Law346 - Partnership

FARIHANA BINTI ABDUL RAZAK (2014) LAW 346

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CHAPTER 2: PARTNERSHIP

The law of partnership is governed by the Partnership Act 1961 (Revised

1974).

In Peninsular Malaysia, a partnership business must be registered under the

Registration of Business Act 1956.

In Sarawak, it must be registered under the Sarawak Cap.64 (Business

Names) and Cap.33 (Business, Professions and Trade Licensing).

In Sabah, it must be registered under the Trade Licensing Ordinance No. 16

1948.

However the mere failure to register the partnership under these statutes

would not mean that the partners cannot enforce their rights against each

other if on the facts, a partnership exists.

Section 3 (1) of the PA 1961 defines a partnership as ‘the relation which

subsists between persons carrying on business in common with a view of

profit’.

Section 3 (2) of the PA 1961 states that the co-operative societies and

registered statutory and chartered companies are specifically excluded from the

definition.

Nature of Partnership

A partnership need not have to be created by a formal deed or written

agreement. It may be created orally or in writing.

Thus the definition of partnership in Section 3 (1) of the PA 1961 for a

partnership to exist, two or more persons must be ‘carrying on business in

common.’

The word ‘business’ has been defined in Section 2 of the PA 1961 as

‘including every trade, occupation or profession’.


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Section 4 of the PA 1961 lays down the circumstances in which there are NO

prima facie partnerships.

a) Joint tenancy, tenancy in common, joint property, common property,

or part ownership

b) The sharing of gross returns

c) The receipt by a person of a share of the profits of business is prima

facie evidence that he is partner in the business, but the receipt such

a share, or of a payment contingent on or varying with the profits of

a business does not of itself make him a partner in the business; and

in particular:

i. The receipt by a person of a debt or other liquidated amount,

by instalments or otherwise, out of the accruing profits of a

business does not itself make him a partner in the business or

liable as such;

COX v HICKMAN (1860) 8 H.L. Cas. 268

Facts:

A, a trader, was unable to pay his creditors.

A came to an agreement with the trustees of his creditors

whereby he assigned his property to them as well as allowed the

trustees to have influence over the running of the business.

This was to enable the trustees to be paid out of the profits.

Held:

This arrangement did not create a partnership. At best, the

business was carried out on behalf of A.

ii. A contract for the remuneration of a servant or agent of a

person engaged in a business by a share of the profits of the


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business does not of itself make the servant or agent a partner

in the business or liable as such;

WALKER v HIRSCH (1884) 27 Ch.D 460

Facts:

P lent money to H & Co which was controlled and owned by

two persons.

P signed an agreement with H & Co which provided that P

would be paid a salary and one-eighth of the profits and losses

and the agreement could be determined with four months’

notice.

P, who was a clerk, continued as such in H & Co after the

agreement.

Held:

P was merely a servant and was not a partner.

iii. A person being the widow or child of a deceased partner, and

receiving by way of annuity a portion of the profits made in the

business in which the deceased person was a partner, is not, by

reason only of such receipt, a partner in the business or liable as

such;

I.R.C. v LEBUS’S TRUSTEES [1946] ALL ER 476

Facts:

A deceased partner, in his will, bequeathed his share of the

profits in a firm to his wife.

The widow’s share of the profits was not paid by the continuing

partners and was in that year surtaxed by the Inland Revenue.

Held:

The widow was not a partner in the business and none of the

assets of the firm belonged to her.

Therefore, her share of profits should not have been surtaxed.


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iv. The advance of money, by way of a loan to a person engaged or

about to engage in any business on a contract with that person

that the lender shall receive a rate of interest varying with the

profits, or shall receive a share of the profits, arising from

carrying on the business, does not of itself make the lender a

partner with the person or persons carrying on the business or

liable as such: Provided that the contract is in writing and

signed by or on behalf of all the parties thereto;

RE YOUNG [1896] 2 QB 484

Facts:

A and B entered into a written contract whereby A lent money

to B for his business and in return A would ‘… be entitled

during the continuance of this agreement, to draw from the

profits of the business the weekly sum of…’.

There was also an option for A to become B’s partner but A

never exercised this option.

Held:

A was not B’s partner.

v. A person receiving, by way of annuity or otherwise, a portion of

the profits of a business in consideration of the sale by him of

the goodwill of the business is not, by reason only of such

receipt, a partner in the business or liable as such.

PRATT v STRICK (1932) 17 T.C. 459

Facts:

A professional man sold his practice and goodwill to another.

In the agreement, he would continue to generate goodwill for his

purchaser for a period in return for a share of the profits.

Held:


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There was no intention that a partnership was to be

established.

