GHULAM MURTAZA KORAI

I OBM
PARTNERSHIP ACT 1932
INTRODUCTION
Partnership remains a common mode of business
enterprise in Pakistan for small to medium business set-
ups. Partnerships are normally formed where there is a
desire to have some structural flexibility along with some
formality of relationship between partners. There is no
compulsory requirement for registration of a partnership
in Pakistan . Nonetheless some litigation and tax related
consequences and advantages are linked to a registered
partnership.

Legal regime for establishment and regulation of
partnerships in Pakistan is stated in the Partnership Act,
1932 which defines a partnership in the following terms:

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".
NUMBER OF PARTNERS
Any twenty or less persons desiring to carry out a lawful
commercial activity or a profession may form a
partnership except in certain cases e.g. where twenty or
more persons may form partnership to undertake
practice as lawyers or accountants or any other practice
which cannot be carried out as a limited liability
company under the provisions of law. In all other cases
where the number of intended partners increases beyond
the figure of twenty a company should be incorporated.

A partnership may be registered with the Registrar of
Firms of an area where the office of the firm is situated or
proposed to be situated.
PARTNERSHIP DEED
A statement in prescribed form must be delivered to the relevant
Registrar stating:
Name of the firm
Names in full and permanent addresses of the partners
Nature and Place or principal place of business of the firm
Names of any other places where the firm carries on business
Date when each partner joined the firm (Date of
commencement of partnership)
Duration of the firm
Amount of capital of each partner
Profit Sharing Ratio
Interest on drawings
Method of valuation of goodwill

PARTNERSHIP DEED
Settlement of accounts in case of retirement, death of
a partner or dissolution of a firm.
The afore stated statement must be signed by all the
partners of the firm for the time being or any
authorized agent on their behalf. Furthermore, the
statement must be verified by the persons signing it.
Once Registrar is satisfied that the abovementioned
requirements have been complied with he records
entry of the statement in Register of Firms and files
the statement.
Essential Elements of Partnership
There are five important elements necessary to constitute
partnership.-
(i) There must be an association of two or more persons
to carry on a business.
(ii) There must be an agreement entered into by all the
persons concerned.
(iii) The agreement must be to share the profits of a
business.
(iv) The business must be carried on by all or any of the
persons concerned acting for all.
(v) Mutual Agency: Mutual Agency relationship means
that each partner is both an agent and a principle.
Essential Elements of Partnership
All the above elements must be present before a group of persons
can be held to be Partners. Each of these elements are discussed
below in their necessary details.

(i) There must be an association of two or more persons to carry on
a business. A group of persons with no legal relations inter se, i.e. no
mutual rights and liabilities between themselves would not be a
partnership.
(ii) There must be an agreement entered into by all the persons
concerned. This requirement emphasizes the fact that partnership
can only arise as a result of an agreement, express or implied,
between two or more persons there must be an agreement entered
into by all the partners. Partnership is thus created by a contract; it
does not arise by the operation of law. Joint ownership may arise by
the operation of law, but not partnership.
Essential Elements of Partnership
Only lawful Agreement. The contract which is the foundation of
partnership, must itself be founded on good faith, and must be for a
lawful object and purpose and between competent persons. In short
it is subject to the ordinary incidents and attributes of contracts.

(iii) The Agreement must be to share the profits of a business.-The
object of the agreement or contract is to carry on a business. And
the business which the partners carry on must, of course, be legal.
Where there is no partnership. the mere fact that several persons
own something in common which produces returns and that such
person divide those returns according to their respective interests,
does not make them partners.

For instance A and B are co-owners of a house let to a tenant and A
and B divide the net rent between themselves. A and B are not
partners, because receiving rent of a house let to a tenant is not a
business
Essential Elements of Partnership
(a) Term "Business". Defined: The term business has been defined
(in S. 2) to include every trade, occupation and profession. This
definition, which has been adopted from the English Act, is very
general and affords very little assistance when dealing with border line
cases. Under-hill has also criticized this definition of the term as being
rather vague. It is submitted that in arriving at a conclusion as to when
persons can be said to cam/on business, each case must be decided on
its own merits, and the only practical guide seems to be dictum of
James L.J. When he observed (in Smith V. Anderson) That this word is
to be understood in any sense in which any man of business would use
the word. Broadly speaking, it refers to any activity which, if successful,
would result in profit.


