CHAPTER 1

INTRODUCTION TO BUSINESS ORGANISATION

There are 4 types of business organization:

1. Sole proprietorship / sole trader

2. Partnership
3. Limited liability Partnership
4. Company

Sole Proprietorship (also known as Sole Trader)

The Sole Proprietorship business entity in Malaysia is owned solely by one individual,
as his/her liability is unlimited. Unlimited liability means, if a business fails or is
declared bankrupt, the creditors can sue the sole proprietor’s owner for all debts owed
and can obtain a court order to claim against his personal assets.

Advantages of a Sole Proprietorship Business Entity

1. Less paperwork & additional formalities (registration is easy, fast and fewer
documents are needed)
2. Price of entity formation is much cheaper and is not required by the Malaysian
government to be audited.
3. Not required to disclose financial statements to the public.
4. Easy to convert into limited company (SDN BHD)

Partnership

Partnership is defined by section 3(1) of Partnership Act 1961 as “the relation which
subsists between persons carrying on a business in common with a view of
profit”.
It is an agreement of two or more persons associated together for the purpose of
conducting a business. In a partnership, there are at least two persons. There also will
have joint responsibility for partnership debts and liabilities.

Limited Liability Partnership (LLP)

A limited liability partnership (LLP) is a partnership in which some or all partners
(depending on types of partner) have limited liabilities. Thus, it exhibits the elements
of partnerships and corporations.

Limited Liability Partnership (LLP) is an alternative business regulated under the

Limited Liability Partnerships Act 2012 which combines the characteristics of a
company and a conventional partnership. An LLP has to be registered via the MyLLP
portal.
 The LLP business structure is designed for all lawful business purposes with a view to
make profit. LLP may also be formed by professionals such as Lawyers, Chartered
Accountants and Company Secretaries for the purpose of carrying on their
professional practice. The LLP concept will also support startups, small and medium
enterprises (SMEs) to grow their businesses without having to worry too much on their
personal liabilities, personal assets and strict compliance requirements.

Company
According to section 2 of the Companies Act 2016, ‘A company is incorporated
pursuant to Companies Act’.

A company is a body corporate or corporation. Once registered, it becomes separate

entity from its members. This rule is known as ‘separate legal entity’ or ‘separate legal
personality’ (or sometimes called the veil of incorporation).

Differences between Company, Partnership, LLP and Sole Proprietorship

Company Conventional LLP Sole Trader

Partnership
According to the According to A body corporate Individual in
1. Companies Act section 3(1) of the and shall have a business on his
Definition 2016, A company is Partnership Act legal personality own or a
incorporated 1961, Partnership separate from its business
pursuant to is an association of partners owned by one
Companies Act and two or more person.
separate from its persons carrying
shareholders and on business in
directors common with a
view of profit

Need to register Register using a Need to register Register with

2. company’s name business name with the Registrar SSM under
Registra- with the Companies which can be done of LLP (Chief Registration of
tion Commission of at any SSM Executive Business Act
Malaysia (SSM) counter Officer) 1956 &
according to the accordance to the Registration of
Companies Act Registration of Business Rules
2016 & Companies Business Act 1956 1957
Regulations 2017 & Registration of
Business Rules
1957
 No maximum The max is 20 Two members There is only
3. number of members except in until no limit one person in a
Number of for public company professional sole
members and for a private partnership, no proprietorship.
company, the ceiling on the
maximum number numbers of
of members is 50 partners

Separate legal No separate legal The partners are No separate

4. entity which means entity status and not liable. The legal entity
Legal the company would unlimited liability. LLP itself is status and
Status & be liable for A partner can be liable for its own unlimited
Liabilities company’s debt. made liable for the debts and liability which
for debts Liabilities borne by debts of the firm. liabilities can extend to
of the directors or personal assets
business shareholders are to of the sole
the extent of unpaid proprietor.
shares only.
Company name Choice of Trade End with Choice of
5. ended with the Name subjected to “Perkongsian Trade Name
Entity word “Sdn Bhd” or ROBA 1956 Liabiliti Terhad” subjected to
Name “Bhd” approval or “PLT” ROBA 1956
Appearanc approval
es
The act of members A partner is a Every partner is A sole
6. cannot bind the principal and agent an agent of the proprietor is
Agency company and other of the firm and LLP but LLP is not an agent of
status member because a other partners only bound by his business
member is not an any act done by
agent to the firm any partner acting
with authority

Must submit No requirement to Not required Not required

7. financial statement submit the
Audit to SSM and financial
accounts required statements to SSM
to be audited. and the accounts
Public will have need not be
access to financial audited.
affairs of the
company.
 Manage by Board Partners take part Managed by Sole proprietor
8. of Directors (BOD) in the management partners and the manages by
Who of the business compliance himself and
manage the officer can employ
business others
By winding up and By agreement Court ordered By the sole
9. liquidation which is between the winding up, proprietor
Dissolution a formal partners. voluntary himself.
and procedures. The Registrar can winding up or The owner
cessation of Winding up - cancel the striking off closes the
business voluntarily by registration if there business /
members or is no business Registrar can
creditors and renewal cancel
compulsory registration if
winding up by High there is no
Court order or business
Striking off renewal
It does not affect Automatically It does not affect Automatically
10. the company dissolves the the LLP because dissolves the
Death or because it has a partnership unless it has a separate business
bankruptcy separate legal entity an agreement to legal entity
the contrary

