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Mercantile law_1

Partnership:

According to section 4 of the partnership act, “partnership

is the relationship between two persons who have agreed to
share the profits of a business carried on by all or any one of
them acting for all”.

In simple words, partnership is the business relationship

between two or more persons who have agreed to share the
profit of their joint business.

Partners:

The persons who have interred into a partnership are

individually called partners.

Firm:

The partners are collectively called firm.

Firm name:

The name under which they carry on the business is called

the firm name.

Essential elements of partnership:

The definition of partnership itself reveals certain

characteristics of partnership these are as under:

(1)An agreement or contract:

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Partnership is the result of contract. It does not arise from

status, operation of law or inheritence. This is an important
feature that distingueshes partnership from various other
relations. For example;

At the death of father, who was a partner in a firm the

son can claim the share of partnership property but can not
become a partner automatically. The agreement may be oral or
written.

Partnership deed:

A partnership deed is also known as partnership

agreement. A aprtnership deed is written agreement between
or among the partners providing for rules and regulations. It is
signed by all the partners.

Contents of partnership deeds:

(a) The name of the firm.

(b) Name and adress of the partners,
(c) Nature of bussiness’
(d) date of commencement,
(e) nature of bussiness,
(f) duration /period,
(g) the amount of capital to be brought in by each partners,
(h) office or placing of bussiness,
(i) profit or loss sharing formula,
(j) partner in profit only,
(k) Rights and duties of partners and
(l) Accounts audit.
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2. Sharing of profit:

The division of profit of a bussiness is an essential

element for the existence of partnership.

3. Mutual agency:

This is most essential element of partnership. The

partnership bussiness may be carried on by all or any one of
them acting for all the partners. Each partner is the agent of
the firm as well as the principle of other partners.

4. Bussiness:

Partnership is formed to carry on some bussiness. The

term bussiness includes every trade accupation and profession.

5. Number of persons or association of two or more

persons:

There must be at least two persons to form a partnership.

Regarding a maximum number companies act, 1956 provides
that where the firm is carrying on banking bussiness the no of
a partners should not exceed 10 and the firm is carryning on
any other bussiness then the no of partners should not exceed
20.

6. Legal entity:

The firm has no legal entity.

7. Registration:
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In patnership the registration is not compulsory.

Registration is optional.

Distinction between co-ownership and partnership:

Following are the deffernces between co-ownership nad

partnership;

(i) Contract:

Partnership is bassed on contractual relationship between

partners. Co-ownership may be by operation of law. On the
death of father son become co-owner of his property. On the
other hand partnership is the outcome of agreement.

(ii) Object:

The object of partnership is bussiness and earne some

profit. Co-ownership is not meant for bussiness.

(iii) Transfer of income:

In a partnership no partner can transfer his intrest (share)

without the consent of all other partners. A co-owner can
transfer his interst at any time and with out asking from other
co-owner.

(iv) Agency relationship:

Partners can act agents of the bussiness. No agency

relationship exists in co-ownership. Every co-owner is
responsible for his own deeds only.
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(v) Act:
Partnership is formed under partnership act 1932, but
there is no such act governing co-owners.

Distinction between company and partnership:

(i) Legality:

Company is an artificial legal-person. Partnership is not a

legal person.

(ii) Perpetual succession:

Company has prepetual succssion. Partnership firm does

not have prepetual succession.

(iii) Registration:

Compnies are created by registration under compenies

act. For a partnership firm registration is not compulsory. It is
guided by partnership act.

(iv) Number of members:

Private limited company shall have at least 2 members

and maximum 50 members. Partnership firm for non-banking
shall have atleast 2 and maximum 20 and for banking
bussiness atleast 2 and maximum 10.

(v) Agent:

In a partnership a partner is an agent of firm and other

partners. In company a member is not agent of company or of
other member.
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Types of partnership:

(1) Partnership at will:

Under section 7 of partnership act where no provision is

made by contract between partners for the duration of their
partnership, the partnership is called partnership at will. Such
type of partnership may dissolved at any time by any partners
by sending notice to all.

