Partnership Act, 1932

Nature of Partnership
Section 4 of the Partnership Act, 1932 defines "partnership", "partner", "firm" and "firm
name":

'"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".

Partnership is defined as a voluntary contract between two or more competent person to place
their money, effects, labour and skill, or some or all of them, in lawful commerce or business,
with the understanding that there shall be a communion of the profits thereof between them.

Halsbury defines a partnership as "the relation which subsists between persons carrying on a
business in common with a view of profit".

Partnership is a relation between individuals who have entered into agreement for the purpose of
sharing profits of a business. (PLD-1985 Karachi-85 (90)).

Partners as Agents:

The person who carries on business on behalf of others can be termed as agent of other partners
and is liable to them. Section 2(a) defines an "act of a firm" means any act or omission by all
the partners, or by any partner or agent of the firm which gives rise to a right enforceable by or
against the firm.

So each partner is an agent of others and has the capacity to bind others with his acts (Section
18). Hence, relationship of partners can be termed as that of an agency so no consideration is
necessary to create a partnership.

However, bear in mind Section 185 of the Contract Act provides that no consideration is
necessary to create an agency.

Legal status of a partnership:

A partnership has no legal existence separate from its partners. In law, a firm is neither a legal
nor a natural person. Hence, the rights and obligations of a firm are the rights and obligations of
partners of a firm (Section 4).

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Essential Elements of Partnership:

There are four important elements necessary to constitute partnership:

a. There must be an association of two or more persons to carry on a business.

b. There must be an agreement entered into by all the persons concerned.
c. The agreement must be to share the profits of a business.
d. The business must be carried on by all or any of the persons concerned acting
for all.

All the above elements must be present before a group of persons can be held to be
Partners.

Each of these elements is discussed below in their necessary details.

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.

(5) A and B are joint owners of a ship. This, by itself does not make them partners.

(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. A partnership firm with just one member would not be a firm.

Partnership Act is silent as to maximum number of members. However, Companies Ordinance,

1984 Section 14 provides that maximum number of partners in a legal partnership should not
exceed 20.

(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.

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Joint ownership may arise by the operation of law, but not partnership. Thus on the death of a
person, his children may inherit the family properly jointly together with the family business and
may share the profits of the business equally; but they are not, for that reasons, partners.

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 for profits and to share it. Sharing of losses and gross receipts
do not constitute a partnership.

The business which the partners carry on must, of course, be legal. Agreement to share profits
can be either express or implied.

Pursuant to Section 13(a), partners in the absence of any agreement are entitled to share equally
in the profits earned and to contribute equally in the losses sustained by the firm. Agreement to
share profits implies an agreement to share losses.

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.

(iv) The business must be carried on by all or any of the persons concerned acting for all - It is
not necessary for every partner to actively take part in business of a firm. Important thing is that
business is carried on by all or by any of the partner on behalf of others.

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 partner’s 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.

But in order to bind his co-partners, it is necessary for the partner acting on behalf of the firm to
contract in the firm name or in any other manner expressing or implying an intention to bind his
co-partners. A partner contracting in his own name can create only a personal liability and not
the collective liability of the firm.

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Kinds / Types of partnership:
A partnership is created by an agreement which can be express or implied. All the essential
elements of a valid agreement must be present.

Partnership Deed:

Is the document in which partnership agreement is written and all terms and conditions are
incorporated therein? All partners and witnesses sign the document which is then properly
stamped and registered.

Duration of the partnership:

Can be fixed within the partnership deed (See Sections 7 & 8).

Partnership at Will:

Where no provision is made by contract between the partners for the duration of their
partnership, or for determination of their partnership, the partnership is called partnership at will
(Section 7).

Partnership for fixed term:

It arises where partners fix the duration of business of their firm for a definite period of time.
The partnership expires automatically at the expiration of such term.

Particular Partnership:

When a partnership has been formed by for a particular undertaking or adventure, it is known as
a particular partnership (Section 8).

Particular partnership is dissolved by the completion of the adventure or the undertaking for
which the partnership was formed.

General Partnership:

It is constituted in relation to business in general. Liabilities of partners extend to all acts,

business and transactions of the firm.

General duties of partners:

Section 9 deals with General duties of partners:

Partners are bound to carry on the business of the firm to the greatest common advantage, to be
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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.

(Sec. 9) imposes the following two paramount duties and liabilities on a partner:
1. Duty of good faith and common advantage.
2. Duty to render true accounts and full information.

