The Partnership Act 1932

The Partnership Act (XI of 1932) 

(as amended upto date).

Book Recommended:

1.      The Partnership Act, 1932, by M. Anwar Ghuman.

Definition: Partnership is a relationship among specific persons who have agreed to share the profit of business carried on by all or any one of them acting for all.

Essential elements of partnership in relation to its definition: It has five essential elements, lack of one renders it defective. They are stated as under:

1.      An association of persons of two or more: Minimum membership is two. In case of banking business maximum association is ten whereas
it is twenty for any business other than banking. If the maximum membership exceeds, partnership becomes illegal and to be converted either in private or public limited company.

2.      An agreement entered into by all persons concerned: Partnership does not emerge from status but it is the creation of agreement among individuals and its purpose is to share profits of business. Partnership has no independent existence or personality separate from its members. The rights and liabilities of partners are rights and liabilities of the firm and are enforceable by and against them individually. Mere promise of a share of profits in lieu of work does not necessarily involve partnership. Partnership relates to the voluntary contractual nature of partnership. It emphasizes the fact that partnership can only arise as a result of an agreement express or implied between two or more persons. Partnership considers the actual agreement among the partners and does not regard the status. If son of a partner renders services to business does not attain the status of a partner. He is mere administrator but not partner. Oral agreement does not constitute partnership.

3.      Agreement for business: Business includes every trade, occupation, or profession, which is lawful. Where there is not intention to carry on business, there can be not partnership. Agreement for marriage does not constitute partnership under this Act. Agreement of service also does not fall within the meaning of this Act.

4.      Carried on by all or any one of them acting for all: If two of three partners, A and B, delegate power to administer the business to third one C, and C makes an agreement with other firm as an agent, shall make liable to all of the partners and not alone C. Act of one partner is supposed of all partners and renders all responsible. Act of third person does not make liable to all.

5.      For sharing profits: All four former conditions do not constitute partnership alone if the object of them is not sharing profit. As and how profit is shared is left to the parties whatever they decide. Fix or unfix, monthly or annually, or varied profit, as the case may be agreed. All the remuneration, annuities, or wages are excluded from sharing of profits however they are paid out of profits.

After all we reach at the conclusion that these are the five essential elements, one of which lack renders partnership incomplete and invalid. Five elements must be there to constitute partnership.

Sharing profit is not proof of the existence of partnership: S. 6 of Partnership Act lays down the rule according to which there are certain shares of profit, which do not prove the existence of partnership. Court always regard the intention and contract of the parties in determining the relationship among the partners. Mere intention or implied intention is no more important.

Following are four categories, although sharing of profit in which is made but do not form partnership between the two persons:

1.      Interest on credit: Where a person lends an amount to invest in business purpose of which is to receive interest does not constitute partnership. It does not aim to share profit but to share a fixed sum of amount regardless profit or loss. Although interest is paid out of proceeds of business, which earns profit, but this payment of profit to creditor, do not render it to be a partner. It is mere status and not agreement to share profits carried on by all or one of them.

2.      Remuneration of services: Business may include any person who is not partner in the stricter sense of the Partnership Act, but he leads business to profit. Since he is third person or party who shares just his services to administer the business, so his agreement with firm renders him servant, share of whose services is engaged but he is not a person who achieves the status of partner. His remuneration is also paid out of the profit of business, which comes out of his efforts but since he has not an agreement with firm being partner so sharing of his profit does not give him status as partner.

3.      Annuity to legal heirs: If after the death of a partner, a sum of amount as annuity is granted to the widow or children of deceased partner, does not form partnership. Legal heir may contract with the rest partners to carry on business but his implied constants are no more important. Written and registered agreement must be there. Their receipt of annuity is result of status and not of an agreement. Although payment of annuity comes from profit but due to lack of agreement, it is just status and not partnership.

4.      Goodwill to predecessor: If the previous owner sells his business and receives sum of amount against the goodwill of the business, does not mean that he has became partner of the firm although payment of goodwill is made out of profits.