(2) Particular partnership:

Under section 8 of partnership act, partnership for specific

time is known as particular partnership. Such partnership
cannot dissolved before expiry date.

Types of partners:

Following are the types of parters;

(1) Active partners:

A partner who take active part in a management is called

active partner. He must be active and known to the public.
Therfore public notice is required for active partner.

(2) Sleeping or dormate partner:

Sleeping partner beings capital only. He is not active.

Public notice is required for sleeping partners.
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(3) Silent partners:

Silent partners means unknown to public and participate

actievly in management. Public notice is not required for
silent partners.

(4) Partner by astopple:

If mr A says in front of mr B that mr A is a prtner of mr C

and mr C keeps silence. Then A is a prtner by astopple or A is
called partner by astopple.

Public notice is rfequired for partner by astopple.

(5) Partner in profits only:

He does not take part in loss. He is known to public. And

public notice is required for partners in profit only.

Rights and duties of partners:

(1) Rights of a partner:

The rights of a partner is following;

(i) To take part in the conduct and management of the

business.
(ii) To have free access to all record, books of accounts
of the firm and take copy from them.
(iii) To share in the profit of business equally as per
agreement.
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(iv) To express opinion in matter connecting with the

business
(v) .to be indemnified by the firm against loss.

(2) Duties of partners:

The duties of a partner is following;

(i) To render true amount and full information of all

things done by them to their co-partner.
(ii) To be just and faithfull.
(iii) To indemnify the firm for willful neglect of a
partner.
(iv) The partner are bound to perform all the duties
created by the agreement between the partners.
(v) To indemnify for loss caused by loss.
(vi) Not to carry on business competing with the firm.

Registration of firm:

Before passing a partnership act 1932 there was no law

and no provision regarding registration of firms, or there is no
registration before 1932.

After partnership act 1932 the registration of partnership

is optional. Now in apkistan registartion of partnership is
optional under partnership act 1932.

Registration time:
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Section 58 of partnership act describes the time of

registration, you may registration at any time.

Procedure of registration:

Section 58 of partnership act deals with the procedure of

registration.

Creation of partnership deed:

Partnership deed consists of following contents;

(i) The firm name,

(ii) The place of bussiness,
(iii) The name of other places where the firm carries on
bussiness,
(iv) The date when the each partner joint the partnership,
duration of the firm.

A firm name shell not contain any of the following,

except when the provincial government signifies its consent to
the use of such words, jinah, quid e azam etc.

The firm name shall not contain the name of “united

Nations” or its observation

Registration:

section 59 of partnership act describes that when the

registrar is setisfied that the provisions of the section 58 have
been dully complied with, he shall record am entry of the
statement in a register called register of firms and shall file.

Amendments in partnership:
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Section 60 to 65 of partnership act deals with the

amendments in partnership.

Rules of evidence:

Under section 68 of partnewrship act, all documents

submitted in the registrar office is a conclussive proof between
partners and not between third persons.

Effects of non-registartion:

Section 69 of partnership act deals the effects of non

registration;

(i) The firm can not file a suit against third party,
(ii) No partner can file a sue against the other partner of
the firm and
(iii) Third party can file a suit against the firm to enforce
their rights.

Penalty for furnishing false particulers:

Section 70 of partnership act state that if any person who

signs any statement, ammending statements notice containing
any particular which he knows to be incomplete or does not
believe to be complete shall be punishable with;

(a) Imprisonment, which may extends to three months or

(b) With fine or
(c) With both, imrisonment and fine.

Relation of partner to third parties:

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We have already seen that mutual agency between the

partners is one of the essential element of a aprtnership, and
therfore each partner is both a principal and an agent for the
other and each is bound by the other’s contract in carrying on
the trade.

Section 18 declares that from the point of view of third

parties a partner is an agent of the firm for the purposes of the
business of the firm. As such even if only one partner acts on
behalf of the firm, the third party can make all the partners of
the firm liable. It is imortant to note that one partner can make
other partners liable towards the third parties only if he acts
within the scope of his express or implied authority.