1-Duty of good faith and common advantage:

Provides that partners are bound-

1. To carry on the business of the firm to the greatest common advantage, and

2. To be just and faithful to each other. This duty is very widely and generally worded.
In practice, it means that all the endeavors of partner must be directed towards
securing maximum profit for the firm, thus, where a partner was authorized to sell
property of the firm for 6000 pound and he sold it for a much higher price and
concealed the excess price, he was held bound to share it with his co-partner. (Dunne
V English, 18 eq 524).

This is a fundamental duty imposed upon partners by the Act, and can not be excluded by a
mutual agreement to the contrary.

2-Duty to render true accounts and full information:

Is also imposed upon a partner by Sec. 9 This duty of a partner is based on the principle of
Uberriance fidei (utmost good faith), and calls upon partners to make full and frank disclosures
of all facts affecting the affairs of the firm.

Thus, when a partner is in possession of vital information about the affairs or assets of the firm,
and concealing such information, if he makes a contract with his Co-partners, the contract can
be avoided by the co-partners (Law V Law (1905) 1 ch. 140).

3. Duty to indemnify for loss caused by fraud:

Every partner shall indemnify the firm for any loss caused to it by his fraud in the conduct of the
business of the firm (Section 10).

4. Duty to attend diligently to his duties (Section 12 b)

Every partner is bound to attend diligently to his duties in the conduct of the business.

5. Duty not to claim remuneration (Section 13 a):

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But the partnership agreement may provide for payment of any amount of remuneration to the
working partners. However, in the absence of such a provision, partners are not entitled to any
salary or remuneration.

6. Duty to share losses (Section 13 b):

Subject to contract to the contrary between the partners, they are entitled to share equally in the
profits earned by the firm. In such a case, they are likewise also liable equally to the losses.
However, a partner ship deed may provide that any one or more of the partners will not be liable
to bear the losses of the firm

7. Duty to indemnify for willful neglect (Section 13 f):

A shall indemnify the firm for any loss caused by his willful neglect in the conduct of the
business.

8. Duty to hold and use property of firm for exclusive use of firm (Section 15):

Subject to contract between the partners, the property of the firm shall be held and used by the
partners exclusively for the purposes of the business.

9. Duty to account for private profit (Section 16 a):

If a partner derives any profit for himself, which profit is the result of the condition given in the
section; in that case he must account for such profit and pay it to the firm.

In Gardener V Mecutecheon (1842 Beav. 534) a ship belonged to two partners, one of whom
was also the captain of the ship, whilst the ship was operating under charter parties, the captain
made considerable profits by making certain contracts. The Court held that he was liable to
account for such profits.

10. Duty to account for profits from competing business (Section 16 b):

Lays down that if a partner carries on any business of the same nature as, and competing with
that of firm, he must account for and pay to the firm all profits made by him in that business.

In one case, a partnership was entered into for the business of importing salt into India and for
re-selling the same in Chittagong. One of the partners in the course of the operations bought
some quantity of salt for himself and re-sold the some on his own account. The Calcutta High
Court held that the partner was liable to account for this profit to his co-partners, as the
opportunity to make such a profit came his way while he was on the business of this firm. (Pulin
v Mahendra, (1921) 34 cal. L.J. 405).

11. Duty to act within given authority [Section 19(1)]:

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 Subject to the provisions of section 22 (which deals with the mode of doing an act to bind the
firm), 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.

Three Conditions must exist to bind a firm:

1. The act must be done in the conduct of the business of the kind carried on by the firm.
2. The act must be done in the way which is usual in such business.
3. Finally, the act must be done in the firm name or in any other manner expressing or
implying an intention to bind the firm.

12. Duty to be liable jointly and severally (Section 25):

Sec. 25 of the Act lays down that all the partners of a firm, jointly and severally, share liabilities
of the firm therefore, even where a partner has signed in his own name a promissory note for the
benefit of the firm, all partners are liable on it as members of the partnership. (AIR-1930 Mad
168 (BE).

Rights of partners
Section 11 of the act provides for the determination of rights and duties of partners by agreement
between them. But no such agreement can override or contravene the provisions of the
partnership act.

Section 12 deals with the conduct of the business of a partnership firm and subject to contract
between the partners:

1. Every partner has the right to take part in the conduct of the business of the firm:
If, therefore a partner is wrongly prevented from taking part in the firm’s business he can
obtain an injunction from the court against the erring partner.

