Business Law

Assignment 02
Partnership Act 1932

By:
Rabia Eman
SP19-BAF-009
Submitted to:
Sir Shaukat Amer

Department of Management Sciences

COMSATS University of Information Technology,

Attock Campus
 Question:
“Please discuss partnership as a business organization, formed  Under Partnership Act
1932?”

Answer:
When we talk about the forms a business organisation can take, one of the most prominent ones
is a partnership. it is a very popular entity to carry out business. Let us take a look at some
important features of a partnership and also its

Partnership:

A partnership is an arrangement where parties, known as business partners, agree to cooperate to

advance their mutual interests. The partners in a partnership may be individuals, businesses,
interest-based organizations, schools, governments or combinations.

Partnership Act 1932:

we have a definite law that covers all aspects and functioning of a partnership, The Partnership
Act 1932. The act also defines a partnership as “the relation between two or more persons who
have agreed to share the profits from a business carried on by either all of them or any of them
on behalf of/acting for all”. So in such a case two or more persons come together as a unit to
achieve some common objective. And the profits earned in pursuit of this objective will be
shared amongst themselves.

The entity is collectively called a “Partnership Firm” and all the individual members are the
“Partners”. So let us look at some important features.

 Not separate legal Entity:

A partnership firm is not a separate legal entity. But according to the act, a firm must be formed
via a legal agreement between all the partners. So a contract must be entered into to form a
partnership firm. Its business activity must be lawful, and the motive should be one of profit.
Similarly, a partnership contract to carry out illegal work, such as smuggling, is void as well.

 Unlimited Liability

all partners have unlimited liability in the business. The partners are all individually and jointly
liable for the firm and the payment of all debts. This means that even personal assets of a partner
can be liquidated to meet the debts of the firm. If the money is recovered from a single partner,
he can, in turn, sue the other partners for their share of the debt as per the contract of the
partnership.
  Limited number of partners

As we know that there should be a minimum of two members and maximum numbers are 20.
However, the maximum number will vary according to a few conditions. For a business of any
other nature, the maximum number is twenty. If the number of partners increases it will become
an illegal entity or association.

 Mutual agency:

In this type of organisation, the business must be carried out by all the partners together. Or
alternatively, it can be carried out by any of the partners acting for all of them or on behalf of all
of them. So this means every partner is an agent as well as the principal of the partnership. He
represents the other partners in some cases so he is their agent. But in other circumstances, he is
bound by the actions of any of the other partners aking him the principal as well.

 Difficulty in transfer of ownership:

A partnership cannot carry out in perpetuity. The death or retirement or bankruptcy or insolvency
or insanity of a partner will dissolve the firm. The remaining partners may continue the
partnership if they so choose, but a new contract must be drawn up. Also, the partnership of a
father cannot be inherited by his son. If all the other partners agree, he can be added on as a new
partner.

Formation of a Partnership:
 The Most Important Step for Formation of Partnership is Entering Into An Agreement by
the Partners of a Firm Which may be Oral or Written.
 However, it is advisable that the Partnership Agreement be in a Written Form.
 The Partnership Agreement in the Written Form is Called “ Partnership Deed”
 The Partners Must Be Selected With Care.
 All the Legal Requirements of A Valid Contract Must be Met.
 The Rights and Duties Must Be Explained in Detail.
 Although the Registration of a Partnership is not Mandatory Under the Relevant Laws,
but it is Advisable.

Partnership Deed:
We Have Already Learnt that a Partnership Agreement Which is in the Written Form is Called “
A Partnership Deed”

A Partnership Deed Must Contained the Following Provisions:

  The Name of the Firm.
 The Name and Addresses of Partners.
 The Nature of the Business of the Firm.
 The Town and Places Where the Business will be Carried on.
 The Amount of Capital Invested by each Partner.
 The Duration of the Partnership.
 The Ratio of Sharing Profit and Losses.
 The Rate of Interest, if any” Allowed on Capital.
 The Rate of Interest on Loans Given by the Partners to the Firm.
 The Rate of Interest to be charged on drawings.
 The amount a partner can withdraw from the firm.
 The amount of salary or commission payable to any partner for his services.
 The circumstances under which a firm shall dissolve.
 The rights, duties and liabilities of partners.
 The matter of valuation of goodwill.
 The period of accounting year.
 The keeping of Proper Books of Accounts and Preparation of Accounts.
 The rules regarding retirement, .death and admission of a partner.
 The methods of solving disputes among the partners and appointment of arbitrator.
 Power of a partner to retire after giving notice.
 The rules to determine the amount to be paid to the deceased partner and manner of
payment.
 The rules of expulsion of partner from the firm.

Procedure for Registration of a Firm:

 The following is a Brief Procedure for the Registration of a Firm:
 An Application on the Prescribed Form After Depositing the prescribed fee will be
submitted to the Registrar of the Firms .
 The Application Must Contain the following.
 The Name of the Firm.
 The Place or Principal Place of the Firm.
 The Names of Other Places Where the Firm Will Operate.
 The Names and Addresses of the Partners.
 The Partners Date of Joining the Firm.
 The Duration of the Firm.

Certificate of Registration:
The Registrar of the Firm will Examine the Application and if satisfied with the application, he
will register the firm by entering the Name in the Register of Firms and Issue the Certificate of
Registration. With the Issuance of Certificate of Registration the Partnership Firm would be
considered as a Registered Firm.

