalf of the firm in his own name
 Compromise : Compromise or relinquish any claim or portion of a claim by the firm
 Withdrawal of suit: Withdraw a suit or proceeding filed on behalf of the firm
 Acceptance of liability: Admit any liability in a suit or proceeding against the firm
 Acquisition: Acquire immovable property on behalf of the firm
 Transfer : Transfer immovable property belonging to the firm
 Partnership: Enter into partnership on behalf of the firm.

Liabilities of partner and firm

Liability of a partner for acts of a firm
In order to make a partner liable for any act of the firm, the same must have been done while he
was a partner. The liability of the partner is both joint and several, so that the creditor may
compel any one or more of the partners to discharge the whole of the debts of the firm. [Section
25]

Liability of the firm for wrongful acts of a partner

Where by the wrongful act or omission of a partner acting in the ordinary course of the business
of a firm, loss or injury is caused to any third party or any penalty is incurred the firm is liable to
the same extent as the partner.
In case of fraud, although the firm is liable to the third party for loss caused to the third party by
fraud committed by a partner but as between partners same must be borne by the partner
committing the fraud and cannot be shared among all the partners. [Section 26]

Liability for misapplication by partners

 A partner acting within his apparent authority receives money or property from a third
party and misapplies it or
 A firm in the course of its business receives money or property from a third party, and
the same is misapplied by any of the partners while it is in the custody of the firm, the
firm is liable to make good the loss. [Section 27]

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Liability to indemnify for willful neglect
Every partner is under a liability to indemnify the firm for any loss caused to it by his wilful
neglect (i.e. failure to perform a duty or to do something which the partner should have done) in
the conduct of the business of the firm. [Section 13]

Liability to share losses

The partners are bound to contribute to the losses sustained by the firm. An agreement to share
profits may imply an agreement to share losses also. [Section 13]

Liability to account for personal profits

A partner must ‘account to the firm’ for any benefit obtained, without the consent of the other
partners, from any transaction involving the partnership, the partnership property, the partnership
name or the partnership’s business connection. In other words, if a partner uses the partnership
property, name or business connections to make a secret profit (a personal profit that the other
partners do not know about), the other partners can claim those profits for the partnership.
[Section 16(a)]

Liability to account for profit of competing business

If a partner competes in business (as in the case of personal profit) with the partnership, without
the consent of the other partners, he is liable to account to the partnership for all the profits that
he earns from the competing business. [Section 16(b)]

Holding out
Where a person represents himself or allows partners to do it, he is then estopped from denying
the character that he has assumed and upon the faith of which creditors may have acted. [Section
28]

Requirement
In order to render a person liable as a partner on the ground of estoppel or holding out.

Direct Representation
He must have by words spoken or written or by his conduct represented himself to be a partner

Indirect Representation
He must have knowingly permitted himself to be represented as a partner to the other person.

Knowledge of the third party

The other person must have acted on the faith of such representation and gives credit to the firm.
It does not matter whether the person representing himself or represented to be a partner does or
does not know that the representation has reached the other person giving credit.

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Examples of applications of holding out partner
Retiring partner
Where a retiring partner does not give a public notice of his retirement and the continuing
partners still use his name as a partner he will be personally liable on the ground of holding out
to third parties. [Section 35]

A Minor on attaining majority

If a minor (who was admitted to the benefits of an existing partnership) after attaining majority
act as a partner without giving public notice, he will be liable as a partner by estoppel. [Section
34]

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