2. Every partner is bound to attend diligently:

Every partner is bound to attend diligently to his duties in the conduct of the business.

3. Every partner has a right to express his opinion in any matter:

Any differences arising as to ordinary matters connected with the business may be
decided by a majority of the partners, and every partners shall have the right to express
his opinion before the matter is decided, but no change may be made in the nature of the
business without the consent of all the partners; and

4. Every partner has a right to have access to and to inspect and copy any of the books
of firm:
A partner need not exercise this right personally, but may have the accounts inspected by
his agent, as for instance, by his accountant.

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 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 this
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
protections of trade secrets. (Bevan v Webbb, 1900-3 A.I.E.R. Rep. 206)

5. The partners are entitled to share equally in the profits earned:

In such a case, partners are likewise also liable equally to the losses. However, a partner
ship deed may provide that any one or more of the partners will not be liable to bear the
losses of the firm (section 13-b).

6. Right to interest:

Where a partner is entitled to interest on the capital subscribed by him such interest shall
be payable only out of profits (Section 13-c)

7. Right to interest on payments & profits:

A partner making, for the purposes of the business, any payment or advance beyond the
amount of capital he has agreed to subscribe is entitled to interest thereon at the rate of
six percent per annum (section 13-d).

not every amount which on proper accounting was found due to the partner as in excess
of his share, would get assimilated to or could be treated as advance made by the partner
for the purposes of business within the meaning of (section 13-d) of partnership act so as
to entitle the partner to interest there on. (Pakistan shipping corporation V Rustam F.
Cowasjee 1989 SCMR 1332)

8. Right to be indemnified:

The firm shall indemnify a partner in respect of payments made and liabilities incurred by
him (section 13-e).

The first indemnity is based on the general rule of an agent’s right to be indemnified in
respect of lawful acts done by him in the exercise of his authority.

The second indemnity covers out goings which are in the nature of emergency or salvage
expenses incurred by a partner personally on behalf of the firm in circumstances of
emergency. Thus, in mining business a partner may incur expenses to sink a new shaft
immediately to reach un-ex-hausted minerals.

9. Right of joint ownership of property:

Subject to contract between the partners, the property of the firms includes all property
and rights and interests in property originally brought into the stock of the firm, or
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 acquired, by purchase or otherwise, by or for the firm, or for the purposes and in the
course of business of the firm, and includes also the goodwill of the business.

The property of the firm 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 (section 14).

10. Implied authority of partner as agent of firm:

a. Subject to the provision of section 22, the act of a 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 his section is called his
“implied authority”.

b. In the absence of any usage or custom of trade to the contrary, the implied
authority of a partner does not empowered him to:

i. Submit a dispute relating to the business of the firm to arbitration,

ii. Open a banking account on behalf of the firm in his own name,
iii. Compromise or relinquish any claim or portion of a claim by the firm,
iv. Withdraw a suit or proceeding filed on behalf of the firm,
v. Admit any liability in a suit or proceeding against the firm,
vi. Acquire immovable property belonging to the firm, or
vii. Transfer immovable property belonging to the firm, or
viii. Enter into partnership on behalf of the firm (section 19).

11. Right to act in emergency:

A partner has authority, in an emergency; to do all such acts for the purpose of protecting
the firm from loss as would by done by a person of ordinary prudence, in his own case,
acting under similar circumstances, and such acts bind the firm (section 21).

12. No new partner to be introduced:

Subject to contract between the partners and to the provisions of section 30, no person
shall be introduced as a partner into a firm without the consent of all existing partners
(section 31-1)

13. No liability prior to joining firm:

Subject to the provisions of section 30, a person who in introduced as a partner into a
firm does not thereby become liable for any act of the firm done before he became a
partner (section 31-2)

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 14. Right to retire:

A partner may retire:

a. With the consent of all the other partners,
b. In accordance with an express agreement by the partners, or
c. Where the partnership is at will, by giving notice in writing to all the other
partners of his intention to retire (section 32-1).

15. Right not to be expelled:

A partner may not be expelled from a firm by any majority of the partner, save in the
exercise in good faith of powers conferred by contract between the partners (section 33-
1).

16. Right to carry on competing business:

An outgoing partner may carry on a business competing with that of the firm and he may
advertise such business, but, subject to contract to the contrary, he may not:

a. Use the firm name,

b. Represent himself as carrying on the business of the firm, or
c. Solicit the custom of persons who were dealing with the firm before he ceased to a
partner (section 36-1).

