Topic > Law of Partnership 1 1 (Part II) LEARNING OUTCOMES > INTRODUCTION The previous topic discusses and explains the meaning of partnership, the important characteristics of partnership, the rules on formation of partnership, the relations of partners to outsiders and the liabilities of partners to third parties. Asa continuation, this topic focuses on: the relation of partners to one another; the mutual rights and duties of the partners; the liabilities of incoming and outgoing partners; the assignment of a partner's share in the partnership property; and the dissolution of partnership. eee ee182% TOPIC11 LAW OF PARTNERSHIP (PART II) 11.1 RELATIONSHIP BETWEEN PARTNERS The relationship between partners may be regulated by a partnership agreement made by the partners which outlines the rights and duties and other terms relating to business management, division of capital and profits of each partner, etc. The provisions contained in Part IV (Sections 21 to 33) of the Partnership Act 1961 will only apply where partners did not provide the terms of partnership in their partnership agreement. Section 21 of the Partnership Act 1961 provides that the mutual rights and duties of partners, whether ascertained by agreement or defined by the Act, may be varied by the consent of all the partners and such consent may be either expressed or inferred from a course of dealing. Above all, the principle of utmost good faith towards each other is implicit in the partnership agreement. 11.1.1 Mutual Rights and Duties of Partners In the absence of a specific partnership agreement between the partners, the following provisions relating to rights and duties of partners are found in Section 26 of the Partnership Act 1961 (a) Every partner is entitled to equal share of capital and profits of the business, and must contribute equally to losses. (b) Every partner who made any payment and incurred personal liabilities in the course of the firm’s business is entitled to be indemnified by the firm. In the case of Kok Hok Leong & Anor v. Seow Kah Cheng & Anor (1950) 16 MLJ 87, the appellant and respondent were partners in a firm which has been sued for breach of contract and ordered to pay for damages of RM4,246.50. The respondent engaged a solicitor and managed to reduce the payment of damages in the legal suit. When the partnership was dissolved, the court ordered the legal fees incurred by the respondent to be paid out of the partnership assets. The appellant refused to pay and went for appeal. The Court rejected the appeal on the ground that the respondent's action in the defence was an act to protect the firm’s assets. Therefore, he was entitled to be indemnified from the firm's assets.© (a) (e) 6) (g) TOPIC 11_LAW OF PARTNERSHIP (PART II) 183 Every partner who made any advance for the purpose of the firm's business, beyond the capital amount he subscribed is entitled to 8% interest per annum from the date of the payment of the advance. No partner is entitled to interest on capital before the ascertainment of profits. In Rishton v. Grissell (1868) LR 5 Eq 326, the Court held that a principal in a business was not entitled to the interest on capital until the employees and the agents remuneration has been ascertained. Every partner may participate in the management of the firm. In Kelly v. Tucker (1907) 5 CLR 1, K and T had entered into a partnership agreement verbally whereby they agreed to involve in the business of buying horses from Australia and to be sold in South Africa. By the said agreement, T would provide the capital while K was entrusted to manage the business. In this case, T’s participation in the management of the partnership was denied by the agreement of both parties. No partner is entitled to remuneration for acting in the partnership business. Reason being is the existence of the fiduciary relationship between partners. Thus, any partner who is assigned to manage the business is duty bound to exercise such duty for the interest of the partnership. The partners are not entitled to any salary or wages because they are performing their duties as partners in the course of the partnership business. No partner may introduce another (new) partner without the consent of sting partners.184 Pm TOPIC11 LAW OF PARTNERSHIP (PART II) In Wong Peng Yuen v. Senanayake (1962] 1 MLJ 204, the defendant and Goh were partners in a share-brokerage firm. On 26/3/59, they signed a partnership agreement whereby Goh transferred part of his interests in the partnership to his two children who were minors. On 3/4/59, Tan join the partnership as a new partner and on 30/4/59 the plaintiff paid the defendant a sum of RM20,000 in consideration of the firm taking him as a partner. The plaintiff then acted as if he was a partner in the firm. Later, the firm suffered unexpected losses and when the firm was dissolved, the plaintiff claimed for the return of RM20,000 he had paid on the ground that he was not a partner because Tan and the children of Goh had never agreed to take him as a partner in the firm. The Court held that: There was evidence to show that Tan's consent had been obtained and the consent from Goh’s children were not necessary. The agreement signed on 26/3/59 was only a transfer of Goh’s interests in the partnership but not his right as a partner in the firm. Therefore, the plaintiff had no right to claim his money