Spring 2011

Business Law

PARTNERS

LAW RELATING TO PARTNERSHIP

PARTNER:One who partakes or shares with anotherAn associateOne who has a share with another or others

in some commercial, manufacturing or other undertaking

One who dances with another.An associate in a firm. A member of a firm or

partnership.

PARTNERSHIP

PARTNERSHIP:The state or condition of being a partnerThe association of two or more persons for the purpose

of undertaking and prosecuting conjointly any business, occupation, or calling

That which subsists between persons who have agreed to combine their property, labour skill in some business and to share the profits thereof between them

A type of business entity in which partners share with each the profits or losses of the business.

FIRM:Persons who enter into partnership are collectively called

a firm

PARTNERSHIP—Contd.

Persons who enter into partnership with one another are individually ‘partners’ and collectively a ‘firm’ and the name under which their business is carried on is called the ‘firm name’

Partners may choose any name as their firm’s name provided id does not go against the rules relating to trade name or goodwill----mislead the public into confusing with a firm already in existence or words which express or imply sanction, approval or patronage of the Government

PARTNERSHIP--Contd

In Pakistan for small to medium size business set ups the common mode of business.

Advantage of structural flexibility and formality of relationship between partners.

Maybe registered or not. Not compulsoryRegistered firms have the advantage of tax and

consequences of litigation.Favoured over corporate structure (companies)

as no dividend is levied.But partners exposed to greater personal

liability than the shareholders of a company.

PARTNERSHIP LAW IN PAKISTAN

PARTNERSHIP ACT 1932Originally it was contained in and formed part of the

Contract Act,1872 (Chap.XI) which was repealed and in its place was passed a comprehensive law.

Is the law governing regulation of partnerships in Pakistan.

Law passed by the Indian Legislature in 1932.The Governor General of India gave assent on April 8, 1932.No.IX of 1932Adopted and followed by the Government of Pakistan

PARTENERSHIP ACT—Contd.

SCHEME OF LAW:Divided into 8 ChaptersSections 74Schedule 1CHAPTERS:1. Preliminary2. The Nature of Partnership3. Relations of Partners to One Another4. Relations of Partners to Third Parties

PARTNERSHIP ACT—Contd.

5. Incoming and Outgoing Partners6. Dissolution of a Firm7. Registration of Firms8.Supplemental

SCHEDULE:

Fees Prescribed

DEFINITIONS

Intention to economise wordsDoes not lay down general principlesWith reference to the whole Act and with

reference to the content

‘ACT OF A FIRM’ Binds every one of the partnersAn act in which every one of them had actually

participatedGives rise to a right enforceable by or against the

firm

DEFINITIONS—Contd.

‘BUSINESS’:Includes every trade, occupation and

profession.Includes and not Means.An Inclusive and not Exhaustive definitionGeneral and vagueBroadly, any activity which, if successful,

would result in profitMust be in existenceMay be temporary or permanent (indefinite)

DEFINITIONS—Contd.

PARTNERSHIP: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 individually called ‘partners’ and collectively a ‘firm’ and the name under which their business is carried on is called the ‘firm name’

A voluntary act between two or more persons.

PARTNERSHIP---Contd.

Placing their money, effects, labour and skill, or some or all of them

In lawful commerce or businessUnderstanding that there shall be

communion of profits or thereof between them.

Contains the following elements/essentials

PARTNERSHIP---Contd.

ESSENTIALS:Association of two or more persons to carry

on a businessAn agreement entered into by all concernedAgreement must share the profits Business must be carried on.Carried on by all or any of the persons

concerned acting for all.

PARTNERSHIP--- Contd.

All elements must be present before a group of persons can be called partners. Only then a partnership can be said to come into existence.

Elements may appear to overlap but are distinctExistence of partnership is a question of fact.Association of two or more persons: There must be at least two persons who should join

together to constitute a partnership. A group of persons with no legal relations (no mutual

rights and liabilities) not a partnership No existence or responsibility separately from its

partners.

ESSENTIALS OF PARTNERSHIP—Contd.

An Agreement:Entered into by all persons concernedPartnership arises only as a result of an

agreement, express or impliedCreated by a contract, it does not arise by operation

of law e.g. joint operation (heirs on death )Voluntary contractualLawful agreement; founded on good faith, for lawful

object between competent persons. Fulfill all the essentials of a valid contract.

Can even come into being upon an oral agreement

ESSENTIALS OF PARTNERSHIP—Contd.

Sharing Profits:Must be an agreement to share profits arising

out of the businessAn essential element of partnership agreementDifferent from clubs, societies, charitable

associations etc.How to be shared left to the parties themselvesSharing of losses not essential.Profits refer to net profits.

ESSENTIALS OF PARTNERSHIP---Contd.

Carrying of Business:‘Business’ as defined i.e. any trade, occupation or

profession.May be temporary or permanent (indefinite).But must

be in existence.Agreement to carry on business at a future time does

not result in present partnership.Must be carried on by all or by any concerned acting

for allBusiness must be lawfulMutual agencyTrue test of partnership.

CARRYING ON BUSINESS—Contd.

Partnership based on the idea of mutual agency.

Every partner assumes a dual role i.e. that of a principal and agent.

Action of each partner is binding on the other; agent and principal.

Liable to account for all.Contract in the name of the firm.

PARTNERS

Can be entered into by every competent person

Attained age of majorityOf sound mindDisqualified from any law to which he is

subjectUnsound mindMarried woman is competentMinor cannot become a partner but can be

admitted to benefits of partnership.