17. Right after retirement to share profits:

Where any member of a firm has died or otherwise ceased to be a partner, and the
surviving or continuing partners carry on the business of the firm with the property of the
firm without any final settlement of accounts as between them and the outgoing partner
or his estate, then, In the absence of a contract to the contrary, the outgoing partner or his
estate is entitled at the option of himself or his representatives to such share of the profits
made since he ceased to be a partner as may be attributable to the use of his share of the
property of the firm or to interest at the rate of six percent per annum on the amount of
his share in the property of the firm:

provided that where by contract between the partners an option is given to surviving or
continuing partners to purchase the interest of a deceased or outgoing partner, and that option is
duly exercised, the estate of the deceased partner, or the outgoing partner of his estate, as the
case may be, is not entitled to any further or other share of profits; but if any partner assuming to
act in exercise of the option does not in all material respects comply with the terms thereof, he is
liable to account under the foregoing provision of this section (section 37).

Liabilities of partners
Every partner is liable to:

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 1. Every partner is liable, jointly with all the other partner and also severally, for all acts of
firm done while he is a partner (section 25).

Even where a partner has signed in his own name a promissory note for the benefit of the
firm, all partners is liable on it as member of the partnership. (AIR-1930 Mad 168 (BE).

2. Indemnify the firm for any loss caused to it by his fraud in the conduct of the business of
the firm or by the willful neglects. (section 26)
3. To contribute equally to the losses sustained by the firm.
4. To account for any profits that he derives for himself from any transaction of the firm or
from the use of the property or business connections of the firm or the firm’s name and to
pay it to the firm.
5. If a partner carries on any business of the same nature and competing with that of firm he
shall account for and pay to the firm all profits made by him in that business.
6. Every partner is liable, jointly with all other partners and also severally, for all acts of the
firm done while he is a partner.

The doctrine of implied authority

The authority of a partner to bind the firm is called his “implied authority”.

Section 19, lays down that subject to the provision of section 22 (which deals with the mode of
dong an act to the firm) 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.

This implied authority of a partner is often referred to as his ordinary or his apparent or
ostensible authority.

In order to bind the firm an act of a partner done within the scope of his implied authority, three
conditions must exist:
1. The act must be done in the conduct of the business of the kind carried on by the firm.
2. The act must be done in the way which is usual in such business.
3. Finally, the act must be done in the firm name or in any other manner expressing or
implying an intention to bind the firm.

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 elephant, 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
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 partners also were bound by this term. (Mathura Nath V Sreejukta Bageshwari – 1972 4
Cal.L.J.362).

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-operations.
4. A partner can institute and defends 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.

Problem

A and B carry on business in partnership as bankers. A sum of money is received by A on

behalf the firm. B does not know of the receipt. A appropriate the money to his own use.
The partnership is liable to make good the money. This is an act done by a partner in the
usual course of business. Therefore the firm is liable.

Implied authority does not come into existence unless the act is done in the usual way, and in the
conduct of business of the kind carried on by the firm.

Example

While a partner in a mercantile firm has an implied authority to draw, accept, & endorse
bill of exchange on behalf of the firm, a partner in a firm of solicitors has no such implied
authority for it is not part of the ordinary business of a solicitor to draw, accept or endorse
bills of exchange. (Krishanji V Abdul, (1941) 43 Bom. L.R. 888).

A, a partner in a trading firm consisting of A, B and C deposits title deeds of firms property by
way of security with a bank without B’s and C’s authority. The question as whether the firm is
liable to the bank. A partner in a trading firm has an implied authority to borrow money on the
credit of the firm. A partner having power to borrow on credit of the firm, may give a valid,
equitable security, by deposit or otherwise over any estate of the partnership. Therefore the firm
is liable to the bank.

The implied authority of a partner does not empower him to:

1. Submit a dispute relating to the business of the firm to arbitration,

2. Open a banking account on behalf of the firm in his own name,
3. Compromise or relinquish any claim or portion of a claim by the firm,
4. Withdraw a suit or proceeding filed on behalf of the firm,
5. Admit any liability in a suit or proceeding against the firm,
6. Acquire immovable property belonging to the firm, or
7. Transfer immovable property belonging to the firm, or
8. Enter into partnership on behalf of the firm

The doctrine of holding out

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Section 28 of the act deals with what is known as liability by “holding out”.