Advantages of Companies over Partnerships

1. Limited liability - Liability of shareholder is limited. Personal wealth is protected

2. Perpetual succession - Deaths, insanity, insolvency of shareholders or directors
do not affect the company’s existence. The company has continued existence
and is not affected by death, insanity, bankruptcy of any of the shareholders or
directors.
3. Number of member -Private limited company can have maximum 50
shareholders while number of members for public company is unlimited.
4. Easy to transfer of shares - Shareholders can freely dispose of their shares to
anyone at any time at the current prevailing price. In the case of private
companies, the share can be transferred with some restrictions.
5. Employee participation - Employees can acquire a stake in company by
acquiring shares in company. Employee who owns shares would have incentive
to increase the company’s productivity and profitability.
6. Change of directors - The appointment, retirement and removal of directors are
effected in a simple manner and does not affect the company’s continuance.
7. Financing- Companies have the machinery for obtaining additional capital by
issuing unissued shares or debentures, borrowing money and for
amalgamations or merging with other companies.
 8. Transfer of property- Property of company is distinct from that of the
shareholders. Company can buy and sell property regardless of changes in the
composition of its shareholders.
9. Suing members - A company, as legal person separate from its shareholders
can sue any one of its shareholders who owes money to the company.

Disadvantages of a company

1. Control by the Registrar of Company who has extensive powers of investigation

into the affairs of a company.
2. Every company has to file annual returns within one month after the AGM
3. The company had to perform annual audits on its financial statements.
4. At least one company secretary is required to manage its statutory submissions
and returns as well as attending and preparing minutes for board and
shareholders' meetings.
5. Incorporation cost is high, and there are yearly recurring fees to be paid such
as audit, accounting, company secretarial and tax fees.
 CHAPTER 2

PARTNERSHIP LAW

What is partnership?

Partnership is defined by section 3(1) of Partnership Act 1961 as “the relation

which subsists between persons carrying on a business in common with a
view of profit”.

Characteristics / Nature of Partnership:

1. Number of partners
The minimum number is 2 and the maximum number is 20 for non-professional
partnership and unlimited for professional partnership. Presently, this type of
business is known as the conventional partnership to distinguish with the limited
liability partnership governed by the Limited Liability Partnership Act 2012. In
Tan Teck Hee v Cheng Tien Peng (1915), the firm consisted of 25 members.
The Court held that the firm was void. Therefore, legal action cannot be taken.

2. There must be an agreement between the persons to have a business in

common.
The agreement can be made either orally or in writing. Partnership could only
be registered using a business name with Registrar of Business under
Registration of Business need to complete forms supplied by SSM and pay
certain fee.

3. ‘Business in common’ means the parties must intended to run the same nature
of business. In Chooi Siew Cheong vs Lucky Height Development Sdn Bhd
& Anor [1995] 1 MLJ 513, the Court held that no partnership from a joint
venture agreement between a landlord who agreed to contribute land and a
housing developer because there was different types business.

4. According to section 2, ‘business’ includes every trade, occupation or

profession and it must already been established.
In Gulazam V Noorzaman And Sobath [1957] 23 MLJ 45, both parties made
an agreement to form a partnership to purchase, breed and sell cattle. There
was a partnership because business exists.

In Keith Spicer Ltd v Mansell [1970] 1 All ER 462, the defendant, Mansell
and his friend Bishop decided to open up a restaurant. The restaurant has not
yet operated. Bishop order goods from the plaintiff for the restaurant but did not
pay for the goods. The plaintiff sued for the unpaid goods. It was held that there
 was no partnership because the business has not yet started. The plaintiff’s
claim failed.

5. The agreement between the persons to carry on the business for ‘profit’. If a
group of people raise funds to run a charitable organization, this is not a
partnership. It must not include club or charitable trusts that set up for welfare.

In Badeley v Consolidated Bank (1888) 38 Ch D 238, if one person carries

on the business and share the profit of the business with another, they are
partners.
Section 4 - The sharing of gross returns does not of itself create a partnership
same as Cox v Coulson [1916] 2 KB 177, they were not partners because
they were not sharing profits but sharing gross returns.

ESTABLISHING THE PARTNERSHIP

The definition of a partnership should be seen in two aspects. The definition of s.3(1)
is a general definition, and whether a partnership exists or not will depend on
whether s.3(1) has been fulfilled. This general definition is followed by s.4 which
specifically sets out rules to determine certain relationships that do not constitute a
partnership.
Section 4 of the PA 1961 lays down certain circumstances which are not ‘prima facie
‘partnerships .The rules for determining the existence of a partnership are set out
under s.4 which concerns three situations:
 S.4(a) Joint tenancy and tenancy in common
 S.4(b) Sharing of gross returns
 S.4( c ) Receipt of share of profits
Section 4 of the 1961 Act gives a detailed guidance on the establishment of
partnership. Certain circumstances are not ‘prima facie’ partnership. Here, the term
‘prima facie’ means evidence based on first impression or at the first view before
further investigation.

1. Section 4(a) – ‘joint tenancy’ and ‘tenancy in common’ refer to ownership of

property by two or more persons, common or joint ownership does not imply
the existence of partnership.

