Partnership Act 1932
The Partnership Act 1932 (Act IX of 1932) governs ordinary partnerships in Pakistan. Originally Chapter XI of the Contract Act 1872, it was carved out in 1932, closely following the English Partnership Act 1890 drafted by Sir Frederick Pollock. The Limited Liability Partnership Act 2017 introduced a modern hybrid form.
Section 4 Partnership Act 1932: '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.' The three essentials — agreement, sharing of profits, business carried on by all or any acting for all — form the test of partnership.
Essentials of partnership
Section 4 provides three cumulative essentials:
- Agreement — express or implied; oral or written.
- Business — § 2(b) defines business to include every trade, occupation and profession.
- Sharing of profits.
- Mutual agency — each partner agent of the firm and of other partners.
A firm is the collective name (§ 4 last para); a firm name has no separate legal personality (unlike a company).
The Cox v. Hickman (1860) 8 HL Cas 268 rule — that sharing of profits is prima facie but not conclusive evidence of partnership — is codified in Section 6: "regard shall be had to the real relation between the parties..."
Test of partnership (§ 6)
A person may share in profits without being a partner — e.g.:
- Lender taking interest related to profits.
- Widow/child of a deceased partner receiving an annuity.
- Employee remunerated by share of profits.
- Seller of goodwill receiving share of profits as consideration.
Mutual agency is the defining test — Mollwo, March & Co. v. Court of Wards (1872) LR 4 PC 419.
Kinds of partners
| Type | Characteristics |
|---|---|
| Active partner | Takes part in management |
| Sleeping/dormant partner | Contributes capital, not management |
| Nominal partner | Lends name without share in profit/management |
| Partner in profits only | No liability for losses (rare) |
| Sub-partner | Receives share from a partner's share |
| Partner by holding out | Liable by estoppel (§ 28) |
| Minor admitted to benefits | § 30 |
Registration of firms (§§ 56–71)
Registration is not compulsory but practically essential:
- § 69(1): unregistered firm cannot sue to enforce a contract right.
- § 69(2): partner of unregistered firm cannot sue the firm or co-partners.
- § 69(3): exceptions — suit for dissolution, accounts after dissolution, recovery from third parties of debts up to Rs. 100, suits by third parties against firm.
- § 69(4): proceedings under arbitration; criminal proceedings unaffected.
A firm registers with the Registrar of Firms by filing a statement (§ 58).
- A minor cannot be a full partner but may be admitted to the benefits of the firm (§ 30) — has right to share profits and inspect accounts; not personally liable.
- Implied authority of a partner (§ 19) does not extend to: submitting disputes to arbitration; opening a bank account in his own name on behalf of firm; compromising claims; withdrawing suits; acquiring immovable property; transferring immovable property; entering into partnership on behalf of the firm.
- Joint and several liability of partners (§ 25) — third parties may sue any or all partners.
- Partnership at will (§ 7) — no fixed term; any partner may dissolve by giving notice (§ 43).
Rights and duties of partners
Rights (§§ 12–13)
- Take part in business.
- Express opinion on matters; consult on differences.
- Access to and copy of books.
- Equal share in profits (default).
- Interest on capital (only out of profits).
- Indemnity for liabilities incurred for the firm.
Duties (§§ 9–10)
- Carry on business of the firm to greatest common advantage.
- Be just and faithful.
- Render true accounts.
- Not compete with the firm (§ 16); if he does, profits accrue to firm.
- Not use firm property for personal gain.
- Indemnify firm for loss caused by fraud (§ 10).
Dissolution (§§ 39–55)
Modes:
- By agreement (§ 40).
- Compulsory (§ 41) — adjudication of partners as insolvent; unlawful business.
- On happening of contingencies (§ 42) — death, retirement, insolvency, expiry of term.
- Notice of partnership at will (§ 43).
- By court (§ 44) — insanity, permanent incapacity, misconduct, persistent breach, transfer of interest, business at loss, just and equitable grounds.
After dissolution, the partnership continues for winding-up purposes (§ 47). Section 48 governs settlement of accounts:
- Losses paid out of profits, then out of capital, then by partners individually in profit-share ratio.
- Assets applied in order: third-party debts → loans from partners → capital → balance to partners in profit-share ratio.
Limited Liability Partnership Act 2017
The LLP Act 2017 (administered by SECP) introduced an alternative vehicle:
- Limited liability: partners' personal assets protected.
- Separate legal personality: LLP can sue and be sued in its own name.
- Perpetual succession.
- Minimum two partners; designated partners with statutory responsibilities.
- No upper limit on partners (unlike Pakistan Companies Act 2017's 50 in private company).
LLP is well-suited to professional firms (law, accounting, consulting). Registration is with the Registrar of LLPs at SECP.
For CSS, distinguish partnership from company: (i) legal status — firm has none, company is separate person; (ii) liability — unlimited for partners, limited for shareholders; (iii) registration — optional for firm, mandatory for company; (iv) management — by partners, by directors; (v) transfer of interest — restricted in partnership, free in public company shares. Cite Salomon v. Salomon [1897] AC 22 for company personality and Cox v. Hickman (1860) for partnership test.
Modern partnership in Pakistan
- Professional firms (lawyers, accountants, architects) are often partnerships or LLPs.
- Family businesses are commonly partnerships with intergenerational succession problems addressed by registration and clear deeds.
- Joint ventures for specific projects (construction, real estate) are typically structured as partnerships or LLPs to take advantage of pass-through tax treatment.
- Conversion: an existing partnership may be converted into an LLP under § 39 of the LLP Act 2017 or into a company under § 47 of the Companies Act 2017.