Where a person represents himself or knowingly permits himself to be represented as a partner

in a firm, he will be liable as a partner in that firm, to any one who, on the faith of any such
representation, has given credit to the firm. The person so representing himself, or permitting
himself to be so re-presented is known as a partner by holding out or a partner by estoppel. Even
want of knowledge on his part of the effects of his act and conduct would not absolve him from
liability.

In other words where a man holds himself out as a partner, or a allows other to do it, he is then
estopped from denying the character he has assumed upon the faith of which creditors may be
presumed to have acted. A man so acting may be rightly held liable as a partner by estoppel.

In other words, the doctrine of “holding out” is a part of the principle of estoppel, which lays
down that where one person, by words or conduct induces another to believe him and act upon
the existence of a particular state or facts, he can not afterwards, as regards that person, deny the
existence of such facts.

Thus A is in the habit of representing himself to be a partner of a particular firm. B on the

strength of such representation, and without giving any notice to A supplies goods on credit to
the firm. A would be liable as a partner to B for the price of the goods.

It will thus be seen that liability by holding out is merely a special application of the principle of
estoppel enuciated by section 154 of the Indian Evidence Act, 1872.

Essential of section 28
In order to estop a person from denying that he is a partner on the doctrine of “Holding out”, the
following two important elements must co-exist.

1. A person must represent himself to be a partner in a firm, or knowingly permit himself

to b represented and
2. Another person must have given credit to the firm on the faith of such representation.

The following seven additional points may also be noted in connection with the doctrine of
holding outs.

I. The representation may be express or implied it need not necessarily be by words

spoken or written, it need not be made by the person himself, but may be made by
others.
II. There will be no representation by conduct if the acts relied upon are ambiguous.
III. A general representation to the, world at large is not sufficient, unless the person who
gives credit can satisfy the court that he was aware of, and acted upon it to his
prejudice.
IV. To establish liability, it is not essential to show that he party making the representation
(or permitting it to be made) has acted fraudulently or negligently. Even want of
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 knowledge on his part, of the effects of his acts and conducts, would not absolve him
from liability, if his acts and conduct were such as would induce a reasonable man to
believe that he was a partner, and to act upon such belief. The man thing is whether the
representation has caused the person to whom it was made to act on the faith of it so as
to alter his position.
V. A former owner does not become a partner by estoppel merely because the firm has
continued to use its old name of which his own name forms a component part. The rule
of estoppel is binding on a former partner who has retired without giving proper notice
of his retirement.
VI. There is no liability in tort on the ground of holding out, because the injured person can
not claim that he was led to suffer the injury by his belief in any representation. Thus, B
allowed his name to appear on a traction engine. A hired the engine, and through his
negligence, injured C. C sued B on the ground of “holding out”. It was hold that B was
not liable.
VII. There can be no holding out to a person who is aware of the actual facts e.g. a person
who has inspected the register of a firm which has been registered under the Act.

Effects of Holding Out

If a person holds himself out to be a partner of a firm, he becomes personally liable, he does not
thereby become a partner in the firm and he is also not entitled to any rights as against those
who are in fact partners in the firm. By holding out to be a partner, he does not become an agent
of the firm. He merely makes himself personally liable for the credit given to the firm on the
faith of his representation.

Admission of a minor to the benefits of partnership

A minor is not competent to Contract:

Since a minor is not competent to contract (section 11 of contract act, 1872), and, therefore
cannot be a partner of a firm. Capacity to contract is essential for the formation of a lawful part.

Section 30 deals with the rights, liabilities and disabilities of a minor in a partnership.

A minor can not be a partner in a firm but, with the consent of all the partners, he may be
admitted to the benefits of partnership.

Minor has a right to a share of the property and the firm as may be agreed upon and he may have
access to and inspect and copy any of the accounts of the firm.

Rights of a minor
The following seven rights of a minor are to be deduced from section 30.
1. He may be admitted to the benefit of a partnership.

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 2. He may have access and inspect and copy of the accounts of the firm.
3. He has right to share the property and profit of the firm.\
4. He may sue for accounts on severing the connection with the firm.
5. On attaining majority, he has option of becoming a partner in the firm in which case he
will be entitled to the share to which he was entitled as a minor.
6. On attaining majority, he also has the option of severing his connection with the firm, in
which case his share is not liable for any act of the firm done after the date of public
notice that he has elected not to become a partner. He is also entitled to sue the partners
for his share of the property and profits.
7. Lastly, he is not personally liable for any acts of the firm during his minority; he cannot
be adjusted insolvent if the debts of the firm cannot be satisfied out of the property of the
firm.