Effects of Non- Registration of a Firm:

As We Have Already Learnt that the Registration of a Firm is not Mandatory under Partnership
Act 1932 but there are certain Implications if a Partnership Firm is not Registered. These are :.
 A Partner can not Sue another Partner or Firm for Breach of Partnership Contact if the
Firm is not registered. For example a Partner of an Unregister Firm and he is not getting
his share of profit. So in this situation neither he Sue other Partners or Firm for his profit
which is due under the Partnership Agreement.
 An Unregistered Firm cannot Sue any third party. For example an Unregistered Firm
cannot sue B, a Purchaser, for recovery of money due on account of sale of goods to him.
 An Unregistered Firm cannot Sue Any Partner for Enforcement of Partnership Contract.
For example A as a Partner has not paid the full amount of capital which was due from
him. Now the Firm cannot sue him for the recovery of remaining amount of capital due
from him.
 A Third Party can Sue an Unregistered Firm but the such firm cannot sue a Third Party ,
as we have already seen.

Rights of Partners Under the Partnership Act 1932:

The Significant Rights of Partners Under the Partnership Act 1932 are the following.

 Right to Take Part in the Business and Right to Express Opinion: Every Partner has
the right to take part in running affairs of the business and involved in the decision
making process. No Partner can stop other partner from doing so.

 Right to Inspect Books: Similarly Every Partner has the right to inspect books related to
the partnership where he is a Partner.

 Right to Share Profits: In accordance with the Partnership Contract between the
Partners, every Partner has the right to get his share of profit as agreed in the Contract of
Partnership.
 Right to take Interest on Capital: In addition to get agreed share of Profit, every
Partner has the right to get Interest on Capital if stipulated in the Contract of
Partnership.
 Right to take Interest on Advances: In accordance with the Partnership Contract
between the Partners, every Partner has the right to take Interest on Advances he
 provided for the business of the Partnership Firm where he is Partner, as agreed in the
Contract of Partnership.
 Right to be Indemnified: Every Partner has the right to be indemnified ( Getting Legal
Protection) for his acts related to business of the Partnership Firm where he is a Partner.
 Right to Act in Emergency: As we have already seen that every Partner has the right to
take part in running affairs of the business and involved in the decision making process.
No Partner can stop other partner from doing so. During the course of this process he has
the right to act in emergency in the best interest of the business.
 Right to Retire and to Carry on Competing Business after Leaving the Firm: Every
Partner of a Partnership Firm has the right to retire in accordance with the Partnership
Contract where he is a partner and to carry on Competing Business after Leaving the
Firm.

Duties of Partners Under the Partnership Act 1932:

The Significant Duties of Partners Under the Partnership Act 1932 are the following.

 Duty to Carry On Business in the Best Interest of the Partnership Firm.

The right of a Partner of a Partnership Firm to take part in running affairs of the business and to
get involved in the decision making process is subject to his act in the best interest of the
Partnership Business where he is a partner. Every partner is bound to carry on the business for
the common benefit of the Partnership Firm and not for his personal gain. In this respect he will
have to act in a just and faithful manner by using his best of Knowledge and Skills.

 Duty to Render Accounts:

Every Partner has the duty to render true and proper accounts to his Co-Partners. This includes
all the business supporting documents and vouchers.

 Duty to Provide Information:

Every partner must give full information about the firm to the Co-Partners. A Partner Must not
conceal any information of the firm from the other Partners.

 Duty to Indemnify:

Every partner is bound to indemnify the firm for any loss caused to it by the fraud in conduct of
the business of the Partnership Firm where he is a Partner.

 Duty to Act Diligently:

We have already noted that the right of a Partner of a Partnership Firm to take part in running
affairs of the business and to get involved in the decision making process is subject to his act in
the best interest of the Partnership Business where he is a partner.

 Duty to Share Losses:

As we have already seen that in accordance with the Partnership Contract between the Partners,
every Partner has the right to get his share of profit as agreed in the Contract of Partnership.
Similarly every Partner has the duty to share in the losses as stipulated in the Contract of
Partnership

 Duty to Use Firm’s Property for Firm:

It is the duty of every Partner of a Partnership Firm to hold and use the property of his firm only
for the purposes of the business of the firm.

 Duty to Account for ( to Record) for Personal Profits:

If a partner gets any benefit without the consent of other partners from the partnership business
where he is a partner , he must account for it as a partnership business profit

 Duty to Account for Profit Earned by a Partner out of Similar Business: .

A Partner must not carry out on any business similar to that of the Partnership Firm where he is
partner. If he does so, he is bound under Partnership Act 1932 to account for and pay to the firm
all the profits made by him in that business.

 Duty to be Liable Individually and Jointly:

Every Partner is liable , individually and jointly , for all acts of the firm done while he is a
partner. Please read it along with the unlimited liability concept of partnership. It means that that
if the assets of the firm is not sufficient to meet the liabilities of the business, the partners have to
pay the remaining amount of liabilities out of personal assets.

 Duty not to Transfer Rights.

A Partner can not transfer his rights and interest in the Partnership Firm where he is a partner, to
an Outsider to make him partner in the business without the consent of his Co-Partners.