Case: Davis v Davis (1894)

A father left his 2 sons, his business and three freehold houses in equal shares as
tenant in common. They let one of them and employed the rent in enlarging the
workshop attached to the 2 houses. They continued to carry out the business. They
each drew out from it a weekly sum but no accounts were kept. The rent of the 3 rd
house was divided between them. It was held that there was a partnership as to the
business but not as to the freehold houses.

2. Section 4(b) – the sharing of gross return also does not imply the existence
of partnership

Case: Cox v Coulson

The defendant (Coulson) was the manager of the theatre and agreed with Mr Mill to
provide his theatre for one of Mill’s production. The defendant was to pay for lighting
and the posters and Mr Mill has to provide the company and the scenery. Under the
agreement the defendant was to receive 60% of the gross takings and the remaining
40% to Mr Mill. The plaintiff was shot by one of the actors during the performance. She
sought to make the defendant liable on the ground that he was a partner of Mr Mill. It
was held that the sharing of gross returns did not create a partnership.

3. S.4( c ) of the PA 1961: The general rule is that if a person receives a share
of the profits, he is prima facie deemed to be a partner of the firm. However,
the courts will look at the other circumstances surrounding the receipt of the profits
to decide whether or not there is a partnership. There are five circumstances
pointed out under s.4 ( c ) where the sharing of profits does not make the person
receiving a partner.Receipt of such a share of profits of a business, does not itself
make him a partner in the business.
• Section 4(c)(i) – payment of debts / payment by instalments

Case: Badeley v Consolidated Bank

Badely advanced money to CB. CB agreed to pay an interest of 10% on the sum
advanced from the net profit of his business. HELD: Badeley is not a partner of CB.

• Section 4(c)(ii) – Payment of servant or agent (remuneration)

The relationship of employer and employee is inconsistent with partnership and that
of an independent agent is clearly distinguishable on the basis that there is no
involvement in the business.

Case: Abdul Gaffoor V Mohamed Kassim (1969)

The sharing of profit as remuneration for an employee does not itself make an
employee as a partner.

• Section 4(c)(iii) – annuity to the widow or children of a deceased partner.

Usually, in partnership agreement, the partner will make the provision that the
partner’s widow or children are to receive a specified proportion of the profits of the
business after his death. Such receipt is clearly no evidence of partnership.
Case: I.R.C v Lebus’s Trustees (1946)
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. It was held that the widow was not a partner
in the business and none of the assets of the firm is belonged to her. Therefore, her
share of profits should not have been surtaxed.

• Section 4(c)(iv) –Loan given with a rate of interest varying with profits.

Case: Re Young , ex parte Jones(1896)

Mr Llyod Jone and Mr Young entered into an agreement provided that Llyod Jone
should lend £500 to Young. In consideration for the payment, Llyod Jone will receive
£3 per week out of profits. Llyod Jone was also to assist in the office. There was also
an option for Llyod Jone to become a partner but he never exercises this option.
HELD: Even though Llyod Jone received a share in the profit, he was not a partner.
He was a creditor.

• Section 4(c)(v) –consideration for goodwill

Case: Pratt v Strick (1932)

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: There was no intention that a partnership was to be established.

FORMATION OF PARTNERSHIP

Number of partners

The minimum number is 2 and the maximum number is 20 for non-professional

partnership and unlimited for professional partnership. In Tan Teck Hee v Cheng Tien
Peng (1915), the firm consisted of 25 members. The Court held that the firm was void.
Therefore, legal action cannot be taken.
Capacity

Where one or more parties to a partnership contract lack of such capacity, the contract
may be invalid.

(a) Minor
The age of majority in Malaysia is 18 as provided in the Age of Majority Act 1971. Until
that age, he is referred as a minor. A minor is a person who has not reached the age
of majority. In Malaysia, the provision of section 11 of the Contracts Act 1950, states
that a minor has no capacity to enter into a contract and this includes a partnership
agreement.
Case: William Jacks & Co (Malaya) Ltd v Chan & Yong Trading Co
Plaintiff claimed RM12,000 for goods sold and delivered to the defendants who were
partners. Yong, a minor at the time the goods were purchased, took no steps to defend
the action, but Chan denied Plaintiff’s claim alleging that the goods bought were for
Yong’s personal use and therefore the partners were not liable.

HELD: The fact that Yong made use of the goods did not mean that the firm and
consequently the partners were not liable. Further, as Yong had not taken any steps
to repudiate the partnership after attaining the age of majority, he was also liable as a
partner of the firm.

Thus, whenever a minor has attained the age of majority, he must make a decision
either to continue or discontinue his existence in the partnership. If he chooses to
remain , he will be regarded as a major/adult partner and thus accountable for the
partnership’s accounts and liabilities.

Case: Goode v Harrison

A minor would be in a partnership for any duration of time until he wanted to disaffirm
it. However, minor cannot incur or be responsible for any ontractual liability for the
firm’s debt.

(b) Unsound mind

Unsound mind is not itself a bar from entering into a partnership. There can still be
legally binding agreement to form a partnership between a person of unsound mind
and another person provided the person of unsound mind can establish that the other
person has prior knowledge of his insanity at the time of the agreement.

Illegality
A partnership agreement, like any other contract may be void ab initio because its
either commercial purpose is illegal or because it is proposed to carry on an otherwise
lawful business in an illegal manner. In addition, a partnership may be void for illegality
because the law prohibits partnerships between certain persons. If a partnership is
illegal, the parties will have no rights as against each other or against anyone else.