PARTNERS--- Contd.

WORKING PARTNER:Not necessarily a partner in businessMaybe only an employeeGets a share in the net profitsRemuneration for services rendered.

FIRM

Firm:Persons who have collectively entered into

partnership with one another is collectively called a firm

Name under which business is carried is Firm Name.

Business under any name or styleTaking care of rules like trade name, goodwill

etc.

ILLEGAL PARTNERSHIP

Object of partnership is unlawful. Section 23 of Contract Act

Number of persons entering into partnership exceed the permitted. Section 4 of Companies Act.1913:

1. Business of banking—more than 102. Any other business—more than 20 With an alien enemy (alien friend); enjoys

civil and personal rights as a citizen Against international comity.

PARTNERSHIP---DISTINGUISHED

CO-OWNERSHIPAkin but differentPartnership result of an agreementMutual rights and obligations differentConsent of all trade/business: ExamplesTransfer of interests

PARTNERSHIP---DISTINGUISHED

COMPANY:1. Person---Legal2. Creation– Legal formalities/agreement3. Transfer of interest4. Agents of others5. Liability to debts6. Contract7. Private arrangements8. Number

PARTNERSHIP DISTINGUISHED--Contd.

9.Death—Dissolution10. Property11. Restrictions12. Sue and be sued13. Decree14.Registration15. Shareholder

PARTNERSHIP & COMPANY—DISTINGUISHED.

1.PARTNERSHIP is not a distinct legal person, but is made of the persons composing it.

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.

Creation of COMPANY involved elaborate legal formalities

PARTNERSHIP & COMPANY--DISTINGUISHED

3. In a FIRM partner can transfer his interest with the consent of other partners.

Shares in a COMPANY (especially Public) are generally freely transferable.

4.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.

Shareholders in a COMPANY are not the agents of one another.

CONTD.

5. Each PARTNER is liable in full for the debts of the firm

The liability of the Company’s shareholders is limited by shares or guarantee.

6. A PARTNER cannot contract with the

firm.A shareholder in a

COMPANY can contract with the COMPANY.

CONTD.

7. PARTNERS may make any private arrangements among themselves e.g buy others’ shares.

Arrangements in COMPANY are regulated by law e.g Company cannot buy its member’s shares

8.In PARTNERSHIP maximum number of members is restricted

In COMPANY no maximum number. Minimum is prescribed

CONTD.

9. Death of a partner dissolves a PARTNERSHIPDeath or retirement of shareholder does not dissolve the

COMPANY.10. Property may be the common property of PARTNERS.Property belongs to the COMPANY and not its members11. Restrictions contained in partnership deed will not

effect third parties, who are not aware of itRestrictions in Articles of Association effect third parties

also.12. A FIRM cannot sue or be sued.A COMPANY can in its own name.

PARTNERSHIP/DISTINGUISHED---Contd.

CLUB:Entirely differentClub members not liable for acts of other

membersNot liable to be creditor of clubLiability—extent of Club’s regulationsNo implied authority i.e. bind other members

of the club.

CONTD.

13. Decree against the FIRM can be executed against the partners.

Decree against the COMPANY cannot be executed against its shareholders.

14.For a PARTNERSHIP registration is optionalFor a COMPANY it is compulsory15 A FIRM cannot be a shareholder. in a

companyA COMPANY can be a shareholder in another

company.

PARTNERSHIP DISTINGUISHED—Contd.

TRADE ASSOCIATION:Mutual agency does not exist

PARTNERSHIP---EXISTENCE

HOW TO DETERMINE:Real relation between the partnersMainly a question of factOnus to prove on the appellant

PARTNERS—RELATIONS TO ONE ANOTHER

Relations between partners definedFreedom to arrange their own affairs among

themselvesMutual rights and duties regulated by contract

Duties and liabilities on a partner:1. Duty of good faith and common advantage Carry on business to the greatest common

advantage Just and faithful to each other

PARTNERS—RELATIONS TO ONE ANOTHER—Contd.

Use knowledge and skill for benefit of firmNot personal advantageIn case of loss to firm by fraud of a partner---

indemnify firm (make good the loss)

2. Duty to render true accounts and full information:

Not to mix with personal business Disclose full facts.

PARTNERS---RELATIONS TO ONE ANOTHER—Contd.

Rights and duties of partners determined by contract between them.

Contract varied only by consent of all partners

In conduct of business every partner has right to:

1. Take part in conduct of business2. Access, inspect and copy books of account3. Express opinion. Majority opinion

PARTNERS—RELATIONS TO ONE ANOTHER—Contd.

Mutual rights and liabilities. Subject to contract:

1. Not entitled to any remuneration2. Entitled to share equally3. Advance by partner to firm (over and above

capital) entitled to profit (interest)

PARTNERS—RELATIONS TO ONE ANOTHER—Contd.

PROPERTY OF FIRM:Inclusive definition1. All property and rights originally brought to

the stock of the firm2. Acquired by purchase or otherwise during

the course of the business3. Goodwill of the business4. Rights and interests acquired with money

belonging to the firm. Deemed.

PARTNERS—RELATIONS TO ONE ANOTHER---Contd.

GOODWILL:Not defined“The whole advantage, whatever it may be, of

the reputation and connection of the firm”IntangibleEasy to describe, difficult to defineIt is benefit and advantage of the good name,

reputation and connection of a business

GOODWILL---Contd.

No independent existenceCannot subsist by itselfAttached to businessAttribute of a business, trade or profession.