We have seen in former text that sharing of profit is not a proof of the existence of partnership. Mere object of profit sharing is immaterial if it lacks an agreement to share profit of a business carried on by all or one of the partners. Mere share arising out from profit is not enough if there is no contract of partnership.

Partnership at Will u/s 7: It means the partnership, which is made upon the will of partners. As soon as the any partner leaves the firm, partnership comes to an end.

Essentials of partnership at will: There are two important elements, which constitute partnership at will:

1.      There is not fixed period has agreed upon or the duration of the partners.

2.      There is no provisions made as to the determination of the partnership in any other way.

Whenever a partner thinks just or proper to retire from firm or dissolve it, he mere gives a notice in writing to the other partners of his intention to that effect.

Particular partnership u/s 8: Particular adventure or undertaking forms the particular partnership. Five essential elements of ordinary partnership must exist. Partners do not incur responsibility beyond the limits of particular adventure of undertaking.

This sort of partnership continuous as long as the adventure continuous and it dissolves as the adventure comes to an end. No formality is necessary to effect the dissolution.

General duties of partners u/s 9: There are three duties of partners to each others, i.e., good-faith, rendering accounts, and full information.

1.      Good faith: Person, who wants to be a partner or wants to leave, requires utmost good faith. Courts always give effect to good faith in dealing of business matters. Every contract is pre-supposed made in good faith unless contrary is proved. It seems not legal but has more importance in deciding the certain disputes. The policy of partnership law is to allow the fullest liberty to partners to regulate their mutual rights and liabilities. This would equally apply where the partners intend to act and exercise their power under the partnership articles.

2.      Rendering true accounts: A partner is bound to render true accounts to all the other members. A partner works in dual capacity. As far as he is member of the firm he is partner but due to carrying on business he acts as an agent. Since his act effects to all of the rest partners, therefore he has to render true account to other partners as and when they require. At the time of retiring he has not only to transfer all the accounts but all the monies in his hand to other partners. He has also to produce all the supporting vouchers and documents.

3.      Giving information: Good faith among partners requires not taking undue advantage of others. If one partner has any material knowledge must inform other partners. If any material fact is concealed the whole of transaction is rendered void. In case of selling and buying if one partner conceals any information, which causes loss puts dealing to void.

Indemnification: Although partners are at liberty to conduct business according to their mutual understanding and internal rules and regulations in good faith, but they are not allowed to commit fraud. This involves breach of duty. If act of any partner causes losses to business, it will be the duty of that partner to indemnify the firm against loss occurred due to his act of fraud. He is duty bound to act in the manner of good faith and not to commit fraud.

According to the provision of Partnership Act, partners are not allowed to carry on any business other than the business of firm. Although his business is lawful and not similar to the firm, but even that he is not allowed to do so.

S. 27 of the Contract Act says that no anybody can be restricted to carry on business, which is lawful, but here for the sake of firm, any business other than of firm, even lawful is not allowed.

Mutual rights and liabilities: S. 13 lays down rules, which govern the mutual rights and liabilities of partners. They are six in numbers:

1.      Prohibition of remuneration: Partners have to attend business diligently. If the contrary is not provided, partner cannot draw any salary, remuneration, commission, or otherwise from the business.

2.      Equal profit and loss: Partner shall share equally profit and loss if the contrary is not provided in contract. In the absence of contract presumption is adjudged on the basis of equality.

3.      Interest on capital: Interest on capital is payable according to the share which partner contributes. Such interest becomes payable after business earns profits. Interest cannot be paid from capital because it shall constitute reduction in capital, which is not allowed under law.

4.      Interest on other subscriptions: When partner subscribes any sum other than capital for the purpose of business, he is entitled to get interest on fixed rate of interest @ 6% p. a. This is fixed for any sum contributed other than capital regardless more or less.