Partnership is illegal if it is formed for a purpose prohibited by statute or at common

law. In times of war it is illegal for a person resident in one country to form a
partnership with a person resident in an enemy country.

A partnership agreement also illegal if the intention of the parties is to conduct illegal
business. Eg: a partnership created for the export or import of drugs as it was
prohibited by law.
Types of partners

1. General partner – this is the normal type of partner who contributed his capital
for the business and manages the business.
2. Active partner – This partner did not contribute capital but managed the
business.
3. A dormant (sleeping) partner – This partner only contribute his capital into the
business but did not involve in the managing the business.
4. A quasi partner – This partner did not legally register his name as a partner but
his involvement in management of the business and his existence make third
party believe that he is legally the partner of the business. (Partner through
holding out or estoppels).

RELATIONSHIP BETWEEN PARTNERS AND OUTSIDERS

(1) Liability under contract

Section 7 Partnership Act 1961

Every partner is an agent of the firm and his other partner. His action binds the firm
(other partners) if it is done:
1. In the usual way of business or in the usual manner
2. Third party knows that the person contracting is a partner or an agent to the
partnership
3. Third party believes that the partner has authority. The authority could be actual
or apparent.

But, the firm would not be liable for personal debt of partner if it is not done in the usual
way of business or not for business purpose.

Case: Chan King Yue v Lee & Wong (1962)

The plaintiff’s husband borrowed from her $35,000 as a loan from her to the firm which
he was a partner. He gave her a receipt in the name of the partnership. The money
was paid into the partnership account and immediately thereafter utilized by the firm
to pay off some of its debts. The plaintiff initiated an action to recover the loan. The
other partners contended that the plaintiff’s husband was not authorized by the firm to
borrow the money.
HELD: The borrowing was an ‘act necessary for the carrying on of the business’ of the
partnership and as such bound the co-partners.

Case: Sithambaram Chetty v Hop Hing (1928)

Two partners who are living in Singapore opened a shop in Penang. The shop was
run by two managers. The partners never revealed themselves as having connection
with the business and as far as the public could see, the managers were running the
business as partners. One of the manager borrowed money from the plaintiff and then
disappeared. The plaintiff sued the partners in Singapore. The partners said that the
manager had no authority to borrow money.
HELD: All the partners are liable.

Section 8 Partnership Act 1961

Partners are bound by act of any person (not necessarily a partner) on behalf of firm
if it is done in the usual way of business and the person is authorized. The contract
made by employee or agent to the firm may bind the partners.

When a partner deals with third parties (an outsider), he is considered as an agent for
the firm and the other partners. Therefore, whatever contracts that he has entered into
with third parties will bind the firm and the other partners as well provided that he does
so within the authority given to him.

What is authority? Authority is a mandate given to an agent by the principals to perform

a particular act or services of an act for them. As an agent, a partner may have;

i. Actual authority
Simply means that an agent may bind his principal to any act which is expressly /
clearly authorized by his principal to do so.

ii. Apparent / ostensible authority

An authority which is not expressly given to the partner but 3rd party may assume that
a partner will have the usual authority of a partner in that particular kind of business.

Section 9 Partnership Act 1961

Where one partner pledges the credit of the firm for the purpose apparently not
connected with the firm’s ordinary courses of business, the firm is not bound unless
he is in fact specially authorized by the other partners but this section does not affect
any personal liability incurred by an individual partner.

Thus, to summarize that for a third party to hold the partnership firm and the rest of
the partners liable, the following condition must be satisfied;

1. the act must be done for the purpose of the business of the partnership
2. The act must be done in the firm’s ordinary course of business
3. The act must be done by the partner as a partner of the firm and not in his own
personal capacity.
Case: Mercantile Credit Co v Garrod (1962)
Mr Garrod and Mr Parkin formed a partnership carried on a garage business. Their
partnership agreement stated that their usual scope of business would exclude the
buying and selling of car. Parkin, without Garrod's knowledge, sold a car to which he
had no title, to Mercantile Credit Co Ltd for $700. The company brought an action
against Garrod to claim back $700.

It was held that Garrod was liable, because the sale of the car was the doing of "an
act for carrying on in the usual way business of a kind carried on by the firm" within
the scope of the Partnership Act.

Section 11 Partnership Act 1961

Each partner is jointly liable with other partners for debts and contractual obligations
while he is a partner.

Joint liabilities means the creditor has only one cause of action. If he sues one partner
or some only and obtain judgment against him or them, he can no longer sue the
other partners who are jointly liable. This is because he can only constitute a single
action and not several actions against member of the firm.

Case: Kendall v Hamilton (1879)

The creditor sued all the obvious members of a partnership and was awarded
judgment against them. He failed to recover the debt in full. He subsequently
discovered a wealthy dormant partner whom he sought to sue for the balance of the
debt.
HELD: Since the debt was a joint one only, the first action prevents the next action.
Therefore, the action taken failed.

After the death of a partner, his estate becomes severally liable for debts and
obligation incurred while he is a partner. However, the liability is subjected to prior
payment of his personal debts. If there is insufficient partnership property to settle
debt, 3rd party may bring separate action against the property of the deceased partner.

(2) Liability of firm for wrongs (liability under tort)

Section 12 Partnership Act 1961

This liability arises when there is an act or omission of a partner, which caused loss or
injury to third party. The wrongs must be committed in the ordinary course of business
and he acts with the authority of his co-partners.

