Role of Sleeping Partner

Introduction
Before going into detail about the role of sleeping partner I would like to discuss partnership.
The basic rules regarding partnership are in the Partnership Act 1932 which was formed by the
British in the pre partition era. Section 4 of Partnership Act 1932 defines partnership as:

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.

It is clear from the definition that partnership must be between two or more persons; hence the
number should number exceed twenty as defined by the Companies Act 1932. There must a ratio
defined according to which the sharing of profit and loss would be done other than that it is not
compulsory for every partner to take active role in the business a single partners can act as an
agent for the rest.

Features of Partnership
Following are the features of partnership.
Agreement:
Partnership is the result of agreement without it partnership cannot be formed. It may be written
or oral.
Registration:
Registration of partnership is not necessary. It is better to get registered as soon the partnership is
formed.
Number of partners:
There must be at least two members, the maximum limit is twenty.
Business:
The object of partnership is to carry on business.
Unlimited liability:
The liability of partner is unlimited to the invested.
Profit and loss distribution:
Profits are distributed among the partners according to their agreement in case of loss all the
partners share in it.
Case law regarding distribution of profit:
P. L. D 1971 Lah. 396
It was held that where a partnership deed instead of fixing the shares of the partners incorporates
the provisions of partnership act in the deed, the shares of the partners will be governed by the
partnership act.
Legal entity:
Partnership has not separate entity from its member.
Management:

All the partners can participate actively in the affairs of business.

Payment of tax:
Each partner pays tax on his share of profit individually.
Co-operation:
The success of the business depends upon mutual trust and confidence.
Share in capital:
Capital of the firm is supplied by the all partners according to the agreement.
No audit:
In the business of partnership no audit is necessary.
Mutual agency:
Business may be carried on by all or any of them acting for all. Each is a principal and an agent.
Transfer of interest:
A partner cannot transfer his interest without the consent of other partners.
Dissolution:
Partnership is dissolved easily. It operates the pleasure of partner.

Types of Partnership
To fulfill different kinds of legal relationship in partnership the law recognizes different types of
partnerships, some of them are explained below:

Partnership at Will:
Where no provision is made by contract between the partners for the duration of their
partnership, or for the determination of their partnership the partnership is "partnership at will".
Particular Partnership
A person may become a partner with another person in particular adventures or undertakings.
Limited Partnership:
A partnership in which the liabilities of all partners are limited to the amount of money invested in the
business. In other words the partners and their firm is a separate entity, however this type of partnership is
not recognized under the Pakistan Law.

Classes of Partnership
Actual or Active Partner:
An active partner is the partner one who is engaged in the actual conduct of business. He acts on
behalf of all the other partners as an agent.
Sleeping or Dormant Partner:
A sleeping partner does not take part in the conduct of the business; he only contributes his share
of capital and enjoys profits and losses. He is not known to the outside world therefore he is also
not liable to the third parties for acts of the firm.
Nominal Partners:
A Nominal partner has no real inters in the business nor does he contributes any capital. The only
contribution made by him is his name, although he has no share in profits of the firm but is liable
to the third parties for all acts of the firm.
Partner in Profits only:
As clear by the name a partner in profit only would share profit but not the burden of loss.
Although he has no interest in the management of the firm but is fully liable for the acts of the
firm to the third parties.
Senior Partner:
A partner who has more investment of capital in the business is known as a senior partner.
Junior Partner:
A partner who has less investment of capital in the business is known as a junior partner.

Minor as a Partner
Section 30 of Partnership Act 1932 states that:
A person who is a minor according to the law which he is subject, may not be a partner in
a firm, but with the consent of all partners for the time being, he may be admitted to the
benefits of partnership.
Case law regarding minor as a partner:
P. L. D 1955 Lah. 350
It was held that under contract act a minor is incapable of entering into any contract thus a minor
cannot be partner in a firm but he can only be admitted to the benefit of partnership.
Important rules regarding minor as a partner:
(i) There must be a partnership in existence before a minor can be admitted to its benefit.
(ii) Consent of all partners is necessary.
(iii) There cannot be a partnership consisting of all minors.
(iv) Minors position is limited only to the benefits of partnership.
(v) If a minor is made full fledge partner under the terms of a partnership deed, the deed
would be invalid.

Position of Minor
Position of minor during minority:
Right of sharing profit:
He has a right to receive his agreed profit of the firm.
Inspection of accounts:
He can inspect and take copies of the accounts of the firm.
Cannot conduct business:
A minor cannot take part in the management of the business.
Cannot be declared insolvent:
A minor cannot be declared insolvent.
Not liable for the acts of firm:
A minor liability is limited and is not liable for the acts of firm.
Filing suit:
He has right to sue the other partners for his shares in profits or property of the firm when he
breaks his relation with the firm.
Position on attaining majority:
On attaining majority he must decide within six months whether he shall continue in the firm or
leave it. He should give public notice about his decision, if he fails to do so, will be considered a
major partner.
In case of becoming a partner:
If minor become partner his positions will be as under:
(i) His rights and liabilities will be similar to those of a fully fledged partner.
(ii) He becomes personal liable to third parties for the debt and obligations of the firm.
(iii) His share of profits and property remains the same unless altered by agreement.