Essential Elements of Partnership
Business may be temporary or permanent (i.e. indefinite). But it must
be in existence. An agreement to carry on business at a future time does
no result in present partnership
(b) Sharing of profits: The sharing of profits is an essential element
of a partnership agreement. The members of religious or charitable
societies and clubs are not partners, as the idea of sharing, or even
making of profits is not involved in these societies associations.
c) Profits of business: The term profits refers to net profits that is to
say the excess of returns over advances, or in other words, the excess of
what is obtained over the cost of obtaining it. The English Partnership
Act expressly provides that sharing gross returns will not constitute a
partnership
Essential Elements of Partnership
(iv) Carrying of business:- The last element is that business must
be carried on by all or by any of the persons concerned acting for all.
This shows that the persons or the group who conduct the business do
so as agents for all the persons in the group, and are, therefore, liable to
account to all. In fact, the relation of principal and agent amongst the
partners i.e. mutual agency, is the true test of partnership. A partner is
both a principal and an agent. While the relation between partners
inter se is that of principals, but in relation to third parties for the
business of the firm, they are agents of the firm and also of one another.
(v) Agency: Each partner is an agent in the sense that he has the
capacity to bind other partners by his acts done. Each partner is a
principle in the sense that he is bound by the acts of other partners.
Essential Elements of Partnership
Illustrations:

(1) A and B buy 100 bales of cotton, which they agree to sell on their
joint account. A and B are partners in respect of such cotton.

(2) A and B buy 100 bales of cotton, agreeing to share the cotton
between them. A and B are not partners.

(3) A and B agree to work together as carpenters. A is to receive all the
profits and pay a salary to B,-A & B are not partners.

(4) A and B enter into a "partnership agreement whereby A is to have
no share in either the profits or the loss of the business - A and B are
not partners.
PARTNERSHIP AND CO-OWNERSHIP
DISTINGUISHED
Very much akin to partnership is the legal conception of co-ownership. The
distinction between the two is important. Now, partners enjoy common
rights over and interest in, in firm's property; all co-owners of property are,
however, not partners, co-ownership, therefore though an incident of
partnership must be distinguished from it. Co-ownership of a property does
not, in itself, constitute a partnership between the co-owners, whether they
share any profits arising from it or not. Thus, A and B are co- owners of a
house let to a tenant A and B divide the rents between themselves. B
contends that A is his partner. Will he succeed? The answer is no. B will not
succeed. A and B are not partners but co-owners. But if A and B use that
house as a hotel, they would become partners in the business of hotel -
keeping.

Similarly, co-owners of a ship are not necessarily partners. If, however,
they employ the ship in trade or adventure on their account, they would
become partners in such trade.


PARTNERSHIP AND CO-OWNERSHIP
DISTINGUISHED
CO-OWNERSHIP
PARTNERSHIP
1. Not always a result of agreement.
1. Always a result of agreement.
2. Does not always involve Community of profits or losses.
2. Involves Community of profits and losses.
3. Co--owner can transfer his interest without consent of other co-owners.
3. A partner can not do so.
4. Co-owner is not agent of other co-owners.
4. Partners are agents of one another.
5. Co-owner has no lien on thing owned by all co-owners.
5. A partner has such lien.
6. Co-owner is entitled to partition.
6. Partner is entitled to have partnership dissolved and take share of the
proceeds.

'PARTNERSHIP' AND 'COMPANY'
DISTINGUISHED
The main points of difference between a partnership and a company
PARTNERSHIP
COMPANY
1. A partnership is not a distinct legal person, but is made of the
persons composing it.
1. A company is a distinct legal person.
2. Creation of Partnership is purely a matter of agreement between the
parties such an agreement need not even be in writing.
2. Creation of Company involves elaborate legal formalities.
3. In a firm partner can not transfer his interest with the consent of the
other partners.
3. Shares in a Company (especially, in a public Company) are generally
freely transferable.


