Partnership (Law 346)

PARTNERSHIP
Meaning and Nature of Partnership

Partnership [1] is defined by Section 3(1) of the Partnership Act 1961 as ‘the relation, which
subsists between persons carrying on a business in common with a view of profit’[2]. No person
may be a partner with himself. There must be at least two or more persons to form a partnership.
Section 3(2) excludes from statutory definition of partnership.
The relation between members of any company association which is:-

a) registered as a company under Companies Act, 1965 or as a co-operative society under any
written law relating to co-operative societies or
b) formed or incorporated by or in pursuance of-
i) any other law having effect in Malaysia or any part thereof; or
ii) letters, patent, Royal Charter or Act of the Parliament of the United Kingdom.

Clubs and societies as well as mutual benefit organizations and building societies cannot be
considered as partnership. It was held in Soh Hood Beng v Khoo Chye Neo (1897) 4 SSLR 115
that Chinese loan association does not fall under the ambit of partnership. By virtue of Section
47(2) of the Act there cannot be an association of more than twenty persons formed or carrying on
business in partnership. As that contravenes Section 14 (3) of the Companies Act 1965, unless it
is a partnership of professionals, eg doctors, solicitors or dentists.

To explore partnership in detail it is worthwhile exploring the characteristics as revealed by the

definition..

1. The relationship, which subsists, is one contract. A partnership agreement is a contract.

However, it is not enough just to agree to be partners; you must also be in a business, which has
started. eg. if Airil and Juanpe decide that they will run a shop as partners, they are not partners in
the eye of the law until the shop is actually operating. Preparation stage is not partnership contract.
as we can see in the case of Spicer (Keith) Ltd v Mansell [1970] 1 All ER 462, M and B lost their
jobs. They agreed to go into business together and for a limited company to run a restaurant. While
they were forming the company and before it had received its certificate of incorporation from the
registrar, B ordered some goods from Specier’s for the business. They also opened a bank account
in the name of the company. The company was eventually formed but not bound by the contract
which B had made because it was not in existence at the time.

B went bankrupt before Spicer’s had been paid. So rather than prove in a bankrupt, Spicer sued M
on the basis that he was a partner of B. Held. B and M were not partners. They were not carrying
business together in partnership. They were preparing to carry on a business as a company as soon
as they could

2. A partnership is between persons, but a company, being a legal person can be a partner with
human person. the members of the company may have limited liability while the human person
has not. Two mote limited companies can be a partner.

3. Parties must be carrying on a business, and for this reason a group of people who run a social
club would not be a partnership.
4. There must a view of making profit.
5. Sharing gross profit.

According to Sir Montague Smith in Mollowo, March & Co v Court of Wards (1872) LR 4 PC
419 at 436, “to constitute a partnership the parties must have agreed to carry on business, or to
share profit in some way common.[3]. Thus in a partnership, each partner is an agent whose acts
are binding on the other partners who are his principals, and each partner is again a principal who
in turn is bound by the acts of the other partners. Section 7 provides:-

“ Every partner is an agent of the firm and his other partners for the purpose of the business of the
partnership; and the acts of every partner who does any act for carrying on in the usual way
business of the kind carried on by the firm of which he is a member bind the firm and his partners,
unless the partner so acting has in fact no authority to act for the firm in the particular matter, and
the person with whom he is dealing either knows that he has no authority or does not know or
believe him to be a partner.”

Firm and Firm Name

Persons entering into partnership with one another are, for the purpose of Partnership Act, called
collectively a firm, and the name under which their business is carried on is called the firm name.
Contrary to popular believe, a partnership does not have to be created by a formal deed. For
example, two individuals, who have started a business in retailing in pursuance to an agreement to
become partners, will be considered by law to be partners until the conclusion of the partnership
agreement.

A partnership business must be registered under the appropriate law, depending on the location of
the business. In Peninsular Malaysia it is the Registration of Business Act 1956. A creditor is
entitled under Section 6 of the Registration of Business Act5 1956 to rely on the particulars kept
in the Business Registry to ascertain whether a person has remained a partner of a firm at the
commencement of a suit[4].

