B.

Law (CAF - 3) Page | 148 ICAP Recommended Answers

Chapter 13 – RELATIONS OF PARTNERS TO 3rd Parties

1 (a) Rights of the bank in the dairy business:

 The bank is entitled to receive the share of profits of Malik in the dairy business.
 In case of dissolution or if Malik ceases to be a partner, the bank will be entitled as against
the remaining partners to receive the share of the assets of the dairy business to which
Malik was entitled, and, for the purpose of ascertaining that share, to receive partnership’s
accounts as from the date of the dissolution.

Limitation of the bank in the dairy business:

The bank, during the continuance of the dairy business, is not entitled to:
- interfere in the conduct of the dairy business, or
- to require its accounts, or
- to inspect the books of the dairy business.

2 Admittance of minor as a partner:

By giving notice of her willingness to be a partner in the firm to the existing partners, Laila would not
become a partner in the firm.

In order to be a partner, Laila may give a public notice that she has elected to become a partner in
the firm and such notice may be given at any time within six months of her attaining majority i.e. up
to 26 September 2020, or her obtaining knowledge that she has been admitted to the benefits of
partnership i.e. 20 October 2020, whichever date is later. And such public notice shall determine her
position as regards the firm.

If Laila fails to give public notice till 20 October 2020, she will become a partner in the firm on the
expiry of the said six months.

Laila’s liability with regard to firm’s debts:

Laila would be personally liable to third parties for all debts of the firm from the date she was
admitted to the benefits of partnership i.e. 26 March 2019.

3 (a)
(ii) Mutual rights and liabilities of partners and the firm:
Bari has clearly exceeded his authority. However, Saima and Ahsan cannot repudiate Bari’s
transaction with the client. Bari’s act of receiving Rs. 150,000 from the client, for defending them
against a law suit, was done to carry on, in the usual way, business of the kind carried on by the firm
and such act binds the firm. Further, where a partner acting within his apparent authority receives
money from a third party and misapplies it, the firm is liable to make good the loss. As a result, each
of the partners is jointly and severally liable to the client for all the acts of the firm done while they
are the partners.

Similarly, where by the wrongful act or omission of Bari (not defending the client against the law
suit), a loss or injury is caused to the client or any penalty is incurred, the firm is liable to the same
extent as the partners are liable.

However, Bari would be personally liable to the other partners for Rs. 150,000 and shall indemnify
the firm for any loss caused to it by his wilful neglect in the conduct of the business of the firm.

Further consequence of his breach of duty not to act in any way prejudicial to the partnership
business; the partnership could be wound up
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(b) Restrictions imposed on the implied authority of a partner:

In the absence of any usage or custom of trade to the contrary, the implied authority of a
partner does not empower 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,

4 (b) Minor’s admission to the partnership:

Partnership is created by a valid contract. Since a minor is not capable of entering into a contract, a
contract by or with a minor is void ab-initio. Accordingly, Muneer cannot be a partner in the firm.
However, Muneer can be admitted to the benefits of partnership with the consent of all the partners
and not only by Naila alone.

The rights and liabilities of Muneer, who has been admitted to the benefits of partnership are
governed by the following rules:

Rights:
(i) Right to share property and profits of the firm as agreed by the partners.
(ii) Right of inspecting and taking copies of accounts of the firms ONLY.
(iii) Right not to be adjudged insolvent.

Liabilities:
(i) Personally not liable to third parties for the debts of the firm i.e. limited liability.
(ii) His share is liable for the acts of the firm.

5 (a)
(i) A transfer by a partner of his interest in the firm does not entitle Hatim to interfere in the conduct
of the business, or to require accounts, or to inspect the books of the firm, but entitles Hatim
only to receive the share of profits of Zain, and Hatim shall accept the account of profits agreed
to by the partners.
(ii) The firm cannot be made liable since the receiving of money by Sarim for investment purposes is
not in ordinary course of a lawyer's business and accordingly, is beyond the scope of his implied
authority as a partner.
(iii) A partner has 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. Hence, Faizan cannot be held responsible for
misconduct.