Case: Hamlyn v Houston & Co. (1903)

A partner in Houston & Co bribed a clerk in a rival firm to disclose to him confidential
information relating to it. The rival firm suffered a loss in consequence and sued
Houston & Co for damages.
HELD: The action succeeded. Houston & Co were liable for the partner’s wrongful act
as he had been acting in the ordinary cause of business of the firm.

(3) Misapplication of money or property received from 3rd party for or in custody
of firm

Section 13 Partnership Act 1961

The firm is liable for the loss to third party if a partner, acting within the scope of his
authority, receives money or property and misapplied it.

Case: Rhoudes v Moules (1895)

The plaintiff sought to raise money by way of a mortgage on his property. He used a
solicitor in a firm who had told him that the lenders wanted additional security and so
he handed the solicitor some share warrants to bearer. The solicitor misappropriated
them and the plaintiff sued the firm.
HELD: The firm was liable.

Nature of liability under sections 12 and 13

Section 14 Partnership Act 1961

The liability under section 12 and 13 of the Act every partner is liable jointly with his
co-partners and also severally for everything for which the firm becomes liable whilst
he is a partner. The distinction in the Act is between joint liability for contracts and joint
and several liabilities for torts.

(4) Improper employment of trust property

Section 15 Partnership Act 1961
If a partner being a trustee improperly employs trust property, he will be liable
personally. Other partners liable if they have noticed of the breach of trust and allow it
to happen.

Case: Blyth v Fladgate (1891)

Trust money may be recovered from the firm if it is still in possession and under the
control of the firm.

(5) Criminal liability

Although partners are jointly liable in civil cases, they are not jointly liable in criminal
cases. So, any criminal offence committed by any partner, he is personally liable.

Case: Chung Shin Kian & Anor v Public Prosecutor (1980)

Both partners (the first and second accused) were accused of applying a false trade
description name “Texwood” to 10 pieces of jackets and 57 pairs of jeans. During the
raid, only the first accused was present in the shop. The second was not present. Both
were charged and sentenced for an offence. They appealed.
HELD: The first accused’s appeal was dismissed. The 2 nd accused conviction was
quashed because he was not present during the raid on the premise and there was
no evidence that he was involved.

(6) Persons liable by “holding out”.

Section 16 Partnership Act 1961
If a person is not a partner but represents himself or allows himself to be represented
as a partner, he may be liable like a partner for the debts of the firm. He is liable as if
he is a partner but only to the third party who has given credit upon believing in that
representation.

Case: Tower Cabinet Co Ltd v Ingram (1949)

Christmas and Ingram entered into a partnership and carried on the business of
household furniture under the name ‘Merry’s’. The partnership was dissolved in but
Christmas continued to carry on business under the same name. Tower Company
Limited which had not previously dealt with “Merry’s” received an order to supply
Merry’s with some furniture. The price for the furniture was never paid and the
company obtained judgment against Ingram on the fact that Ingram’s name appeared
on the headed notepaper which used in relation to the ordered goods.

The court held Ingram was not liable because he had not ‘knowingly’ suffered himself
to be represented as a partner.

(7) Liability of incoming and outgoing partners

Partners are liable without limit for all debts committed by the firm whilst they are
partners. However, partners may come and go. Thus it is necessary to know when a
retiring partner ceases to be liable for the debts of the firm and a new partner assumes
such liability.
Liability of incoming / new partner

Section 19(1) Partnership Act 1961

An incoming or new partner is not liable to creditors for anything done before he
becomes a partner unless there is a special agreement to accept liability.

Case: Rolfe and Bank of Australasia v Flower Salting & Co (1865)

The new partners were held liable to the debts of the old firm as they had impliedly
agreed to accept liability by not objecting to the accounts provided by the creditors. In
other word, a new partner will still be made liable to the debts of his old firm even
though he has joint a new firm

Section 19(2) Partnership Act 1961

Liability of outgoing / retiring partner - Where a partner retires from the firm, he remains
liable for partnership debts incurred while he is a partner unless there is an agreement
to release him.
Case: Court v Berlin (1897)
It was HELD that the retiring partners were liable for the debts incurred in the course
of continuing transaction that commence while they were partners. Since they did not
give the notice of retirement, they were also responsible for the debts incurred after
the retirement.

What about debts incurred by the firm after a partner’s retirement?

According to section 38(1), he is still liable the persons who deal with the firm and his
acts still bind the company unless the firm / he has given express notice to such
persons to inform that he is no longer a partner.

Case: Tan Sin Moh v Lebel Ltd (1988)

Third party must be specifically notified. There must be an express notice or actual
notice given to them or advertised in Federal Gazette. A mere notice to the Registrar
of Business was insufficient.

Case : Re Siew Inn Steamship Co. (1943)

The creditor, who was an old customer, sued the retired partner for the repayment of
his money lent to the firm after his retirement.

HELD: The retired partner was liable even though he had inserted the notice of
retirement in the newspaper. This is because of his failure to give an actual notice to
the creditor. The advertisement in the newspaper considered to be insufficient.

TUTORIAL QUESTION & SAMPLE ANSWER

QUESTION 1
Lina, Mila and Fieda are partners in a firm called “ The New You” which specializes in beauty
treatment.