Liabilities of a Minor
The following are three liabilities of a minor admitted to benefits of a partnership:

1. His share is liable for the acts of the firm, but he has an option of serving his connection
with the firm within six months of his attaining majority or of his obtaining knowledge
that he had been admitted to the benefit of partnership, whichever date is later.
2. If, on attaining majority, he elects to become a partner, he becomes personally liable to
third parties for all acts of the firm done since he was admitted to the benefits of the
partnership.
3. After attaining majority and before giving public notice, he may be liable for holding
himself out as a partner.

(Section 30-5) of the act a minor cannot become a partner of a firm automatically on attaining
majority, he can become a partner only by electing to join the firm with manner prescribed in the
section. (PLD-1973 Kar 522).

In case such person, on attaining majority, fails to give public notice within six months of
majority, that he has elected to become or that he has elected not to become a partner in the firm,
than he becomes a partner in the firm on the expiry of the period of six months.

When a minor after attaining majority elects not to become a partner:

a) His rights and liabilities continue to be those of minor under this section up to the date on
which he gives public notice.
b) His share is not liable for any acts of the firm done after the date of the notice, and
c) He is entitled to sue the partners for his share of the property and profits.

Re-constitution of a firm (incoming & outgoing partners)

Meaning of Re-constitution:

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It means change in the existing numbers of partner in a firm or continuation of firm even after
expiration of fixed duration of partnership. In other words firm continues to work without
dissolution.

Section 17 provides that subject to contract between the partners:

a) Where a change occurs in the constitution of a firm:

The mutual rights and duties of the partners in the reconstituted firm remain the same as
they were immediately before the change, as far as may be:

b) After the expiry of the term of the firm:

Where a firm constituted for a fixed term continues to carry on business after the expiry
of that term, the mutual rights and duties of the partners remain the same as they were
before the expiry, so far as they may be consistent with the incidents of a partnership at
will and,

c) Where additional under takings are carried out:

Where a firm constituted to carry out one or more adventure or undertaking carries out
other adventures or undertakings, the mutual rights and duties of the partners in respect of
the other adventures or undertakings are the same as those in respect of the original
adventures or undertakings.

Modes of re-constitution of a Partnership Firm

I. By introduction of a new partner (section 31):

a. Subject of contract and to the provisions of section 30, no person shall be

introduced as a partner into a firm without the consent of all existing partner.

b. Subject to the provisions of section 30, a person who in introduced as a partner

into a firm not thereby become liable for any act of the firm done before he
become a partner.

II. By retirement of a partner (section 32):

1. A partner may retire:

a. With the consent of all the others partners,
b. In accordance with an express agreement by the partners, or
c. Where the partnership is at will, by giving notice in writing to all
the other partners of his intention to retire.

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 2. A retire partner may be discharged from any liability to any third party for acts
of the firm done before his retirement by an agreement made by him with such
third party and the partners of the reconstituted firm, and such agreement may
be implied by a course of dealing between such third party and the
reconstituted firm after he had knowledge of the retirement.

3. Notwithstanding the retirement of a partner from a firm he and the partners

continue to be liable as partners to third parties for any act done by any of them
which would have been an act of the firm if done before the retirement, until
public notice is given of the retirement.

Provides that a retired partner is not liable to any third party who deals with the
firm without knowing that he was a partner.

4. Notices under sub-section 3 may be given by the retired partner or by any

partner of the reconstituted firm.

III. By expulsion of a partner (section 33):

1. A partner may not be expelled from a firm by any majority of the partners, save
in the exercise in good faith of powers conferred by contract between the
partners.

2. The provisions of sub-section 2, 3 and 4 of section 32 shall apply to an

expelled partner as if he were a retired partner.

IV. By insolvency of a partner (section 34):

1. Where a partner in a firm is adjudicated an insolvent he ceases to be a partner

on the date on which the order of adjudication is made, whether or not the firm
is hereby dissolved.

2. Where under a contract between partners he firm is not dissolved by the

adjudication of a partner as an insolvent, the estate of a partner so adjudicated
is not liable for any act of the firm and the firm is not liable for any act of the
insolvent, done after the date on which the order of adjudication is made.

V. By the death of a partner (section 35):

Where under a contract between the partners the firm is not dissolved by the death of
a partner, the estate of a deceased partner is not liable for any act of the firm done
after his death.