In both English and Malaysian law, a firm has no legal existence distinct from its members . It has
no legal entity. In Alagappa Chettiar v Coliseum Café [1962] MLJ 111, The appellant is the owner
of premises known as No 102 Batu Road and the respondent is a firm of partners carrying on
business of a cafe and hotel in Nos 98, 100 and 102 Batu Road. The present appellant brought an
action in the Sessions Court for recovery of possession of his premises No 102 and for mesne
profits. The learned President was of the opinion that the defendant firm though registered as a
business had not the power to become tenants as so constituted and he gave judgment for the
appellant.

The respondent appealed to the High Court and Hashim J allowed the appeal. From this decision
the appellant appealed to the Court of Appeal. A preliminary point was raised by counsel for the
respondent that as “he amount or value of the subject matter at the trial is less than five hundred
dollars” there was no right of appeal unless leave was obtained from the High Court or from the
Court of Appeal.
The only other point raised was that it was suggested that since a partnership firm is not a legal
entity in law, the firm cannot hold a tenancy. – rejecting the opinion of the trial court that the
partnership known as Coliseum Café, although registered as a business, had no power to become
tenants as so constituted, his Lordship went on to say that ‘ a single individual can be a tenant, and
equally can eight partners be joint tenant’. ‘ Coliseum Café or Hotel, as such is not a legal persona,
but a label used by a number of individuals trading in partnership under one name.
Held:
(1) the profits claimed must be taken into account in determining whether the amount or value of
the subject matter was more or less than $500;

(2) in this case the respondent had not made out the allegation on which his preliminary objection
rested;

(3) the letting in this case created the relationship of landlord on the one hand and the partners on
the other, and though there had been a change of partners over the years, members of each new
partnership arising from each change by virtue of s 206(g) and (j) of the Contracts (Malay States)
Ordinance, 1950, had continued de jure to assume obligations and enjoy benefits of the tenancy.
This followed from the fact that when the tenancy agreement was made no reliance was placed
upon the “personnel of the Partners

Consideration Affecting Existence of Partnership

(1) Joint Tenancy and Tenancy in Common[5]

Joint Tenancy and Tenancy in Common refers to ownership of property by two or more persons.
Such an ownership alone does not imply the existence of a partnership if it is not designated to
share the net profit as a result of the relationship.

A joint tenancy arises where there exists (a) unity of possession (b) unity of title (c) unity of time
(d) unity of interest. The most distinct element in such tenancy is survivorship, on the death of a
joint tenant, the entire property vests in the survivor or survivors

A tenancy in common arises when two or more persons own distinct and undivided share in the
property. The death of a tenant in common does not result in the acquisition of his shares by the
surviving partners but passes to his next of kin or according to his will if he has left one.

A joint ownership of a land or any property by two or more parties does not necessarily make them
partners, not even if the actually conducted their business activities on the property.

(2) Sharing of Gross Returns[6]

A distinct must be made between a specific interest in the profits and a claim on the gross takings.
This is best illustrated in the case of Sutton & Co v Grey[7] in which the court held that the
commission earned by one, for business introduced by his to a firm to stockbrokers, did not amount
to a specific interest in the profit.

In Cox v Coulson[8] the defendant, a theatre manager was sued as a partner, for an injury alleged
to have been caused to the plaintiff by a person the plaintiff claimed to be the defendant’s partner.
The only relationship between the defendant and that person was an agreement to share whatever
might come from a theatrical group performance. The court held that there was no partnership in
this situation

Sharing of Profits[9]

As general rule, a person who receives a share of the profits is prima facie deemed to be a partner
of the firm but the receipt of such share, or of a payment contingent on or varying in the profit of
a business, does not of itself make him a partner in the business. Here the court has to examine all
the circumstances of the cases in order to ascertain the intention of the parties, without giving
undue weight to any of such circumstances including the question of the sharing of profit.[10] In
Davis v Davis [1984] 1 Ch 393 two brothers held certain houses as tenants in common. They also
had a business. They let one of the houses and employed the proceeds in enlarging the business. It
was held that they were partners as to the business but not to the houses, and the property acquired
for expanding the business was not partnership property.