5.      Indemnification of partner: Firm is liable to indemnify a partner when he incurs sum to conduct of business. This conduct should be ordinary and proper. Firm is also liable for indemnification when any act is committed in emergency for the protection of business, as would be done by a person of ordinary prudence, in his own case, under the similar circumstances.

6.      Indemnification of firm: Any partner, who causes to firm any loss or damage by willful neglect, shall indemnify the firm. Neglect does not render all partners liable but only person who commits it.

The property of the firm: Whatever property is brought to business is deemed of business if otherwise is not provided in the contract. Any property, which is bought during the course of business and for the purpose including goodwill of the business, is deemed of the business.

Use of firm’s property: Partners cannot use the property of firm in the matter other than business. Contract may provide contrary for the use of property in matters other than business.

Personal profits earned by a partner: Partners are bound to carry on only the business for which they are concerned. Partner is not allowed to use his personal account for firm. He cannot open account in his own name for firm. Firm is an association of persons, so it’s separate name and entity must be used in all matters of firm. Without knowledge and consent any similar business cannot be carried on which competes the firm’s business.

Partner cannot make any profit:

1.      From any transaction of the firm.

2.      From the use of property or business connection of the firm.

3.      By use of the firm name.

This is equitable principle that if he derives any profit for himself from the above transaction must be accounted for and paid to the firm. Where any gift or concession is given by using firm’s name or anything, which is delivered in firm’s name, must be deposited to firm.  Property of firm cannot be used for personal purposes and if so used benefits derived must be paid to firm. While dealing the firm affairs, all discounts and benefits derive, shall be the property of firm. Whenever a person agrees to share profit of business in carrying on business by one or all in result of agreement, he devotes himself for the benefit of firm and not his own.

Partners are required to devote themselves only in the activities of the firm in good faith. Rivalry in business is not allowed. They cannot carry on any business similar with the firm business indirectly or secretly which they:

1.      Where continuity after expiry occurs: Business of the firm may be specific or at will. In case specific object business expires when object is achieved or where business is run at will, expires when any partner shows his will to discontinue the business. But in both cases the rest members can continue business with mutual existing contract after reconstitution. Rights and duties of the partners shall remain the same as they were before the expiry.

2.      Where one or more subject matters are involved: Firm can be constituted for one specific job or more, or at will. Firm may carry out other adventure or undertaking. In any case rights and duties shall remain the same as stated in original agreement.

Partner being as an agent: In partnership every partner is required to take part in activities of the firm in good faith to earn and cannot carry on directly or openly. Neither they can use their own name or firm name for separate similar business. They have to indulge themselves only in one and firm business.

Rights and duties of partners after change in constitution of the firm: Where constitution or structure changes by death of partner and entry of new partner, the rights and duties are changed. Some business is carried on for specific purpose or at will. Upon the completion of project they may carry on the business under the existing agreement among them without forming another contract.

Their rights and duties shall continue us under:

1.      Where change of constitution occurs: Where any change occurs in the constitution of firm due to any reason such as death, resign, or otherwise, firm is reconstituted with mutual agreement, the rights and duties shall remain same as previously regardless any restructuring of the firm.

2.      To Share profits: All partners may agree to carry on business by all. They shall work in duel capacity such as principal and as an agent. Share of profit shall be distributed, as there is only one principal of the firm. Transaction made by one partner binds all of the rest.

Implied authority of a partner as agent: Any act or transactions which is done in the name of firm, make responsible all the rest of partners of the firm. This act or transaction must be in accordance to the provisions of contract and in the usual way and for the business. Authority, which binds the firm, is called implied authority. S. 19(b) lays down the rule that costumes and traditions determine the implied authority, otherwise they are not empowered to do:

1.      Arbitration: They have to resolve all the matters with the mutual agreement. If any partner submits dispute related to the business of the firm to arbitrator shall not bind the firm, as not allowed by the custom and usage.

2.      Opening of account: When usage or custom does not allow, partner cannot open account in bank in his own name transactions of which derive from firm. Account must be opened in the name of firm.