VI. By transfer of a partner’s share (section 29):

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 1. A transfer by a partner of his interest in the firm, either absolute or by
mortgage, or by the creation by him a charge on such interest, does not entitle
the transferee, during the continuance of the firm, to interface in the conduct of
the business, or to require accounts, or to inspect the books of the firm, but
entitles the transferee only to receive the share of profits of the transferring
partner, and the transferee shall accept the account of profits agreed to by the
partners.

2. If the firm is dissolved or if the transferring partner ceases to be a partner, the

transferee is entitled as against the remaining partners to receive the share of
the assets of the firm to which the transferring partner is entitled, and, for the
purpose of ascertaining that share, to an account as form the date of the
dissolution.

Problems:

1. X and Y are partners for seven years, X taking no active part in the business. After the
expiry of seven years, Y continues the business in the same name and with the property of
the firm, without giving any accounts to X. Is X entitled to a share in the profits of
business?

Answer:
In the above circumstances, the partnership is not dissolved and X is entitled to
participate in the profits on the same terms as those of the original agreement. (Parson B
Hayward – (1862) 4D.F.J. 474).

2. An agreement of partnership between P, Q and R for one year contains an arbitration

clause. The partnership is continued beyond one year. Is the arbitration clause binding on
the partners after one year has expired?

Answer:

An arbitration clause is not inconsistent with a partnership at will (see clause b) and
therefore arbitration clause continues to bind partners even after the expiry of one year.
(Gillett V Thomton 1875 L.R. 19).

3. X and Y were partners in a business with 60% and 40% shares respectively. On the death
of X his son Z, stepped into his shoes, and continued at the business with Y without and
express agreement. What is the share to which Z is entitled?

Answer:
Applying clause (a) of section, Z will be entitled to the same share as his father was
entitled namely 60%. (Dawood sahib V Sheik Mohideen – 1973 -2 M.L.J. 760).

Modes of dissolution of a firm

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Section – 39 to 55, lays down the regulating the dissolution of a firm.

Section 39 lies down that the dissolution of partnership between all the partners of a firm is
called the “dissolution of the firm”.

The various way of dissolution of firm

The dissolution of a firm may take place in one of the following five ways.

1. Dissolution by agreement (section 40):

A firm may be dissolved with the consent of all the partners or in accordance with a
contract between the partners.

2. Compulsory dissolution (section 41):

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 carried on or for the partners to carry it on in partnership.

Provided that, where more than one separate adventure is carried on by the firm, the illegality of
one or more shall not of itself cause the dissolution of the firm in respect of its lawful adventure
and undertaking.

Examples:
a. A and 10 others form a partnership and carry on a particular trade later. The
legislature passes an act which makes it un-lawful for more than 10 persons to
carry on that trade in partnership. The partnership is dissolved.
b. X domiciled in England carries on business in partnership with Y. Domiciled in
Germany, war breaks out between England and Germany. The partnership
between X and Y is dissolved.

3. Dissolution on the happening of certain contingencies (section 42):

Subject to contract between the partners a firm is dissolved:

1. If constitute for a fixed term, by the expiry of that term.

2. If constituted to carry out one or more adventures or undertakings, by the

completion thereof.

3. By the death of a partner.

4. By the adjudication of a partner as insolvent

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 4. Dissolution of by notice of partnership at will (section 43):

a. Where the partnership is at will, the firm may be dissolved by any partner giving
notice is writing to all the other partners of his intention to dissolve the firm.

b. The firm is dissolved as from the date mentioned in the notice as the date of
dissolution or, if no date is so mentioned, as from the date of the communication
of the notice.

5. Dissolution by the court (section 44):

At the suit of a partner, the court may dissolve a firm on any of the following grounds,
namely:

a. That a partner has become of unsound mind, in which case the suit may be
brought as well by the next friend of the partner who has become of
unsound minds as by any other partner.

b. That a partner, other than the partner suing, has become in any way
permanently incapable of performing his duties as partner.

c. That a partner, other than the partner suing, is guilty of conduct which is
likely to affect prejudicially the carrying on the business, regard being had
to the nature of the business.

d. That a partner, other than the partner suing, willfully or persistently

commits breach of agreements relating to the management of the affairs of
the firm or the conduct of its business that it is not reasonably practicable
for the other partners to carry on the business in partnership with him.

e. That a partner, other than the partner suing, has in any way transferred the
whole of his interest in the firm to a third party, or has allowed his share to
be charged under provisions of Rule 49 of Order XXI of the first schedule
to the code of civil procedure, 1980, or has allowed it to be sold in the
recovery of arrears of land-revenue or of any dues recoverable as arrears of
land revenue due by the partner.

f. That the business of the firm cannot be carried on save at a loss.

g. On any other ground which renders it just and equitable that the firm should
be dissolved.