If one advances a sum of money (RM 25,000) to a firm and receives payment by installments of
RM 500 monthly, this does not qualify him as a partner. Payment can be in the form of a salary
plus a commission of the share of the profits. This arrangement does not make the recipient to be
considered as a partner. Sometimes this category is also known as salaried partner.
In Walker v Hirsh[11] plaintiff advanced a monetary sum to H & Co, controlled and owned by
two individuals. P signed an agreement with H & Co which included clauses, inter alia, that P
would be paid salary plus one –eight (1/8) of the profits, and losses and the agreement could be
determined with four moths notice. P was previously a clerk and continued to discharge clerical
duties in H & Co after the agreement. The firm gave his notice as agreed, in which case he brought
an a action claiming to be a partner and demanding the dissolution of the firm. The court held that
he was only a servant of the firm and not as partner as what he claims to be.

Formation of Partnership

The agreement is not required by the partnership Act 1961 to take any special form, though it is
usually written. Writing is preferred as it makes it easy to ascertain the right and duties of the
partner. In an agreement to form a partnership, as in all contracts, there must be free consent and
consideration.

Capacity to be a firm’s member

Persons who have capacity to contract, including those of a religion, women, limited companies,
and aliens may enter into the partnership agreement but others also may do the same thing in
certain instances.

According to the age of Majority Act 1971, a minor is a person under the age of 18. In William
Jacks and Co (Malaya) Ltd v Chan and Yong Trading Co[12], The plaintiffs claimed against the
defendants the sum of $12,734.91 for goods sold and delivered by the plaintiffs to the defendants.
The writ was served on Chan and Yong the partners of the defendant firm. Yong did not take any
steps to defend but Chan denied the plaintiffs’ claim on the following grounds namely that (a) 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 (b) he had not in any way represented or held himself out as partner
of the said firm (c) the goods bought from the plaintiffs were for the personal use of Yong who
was a minor and that therefore the partners were not liable.

Held:

(1) Chan was a partner of “Chan & Yong Trading” and “Chan & Yong Construction” and on the
evidence “Chan & Yong Trading Co” and “Chan & Yong Trading” were one and the same firm
because there was no evidence that there were two separate firms by these two separate names;

(2) Chan 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 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 plaintiffs for his own purpose did
not mean that the partnership and consequently the partners were not liable. Further 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.

However in Goode v Harrison [1984] AC 607 a debt contracted during minority would not bind
the contractor of he did not repudiate the partnership agreement on attaining the age of majority.
It was further held that to avoid incurring liability on the firms future debts the minor who became
of age should repudiate the partnership agreement before such debts were incurred.

Types of Partners
Partners can be described as follows
a) A general partner – that is, he is a partner in the fullest sense.

b) An active partner – that is , he is a partner who actively participates in the management of the
business and is known to the world as a partner.

c) A dormant partner – sometimes called as the sleeping partner, that is, a partner who takes no
active part in the management but is nevertheless liable as a partner.

d) A quasi partner – that is, a person who, in fact, is not a partner but who is liable for debts of the
partnership as a consequence of holding out, that is causing people to believe he is a partner.
e) A salaried partner – commonly found in professional firms, may receive a fixed remuneration
irrespective of profits or fixed salary every month plus a small percentage of the profits. The firm
is fully responsible for his acts

Relations of partners to outsiders

Every partner is an agent to the firm and his other partners for the purpose of the business of the
partnership, and the acts of every partner who does any act for carrying on the usual was business
of the kind carried on by the firm of which he is a member bind the firm and his partners, unless
the partner so acting has in fact no authority to act for the firm in the particular matter, and the
person with whom he is dealing either knows that he has no authority or does not know or believe
him to be a partner[13]. –. – British Homes Assurance Corporation v Peterson [1902] 2 Ch 404

The above mentioned section states that each partner in an agent to other partner. Each partner
when contracting with outsiders are agents and principals at the same time.

There are four elements which must be satisfied for the act of the partner to bind the firm and other
partners.

1. the act must be done in relation to the partnership business

2. carrying on usual way of business
3. the act must be done in the capacity as a partner and not as an individual person.

4. the person with whom he is dealing either knows that he has no authority or does not know or
believe him to be a partner.