Formation of Partnership

A partnership can be formed with or without a written agreement.

Section 3 (1) of the PA 1961, Minimum of 2 partners in a firm.

Section 47 (2) of the PA 1961, maximum of twenty.

Section 14 (3)(a) of the PA 1961, professional partnership firms are not

subject to any maximum limit on the number of members.

General Rule = Everyone sui juris (of legal capacity) is capable of entering into a

partnership agreement.

There can be a partnership between a minor and an adult.

A minor could be in a partnership for any duration of time until he wanted to

disaffirm it.

However, a minor cannot incur or be responsible for any contractual liability

for the firm’s debts.

WILLIAM JACKS & CO (MALAYA) LTD. v CHAN & YONG TRADING CO.

[1964] 30 M.L.J. 105

Facts:

The plaintiff claimed against the defendants the sum of $ 12 734.91 for goods

sold and delivered by the plaintiff to the defendants.

Chan and Yong were sued as partners of the defendant firm.

Yong did not take any steps to defend but Chan raised the following defences:

1) That no firm by the name of Chan & Yong Trading Co. ever existed,

and that, if such a company did exist, he was not a partner thereof;

2) That he had not in any way represented or held himself out as partner

of the said firm;


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3) The goods bought from the plaintiff were for the personal use of Yong

who was a minor and that the partners were therefore not liable.

Held:

1. Chan was a partner of Chan & Yong Trading.

2. Chan represented himself to be partner in the firm by approaching a

salesman of the plaintiff to ask for credit facilities with the plaintiff

company, by registering the partnership with the Registrar of

Businesses, and by opening a banking account with his own money in

the name of the partnership with the Bangkok Bank. Each mode of

representation was sufficient to fix him with liability as a partner of

the firm.

3. The fact that Yong made use of the goods bought from the plaintiff

for his own purpose did not mean that the partnership and

consequently the partners were not liable.

4. As Yong had not taken any steps after attaining the age of majority

to repudiate the partnership he was also liable as a partner of the

firm.


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Relationship between partners and outsiders

As partners are agents of the partnership firm, any act or omission

committed by one parties binds the rest of the partners if it is carried out

within the ordinary scope of the firm’s business.

Section 7 of the PA 1961 stated that as partners are agents of the

partnership firm, any act or omission committed by one partner binds the

rest of the partners if it is carried out within the ordinary scope of the

firm’s business.

The authority of each partner may be either actual (express or implied) or

apparent (or ostensible).

Express authority may be given in writing (as in the partnership agreement)

or orally.

Implied authority is inferred from the conduct of the parties.

Apparent or ostensible authority arises when the partner holds out to others

that he has such authority section 8, PA 1961.

Section 10 of the PA 1961 provide if the third party has notice of the

agreement between the partners that there are some restrictions on the

power of any one or more of them to bind the firm, the firm will not be

bound in respect of any act done in contravention of the agreement.

For the 3rd party to hold the partnership firm and the rest of the partners

liable, the following conditions must be satisfied:

i. The act must be done for the purpose of the business of the

partnership (Section 7 & 9 of the PA 1961)

ii. The act must be done in the firm’s ordinary course of business.

iii. The act must be done by the partner as a partner of the firm

and not in his own personal capacity.


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Liability of Partners

Ordinary torts

Misapplication

Misappropriation

Criminal liability

Contractual liability

Ordinary Torts

Section 12 of the Partnership Act 1961

Where, by any wrongful act or omission of any partner acting in the

ordinary course of the business of the firm or with the authority of

his co-partners, loss or injury is caused to any person not being a

partner in the firm, or any penalty is incurred, the firm is liable

thereafter to the same extent as the partner so acting or omitting to

act.

By virtue of Section 12 of the Partnership Act 1961, in order to make a firm

liable, the tortious act must be committed by a partner either in the

ordinary course of the business of the firm or with the authority of his co-

partners.

For example, all the partners of an accounting firm would be liable if any one

of them has been negligent in the handling of accounts for their client.

Misapplication

Section 13 of the Partnership Act 1961

Misapplication of money or property received for or in custody of firm

in the following cases, namely:-

a) Where on partner, acting within the scope of his apparent

authority, receives the money or property of a third person and

misapplies it; and

b) Where a firm in the course of its business receives the money or

property of a third person, and the money or property so


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received is misapplied by one or more of the partners while it is

in the custody of the firm,

The firm is liable to make good the loss.

Every partner is liable jointly and severally for everything for which the firm,

while he is a partner therein, becomes liable under Section 12 or 13.

