1
Core Concept & Key Definitions
🤝Governing law: Partnership Act, 1932 S. 1 — in force from 1 October 1932, applies to the whole of Pakistan. Contract Act provisions continue to apply where not inconsistent S. 3.
Partnership S. 4 = 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.
Partners / Firm
Individually partners; collectively a firm; business name = firm name.Act of a firm
Any act/omission by all partners, or any partner or agent, giving rise to a right enforceable by or against the firm.Business
Includes every trade, occupation and profession.Third party
Any person who is not a partner in the firm.No legal personality: Unlike a company, a partnership firm is not a legal person — partners act as agents for each other.
2
Test of Partnership — 5 Elements S. 6
🔍Regard is had to the real relationship between the parties, shown by all relevant facts taken together.
1. Association of 2+ persons
All competent to contract; one person cannot be a partnership. Max 20 (Companies Act, 2017) — may exceed 20 for lawyers, accountants and professions not allowed to practise as limited companies.28 MBA graduates → must form a company; 28 CAs → allowed.2. Agreement
Express (written/oral) or implied. Written = partnership deed. Without a deed, the Act's default rules apply.Cousins repair & sell furniture, share profit → implied partnership.3. Carrying on business
Lawful trade/occupation/profession. Future business — only once commenced. Charitable work ✖.Co-owners renting a shop → not partners.4. Sharing of profits
Prima facie, not conclusive evidence. Sharing losses not necessary, but liability to outsiders is unlimited.Sharing gross revenue/door money ≠ sharing profits.5. Mutual agency
Each partner is both an agent (binds others) and a principal (bound by others).Contract, not status S. 5
Partnership arises from contract, not status — heirs inheriting a family business (e.g. Hindu undivided family) are not partners.✖ Receiving a share of profits does NOT by itself make a partner:
- Lender of money to the business
- Co-owners sharing returns from property
- Transferee of a partner's interest
- Servant or agent as remuneration
- Bank customer / loan from a banking company
- Minor admitted to benefits
- Widow/child of deceased partner as annuity
- Previous owner as price of goodwill
- Publisher paying author half profits (royalty)
| Basis | Partnership | Co-ownership |
|---|---|---|
| Formation | By agreement alone | Not necessarily by agreement |
| Business | Essential | Not necessary |
| Number | Min 2; max 20 (professionals may exceed) | No maximum |
| Profit / agency | Profit sharing & mutual agency essential | No profit sharing; not agents of each other |
| Transfer of interest | Needs consent of other partners | Freely transferable |
3
Types of Partnership & Partners
🧩Partnership-at-will S. 7
No provision for duration or determination. Any partner may dissolve by written notice to all others — from the date in the notice, or if none, date of communication. If deed requires mutual consent to dissolve → not at will.Particular partnership S. 8
For a particular adventure/undertaking or a fixed period; ends on completion/expiry. If continued afterwards → becomes partnership-at-will.Actual / ostensible — actively conducts business; agent of others; binds firm.
Sleeping / dormant — not known to third parties; fully liable; no public notice needed on retirement and not liable for later acts.
Nominal — lends only his name; no capital/profit; liable to outsiders.
Partner in profits only — not liable to contribute to losses internally; liable to third parties.
Sub-partner — stranger sharing a partner's profit; no rights against, nor liability for, the firm.
Silent — no voice in management by agreement, but known; shares profit/loss; fully liable.
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Duties & Rights of Partners
📜General duties — mandatory (cannot be changed) S. 9–10
- Carry on business to the greatest common advantage
- Be just and faithful to each other
- Render true accounts
- Provide full information
- Indemnify firm for loss caused by his fraud
Conduct of business — default rules (subject to contract) S. 12
- Right to take part in conduct; duty to attend diligently
- Right to be consulted; ordinary matters by majority; change in nature of business needs all
- Right to access, inspect & copy books
- No remuneration unless agreed
- Profits shared equally; losses contributed equally; profit ratio implies loss ratio
- No interest on capital unless agreed (payable only out of profits)
- Interest on advances beyond capital: 6% p.a. or as agreed
- Right to indemnity for payments in ordinary conduct / emergency
- Duty to indemnify for wilful neglect
By contract S. 11
Mutual rights/duties may be fixed by contract, express or implied by course of dealing; varied by consent of all. Partners may agree not to carry on other business while a partner (exception to restraint of trade).Partners accepting a different ratio for years → implied variation.Personal profits S. 16
Must account for secret profits from firm transactions, property, name or connection; and for profits of a competing business run without consent.Equipment bought Rs. 18,000, resold to firm Rs. 30,000 → hand over Rs. 12,000.After a change in firm S. 17
Rights/duties stay the same on: change in constitution; continuing after fixed term; carrying out additional adventures.Property of the firm S. 14
Property brought into common stock and rights in it; property acquired by/for the firm; goodwill; property bought with firm money (unless contrary intention).Shares bought in own name with firm money → firm property. Land bought for self, partner debits himself → not firm property.Use of property S. 15
Use firm property exclusively for the business — not for personal benefit.Firm's laptop/printer used at home till worn out → compensate firm.5
Authority of a Partner
🔑A partner is the agent of the firm for the purpose of its business S. 18. To bind the firm, the act must be done in the firm name or in a manner implying intention to bind it S. 22.