An act or instruments relating to the business of the firm and done executed in the firm-name, or
in any other manner showing an intention to bind the firm, by any person thereto authorised,
whether a partner or not, is binding on the firm and all the partners[14].
Re Briggs & Co (1906)

A father and son were partners in a firm. The firm was in financial difficulties. They were being
pressed by the creditors and they have no money to pay back the creditors. The assigned book
debts to the creditors. The son deal with this without informing the other partner i.e the father.
Later they firm was declared bankrupt and the trustee sought to set a side the agreement stating
that it was executed by the individual. Court held that the agreement was bonding because it was
an instrument relating to the business of the firm and there was some intention to bind the firm.

When one partner pledges the credit of the firm for a purpose apparently not connected with the
firm’s ordinary course of business, the firm is not bound, unless he is in fact specially authorised
by the other partners; but this section does not affect any personal liability incurred by an individual
partner.[15]

This section explain that if a partner uses the fund of the firm for his personal purposes which is
not connected with the ordinary course of business, than the other partners will not be liable for
his act, but if it was authorised by the other partners therefore all the partners can be made liable.

If it has been agreed between the partners that any restriction shall be placed on the power of any
one or more of them to bind the firm, no act done in contravention of the agreement is binding on
the firm with respect to persons having notice of the agreement.[16]

Liability of Partners

Every partner is liable jointly with the other partners for all debts and obligations of the firm
incurred while he was a partner.[17] If a partner dies, his estate becomes severely liable for the
debts and obligations in so far as they remain unsatisfied but subject to the prior payment of his
separate debts.

If a partner who is not authorised to act on behalf of the firm for any transaction, and the third
party knows about it, and if the third party goes on to contract with the unauthorized partner, the
other partners cannot be held liable for his unauthorised act.
Illustration.

Linda has supplied furniture worth RM50,000/- to the firm of Azizul, Samdan and Najib
Enterprise. Linda has not been paid her 50,000/-.

Linda may sue Azizul, Samdan and Najib Enterprise. But if there is insufficient common
partnership property to satisfy the debt, she can levy execution against the private property of the
partners – Azizul, Samdan and Najib.. On the other hand, Linda may choose to sue only one
partner.

Incoming Partners
When a person is admitted as a partner into an existing firm he immediately assumes the liability
of a partner but he will not be liable for anything done before he became a partner except by special
agreement[18]. Although the special agreement is enforceable by any of the parties to it, creditors
of the old firm do not have any right under it against the incoming partner. Therefore any debts
contracted before he joined the firm are to be shouldered by his co partners alone. However the
Partnership Act does not impose any restriction or prohibit ant incoming partner from concluding
an agreement whereby he holds himself liable to the firm’s creditors for debt contr4acted while he
was the partner of the firm

Retiring Partners

When a partner retires from the firm, he remains liable for the partnership debts incurred before
his retirement. This is clearly stated in Section 19(2), which says that ‘a partner who retires from
the firm, he remains liable for the partnership debts incurred or obligations incurred before
retirement’.
However 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.[19]

Where the debts incurred after a partner’s retirement, he is still liable to persons who deal with the
firm after a change in its constitution unless he has given express notice to such persons that he is
no longer a partner.
In Phillips Singapore Private ltd v Han Jong Kwang & Anor [1989] 2 MLJ 323, it was held that
the mere fact of registration of retirement in the Registry of Business will not give notice to a third
party of that party.
Liability of partners

Every partner is liable jointly with the other partners for all debts and obligations of the firm
incurred while he was a partner.

a) A partner’s liability in contract is governed by Part II of the Partnership Act 1961. According
to that, a partner’s liability for debts and obligation if the firm incurred while he is a partner. This
means that there is only one cause of action and if it is exhausted no further action against any
member of the firm can be commenced. [20]

b) Liability in torts has been provide for in Section 12 of the Partnership Act 1961. It is to be noted
here that by virtue of Section 14 a partner is jointly and severally liable for torts committed by co
partner while both are members of the firm.

c) Under section 13 (a) of the Partnership Act 1961, a partner is liable for his co partner’s
misapplication of money received by the co partner in the course of his apparent authority