This means that if the partnership firm is liable for wrongs under Sec 12 of

the PA 1961 or liable to make good the loss due to misapplication of money

or property, the plaintiff can sue all the partners jointly or may even sue one

or more of the partners concerned.

Misappropriation

Section 15 of the PA 1961 provides to the effect that if a partner, acting in

his individual capacity, improperly makes use of trust property in the business

of the firm, as a general rule, his other partners are not liable to the

beneficiaries.

However, if the trust money is still in the firm’s possession or under its

control, the beneficiaries can recover the same from the firm.

Criminal Liability

CHUNG SHIN KIAN & ANOR v PUBLIC PROSECUTOR [1980] 2 MLJ 246

Facts:

Officers from the Trade Description Department raided the accused’s tailor

shop.

At that time, there were 10 workers engaged in stitching materials into jeans

and jackets.

The premises were searched and officers discovered various types of ‘Texwood’

labels and tags, and ‘Texwood’ jeans and jackets both finished and unfinished.

During the raid, only the first accused was present in the shop.

The second accused, a partner, was not present.


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The charge made against both the accused was that in the course of their

business, they applied a false trade description name ‘Texwood’ to 10 pieces

of jackets and fifty-seven pairs of jeans.

Both accused were convicted and sentenced for an offence under Section

5(1)(a) of the Trade Description Act 1972.

They appealed.

Held:

1) The first accused’s appeal was dismissed.

2) The second accused’s appeal was allowed. There was no evidence showing

that the second accused was implicated in the offence except that he

was a partner of the shop.

Although partners are jointly liable in civil cases, they are not jointly liable in

criminal cases.

Contractual Liability

Section 11 of the Partnership Act 1961 states to the effect of this section is

that all partners in a firm are jointly liable for all contractual and other debts

and liabilities including tax and judgment debts which are incurred while each is

a partner.

GUINNESS ANCHOR MARKETING SDN BHD v CHELLAM JOE [1999]7 CLJ

392

A joint liability basically means that where there is only one cause of

action for the recovery of debt, and that cause of action having been

exhausted a second cause of action or a new proceeding is no longer

available against any partner or partners whom the creditor failed to

sue at the first instance.


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Duration of liability

Section 19 (1) PA 1961

A new partner who has just been admitted into a firm is not liable for the

debts incurred prior to his admission.

However, if the new partner agrees to be liable for the existing debts of the

partnership at the time of his admission, he would be liable.

Section 19 (2) and (3) PA 1961

(2)

A partner who retires from a firm does not thereby cease to be liable for

partnership debts or obligations incurred before his retirement.

(3)

A retiring partner may be discharged from any existing liabilities by an

agreement to that effect between himself and the members of the firm as

newly constituted and the creditors, and this agreement may be either

express or inferred as a fact from the course of dealing between the creditors

and the firm as newly constituted.

SUBRAMANIAM CHETTIAR v KADEN MASTAN & CO [1934] MLJ 74

It was decided that mere abandonment and inactivity by a partner who has

given up all hope of recovering his share does not affect his liability for the

partnership debts.

Liability of Persons for Holding Out

Section 16 of the PA 1961 provides that persons may be liable by ‘holding

out’.

The effects of this section is illustrated in the case of WILLIAM JACKS &

CO. (MALAYA) LTD. v CHAN & YONG TRADING CO [1964] 30 MLJ 105:

One of the defences raised by the defendant Chan was that he had not

in any way represented or held himself out as partner of the

partnership firm.


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The court held that Chan had represented himself to be a partner in

the firm by approaching a salesman of the plaintiffs to ask for credit

facilities with the plaintiff company, by registering the partnership

with the Registrar of Businesses, and by opening a banking account

with the Bangkok Bank, using his own money in the name of

Partnership.

Each mode of representation was sufficient to fix him with liability as

a partner of the firm.

Liability of Retires Partners

Section 38 (1) of the PA 1961:-

After retirement, a partner is still liable to persons who deal with the firm

after a change I its constitution unless he has given notice to such persons

that he is no longer a partner.

MALAYAN BANKING BERHAD v LIM CHEE LENG & ANOR [1985] 1 MLJ

214

Facts:

The respondents were partners of a firm called Berjasa Corporation.

The appellants sued the respondents under a trust receipt which matured and

became payable on 14 June 1975.

2 of the respondents resigned from the firm on 16 August 1976.

Held:

The respondents incurred the debt on the trust receipt before their

resignations or retirement and they could not escape liability by merely

pleading resignation or retirement.


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Relationship between partners inter se

Determined by their partnership agreement.

The partnership agreement normally provides for the rights and duties of the

partners, the conduct and management of the firm, the capital and their

profit sharing arrangement.