(b) Holding out

Anyone, who by words spoken or written or by conduct represents himself, or knowingly
permits himself to be represented, to be a partner in a firm, is liable as a partner in that firm to
anyone who has on the faith of any such representation given credit to the firm, whether the
person representing himself or represented to be a partner does or does not know that the
representation has reached the person so giving credit.

Exceptions of holding out partner

After a partner's death if the business of the firm is continued in the old firm's name, the
continued use of that name or of the deceased partner will not itself make legal representatives
of the deceased partner liable for any act of the firm done after his death.
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6 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. Further, in case a loss is sustained by a third party ME Motors (MEM) would
be liable even for the wrongful acts of Majid. Therefore, Zahid can recover the amount from MEM or
any of the partners.
However, Majid shall indemnify MEM or Ebad for any loss caused to them by his fraud in the conduct
of the firm’s business.

7 Noman would only be considered a partner in the firm when either he gives public notice of becoming
a partner, at any time within six months of the later of following dates:
 the date of his attaining majority; or
 the date of his obtaining knowledge that he had been admitted to the benefits of partnership; or
If Noman fails to give such notice he shall become a partner on the expiry of the above six months.
i.e. 15 January 2017 in the given case.

Since up to 10 January 2017, when the firm suffered heavy losses, Noman’s status in the firm had not
been determined, i.e. whether he is or is not a partner in the firm, Noman would not be liable to pay
additional Rs. 100,000 and would only be liable up to the extent of his share in the firm.

8 (a) Partner by Estoppel or Holding out:

Amjad would be regarded as partner by estoppel or holding out if:
 he knowingly permitted himself to be represented as a partner in the firm by Kashif.
 Kalim on the faith of such representation extended credit to the firm.

It does not matter whether Amjad does or does not know that the representation has reached Kalim.
Therefore, in such case, Amjad would be liable for the outstanding amount to Kalim.

However, Amjad would not be considered as holding out partner if he has denied Kashif’s
representation in public holding him as a partner in the firm or if he has no knowledge of Kashif’s
representation.
(b)
(i) Subject to contract between the partners, a partner can bind the firm by his actions. However,
in case of differences, decision should be made by majority of the partners. Asghar cannot take
decision without consultation with other partners. Every partner has a right to express his
opinion before the matter is decided.
(ii) Every partner is liable jointly with all the other partners and also severally to third parties for
all acts of the firm done while he is a partner. A partner may not share in the business losses, yet
his liability towards outsiders shall be unlimited. If the partnership assets are insufficient to
meet the firm’s liabilities, Careem would have to repay the amount personally. However, Careem
can recover the amount which he is called upon to pay to the creditors from Asghar and Babar.

9 (ii) Restrictions on the implied authority:

In the absence of any usage or custom of trade to the contrary, the implied authority of a partner does
not empower him to:-
 submit a dispute relating to the business of the firm to arbitration,
 open a bank account on behalf of the firm in his own name,
 compromise or relinquish any claim or portion of a claim by the firm,
 withdraw a suit or proceeding filed on behalf of the firm,
 admit any liability in a suit or proceeding against the firm,
 acquire immovable property on behalf of the firm,
 transfer immovable property belonging to the firm, or
 enter into partnership on behalf of the firm.
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10 (i) Rights:
 right to share property and profits of the firm as agreed by the partners.
 right to have access to accounts of the firm and not to the secret books of the firm.
 right not to be adjudged insolvent
(ii) Disabilities:
 he will not be considered as a partner.
 cannot file suit against partners for profit and property except after disconnecting his
relation with the firm.
 not entitled to have access to books other than accounts.