Express authority of partner:

When a partners ia expressly authorised by an agreement

of all the partners to do certain acts on behalf of the firm, it is
called express authority of a partner.

Implied authority of a partner:

An implied authority of a partner can be inferred from the

circumstances of the case.

Section 19(1) and 22 define the scope of the implied

authority of a aprtner. Accordingly for an act to be covered
with in the implied authority it is necessary that:

(a) The act should be done for carrying on the business of

the kind carried on by the firm,
(b) The act should be done in the firm name or any other
manner expressing or implying an intention to bind the
firm,
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(c) The act should be done in the usual way of such

business.

Partners authority in an emergency:

Section 21 extends the authority of the partners in an

emergency and lays down that, “a partner has a authority, in
an emergency, to do all such acts for the purpose of protecting
the firm from loss as would be done by a person of ordinary
prudence, in his own case, acting under similar circumstances,
and such acts bind the firm.”

Effect of a admission by partner:

An admission or representaion made by a partner

concerning the affairs of the firm is evidence against the firm,
if it is made in the ordinary course of business.

Liability of a partner to third parties:

The liability of a partners to third party may be divided

into three categories;

(I) Liability of a partners for acts of the firm:

Liability of a partner for acts of the firm, Every patner is

liable, jointly with all the other partners and also severally, for
all acts of the firm done while he is a partner. Furthur, the
liability of all the partners is unlimited.

(II) Liability of the firm wrongfull acts for a partner, and

(III) Liability of the firm for missapplication by partners.
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Mode of doing act to bind firm:

In order to bind a firm, an act or instrument done or

executed by a partner or other person on behalf of the firm
shall be done or executed in the firm name, or in any other
manner expressing or implying an intention to bind the firm.

Dissolution of a firm:

The dissolution of a partnership between all the partners

is called the sdissolution of a firm. The firm may be dissoved
by the following manner;

(i) Dissolution by agreement:

A firm may be dissolved with the consent of all the

partners or with the accordance with the contract between the
partners.

(ii) Dissolution on the happening of certain

contigences:

Subject to the contract between the partners a firm is

dissolved on the happening of the following contigencies;

(a) If consituted for a fixed term,

(b) By the death of the partners and
(c) On insolvency of the partners.
(iii) Dissolution by notice:

Where the partnership is at will the firm may be dissolved

by any partner at any time by sending notice to all partners.

(iv) Dissolution by court:

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The court may dissolved a firm at the suit of any partner

on any of the following grounds;

(a) Insanity of the partners:

If that partner has become of unsound mind. The insanity

of a partner does not ipso facto dissolve the firm and the next
friend has to file suit for dissolution.

(b) Permenet incapacity of a pertner:

If that a partner has become permenantly incapable of

performing his duty as a partner.

(c) Conduct affecting prejudicially the business:

If that a aprtner is guilty of conduct which is likely to

effect prejudicially the carrying on the business of the firm.

(d) Transfer of interest of a aprtners:

That a partner has in any bway transfer the whole of his

interest in the firm to a third party.

(e) Loss:

That the business of the firm can not be carried on save at

loss.

(f) Breach of partnership agreement.

(g) Just and equitable:
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On any other grounds that render it just an equitable that

the firm should be dissolved.

Distingtion between partnership act and limited

liability act (LLP):

Followin are difference between partnership act and

limited liability act (LLP);

(i) Registration:

In partnership act registration is optional while in LLP

registartion is compulsory.

(ii) Liability:

In partnership act the liability of a partner is unlimited on

the other hand in LLP is limited.

(iii) Legal entity:

In partnership act partnership has no legal entity, while in

LLP has separate legal entity.

(iv) Perpetual seccession:

Partnership act has no perpetual succession, while in LLP

there is perpwtual succession.

(v) Common seal:

In partnership act there is no common seal on the other

hand in LLP there will be a common seal.
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(vi) Designated partners:

Designated partner means;

(a) must be a human being and

(b) must be a resident of pakistan.