Rights and duties of partners in the Absence of Agreement

all partners are entitled to share equally in the capital and profits of the business and must
contribute equally to losses.
Every partner may take part in the management of the firm
No partner is entitled for any remuneration while acting as a partner
No person may introduce a partner with the consent of other partners
No partner is entitle to the interest on capital before the ascertainment of the profits

Dissolution of Partnership
Partners are at liberty to fix the duration of the partnership. Where no fixed term has been agreed
upon for the duration of the partnership, any partner may terminate the partnership at any time on
giving notice of his intention to do so to all the other partners – section 28(1)

By agreement

The partnership articles may fix the duration of partnership, and the partnership is terminated on
the expiry of the period. The partners may mutually agree to dissolve the partnership at anytime.
By operation of law
Expiration. If the partnership it entered into for a fixed term

(s.34 (1)(a)) or for a single adventure or undertaking (s.34 (1)(b) ), the partnership is dissolved on
the expiration of the fixed term or termination of the adventure or undertaking.

Notice. If the partnership is entered into for an undefined time, any partner may determine the
partnership at any time by notice to the partners (s.34 (1)(c)). Such a partnership is a partnership
at will and may be determined at any time on notice. The partnership is dissolve as from the date
mentioned in the notice as the date of dissolution. If no date is mentioned, it is dissolved from the
date of the communication (s.34 (2)).

Death or bankruptcy
Every partnership is dissolved as regards all the partners by the death or bankruptcy of any partner.

By charging on shares

Where a partner suffers his share of the partnership property to be charged with payment of his
personal debt, the other partners have the option of dissolving the partnership (s.35 (2)).

By supervening illegality

If an event occurs which makes it unlawful for the business of the firm to be carried on or for the
members of the firm to carry on in partnership, the partnership is dissolved (s.36).

6. Dissolution by the Court

The courts by virtue of section 37 of the Partnership Act 1961 may dissolve a partnership on the
application by the other partner.
a) Partner’s mental incapacity

The court may dissolve the firm when a partner becomes in sane by virtue of section 37 (a). The
partner concerned must be unable to perform his duties, because of mental disorder, of managing
his property and affairs. The insanity must be of permanent nature, otherwise there can be no
grounds to dissolve the partnership.[21]
b) Partner’s physical incapacity

According to section 37(b) Partnership Act 1961, The incapacity must be permanent. In Whitwell
v Arthur (1865) 35 Beav 140, a partner was paralysed for some months. By the time the case
reached the court the partner had recovered and the court did not grant the dissolution

c) Conduct Prejudicial to the business

Section 37(c) Partnership Act 1961 provides that a partnership may be dissolved when a partner is
found to be guilty of any misconduct. This situation will be considered by the courts a s ‘ affecting
prejudicially the carrying on of the business. Moral misconduct is not enough unless, in the view
of the court, it is likely to effect the business. In snow v Milford (1868) 18 LT 142, a partner’s
massive adultery all over Exeter was not regarded by the court as sufficient grounds for dissolution
under the section.

d) Breach of agreement

The court may dissolve a partnership by section 37(d) partnership Act 1961 when one partner
breaches the partnership agreement either willfully or persistently. Here the word willful means a
serious breach inflicting damage to the business or on the firm. However the court will not interfere
if the breach was a minor one and has no impact on the business of the firm. Thus occasionally
bad tempered or behaving rudely will not suffice.
Note: No partner can force dissolution by his own default.

e) Business carried on at a loss.

This is provided by section 37(e) Partnership Act 1961. if the business can only be carried on at a
loss that it can be petitioned to the court to dissolve the partnership. As we know the essential of
having a partnership is in order for two or more people to get together in the common view of
making profit. If this purpose is defeated then it is proper for the courts to dissolve the partnership.

f) On Just and equitable ground.

According to section 37(f) Partnership Act 1961 the court may dissolve the partnership if it is just
and equitable to do so. In re Yenidje Tobacco Co Ltd 2 Ch 426, a company dissolution based upon
the fact that the company was in reality a partnership, that deadlock between the partners is enough
for dissolution, even though the business is prospering.