In Malaysia, it is common for there to be no written partnership agreement

and provisions in the Partnership Act 1961 would therefore apply unless the

partners have orally agreed on those provisions.

The interests and duties of partners in the absence of agreements to the

contrary are provided for in Section 26 of the PA 1961.

The rules in this section apply in the absence of an agreement to the

contrary.

The principle of utmost good faith between partners is implicit in every

partnership agreement and is a prime requisite in relations between

partners.

This is because the relationship between partners is based on mutual

trust and confidence.

Section 30 of the PA 1961 = Partners are bound to render true accounts and

full information of all things affecting the partnership to any partner or his

legal representatives.

LAW v LAW [1905] 1 Ch. 140

Facts:

A partner sold his share in the partnership to another partner for £21,000.

Subsequently he discovered that, unknown to him; the partnership assets

included mortgages and other securities.

The other partner, who knew about them, never told him of this fact.

The partner who sold his share sought a court order for the sale and purchase

agreement to be set aside.


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Held:

An order setting aside the transaction would have been made but for the fact

that in this case, a settlement of the claim had been made and the partner

had agreed to be bound by it.

Therefore, on the facts, the transaction could not be set aside.

Section 31 of the PA 1961 = accountability of partners for private profits.

However, a partner is not prevented from keeping any profits made

from transactions that are entirely outside the scope of partnership.

A partner must not make a profit or commission for himself by making

use of his position or any information acquired in the partnership

business.

A partner must not make a profit from a sale of the firm’s property

without full disclosure to the other partners.

Section 32 of the PA 1961 = duty of partner not to compete with firm.

If there is breach of duty committed by a partner, he is only liable to make

good the loss suffered by the partnership if he is guilty of fraud or culpable

negligence or wilful default.

Partnership Property

Has been defined in Section 22(1) of the PA 1961:

All property and rights and interests in property originally

brought into the partnership stock or acquired, whether by

purchase or otherwise on account of the firm or for the

purposes and in the course of the partnership business, …

and must be held and applied by the partners exclusively for

the purposes of the partnership and in accordance with the

partnership agreement.


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Provided that the legal estate or interest in any land which belongs to the

partnership shall devolve according to the nature and tenure thereof and the

general rules of law applicable thereto but in trust, so far as necessary, for

the persons beneficially interested in the land under this section.

It must be used and applied for the purposes of the firm and in strict

accordance with the partnership agreement.

WRAY v WRAY [1905] 2 Ch. 349

Facts:

Joseph Turnbull and William Wray together with his son, Henry Wray and

William James Wray, formed a partnership under the name ‘William Wray’.

William Wray died in 1885and his widow became a partner.

In 1890, the partners bought a house out of the partnership assets and the

property was conveyed to ‘William Wray’, this name being signed by Henry

Wray with the concurrence of the other partners.

Henry Wray died in 1902.

The three continuing partners sought a declaration that the conveyance of the

house to William Wray passed to the persons carrying on business under the

name of ‘William Wray’ because it had been purchased out of the partnership

assets.

Held:

The declaration was granted.

Section 24 of the PA 1961:

Where land or any interest therein has become partnership

property, it shall, unless the contrary intention appears, be

treated as between the partners (including the

representatives of a deceased partner), and also as between

the heirs of a deceased partner and his executors or

administrators, as personal and not real estate.


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In other words, Section 22(1) of the PA 1961 deals with the partnership

property – what constitutes partnership property, its application and

devolution; WHILE Section 24 of the PA 1961, speaks of conversion into

personal estate of land held as partnership property.

The underlying principle in Section 24 is that prima facie, unless there exists

an agreement to the contrary, the property of the partnership has to be sold

on dissolution of partnership, though in equity it is deemed to have already

been converted.

Whether or not a property is partnership property or a property deemed to

be partnership property depends on the intention of the partners which has

to be determined o each individual case.

The fact that a property is used by all the partners for the partnership

purposes need not necessarily qualify it to be termed partnership property

even though the partnership may be debited with the outgoings and expenses

of the property, unless there is evidence to show such an intention.

Shares in partnership and assignment

The share of a partner is defined as his proportional division of the joint

assets after their realization and conversion into money and after payment

and discharge of the joint debts and liabilities.

Whether a partner can dispose of his share to another person depends on

the construction of the partnership deed.

Unless there is express provision in the deed, a partner cannot transfer his

share to another person so as to entitle that person to all the rights of a

partner without the unanimous consent of all the partners.


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Section 33(1) of the PA 1961:- although a partner cannot transfer his share

without the consent of all other partners, the PA allows him to assign his

share in the assets and profits.