Lina, without Mila’s and Fieda’s knowledge, borrowed RM50,000 from Sure Finance to pay
off some debts of the firm and to buy new treatment machine. Sure Finance demanded
repayment of the loan form Mila and Fieda when Lina defaulted a few monthly instalments.

Discuss whether Sure Finance is likely to succeed in its action.

SAMPLE ANSWER

a)Issue:

Whether Sure Finance can succeed in its action to sue “The New You “ for not paying the
debt sum ?

Principles of Law/General Rules:

(1) Liability under contract

Section 7 PA
Every partner is an agent of the firm and his other partner. His action binds the firm (other
partners) if it is done:
(i) in the usual way of business or in the usual manner
(ii) third party knows that the person contracting is a partner or an agent to the
partnership
(iii) third party believes that the partner has authority. The authority could be actual or
apparent.

But, the firm would not be liable for personal debt of partner if it is not done in the usual way
of business or not for business purpose.
Case: Chan King Yue v Lee & Wong
The plaintiff’s husband borrowed from her $35,000 as a loan from her to the firm which he was
a partner. He gave her a receipt in the name of the partnership. The money was paid into the
partnership account and immediately thereafter utilized by the firm to pay off some of its debts.
The plaintiff initiated an action to recover the loan. The other partners contended that the
plaintiff’s husband was not authorized by the firm to borrow the money.
HELD: The borrowing was an ‘act necessary for the carrying on of the business’ of the
partnership and as such bound the co-partners.

Case: Goldberg v Jenkins & Law

The Court held that the borrowing of money by a partner was held not to amount to the ‘usual
way’ due to the exorbitant rate of interest of the loan.

Case: Sithambaram Chetty v Hong Hing & Ors

Two partners who are living in Singapore opened a shop in Penang. The shop was run by two
managers. The partners never revealed themselves as having connection with the business
and as far as the public could see, the managers were running the business as partners. One
of the manager borrowed money from the plaintiff and then disappeared. The plaintiff sued
the partners in Singapore. The partners said that the manager had no authority to borrow
money.
HELD: All the partners are liable.
Section 11 PA
Each partner is jointly liable with other partners for debts and contractual obligations while he
is a partner.

Third party may sue all the partners individually or the firm. It is because all the partners in the
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.

Kendall v Hamilton.
The creditor sued all the obvious members of a partnership and was awarded judgment
against them. He failed to recover the debt in full. He subsequently discovered a wealthy
dormant partner whom he sought to sue for the balance of the debt.

HELD: Since the debt was a joint one only, by suing the apparent partners the creditor elected
to sue only them and could not commence a fresh proceedings against the other partner.

After the death of a partner, his estate becomes severally liable for debts and obligation
incurred while he is a partner. However, the liability is subjected to prior payment of his
personal debts. If there is insufficient partnership property to settle debt, 3rd party may bring
separate action against the property of the deceased partner.
Application:
According to section 7 of the PA 1961, a partner’s action will make the other partners and firm
liable for the partners action ,if the 3 conditions are fulfilled.
By applying CKY v. L & W to this present case, , the borrowing power is regarded as an act
necessary for the carrying on off the business of the partnership.
Thus, whatever that has been made Lina as long as it is necessary for the ‘New You” firm ,
her action will make the other partners (Fieda and Mila) are accountable too. Furthermore,
Fieda and Miela are jointly liable with other partners for debts and contractual obligations
while he is a partner .Sure Finance may sue all the partners individually or the firm

Conclusion:
In conclusion, Sure Finance is likely to succeed in its action to sue the firm “New You” if all the
conditions stipulated under section 7 and 11 are been fulfilled.

QUESTION 2
Eza, Piekah and Amal are partners in a firm manufacturing “ikan masin”(salted fish).The
partnership was formed on 1st January 2016 under the name “Masin Enterprise”.

Discuss the legal position of the concerned parties in the following situation:-

i) On 1st May 2017, Eza retired from the firm. Piekah and Amal continued the business of the
firm without changing the name of the firm. The firm had borrowed a sum of money from Koko
Bank in March 2018. The firm had also borrowed RM10,000 from Semperit Bank in
September 2018.

Consider the liability of Eza towards Koko Bank and Semperit Bank.

SAMPLE ANSWER :

ISSUE:whether Koko Bank and Semperit Bank can sue Eza ?whether Eza is liable towards
the said Banks?

PRINCIPLES OF LAW/ GENERAL RULES:

A new partner
Section 19(1) PA – Liability of new partner
Generally, a new partner is not liable to creditors for anything done before he becomes a
partner unless there is a special agreement to accept liability.

Section 19(2) PA – Liability of retiring partner

Where a partner retires from the firm, he remains liable for partnership debts incurred while
he is a partner unless there is an agreement to release him.

What about debts incurred by the firm after a partner’s retirement?

He is still liable the persons who deal with the firm and his acts still bind the company unless
the firm / he has given express notice to such persons to inform that he is no longer a partner.

Section 38(1) provides that 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 a member of the firm
until he has notice of the change.

Case: Tan Sin Moh v Lebel Ltd

Third party must be specifically notified. There must be an express notice or actual notice
given to them or advertised in Federal Gazette. A mere notice to the Registrar of business
was insufficient.
Gazette : official journal with public notice.
Notice in newspaper may not be sufficient.

Case : Re Siew Inn Steamship Co.