11 Rights of Dostana Bank Limited:

Following rights are available to the bank:
(i) entitlement to receive the share of the profits of Sham (the transferring partner).
(ii) On the dissolution of the firm or on retirement of Sham the bank is entitled to receive:
 the share of the assets of the firm to which Sham is entitled.
 an account from the date of the dissolution for the purpose of ascertaining the share.

Disabilities of Dostana Bank Limited:

The bank shall not be treated as a partner in the firm and during the continuance of the partnership,
shall not be entitled, to:-
 interfere in the conduct of the business of the firm.
 require accounts.
 inspect the books of the firm.
 challenge the accounts of profits agreed to by the partners.
 sue for dissolution of the firm.

12 Liability of a partner for acts of the firm:

Where after a partner’s death, the business is continued in the old firm name, the continued use of
that name or of the deceased partner’s name as a part thereof shall not of itself make his legal
representative or his estate liable for any act of the firm done after his death. Bari
Builders cannot sue Abid’s estate for the recovery of the outstanding amount of the credit which was
extended after Abid’s death.

However, Bari Builders can recover the outstanding amount from Abid’s estate only if the credit was
extended to the firm before Abid’s death.
Moreover, since every partner is liable, jointly with all the other partners and also severally, for all
acts of the firm done while he is a partner, Bari Builders may file a suit against Meher for the recovery
of outstanding balance and succeed, provided Meher was a partner in the firm at the time when credit
was extended to the firm.

13 Minor’s admission to the partnership:

Partnership is created by a valid contract. Since a minor is not capable of entering into a contract, a
contract by or with a minor is void ab-initio. Accordingly, a minor cannot be a partner in the firm.
However, a minor can be admitted to the benefits of partnership with the consent of all the partners
for the time being. i.e. before admission of a minor there must be an existence of partnership.
Rights, liabilities/limitations of Raghib ( minor):
The rights, liabilities and limitations of Raghib who has been admitted to the benefits of partnership
are governed by the following rules:
Rights:
(i) Right to share property and profits of the firm as agreed by the partners.
(ii) Right of inspecting and taking copies of accounts of the firms ONLY.
(iii) Right not to be adjudged insolvent.
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Liabilities:
(i) Personally not liable to third parties for the debts of the firm i.e. limited liability.
(ii) His share is liable for the acts of the firm.
Limitations:
(i) No status of partner. The minor is not entitled to take part in the conduct of the business of firm.
(ii) No suit against partners for profit and property except after disconnecting his relation with the
firm.
(iii) Not entitled to have access to books other than accounts.

14 Restrictions imposed on the implied authority of a partner:

In the absence of any usage or custom of trade to the contrary, the implied authority of a partner does
not empower 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 on behalf of the firm,
(vii) transfer immovable property belonging to the firm, or
(viii) enter into partnership on behalf of the firm.

15 Expulsion of a partner: Marvi cannot be expelled from firm by Zahid and Ahmed except if following
conditions are fulfilled:
(i) the power of expulsion has been expressly provided in the partnership deed;
(ii) power has been exercised by all partners whose concurrence must be necessary in agreement;
(iii) the power has been exercised in absolute good faith.
Liability of Marvi after expulsion from partnership: So far as the liability is concerned, Marvi would
be treated as if she were a retired partner. Marvi may be discharged from any liability to any third
party for the acts of the firm done before her retirement if,
(i) Zahid and Ahmed agree with Marvi to release her from the existing debts and liabilities; and
(ii) the third party is informed of Marvi’s expulsion and the new arrangement and such third party
has expressly or impliedly agreed to release Marvi and accept the reconstituted firm as their
debtor. Marvi will not be liable for any act of the firm done after her expulsion if a public notice
of expulsion is given either by Marvi herself or by Zahid or Ahmed of the reconstituted firm. If a
public notice is not given Marvi and the partners will 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 expulsion.