The rights of an assignee are limited and he is not entitled to act as a

partner.

For instance, an assignee cannot interfere in the management of the business

and he cannot object to payments made by the firm to individual partners

and employees for managing the business.

An assignee is not entitled to require any accounts of partnership

transactions or to inspect partnership books.

It is only on dissolution of the partnership that an assignee is entitled to

receive is share of the partnership assets and to call for an account as from

the date of dissolution.

Section 33 of the PA 1961:- the rights and restrictions of an assignee.

During the continuance of the partnership, an assignee has the right

to receive the assignor’s share of the profits, and the assignee must

accept the account of profits agreed to by the partners.

However, during the continuance of the partnership, the assignee

does not have the following rights:

1. To interfere in the management or administration of the

partnership business or affairs;

2. To require any accounts of the partnership transactions;

3. To inspect the partnership books.

When the partnership is being dissolved, the assignee has the following rights:

i. To receive the assignor’s share of the partnership assets;

ii. To receive an account as from the date of dissolution in order to

ascertain his share of the partnership assets.


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Dissolution of Partnership

May happen in various circumstances and its consequences not only affect the

partners themselves but 3rd parties dealing with them.

A partnership may be terminated / dissolved by:-

1) Agreement

2) Operation of law

3) Death / bankruptcy

4) Charging on shares

5) Supervening illegality

6) Court order

1.0 By agreement

a) If the duration of the partnership has been specified in the

partnership agreement, the partnership is terminated on the

expiry of that period;

b) If the partners mutually agree to dissolve the partnership.

2.0 By operation of law (unless otherwise agreed between the partners)

a) Section 34 (1) (a) of the PA 1961: if the partnership was

entered into for a fixed term and the term expires.

b) Section 34 (1) (b) of the PA 1961: if the partnership was

entered into for a single adventure or undertaking, and that

adventure or undertaking terminates.

c) Section 34 (1) (c) of the PA 1961: if the partnership was

entered into for an undefined time, by any partner giving notice

to the other partner(s) of his intention to determine (or end)

the partnership.

3.0 By death or bankruptcy (unless otherwise agreed between the partners)


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a) Section 35 (1) of the PA 1961

b) Lee Choo Yam Holdings Sdn Bhd & Ors v Khoo Yoke Wah & Ors

[1990] 2 MLJ 431

4.0 By charging on shares

a) Section 35 (2) of the PA 1961

5.0 By supervening illegality

a) Section 36 of the PA 1961

6.0 By court order

a) Section 37 of the PA 1961

b) The court may order the dissolution of the partnership, on

application by a partner, in any of the following cases:

Section 37 (a) of the PA 1961: Insanity of a partner

Section 37 (b) of the PA 1961: Permanent incapacity of

any partner to perform his duties

Section 37 (c) of the PA 1961: Conduct calculated to

prejudicially affect the carrying on of the business.

CLIFFORD v TIMMS [1908] A.C. 12

Facts:

The appellant and respondent, both surgeons, were

partners.

The appellant was a director of the American Dental

Institute Limited, a party to self-puffing advertisements.

The respondent gave notice to the appellant of his

intention to dissolve the partnership.


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Held:

The appellant’s conduct was prejudicial and the partnership

could be dissolve.

Wilful and persistent breach of the partnership agreement

(by any partner other than the applicant)

When the business of the partnership can only be carried on

at a loss

Where, in the opinion of the court, it is just and equitable

to dissolve the partnership.

Notice of Dissolution

Section 39 of the PA 1961:

Unless a notice of dissolution is given, all customers of the partnership

are entitled to treat all the former members as continuing to be

members.

Notice of dissolution may be given by an advertisement in a local press,

gazette or by a circular letter.

However, for old customers and clients of the partnership, an

advertisement in a gazette alone is not sufficient notice.

Continuation of Authority of partners

Section 40 of the PA 1961

After the dissolution of a partnership, the authority of partners

continues only so far as is necessary to wind up the affairs of the

partnership and to complete uncompleted transactions.



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Envisages a situation where prior to the settlement of account, i.e.

before the winding up of the partnership, in the event the surviving

partner carries on with that business using the same name, then that

surviving partner has to account to the estate of the late partner

giving it the option to a share of the profits or to pay an interest of

8 per cent per annum on the amount of his share of the partnership

assets.

Settlement of Accounts after Dissolution


Upon dissolution of a partnership, every partner is entitled to have the

property of the partnership applied in payment of the debts and

liabilities of the firm, and to have the surplus assets payment of the

debts distributed among the partners.


The rules for dissolution of partnership assets on final settlement of

accounts.

Law346 - Partnership

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Transcript of Law346 - Partnership