Advertisement of retiring partner in a newspaper, believed to be read by potential customers,
was held to be insufficient. Thus the retired partner was still liable.

APPLICATION:
In this case, Eza who is a retired partner is under a duty to inform her old cutomers or clients
that she has now retired from Masin Enterprise. Otherwise, she is accountable to their old and
new customers. By applying section 19(2) of the PA 1961 Eka, a partner who retires from the
firm, will remain liable for partnership debts incurred while he is a partner unless there is an
agreement to release her.Besides that, under section 38(1) of the PA 1961, Koko and
Semperit Bank are entitled to treat all apparent members of the old firm including Eka as still
being a member of the firm until the has notice of the change.

CONCLUSION:In a nutshell, Koko and Semperit Bank can succeed in their actions to sue
Eka since Eka has not informed her retirement to the old clients.

RELATIONSHIP BETWEEN PARTNERS INTER SE

Section 21 - Right and duties under the acts or agreement may be varied by consent
of all parties and not majority.

Section 26 - Interest and duties of partners are subjected to the agreement made
between all partners. If there is no agreement, all the provisions in section 26 are
applied.

Section 26 of Partnership Act:

(a) profits and losses are to be shared equally

(b) the firm must indemnify every partner in respect of payment made and personal
liabilities incurred by him:
(i) in the ordinary and proper conduct of the business of the firm ;or
(ii) in or about anything necessarily done for the preservation of the
business or property of the firm
(c) loan or advances by a partner to the firm are to bear interest at the rate of 8% per
annum

(d) no interest payable on the partners’ capital

(e) every partner is entitled to participate in management of the business
(f) no partner is entitled to a salary for participating in a partnership business
(g) introduction of a new partner must be by unanimous consent from all existing
partners
Byrne v Reid (1902)
A father proposed his son as partner as allowed under a partnership deed. The
other partners refuse to admit the son. Later they agreed to execute all deeds
necessary for his admission. However, they did not fulfill with their promise, and
still refused to admit him. The son sued them.
HELD: The partners were bound by the partnership deed. The son was a partner
in the eyes of the law upon his father's proposal and therefore could exercise his
rights as such.
(h) ordinary matters may be decided by majority of the partners, but no changes may
be made of the nature of business without the consent of all existing partners
(i) the partnership book must be kept at the principal place of business and accessible
to every partner. They must also be allowed to have a copy of the accounts.

Section 27 - Every partner cannot expel any partner unless that power was conferred
by prior express agreement between the partners.

Green v Howell (1910)

A clause in a partnership agreement provided that if a partner committed any flagrant
breach of his duties as a partner, the other partner could expel him. One partner was
guilty of flagrant breach and the other partner served a notice of expulsion without
giving an opportunity to explain.
HELD: The notice was valid in accordance with the provision in the agreement.

DUTIES OF PARTNERS
(i) They must act in utmost good faith or bona fide towards every other member. They
cannot gain benefit at the expense of the firm. This is because the relationship
between partners is based on mutual trust and confidence.

Case: Vasu Devan & Ors v V.A Nair (1985)

A partner alleged that his co-partner fraudulently sold the business without discussing
the sale agreement with him or obtaining his consent.
HELD: The mala fide partner can be held liable.

(ii) Section 30 – Duty to render proper account

The partners are bound to render true accounts and full information of all things
affecting the partnership to any partner or his legal representatives.

Case: Law v Law (1905)

A, a partner, sold his share in the partnership to another partner, B for $21,000. A later
discovered that the partnership assets consisted of mortgages and other securities.
This fact had not been disclosed to him by B. A asked an order to set aside the
contract.
HELD: The contract could be set aside.
(iii) Section 31 - Account to the firm for any secret profit / benefit
A partner cannot make secret profit. If there is any, he has to account it to the firm
regarding to any transaction concerning the partnership or from any use by him of the
partnership property, name or business connection.

Case: Bentley v Cravan (1853)

A partner must not make a profit from a sale of the firm’s property without full disclosure
to the other partners.

(iv) Section 32 – Duty not to compete with the firm

A partner cannot carry on any business of the same nature as and competing with that
of the firm. If this duty is breached, the remedy has to pay to the firm and all profits
made in the competing business.

Case: Ass v Benham (1891)

A partner cannot use information obtained by him in the course of partnership business
to compete with the partnership itself. In this case, the court HELD that the partner’s
involvement in the business of shipbuilding did not amount to competition with his
firm’s shipbroking business.

PARTNERSHIP PROPERTY

Section 22
“All property and rights and interests in property originally brought in 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;

Provided that the legal estate or interest in any land which belong 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.”

The meaning rather wide as it includes not only property but also rights and interests
in property.

Three ways of determining partnership property:

1. All property originally brought into the partnership stock is considered as

partnership property unless there is an express or implied agreement between
the partners to consider it otherwise.
Case : Miles v Dark
 Dark carried on a photography business on premises for which he was the
owner of the lease. Miles, a freelance photographer entered into a partnership
with Dark, bringing with him his business connection. They had quarrel and
decided to dissolve partnership. Held; partners had only agreed to share profits
and there was no other arrangement with regard to property. Only consumable
stock in trade was considered partnership property, the lease and equipment
as well as the goodwill was not.