3.      Compromise of claim: Partners are not allowed to compromise on any claim or its portion to set aside or remit. It is not implied authority.

4.      Withdrawal or filing suit: Where suit is filed on the behalf of the firm, they cannot withdraw the suit or they cannot file a suit on the behalf of the firm where they are not expressly empowered to do so.

5.      Admission of liability: They are not allowed to admit any liability in a suit against the firm. Joint decision must be obtained.

6.      Acquisition of immovable property: They cannot acquire any immovable property on the behalf of firm unless they are empowered.

7.      Transfer of immovable property: Any property, which belongs to firm, cannot be transferred without mutual agreement and authority and if transferred, shall be void.

8.      Partnership with others: Partners are not allowed to form contract of partnership with other firm as it injures and harms the object of the firm.

Extension and restriction on implied authority of partner: Implied authority is not provided under this law. Partner may agree on the extent, limitation, and extension of implied authority. Act of the partner is deemed to be a act of the firm and firm is bound to admit it. But if person in dealing knows the restriction shall not bind the rest of partners.

Restriction can be imposed on implied authority. Transaction shall become void if public notice was given. Authority shall be binding if notice is not given.

Authority in emergency: Act of partner, which is done in emergency for the protection of interest of firm or protection from loss, binds the firm liable. Such Act should be done in good faith considering the property as his own. This Act of protection should be as Act of any person of ordinary prudence.

When firm binds of act: A firm is bound only in two cases where act of partner is done as agent of the firm. Such cases are act is done in the name of firm or act is done in manner express or implied to bind firm.

Any act done in his own name shall not bind the firm.

Effects of admission: Where a partner admits the facts in litigation being as agent shall bind the firm as liable. In the case of Yummy v Walls, facts were admitted while litigation.

Effect of notice to act as partner: Notice to one shall be notice to all or notice to agent shall be considered notice to principal. Where a notice is given to partner who habitually acts in business shall considered notice to firm.

Liability of partner for act of a firm: Any act, which is done during the course of business, binds the rest of all partners being the act of firm. All partners shall be liable jointly and as well as severely. Liability ends where public notice is given.

Liability of the firm for wrongful acts of partner: Where a partner commits wrong during the ordinary course of business with or without authority of the rest partners, firm shall be liable as the agent himself is liable. Loss or injury to third person shall also make firm liable.

Liability of firm for misapplication by partners: Whatever a partner does, any act in the ordinary course of the partnership business and within the scope of the authority, he does as agent for the other partners, and every partner is liable for such act of his authorized agent, whether it be the receipt of money or anything else. It is immaterial that other partners are unaware or do not have the possession or control of the money. Misapplication of any money received by a partner or firm during the ordinary course of business, makes firm liable.

Holding out: Where a person acts as agent or represents himself as partner, makes firm liable unless public notice is given. Continue use of the name of deceased person shall not bind his family member liable if any loss or injury occurs. Death needs no notice as it itself is a public notice as insolvency itself is a public notice.

Rights of transferee: A partner cannot transfer his share to any other person because partnership is an agreement among the specific persons. But a partner may transfer his interest to other by way of mortgage or absolute interest. Such transferee has not right as partner, thus he is not allowed to interfere in business, neither he can require accounts nor he can inspect the books of firm. He can only receive the profit of the transferring partner.

If the firm is dissolved or transferring partner ceases to be a partner, he can receive his share in asset of the firm.

Minor being partner: A minor cannot act as partner, but if agreed upon all partners, a minor can share the profits of the firm. Such minor may inspect and obtains copies of the accounts. Share of minor becomes liable but he is not personally liable.

After attaining age of majority, within six months he has to give public notice whether he has elected to be a partner or not. In contrast, he shall be presumed a partner.

Introduction of a partner: New membership of the firm is not allowed until all partners agree upon it.

If any minor later on decides to be a partner, shall not be liable of previous acts of the firm.