'PARTNERSHIP' AND 'COMPANY'
DISTINGUISHED
4. Each partner is prima facie the agent of others, and can bind
them by his contract made in the course of business of the
partnership.
4. Shareholders in a Company are not the agents of one another.
5. Each partner is liable in full for the debts of the firm.
5. The liability of Companys shareholders is limited by shams or
by guarantee.
6. A partner can not contract with his firm.
6. A share holder in a company can contract with the company.
7. Partners may make any private arrangements among
themselves. For instance a partner may buy his partners share.
7. Arrangements in regard to Companies are regulated by law
and statute for instance a company cannot buy its member's
shares, but a partner can.

'PARTNERSHIP' AND 'COMPANY'
DISTINGUISHED
8. The Maximum number of partners can be twenty. But in banking
business it is ten.
8. There is no maximum number of share holders laid down by the law
in a public company though the minimum is seven. In a private
Company, the minimum is two, and the maximum is fifty.
9. The death or retirement of a partner dissolves a firm.
9. Death or retirement of a share holder does not dissolve the company.
10. Property may be the common property of partners.
10. Property belongs to the company and not to its members.
11. Restrictions contained in a partnership deed will not affect third
parties, who are not aware of such restrictions.
11. On the other hand restrictions in the Articles of a Company affect
third parties also.
12. A firm cannot sue and be sued in its own name.
12. A company can sue and be sued in its own name.

'PARTNERSHIP' AND 'COMPANY'
DISTINGUISHED
13. Decree against a firm can be executed against the
partners.
13. A Decree against a company cannot be executed against
its shareholders.
14. Registration is optional.
14. Registration is compulsory.
15. A firm having no separate legal existence, cannot be
shareholder of company.
15. A company on the other hand can be a shareholder of
another company.

Test of Partnership.
Although the right to participate in the profits of a
business is a strong test of partnership, yet whether
the relationship does or does not exist must depend
on the real
intention and contract of the parties, the real test as
whether such participation in profits constitutes the
relationship of principal and agent between the
persons taking the profits and those actually carrying
on the business
TYPES OF PARTNERSHIP
Partnership at will:
Where no provision is made by contract between the
partners for the duration of their partnership, or for
the determination of their partnership, the
partnership is "partnership at will".
Particular Partnership:
A person may become a partner with another person
in particular adventures or undertakings.
TYPES OF PARTNERSHIP
Particular partnership duration of.-
Partnership Deed clearly stating formation of
Partnership, to run agency acquired by plaintiff at a
particular station from a particular company.
Partnership, held formed for a single venture and
could continue only as long as agency lasted.
Partners if wishing to carry on partnership on expiry
of agency for running some other business, could do
so only by a fresh agreement.
Types of Partners
Actual or Ostensible Partner:
He takes an active part in the conduct of the business
He is liable to third parties.
He must give public notice of his retirement.
His insanity or permanent incapacity to perform his
duties may be ground for the dissolution of the firm.
Types of Partners
Sleeping or Dormant Partner:
He does not take active part in the conduct of
business.
He is liable to third parties.
He needs not give public notice of his retirement.
His insanity is no ground for dissolution of the firm.


Types of Partners
Silent Partner: He lends his name to the firm without
having any real interest in the firm. He neither
contributes to the capital nor shares the profits or
takes part in the conduct of business.
He is liable to third parties if he is an actual partner.
He must give public notice of his retirement.
His insanity is no ground for the dissolution of the
firm.