back. (h) The majority partners may decide any differences as to ordinary matters connected with the firm's business but the changes in the nature of the firm's business must be made with consent of all the existing partners. In Highley v. Walker (1910) 26 TLR 685, there were three partners in a firm, carrying on business in worsted clothes. Two of the partners agreed to train one of the partner's son in the business. The plaintiff opposed to the agreement and applied to the court for an injunction to prevent the two partners from proceeding with their plan. The court dismissed the application on the ground that the dispute or disagreement between partners is usual in a partnership business. Thus, majority agreement is sufficient to resolve the dispute.TOPIC 11__LAW OF PARTNERSHIP (PART II) 185 However, in the case of Tham Kok Cheong & Ors v. Low Pui Heng [1966] 2 MLJ 52, the Court held that the act of the first, second and third partners who sold the partnership business to a company without informing the fourth partner was invalid. (i) The partnership books are to be kept at the place of partnership business, or at the principal place if there is more than one place of business. In Gan Khuan v. Tan Jin Luan [1939] MLJ 286, the Court held that the right to examine and make copies of the partnership books is not It is important to note that Section 26 of the Partnership Act 1961 is only applicable in the absence of the partnership agreement between the partners. In the existence of the partnership agreement, the above provisions are not applicable. 11.1.2 Obligations of Partners to Act in Utmost Good Faith Every partner must act honestly because the relationship between partners is based on the principle of uberrimae fidei (utmost good faith). Further obligations of partners in a firm are provided in the following provisions; Section 30, 31 and 32 of the Partnership Act 1961. (a) Under Section 30, every partner is obliged to render true accounts and full information on all things affecting the partnership. In Law v. Law (1904) All ER 526, a partner transferred part of his shares to another partner for £21,000. The partner who bought the shares knew that the partnership assets comprised of securities and charges but concealed the facts from the partner's knowledge. The Court held that: The partner who had the information must disclose it; otherwise the sale of the shares may be set aside.186 TOPIC 11 LAW OF PARTNERSHIP (PART 11) (b) © According to Section 31, every partner who uses the partnership property, name or business connection, or involve in any transaction concerning the partnership, without the consent of other partners, must account to the firm for any secret profit or benefit derived by him. In Pathirana v. Ariya Pathirana [1967] 1 AC 233, a dispute arose between two partners who were the marketing agents for Caltex Ceylon company. The defendant gave three months notice to terminate the partnership. However, before the period of the notice ended, the defendant entered into a new agency contract with Caltex under his own name. The Court held that: The profit gained by the defendant from the agency contract belonged to the firm because the defendant had used the firm’s goodwill to obtain the new contract before the partnership was dissolved. Section 32 provides the obligation of a partner not to compete with the firm in business of the same nature without consent of the other partners. Thus, if a partner opens a competing business without the consent of other partners, he must account for and render all profits made by him to the firm. In Ass v. Benham [1891] 2 Ch 244, a partner in a ship-brokerage firm assisted in the incorporation of a ship building company using information he obtained from the firm's business. He was then appointed as a director in the said company and received a salary in consideration for the services he rendered. Other partners claimed for the benefit to be given to the firm. The Court held that: Other partners had no right to claim for the benefit since the ship building business was of different nature from the shiv-brokerage business.TOPIC 11__LAW OF PARTNERSHIP (PART II) 187 INCOMING AND OUTGOING (RETIRING) PARTNERS A partner takes up the liability as a partner upon joining an existing firm. However, he will not be liable before he became a partner, as provided under Section 19(1) of the Partnership Act 1961," person who is admitted as a partner into an existing firm does not thereby become liable to the creditors of the firm for anything done before he became a partner.” The incoming, partner will only be liable to the creditors of the firm under a contract of novation whereby the creditors agree to accept the liability of the incoming partners. On the other hand, a partner who retires from the firm continues to be liable for the partnership debt incurred before he retires, as provided under Section 19(2) of the Partnership Act 1961, "A partner who retires from a firm does not thereby cease to be liable for partnership debts or obligations incurred before his retirement."