PARTNERSHIP ACT 1932

Ghulam murtaza korai iobmPARTNERSHIP ACT 1932INTRODUCTIONPartnership 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 PARTNERSAny 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 DEEDA statement in prescribed form must be delivered to the relevant Registrar stating:Name of the firmNames 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 partnerProfit Sharing RatioInterest on drawingsMethod of valuation of goodwill

PARTNERSHIP DEEDSettlement 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 PartnershipThere 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 PartnershipAll 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 PartnershipOnly 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 businessEssential 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 PartnershipBusiness 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 partnershipEssential 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 PartnershipIllustrations:

(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 DISTINGUISHEDVery 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 DISTINGUISHEDCO-OWNERSHIPPARTNERSHIP1. 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' DISTINGUISHEDThe main points of difference between a partnership and a companyPARTNERSHIPCOMPANY1. 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' DISTINGUISHED4. 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' DISTINGUISHED8. 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' DISTINGUISHED13. 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 realintention 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 businessTYPES OF PARTNERSHIPPartnership 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 PARTNERSHIPParticular 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 PartnersActual or Ostensible Partner: He takes an active part in the conduct of the businessHe 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 PartnersSleeping 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 PartnersSilent 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 AnotherGeneral 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 AnotherDuty 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 AnotherDuty 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 AnotherRight 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 secretsPartnership propertyThe 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 firmRelations Of Partners To Third PartiesPartner 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 firmRelations Of Partners To Third PartiesImplied 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 Parties3. 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 PartnerStatutory 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 firmThe 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 partnerRetirement of a partnerExpulsion of a partnerInsolvency of a partnerDeath of a partnerDissolution Of A FirmDissolution of a firm:The dissolution of partnership between all the partners of a firm is called the "dissolution of the firmDissolution 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 FirmDissolution 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 FirmRight 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.