In case of not becoming partner:

His position will be as under:(i) His rights and liabilities continue to be those of a minor up to the date of giving public
notice.
(ii) He is not liable for the acts of firm done after the date of public notice.
(iii) He is entitled to sue the partners for his share of profit in the firm.
Disabilities of minor in a firm:
Generally disabilities of minor in a firm are as under:
(i) He may not be a partner.
(ii) He may not sue the partner for accounts, save when serves his connection with the firm.

Rights of a Partner
Following are the rights of a partner.
Right to manage the business:
Every partner has right to take part in the management of business.
Right to express opinions:
Every partner has right to express his opinions relation to business matters.
Right to access accounts book:
Every partner has right to access the account books of firm.
Right to share the profit:
Every partner has right to share the profit of the business.
Right to interest on capital:
Every partner can charge interest on capital contributed by him.
Right to interest on advances:
Every partner has right to interest on advances to the firm.
Right to be indemnified:
Every partner has right to be indemnified by the firm in respect of payment made by him.
Partners authority in emergency:
Partner has right to act in emergency to protect the firm from loss.
Conditions:
(i)

There must be an emergency.

(ii)

The act must be done for the purpose of protecting the firm from loss.

(iii)

The act must be such as a person of ordinary prudence, would have done in his own
case acting under similar circumstances.

Right to give consent for new partner:

Every partner has right to prevent the introduction of a new partner unless he consents to that.
Right to retire:
Every partner has right to retire from the firm.
Right not to be expelled:
A partner cannot be expelled from firm by any majority of partners provided the decision is made
in good faith and there is a provision in contract.
Right to carry on competing business:
Every out going partner has a right to carry on a business similar to that of the firm subject to
certain restrictions.
Right of dissolution of firm:
Every partner has right to file suit for dissolution of firm.
Right to restrain from use of firm name or firm property:
Every partner has the right to see that the property of the firm is used only for the purpose of
partnership.
Right to claim share:
Right of the partner who leaves the firm due to any reason is entitled to claim any share
according to the agreement.

Duties of a Partner
Following are the duties of a partner.
Duty to carry on business:
Every partner is bound to carry on the business of the firm to common advantage.
Duty to maintain true accounts:
Every partner must render true and proper account to his co-partner.
Duty to keep secrecy:
It is duty of every partner that he should maintain the secrecy for the business.
Duty to provide information:
Every partner should provide all the necessary information about the business to co-partners.
Duty to compensate:
It is duty of every partner to compensate any loss incurred by him.
Duty to abide by the decisions:
Every partner should abide by the decision taken by the majority of the partners.
Duty to share the loss:
Every partner shall bear the loss equally borne by the firm irrespective of their capital
contribution.
Duty not to use the firm property for his own.
It is the duty of every partner of the firm to hold and use the property of the firm only for the
purpose of business.
Sincere and faithful:
Every partner should be just and faithful to the other partners.
Duty to indemnify for willful neglect:

Every partner shall indemnify the firm for any loss caused to it by his willful neglect in the
conducted of business of firm.
Duty not to carry other business.
It is the duty of a partner not to carry other business.
Duty to pay profit to firm:
If a partner earns profit from any source of the firm it should be paid to firm.
Duty to be liable jointly and severally:
Every partner is liable jointly and severally for all the acts of the firm.
Duty not to transfer his rights:
A partner cannot transfer his rights and interest in the firm to an outsider to make him partner in
the business without the consent of others partners.

Need for Dormant Partner

Not Liable to third parties:
In a general partnership, the silent member is not liable to third parties. Although a silent partner
shares in the companys profits and losses but the third parties cant sue him for the act of the
firm.
Corporate Partner:
An established company may invest silently for competitive reasons. An electronics
manufacturer, for example, might want to keep competitors in the dark as it quietly finances a
smaller firms promising technology.
Mentor Role:
The established company, silent in running the start-ups affairs, can nevertheless provide
valuable advice and expertise in developing the promising business plan.
Reputation:
A silent partner may prefer not to be publicly associated with the investment. The owner of an
upscale boutique may prefer to keep quiet about her stake in a dollar discount store on the other
side of town, for example.
Conflict of Interest:
If an investor already has a stake in one company, he may want not to be identified with the
capital he has put into a competing business.
Personal Stake:
A silent partners investment may represent a personal conviction, a wish to see a business
succeed, rather than a desire to share in future profits.

Conclusion