In a partnership act there is no designated partners, in

LLP there must be aminimum one designated partners.

Negotiable instrument:

Def; negotiable instrument does not define what a

negotiable instrument is? But accordingly to section 13, of the
act, a “negotiable instrument” means promissory note, bill of
exchange or a cheque.

It is a document evidencing an obligation which:

(1) Is transferable by mere delivery,

(2) Such delivery operating to transfer all legal rights to the

obligation evidence,

(3) Free of any defects in the transferor’s title.

Negotiable instrument is the combination of two words;

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(a) Negotiable: negotiable is derived from the word

“negotiate” which means “transfer”, transfer by
delivery.
(b) Instrument: instrument meand any written documents
created in the favour of someone else.

Porpuse:

The porpuse of negotiable instrument is to discharge

the liability of payment.

Delivery:

Delivery means voluntraly transfer of possession by

one person to another

Essential features of negotiable instrument:

(1) The property and rights in the instrument pass by

delivery, with or without endorsement according to
circumstances, and no further evidence of the transfer is
required.

(2) The holder of the instrument for the time being passes
a right of action in his own name.

(3) Consideration is presumed to have been given for the

instrument.

(4) notice of transfer of the instrument is not required to

the person liable to any in respect of the instrument.

Kinds of negotiable instrument:

(1) Promissory note,

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(2) Bill of exchange and

(3) Cheque.

(1) Promissory note:

A promissory note is an instrument in writing (not being a

bank note and not are a currency note). Containing an
unconditional undertaking signed by the maker, to pay a
certain sum of money only to or to the order of, a certain
person, or to the bearer of the instrument.

Debtor:

The person who makes the promise to pay is called

Debtor. The debtor who makes the instrument is also called
the maker.

Creditor:

The person who will get the money is called the creditor.
The creditor is also known as payee.

Essential element:

In order that a document to be a promissory note it is

necessary that there should be the following essentials;

(1) The instrument must be in writing,

(2) The instrument must contain an undertaking or a

promise to pay.
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Example; Mr. Dar, I owe you Rs 500. Here there is no

undertaking or promise to pay. Therefore it is not a
promissory note.

(3) The undertaking or promise must be unconditional.

Example; I promise to pay B Rs 1000 seven days after my

marriage with C. in this example the promise is conditional, so
the instrument is not a promissory note.

(4) The instrument must be signed by the maker of it.

(5) The maker must be certain.

(6) The sum payable must be certain.

Example: I promise to Mr A Rs 1000 and all other sums

which may be due to him. The above instrument would be
invalid as a promissory note for not being for a certain sum.

(7) The instrument must contain a promise to pay money

and money only.

Bill of exchange:

Def: A “Bil of exchange” is an instrument in writing

containing an unconditional order, sigend by the maker,
directing a certain person to pay a certain sum of money only
to or to the order of, a certain person or to the bearer of the
instrument”.

Drawer:

The maker of the bill of exchange is known a drawer.

Drawee:
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The person who is directed to pay is called the drawee.

Payee:

The person named in the instrument, to whom or to whose

order the money is by instrument directed to be paid is called
payee. The payee is also called the holder when has custody of
the bill.

Accepter:

The bill is delivered by the holder to the drawee for his

acceptance. After the drawee has signed his assent upon the
bill and delivered the same or give notice of such signed to the
holder or to some person on his behalf, he is called the
“Acceptor”.

Drawee in case of need:

In a bill of exchange, the drawer who fears mat the bill

may not be accepted by the drawee, may designated some
other person, called the drawee nm case of need in the event
of the dishonor by the drawee.

Essential element of bill of exchange:

(1) The instrument must be in writing.

(2) the instrument must contain an order to pay.

(3) The order should be unconditional.

(4) The instrument must be signed by the drawee.

(5) The drawee must be certain.

(6) The sum payable must be certain.

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(7) The instrument must be containing an order to pay

money and money only.

(8) The payee must be certain.