16 Yaseen is entitled to the repayment of premium or of such part thereof as may be reasonable regard
being had to the terms upon which he became a partner and to the length of time during which he
was a partner. He will not be entitled to repayment of premium if the dissolution of the firm was:
(i) By the death of a partner.
(ii) Mainly due to his own misconduct.
(iii) In pursuance of an agreement containing no provision for the return of the premium or any part
of it.

17 The authority of a partner to bind the firm with his acts is referred to as the implied authority of a
partner. Accordingly, for an act to be covered within the implied authority, it is necessary that:
(i) The act should be for the kind of business carried on by the firm;
(ii) The act should be done in the usual way of such business; and
(iii) The act must be done in the name of the firm or in any other manner expressing or implying an
intention to bind the firm.
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18 (i) Liability of a partner for acts of the firm Every partner is liable jointly with all the other partners
and also severally for all acts of the firm done while he is a partner.
(ii) Liability of the firm for wrongful acts of a partner Where, by the wrongful act or omission of a
partner acting in the ordinary course of the business of a firm, or with the authority of his
partners, loss or injury is caused to any third party, or any penalty is incurred, the firm is liable
to the same extent as the partner. Although the firm is liable to the third party for the loss caused
to him (third party) by fraud committed by a partner, but, as between the partners, the same
must be borne by the partner committing the fraud and cannot be shared among all the partners.
(iii) Liability of firm for misapplication of money or property by a partner The firm is liable to make
good the loss where:
 A partner acting within his apparent authority receives money or property from a third party
and misapplies it, or
 A firm in the course of its business receives money or property from a third party, and the
money or property is misapplied by any of the partners while it is in the custody of the firm.

19 Yawar, a minor may not be a partner in a firm, but, with the consent of all the partners for the time
being, he may be admitted to the benefits of partnership.

Rights
(i) He has a right to such share of the property and of the profits of firm as may be agreed upon, and
(ii) He may have access to and inspect and copy any of the accounts of the firm.

Liabilities
(i) His share is liable for the acts of the firm but he is not personally liable for any such act.
(ii) He may not sue the partners for an account or payment of his share of the property or profits of
the firm.

20 Rights of transferee of a partner’s interest

Where a partner’s interest is transferred, the transferee does not become a partner and similarly the
transferor does not cease to be a partner. Therefore, Adil would not be considered as a partner in the
firm.

Rights of Adil:
Adil would be entitled only to receive the share of the profits of the firm to which Fauzia is entitled.
He would be bound to accept the account of profits agreed to by the partners.

Upon dissolution of the firm or, in case, if Fauzia ceases to be a partner, Adil would be entitled, as
against the remaining partners, to receive the share of the assets of the firm, to which Fauzia was
entitled and for the purpose of ascertaining that share he would be entitled to ask for the accounts
as from the date of the dissolution.

Restrictions on Adil:
Adil would not be entitled, during the continuance of the partnership:
(i) to interfere in the conduct of the business; or
(ii) to require accounts; or
(iii) to inspect the books of the firm.

21 Partner’s Act not under implied authority

In the absence of any usage or custom of trade to the contrary, the implied authority of a partner does
not empower him to:
(a) submit a dispute relating to the business of the firm to arbitration,
(b) open a banking account on behalf of the firm in his own name,
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(c) compromise or relinquish any claim or portion of a claim by the firm,

(d) withdraw a suit or proceeding filed on behalf of the firm,
(e) admit any liability in a suit or proceeding against the firm,
(f) acquire immovable property on behalf of the firm,
(g) transfer immovable property belonging to the firm, or
(h) enter into partnership on behalf of the firm.

22 Return of premium on premature dissolution

Moeen would be entitled to claim the refund of the premium or of such part thereof as may be
reasonable, however, regard being had to the terms upon which he became a partner and to the
length of time during which he was a partner.

Moeen would however, not be entitled for the return of premium if:
(i) the dissolution is mainly due to his own misconduct, or
(ii) the dissolution is in pursuance of an agreement containing no provision for the return of the
premium or any part of it, or
(iii) the dissolution is due to the death of a partner.