The above can be summarized in a tabular form

Sr. No. Dissolution of firm

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 Without interface of court By order of court
2. By agreement By the insolvency all / one partners
3. By compulsory dissolution By the business becoming unlawful
4. By the happening of certain contingencies
5. By notice

Liability for acts of partners done after dissolution (section 45-55)

Section 45 to 55 of the act lays down the liabilities and rights of partners after dissolution of
firm. They lay down the rules for the guidance of the partners.

Section 45 speaks of a liability of a partner after dissolution. The principle on which this
provision is based is that:

After dissolution of a firm, persons dealing with its partners are entitled to assume that they
continue to be each others agents, until public notice is given of the dissolution. It is only fair
and equitable that a secret dissolution should not be allowed to prejudice the rights of third
parties who have continued to deal with the firm in ignorance of the dissolution, and upon the
assumption that the relationship of partnership has continued.

Registration of firm
The application for registration must be made to a Registrar appointed under section 57.

The registration of a firm may be effected at any time by sending by post or delivering to the
Registrar of the area in which any place of business of the firm is situated or proposed to be
situated, a statement in the prescribed form and accompanied by the prescribed fee, stating:

a. The firm name

b. The place or principal place of business of the firm
c. The names of any other places where the firm
d. The name in full and permanent addresses of the partners, and
e. The duration of the firm.

Such a statement is to be signed by all the partners or by their agents specially authorized in this
behalf. Each person signing the statement must also verify it in the prescribed manner. When the
Registrar is satisfied that he provisions of section 58 have been duly complied with, he will
entertain the statement for its Registration.

Effect of non-registration
Section 69 details the effect of non-registration:

1. No suit to enforce a right arising from a contract or conferred by this act can be instituted
in any court by or on behalf of any person suing as a partner in a firm against the firm or
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 any person alleged to be or to have been a partner in the firm unless the firm is registered
and the person suing is or has been shown in the Registrar of Firms as a partner in the
firm [section 69 (1)].

2. No suit to enforce a right arising from a contract can be instituted in any court by or on
behalf on a firm against any third party unless the firm is registered and the persons suing
are or have been shown in the Registrar of Firms as partners in the firm [section 69(2)].

Problem:

A & B Co., as registered as a partnership firm in 1988, with A, B and C as partners. In

1989, A dies in 1990, B and C sue X in the name and on behalf of A & Co., with fresh
registration, is the suit maintainable? What difference would it make, if in 1990 B and C
had taken a new partner D, and then filed a suit against X without fresh registration?

Answer:

The suit is maintainable without fresh registration. If an additional partner D had come
into firm as a partner, and his name had not been entered in the register in accordance
with notice of a change in the constitution of the firm given to the Registrar, the firm as
then constituted could not sue because although it was a registered firm, D one of the
persons suing, would not be shown in the Register of firm as a partner in the firm at the
date of the suit. (Pratapchand V Jehangiri 42 Bom. L. K. 487).

3. The provisions of sub section 1 and 2 shall be apply also to claim of set-off or other
proceeding to enforce a right arising from a contract. But shall not affect.

a. The enforcement of any right to sue for the dissolution of a firm or for accounts of
a dissolved firm, or any right or power to release the property of a dissolved firm.

or

b. The power of an official assignee, receiver or court under the insolvency, Federal
Territory of Karachi act, 1909], or the Provincial Insolvency act 1920, to realize
the property of an insolvent partner.

4. This section is not applicable:

a. To firms or to partners in firms which have no place of business in Pakistan, or

whose places of business in Pakistan are situated in areas to which, by notification
under section 56, this chapter does not apply, or

b. To any suit or claim of set-off not exceeding one hundred rupees in value which, is
not of a kind specified in the Second Schedule to the Provincial Small Cause
Courts Act, 1887, or to any proceeding in execution or other proceeding incidental
to or arising from any such suit or claim.
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This section does not affect the right of a third party to proceed against the firm or its partners,
even though un-registered nor does it affect the right of an official assignees to realize the
property of an insolvent partner.

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Prepare assignment on following topic:

Identify and explain various laws contained in Partnership Act, 1932.

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