Difference between a promissory note and bill of exchange:

(1) In promissory note there are two parties – the maker

and the payee. Whereas, in Bill of exchange there are three
parties – the Drawer, Drawee, and Payee.

(2) In Promissory-note the executed promises himself to

pay, while in bill of exchange he directs another to pay.

(3) The liability of the maker in promissory note is

primary and absolute but in a bill of exchange the liability of
the drawee in a bill of exchange is secondary conditional.

(4) In promissory-note no acceptance is necessary as the

note is signed by the person liable to pay. But a bill of
exchange requires to be accepted by the drawer except in
certain cases.

(5) The maker of the Promissory-note stands in

immediate relation with the payee, whereas the drawer of an
accepted bill of exchange stands in immediate relation with
acceptor.

Holder and holder in due:

Holder:

The holder of the negotiable instrument (promissory-note,

Bill of exchange and cheque) means any person who is;

(1) Entitled in his own name of the possession thereof and

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(2) To receive or recover the amount due thereon from the

parties thereto.

Before a person can claim to be a holder of a negotiable

instrument, two things are necessary;

(i) He should be entitled in his own name to the

possession of the instrument and
(ii) He should have the right to receive or recover the
amount due thereon from the parties.

When a negotiable instrument is lost or destroyed, its

holder is the person so entitled at the time of such loss or
destruction.

Holder in due course:

A “Holder in due course of a negotiable instrument means

any person who foe consideration become;

(i) The possessor of it in case where the instrument is

payable to the bearer or
(ii) The payee or endorsee of it in cases where the
instrument is payable to order but
(a) Before the amount mentioned in it become payable and
(b) Without having sufficient cause to believe that any
defect exists in the title of the person from who he
derived his titled. Therefore, to constitute a person a
holder in due course it is necessary that (1) he must be
holder for consideration, (2) the instrument must have
been transferred to him before it became payable and
(3) he must be a transferee in good faith.
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Distinction between Holder and holder in due course:

(1) A Holder may become the possessor or payee of an

instrument even without consideration, where as a Holder in
due course is one who acquires possession for consideration.

(2) As against the holder in due course must have become

the payee of the instrument in due course.

Negotiation:

A negotiable instrument, being an actionable claim, can

be transferred by negotiation of an instrument in the person by
which the ownership of the instrument passes from one person
to another in order to constitute the transferee the Holder of it.

When a promissory-Note, Bill of Exchange and Cheque is

transfer to any person, so as to constitute that person the
holder thereof, the instrument is said to be negotiated.

Who may negotiate

Every sole maker, drawer, payee or endorse or all of several

joint makers, drawers, payee or endorsee of a negotiable
instrument may , if the negotiability of such instrument has
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been restored or excluded as mentioned in section 50 , indorse

and negotiate the same .

The duration of negotiability

A negotiable instrument may be negotiable until payment or

satisfaction thereof by the maker , drawee or acceptor at or
after maturity . it cannot be negotiated after such payment or
satisfaction .

Distinction between negotiation and assignment

1).In case of negotiation consideration is presumed , but in

assignment it is necessary to prove consideration

2).In case of negotiation the rights of transferee (indorse) may

rise higher than those of transferor (endorser) but the assignee
has only those rights which the assigner possessed.

3).In case of assignment notice is compulsory , where as no

such notice is required in a transfer by negotiation

Modes of negotiation

There are ways of negotiation a negotiable instrument

1).Negotiation by delivery

A negotiable instrument payable to bearer is negotiable by

delivery with the intention of voluntarily with the intention of
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transferring the ownership of the instrument to the transferee

is essential

Delivery of a negotiable instrument are of two types .

i).Actual

Delivery is actual when the instrument is physically handed

over by the transferor to the transferee or to someone on his
behalf transfer completely

ii).Constructive delivery

Is effected without any change of actual possession . it implies

a delivery in the eyes of law compulsory

Negotiation by endorsement

Types of endorsement

i).Blank endorsement

If the endorser signs his name only , the endorsement is said to

be in blank . a blank endorsement does not indicate the person
to whom