(Refer also to Topic 10, subtopic 10.3.2). After a partner retires, he is still liable to any person who deals with the firm after a change in its constitution unless he has given express notice to the person that he is no longer a partner. According to Section 38(1) of the Partnership Act 1961 "Where a person deals with a firm after a change in its constitution, he is entitled to treat all apparent members of the old firm as still being members of the firm until he has notice of the change.” Further in Section 38(2), “An advertisement as to a firm in the Federal Gazette, Sabah Gazette or Sarawak Gazette shall be notice to persons who had no dealings with the firm before the date of dissolution or changed so advertised.”188 DP TOPIC11 LAW OF PARTNERSHIP (PART II) In the case of Re Siew Inn Steamship Co. [1934] ML} 180, a retired partner had inserted a notice of his retirement in several issues of a newspaper to which certain old customers were proved to be regular subscribers. After his retirement, these old customers lent money to the firm on the security of promissory notes executed by the remaining partners. One of the lenders later sued the retired partner on these notes, denying having actually seen notice of is retirement in the papers. The Court held that: The retired partner was liable on the notes, actual notice being necessary so far as old customers were concerned. In relation to dismissal under Section 27, the majority partners cannot expel any partner unless a power to do so has been conferred by express agreement between the partners. ASSIGNMENT OF SHARE Under Section 33(1) of the Partnership Act, 1961, a partner may assign his share if there is no agreement among the partners prohibiting the assignment. However, the assignee is not entitled to interfere in the management of the partnership business or to require any accounts of the partnership transactions or to inspect the partnership books. The assignee is only entitled to receive the share of profits to which the assigning partner would be entitled. In Ong Kian Loo v. Hock Wah Trading Co. & Ors [1990] 1 MLJ 315, Ong contended that he was a partner in the defendant's firm after taking over all his mother's shares in the partnership. Thus, he had the right to interfere in the administration of the partnership's business. The defendant denied it on the ground that Ong was only an assignee of his mother’s shares and he had no locus standi to contend as such. The Court decided that: Section 33(1) of the Partnership Act 1961 was applicable in this case. Ong was only an assignee to the share of his mother in the firm. Therefore, he had no right to interfere in the administration of the partnership including the right to inspect the partnership books.TOPIC 11_LAW OF PARTNERSHIP (PART II) 4189 What is the important principle implicitly provided in all partnership agreements? What is the distribution of share of each partner in the capital, profits and losses in the business? Is a partner entitled to be indemnified by the firm for his personal liabilities? What is the right of a partner who gives advance to the firm for its business? Can a partner participate in the management of the business and receive wages or salary? ‘What is the consequence of a partner who uses the partnership property, name or business connection to make secret profit for himself? What is the liability of a partner who competes with the firm in business of the same nature without the consent of other partners? Can a partner assign his share to other persons?190 > TOPIC11 LAW OF PARTNERSHIP (PART II) Discuss the following problem by applying the principle of law on partnership: (a) Car Universal Partners (CUP) was registered in 2004 to carry out business of car-trading of the national cars. The partners of the firm are Mark, Cathy and Sarah. The firm managed to acquire handsome profit due to the national campaign which encouraged people to buy national cars. In the year 2006, the firm agreed to sell their branch at Beruntung since the business was not doing well. Sarah offered to purchase the business in Beruntung as she has the knowledge that the state government has intended to develop the place as a mass housing project and there was the opportunity to have a good market for car-trading. Sarah purchased the branch and she has withdrawn herself from being the partner of CUP. The fact that Sarah has been very successful in Beruntung and with the development in Beruntung itself, has come to the knowledge of all other partners in CUP. The partners claimed that Sarah has not disclosed the information to the firm with the intention to get the sole-profit for herself. Advise Mark. 11.4 PARTNERSHIP PROPERTY It is important to determine whether the property used in the course of the firm's business is the property of partnership or the individual partner's property. Section 22 and 23 of the Partnership Act, 1961 provide the rules on this issue. Section 22(1) states that, "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, are called in this Act as partnership property and must be held and applied by the partners exclusively for the purposes of the partnership and in accordance with the partnership agreement......” According to Section 23, unless the contrary intention appears, property bought using firm’s money is deemed to have been bought on account of the firm.TOPIC 11 LAW OF PARTNERSHIP (PART II) 191 From the statutory provisions and the decided case-laws, the following conclusions may be made: (a) (b) Whether the property brought into the firm is a partnership property or property of an individual partner depends on the partnership agreement between the