Retirement of a partner: A partner may retire:

1.      If all the partners give consents.

2.      By giving notice if partnership is at will.

3.      If agreement provides.

He is discharged against any liability to third person.

Exclusion of a partner: Partners cannot expel anyone of them except in good faith only where contract provides.

Insolvent person ceases partnership from the date on which he is declared insolvent.

Liability of the estate of deceased person: If firm is not dissolved after death of partner according to the provisions of contract, estate of deceased partner shall be liable.

Rights of outgoing partner to carry on competing business: Normally restriction cannot be imposed to carry on any lawful business. But in case of partnership there is exception to this rule. Any outgoing partner may be restricted from carrying on any business similar to the business of firm. But this restriction is imposed only for any specific and reasonable period. Restriction should also be reasonable.

A leaving partner may carry on similar business of the firm and may advertise it. He cannot do the following things:

1.      Name of the firm: He cannot use the name of the firm from where he ceased membership.

2.      Representation: He cannot represent himself being the partner or agent of the firm.

3.      Soliciting customers: He cannot solicit the customers dealing with that firm before he ceased to be a partner.

Right of subsequent profit after leaving: If otherwise is not provided in contract, partner who leaves the firm may claim the subsequent profit arising out after he is left. This profit is claimed where his final settlement is left outstanding till the arising out of profits. He also may charge 6% interest against the use of his estate after leaving. He cannot claim profit if he has sold his estate to firm.

Revocation of continuos guarantee: Where any firm is constituted and contract does not provide anything contrary, continuos guarantee is revoked.

Dissolution of a firm: Dissolution of a firm means breaking up or extinction of the relationship, which subsists among all the partners of the firm. It may take place:

1.      As a result of any agreement among all the partners.

2.      By the adjudication (decision, judgement, determination) of all the partners or of all the partners but one as insolvent.

3.      By the business of the firm becoming unlawful.

4.      Subject to the agreement among the partners, on the happening of certain contingencies, such as:

(1)        Efflux (exhaust) of time.

(2)        Completion of the adventure for which it was entered into.

(3)        Death of a partner.

(4)        Insolvency of a partner.

5.      By intervention of the Court in cases of:

(1)        A partner becomes of unsound mind.

(2)        Permanent incapacity of a partner.

(3)        Misconduct of a partner effecting the business.

(4)        Willful or persistent breaches of agreements by a partner.

(5)        Transfer or sale of the whole interest of partners.

(6)        Improbability of the business being carried on saves as a loss.

(7)        The Court being satisfied on other equitable ground that the firm should be dissolved.

(8)        By a partner giving notice of his intention to dissolve the firm in case of partnership at will.

Application for registration: Application for the purpose of registration may be sent by post or may be delivered personally to the Registrar where the business of the firm is situated. Prescribed form and fee should accompany the application.

Contents of application: Application for registration should state:

1.      Name: Name of the firm should be mentioned in application. Name should not include the words “Government”, “Jinnah”, “Quaid-e-Azam” or any word implying patronage of government either provincial or federal.

Word United Nations or World Health Organization or their abbreviations are also prohibited to use. Prior sanction of Secretary General or Director General must be obtained. Any word declared undesirable by government cannot be used.

Where word is declared undesirable, it should be changed within one month.

2.      Situation: Application should also include the principal place of business of the firm.

3.      Name of other places: Not only the name of place where the principal office is situated should be provided in application but also it should state the names of any other places where the firm carries on business. Where mistakenly any place could not be mentioned in application form, it can be rectified later on.

4.      Date of joining: Application should also state the date on which each partner has joined the firm.

5.      Names and addresses: Names of all partners including addresses should also be the part of application for registration.

6.      Duration: Application should clarify clearly whether firm is for any specific time period. If so, it should state what shall be the duration of firm.

7.      Signature: All partners have to sign the application self or through their agents.

8.      Verification: All the signatories would also verify the statement in the manner prescribed.