✔ Implied authority — acts done in the usual way of the firm's business S. 19
- Buy/sell goods; give receipts
- Receive payments; give discharge
- Contract and pay debts; settle accounts
- Employ servants
- Draw cheques; accept/endorse bills & notes
- Pledge movable property
- Sue / defend suits in firm name
✖ No implied authority (unless usage/custom) S. 19
- Submit dispute to arbitration
- Open bank account in his own name for firm
- Compromise or relinquish a claim
- Withdraw a suit
- Admit liability in a suit
- Acquire immovable property
- Transfer immovable property
- Enter into partnership on firm's behalf
Restriction by contract S. 20
Effective against a third party only if he knows of it (or doesn't know/believe the person is a partner).Borrowing banned in deed; bank unaware → firm liable.Exceeding authority
Partner must compensate the firm; other partners may ratify, and then the firm bears the loss.Emergency S. 21
Acts to protect firm from loss as a person of ordinary care would in his own case.Selling all stock in a price crash → binds firm.6
Liability of Partners & Firm
⚖Admissions S. 23
Evidence against the firm if (i) relates to firm's affairs and (ii) made in ordinary course of business.Notice S. 24
Notice to a partner = notice to firm if: relates to firm affairs; given to an acting (not sleeping) partner; no fraud by the receiving partner.Joint & several S. 25
Liable for acts of firm done while he was a partner; creditor may sue any one or more for the whole debt — liability is unlimited.Wrongful acts S. 26
Loss to third party by a partner's wrongful act in the ordinary course → firm liable to same extent. Internally, loss from fraud is borne by the fraudulent partner.Trading stolen goods → all partners (even sleeping) liable for conversion.Misapplication S. 27
Firm must make good the loss where a partner, within apparent authority, receives third-party money/property and misapplies it; or the firm receives it in the course of business and a partner misapplies it while in the firm's custody.Security deposit taken by partner and absconded → all partners liable. Lawyer-partner misuses client's advance → firm liable; he must indemnify the others.7
Minor Admitted to Benefits S. 30
🧒A minor cannot be a partner, but with the consent of all partners may be admitted to the benefits of an existing partnership.
Rights (as minor)
- Agreed share of property & profits
- Access, inspect, copy accounts (not other books)
Liability
Not personally liable; only his share is liable (limited liability).Disabilities
- No status of partner
- Can't sue partners for share unless he severs connection
- No access to books other than accounts
⏳ On attaining majority — Roadmap
Attains majority / learns of admission (later date)
➜
Within 6 months give public notice of choice
➜
Elects to join: personally liable for all acts since admission; same share
OR
Elects not to join: minor's position till notice; share not liable after; may sue for share
IF NO NOTICE
Deemed a partner on expiry of 6 months
Burden to prove late knowledge lies on the minor. Other partners cannot refuse a minor who elects to join. D learned 16 Aug 2007 → partner from 16 Feb 2008 → shares later losses.
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Common Exam Traps
⚠️Partnership for one project = particular partnership; continued after → at will.
Transfer of firm's land by a partner → no implied authority.
Nature of business changed by majority → needs all partners.
Internal restriction binds only third parties who know of it.
Interest on capital @6% automatically → only if agreed; 6% is for advances/loans.
Minor electing to join is liable from date of admission, not date of majority.
Profit share agreed 3:2, losses silent → losses also 3:2; nothing agreed → equal (not capital ratio).
Notice served on a sleeping partner or the fraudulent partner → not notice to firm.
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Quick Revision Box
⚡5Elements of partnership (S. 6)
20Max partners (professionals may exceed)
6%Interest on partner's advance (default)
6 monthsMinor's election window after majority/knowledge
- S. 4 Definitions · S. 5 Not by status · S. 6 Test · S. 7–8 At will / particular
- S. 9–10 Mandatory duties · S. 11–12 Contract & conduct · S. 14–17 Property, profits, change
- S. 18–22 Agency & authority · S. 23–27 Admissions, notice, liability
- S. 30 Minor admitted to benefits
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