partners. In Miles v. Clark [1953] 1WLR 537, a photographer who carried out his own business brought in a new partner who had many business contacts. There was no clear agreement between the partners. Later, a }) dispute arose between them and the partnership was dissolved. The Court decided that: Since there was no clear agreement pertaining to the use of the assets in the partnership, the assets were not partnership properties but owned individually by the partners who brought them into the firm. If there is no agreement provided for the partnership property, the partners must have the intention to regard the property as a partnership property. ‘The property is intended to be a partnership property when it is purchased using the partnership money, even though it was purchased under a partner’s name. The property remains as a partnership property even though it is not used for the partnership business. In the case of Murtagh v. Castello (1881) T LR Ir 428, it was held that a property bought using partnership asset, although not used in the business, was regarded as a partnership property. If the property is obtained using an individual partner's money, the property will remain to be an individual partner's property.192 > TOPIC11 LAW OF PARTNERSHIP (PART II) In Ponnukon v. Jebaratnam [1980] 1 MLJ 283, the appellant had formed a partnership with the respondent to develop a land into a housing area. However, efforts to get the bank to purchase the land failed and the respondent decided to purchase the land using his money. The appellant applied for a court declaration that the respondent held the land as a trustee to the partners! The court however dismissed the application on the following grounds: * there was no agreement between the parties that the land was purchased or owned as a partnership property; the intention of the firm was to develop the land and not necessarily the land must be owned by the firm to carry out its business; the respondent personally financed the purchase of the land and did not use any partnership moncy. Therefore, the said land was owned by the respondent as his personal property and it was not to be regarded as a partnership property. (c) If certain asset is acquired for the firm, such asset is regarded as a partnership property. (d) In the absence of specific provisions or proots to show that the property is intended for the partnership, then the property is regarded as the property of an individual partner. (@) The facts of every case will be considered in ascertaining whether the property is a partnership property or property of an individual partner. Consequently, in the execution of judgement, a creditor who has obtained judgement against a firm may seize partnership property. But if a creditor obtains judgement against an individual partner only, he cannot seize all the partnership property. However, the creditor is entitled to obtain an order of court charging that partner's interest in the partnership property (Section 25(1)(2)).TOPIC 11 LAW OF PARTNERSHIP (PART Il) 193 115 DISSOLUTION OF PARTNERSHIP A firm ceased to exist when it is dissolved. This means all the firm's business cease to operate upon dissolution of a partnership, except the obligations of the partners to continue to do the necessaries for purpose of dissolution and completing the incomplete activities. There are several ways in which a partnership may be terminated as shown in the following table (Table 11. Table 11.1: Dissolution of Partnership By expiration of __ | Section 34 term or notice Subject to any agreement between the partners, a partnership is dissolved by the expiration of the term fixed, or by the termination of an adventure or undertaking, or by any partner giving notice to the other of his intention to dissolve the partnership. By death, Section 35 bankruptcy, Subject to any agreement between the partners, every partnership charge is dissolved by the death or bankruptcy of any partner. A partnership may also be dissolved if any partner suffers his share of the partnership property to be charged under this Act for his separate debt. By supervening __| Section 36 illegality A partnership is dissolved by the happening of any event which makes it unlawful for the business of the firm to be carried on or for the members of the firm to carry it on in partnership. By court order Section 37(a) When a partner is lunatic, or permanently unsound mind. Section 37(b) When a partner becomes permanently incapable of performing his part in the partnership contract. Section 37(c) When a partner has been guilty of any conduct which affect prejudicially the carrying on of the business. Section 37(d) When a partner wilfully or persistently commits a breach of the partnership agreement, or conducts himself in a manner that is not reasonably practicable for the other partner/s to carry on the business in partnership with him. Section 37(e) When the partnership business can only be carried on at a loss.194 b& TOPICI LAW OF PARTNERSHIP (PART II) Section 37(f) Whenever any circumstance arises that render it just and equitable (in the opinion of the court) for the partnership to be dissolved. 