Relations of Partners to one Another
General duties of partners: Partners are bound to
carry on the business of the firm to the greatest common
advantage, to be just and faithful to each other, and to
render true accounts and full information of all things
affecting the firm to any partner or his legal
representative.
Fiduciary obligation: Their mutual confidence is the
life blood of the concern. It is because they trust one
another that they are partners in the first place; it is
because they continue to trust one another that the
business goes on."Likewise, a partner cannot make secret
profit at the expense of the firm.
Relations of Partners to one Another
Duty to attend diligently (carefully) to his duties in
the conduct of the business.
Duty not to claim remuneration for taking part in the
business.
Duty to contribute equally to the losses of the
business.
Duty to hold and use firms property for business
purpose only.
Duty to account for and pay the personal profits from
transactions of the firm etc.
Relations of Partners to one Another
Duty to account for and pay the personal profits from
competing business.
Right to take part in the conduct of the business.
Right to express opinion.
Right to share profits equally.
Right to be indemnified.
Right to prevent the induction of a new a partner.
Right to retire in the partnership at will.
Right not to be expelled.
Relations of Partners to one Another
Right to have access to books.- Under sub-clause (d)
of the Section every partner has a right to have a access
to, and inspect and copy, any of the books of the firm. A
partner need not exercise this right personally, but may
have the accounts inspected by his agent, as for instance,
by his accountant.
In one English case, a sleeping partner wished to sell his
interest to the other partners. He therefore authorized a
valuer to inspect the accounts and to ascertain the value
of his interest. the other partners objected, and the court
held that they could not have any objection, unless, of
course there was reasonable ground for objecting, as for
instance, the protection of trade secrets
Partnership property
The property of the firm, as stated above in the
section itself, also includes its goodwill. The term
goodwill is not defined by the Act, and may be said to
be "the whole advantage, whatever it may be, of the
reputation and connection of the firm". It is
something more than the mere chance or probability
of old customers maintaining their connection with
the firm
Relations Of Partners To Third Parties
Partner to be agent of the firm:
Subject to the provisions of this Act, a partner is the
agent of the firm for the purposes of the business of the
firm.
Partner Principal as well as an Agent.- This is one
of the most important tests of partnership as agency is
the essence of the relationship of partnership. Therefore,
a partner is both a principal and an agent. While the
relation between partners interest is that of principals,
they are agents of the firm and of one another in relation
to third parties for the purposes of the business of the
firm
Relations Of Partners To Third Parties
Implied authority of partner as agent of the firm:
(1) Subject to the provisions of section 22, the act of partner which
is done to carry on, in the usual way, business of the kind carried on
by the firm, binds the firm. The authority of a partner to bind the
firm conferred by this section is called his "implied authority.
Examples of Implied authority of a partner.-
1. A partner can buy on the credit of the firm any goods of a kind
used in its business.

2. Similarly, a partner may hire on the credit of the firm, any goods
of a kind used in its business.

Case.- A partner of firm, whose business it was to trap wild
elephants, hired an elephant to be used for trapping wild elephants,
and one of the terms of hire was that the hirer should pay Rs.
5,000/- if the elephant died during the period of hire. It was held
that other partners also were bound by this term.
Relations Of Partners To Third Parties
3. A partner may engage servants or agents, and he
may also discharge such persons, although he can
not discharge them against the will of his co-
partners.

4. A Partner can institute and defend suits in the
name of the firm. It has been held in England that a
partner, who attends to the affairs of the firm has an
implied authority to employ a solicitor to defend a
suit filed against the firm.
Restrictions on the Implied Authority of the
Partner
Statutory Restrictions: In the absence of any
agreement, the implied authority of a partner does
not empower him to do the following acts:
To open a bank account on behalf of the firm in
partners own name.
To withdraw suit or proceedings filed on behalf of
the firm.
To acquire any immovable property on behalf of the
firm.
To submit a dispute to arbitration relating to the
business of the firm.
Reconstitution of the firm
The reconstitution of a firm takes place when there is
any change in the composition of the partnership.
The various ways of the reconstitution are:
Introduction of a partner
Retirement of a partner
Expulsion of a partner
Insolvency of a partner
Death of a partner
Dissolution Of A Firm
Dissolution of a firm:
The dissolution of partnership between all the partners of
a firm is called the "dissolution of the firm
Dissolution by agreement:
A firm may be dissolved with the consent of all the
partners or in accordance with a contract between the
partners.
Compulsory dissolution:
A firm is dissolved -
(a) by the adjudication of all the partners or of all the
partners but one as insolvent, or
(b) by the happening of any event which makes it
unlawful for the business of the firm to be carded on or
for the partners to carry it on in partnership:
Dissolution Of A Firm
Dissolution on the happening of certain
contingencies:
Subject to contract between the partners a firm is
dissolved-
(a) if constituted for a fixed term, by the expiry of
that term;
(b) if constituted to carry out one or more adventures
or undertakings, by the completion thereof;
(c) by the death of a partner; and
(d) by the adjudication of a partner as an insolvent.

Dissolution Of A Firm
Right of partners to have business wound up
after dissolution:
On the dissolution of a firm every partner or his
representative is entitled, as against all the other
partners or their representatives, to have the
property of the firm applied in payment of the debts
and liabilities of the firm, and to have the surplus
distributed among the partners or their
representatives according to their rights.