1716 PARTNERSHIP ACCOUNTS SETTLEMENT Unless there is a specific agreement between the partners, the rules to settle the partnership accounts after dissolution are provided in Section 46 of the Partnership Act 1961, as may be simplified below (Table 11.2): Table 11.2: Partnership accounts settlement Tosses (including losses and deficiencies of capital) Tobe paid first out of 1 2. a) Profits. Capital. By the partners individually according to their proportion in the sharing of profits. ‘Assets of the firm (including sums contributed by the partners to make up losses or deficiencies of capital) Tobe applied in: Paying debts and liabilities of the firm to non-pariners. Paying each _ partner rateably what is due from the firm to him for advances (other than the capital). Paying each _ partner rateably what is due from the firm in respect of capital. Ultimate residue (if any) to be divided among the partners according to the division of profits.TOPIC 11_LAW OF PARTNERSHIP (PART II) 4195 (a) Whatis meant by a partnership property? (b) If a certain asset is acquired for the firm, is the property regarded as a partnership property? (Ifa property is obtained using an individual partner's money, is the property regarded as a partnership property? (d) What are the ways of termination of a partnership? (©) Whatis the effect of dissolution of partnership? () What are the rules for the settlement of a partnership accounts after dissolution, in absence of a specific agreement between partners? Discuss the following problems by applying the principle of law on partnership: (a) Gemilang & Co. is a trading firm comprises of four partners; Joyce, Wan, Mulan and Sam. The partnership was established under Wan's name. In the year 2000, Wan died and his widow resumed his position as a partner. In 2005 the partners bought a shop-house using partnership money. Mulan signed the transaction with the consent of other partners. When Mulan died, the three surviving partners applied for a court declaration that the shop-house belonged to them, having still carrying on business under the name of Wan. Decide whether the shop- house is a partnership property. Why? (6) Mand D were partners in a law firm. The partnership agreement provided that on the death of a partner during the partnership period, the business and goodwill of the partnership should become an exclusive right of the surviving partner. On 23.3.1927, M served a notice of dissolution to D on the stated date. The notice only arrived and received by D on 10.00 a.m. of 24/3/1927. Meanwhile M died at 3.15 a.m. on 24/3/1927. Decide whether the partnership dissolved due to the notice or the death of M.196 P TOPIC11 LAW OF PARTNERSHIP (PART Il) * Every partner is entitled to equal share of capital and profits of the business, and must contribute equally to losses. * Every partner who made any payment and incurred personal liabilities in the course of the firm’s business is entitled to be indemnified by the firm. * Every partner who made any advance for the purpose of the firm's business, beyond the capital amount he subscribed is entitled to 8% interest per annum from the date of the payment of the advance. * No partner is entitled to interest on capital before the ascertainment of profits. * Every partner may participate in the management of the firm. * No partner is entitled to remuneration for acting in the partnership business. « No partner may introduce another (new) partner without the consent of other existing partners. * The majority partners may decide any differences as to ordinary matters connected with the firm's business but the changes in the nature of the firm's business must be made with consent of all existing partners. * The partnership books are to be kept at the place of partnership business or at the principal place if there is more than one place of business. * Every partner must act honestly because the relationship between partners is based on the principle of uberrimae fidei (utmost good faith). * A partner may assign his share if there is no agreement among the partners prohibiting the assignment. © Whether a property brought into a firm is a partnership property depends on the partnership agreement between the partners. * All the partnership businesses cease to operate upon dissolution of a partnership. + A partnership may be dissolved by expiration of a partnership term or notice; death, bankruptcy and charge; supervening illegality or court order.TOPIC 11_LAW OF PARTNERSHIP (PART II) 197 DM cece eee neces Uberrimae fidei Assignment of share Utmost good faith Partnership property Incoming partner Dissolution Outgoing (retiring) partner Partnership accounts Text Books: ¢ Harlina Mohamed On & Rozanah Ab. Rahman. (2007). Undang-Undang Perniagaan Malaysia. Selangor: Kumpulan Usahawan Muslim Sdn. Bhd. * Wu MA. & Vohrah, B. (2000). The Commercial Law of Malaysia (2nd ed.). Selangor: Pearson and Longman. Cases: «Ass v. Benham [1891] 2 Ch 244. * Gan Khuan v. Tan Jin Luan [1939] ML] 286. * Highley v. Walker (1910) 26 TLR 685. * Kelly v. Tucker (1907) 5 CLR 1. © Kok Hok Leong & Anor v. Seow Kah Cheng & Anor (1950) 16 ML] 87. © Law v. Law (1904) All ER 526. © Miles v. Clark [1953] 1WLR 537. * Murtagh v. Castello (1881) T LR Ir 428. * Ong Kian Loo v. Hock Wah Trading Co. & Ors [1990] 1 ML] 315. © Pathirana v. Ariya Pathirana [1967] 1 AC 233. © Ponnukon v. Jebaratnam [1980] 1 ML} 283. * Re Siew Inn Steamship Co. [1934] MLJ 180. * Rishton v. Grissell (1868) LR 5 Eq 326. © Tham Kok Cheong & Ors v. Low Pui Heng [1966] 2 ML] 52. * Wong Peng Yuen v. Senanayake [1962] 1 ML] 204.