2. Where the property is obtained through a purchase or through any other way
for the firm. Where the property is brought with the partnership money, the
property is deemed bought for the firm.
Case : Ex parte Hinds
A few partners traded as merchants in Liverpool and Barbados. The partner in
Liverpool had purchased shares in a railway with money that belonged to the
firm without the knowledge of the others. His intention was to buy it on behalf
and for the firm. Held; the shares were partnership property.

3. The property is obtained through any lawful means where the property is
obtained for the purpose and in the course of the partnership business.
However not all property used in the course of partnership business is
partnership property.

TUTORIAL QUESTION & SAMPLE ANSWER

Ida, Ima and Hana are partners of a beauty saloon. Their saloon is located in section 9, Shah
Alam. Without the knowledge of the other two, Ida set up her own beauty saloon in Jalan
Telawi 3 Bangsar. Two months later, Ima and Hana came to know about Ida’s saloon and
demanded that Ida hand over all profits made by her saloon as she has breached her duty as
a partner under the Partnership Act 1961.

Identify the duty in question and the section which provides for it. Decide
whether Ida is, in fact, in breach of that duty.
(20 marks )

a)Issue:

whether Ima and Hana can sue Ida for the keeping of profits to herself ?

whether Ida has breached any duties as a partner i.e. for setting up her own beauty
salon without the knowledge of the other partners ?

General Rules:

(1) Section 31 - Account to the firm for any secret profit / benefit
A partner cannot make secret profit. If there is any, he has to account it to the firm
regarding to any transaction concerning the partnership or from any use by him of the
partnership property, name or business connection.
Case: Bentley v Cravan (1853)
A partner must not make a profit from a sale of the firm’s property without full disclosure
to the other partners.

(2)Section 32 – Duty not to compete with the firm

A partner cannot carry on any business of the same nature as and competing with that
of the firm. If this duty is breached, the remedy has to pay to the firm and all profits
made in the competing business.

Case: Ass v Benham

A partner cannot use information obtained by him in the course of partnership business
to compete with the partnership itself.

Application:

By virtue of section 31, Ida’s action has shown to us that she has breached the duties
as a partner. Thus, she is accountable to render the private profit to the partnership
consisting Ima and Hana.This is in line with the decision in Bentley v Cravan where
a partner must not make a profit without the full disclosure to the other partners.

In accordance to s.32, Ida’s action of setting up a beauty saloon on her own and
without the knowledge of the other partners clearly depicts that it is of the same nature
and competing with the firm’s business.
This is further supported by Aas v. Benham case whereby a partner cannot use
information obtained by him in the course of partnership business to compete with the
partnership itself.

By applying. s31 and s.32 and Benham’s case to Ida’s case, we can summarise that
as a partner, Ida has done something which is contrary to the duties as a partner.
Thus, she is accountable on what he has done to the partnership bisness.

Conclusion: In conclusion, Ima and Hana can sue Ida for breach of duties as a partner
and Ida has to account for the profit derived from the partnership.
DISSOLUTION / TERMINATION OF PARTNERSHIP

Part V of the Partnership Act deals with dissolution of partnership in the following ways:

1. By agreement
a. Terminated on the expiry of the period fixed by the partnership agreement.
b. The partner may mutually agree to dissolve the partnership at any time.

2. By operation of law – section 34(1) Partnership Act 1961

a. By expiration of fixed period or
b. By completion of single project
c. By notice - If there is no fixed time or provision regarding dissolution, a
partner may terminate the partnership at any time by giving a notice to other
partners. It can be orally or in writing depend on the agreement between
partners if the partnership was originally constituted by written document,
notice in writing is required.
In J.M.M Lewis v W.E Balasingham, a notice of dissolution would be
ineffective as there was in existence an agreement which had provided for
a means of terminating a partnership. If the partners have agreed as to the
method by which the partnership can be dissolved, no other way is to be
used.

3. Death or bankruptcy of any partner – section 35 (1) PA 1961

In Lee Choo Yam Holdings Sdn Bhd v Khoo Yoke Wah it was held that death
or bankruptcy of any partner may dissolve a partnership unless there is an
agreement to provide otherwise. Therefore partners may agree that any
bankruptcy or death or any partner may not dissolve the partnership.

4. By charging on shares – section 35(2) PA 1961

If any partner charges his shares of partnership property for his own personal
debt, the partnership would be dissolved

5. By supervening illegality – section 36 PA 1961

Any event which makes the business becomes unlawful. Eg: there is a change
in circumstances or status in law.
In R v Kupfer the Court held that the partnership was dissolved as soon as war
was declared as the partners of the firm were considered enemies of each other
as they came from two countries at war.
In Hudgell Yeates & Co v Watson, the partnership was automatically ended
one of three solicitors in a firm forgot to renew his practicing certificate without
which he was forbidden to practice under Solicitors Act 1974.

6. By court’s order. A partner may be dissolved by a court order on the application

by a partner – section 37 of the Partnership Act 1961. This is discretion by
High Court for just and equitable. On application by a partner, the court may
order the dissolution in any of the following cases:
a. Insane of a partner
b. Permanent incapacity
c. Conduct calculated to prejudicially affect the carrying out the partnership
business by any partners other than the applicant.
Case: Carmichael V Evans, C and E were partners. C was convicted of
travelling on the railway without a ticket and with intent to defraud. The court
held that as the conviction was for dishonesty, it is detrimental to the
partnership business.
d. Willful or persistent breach of the partnership agreement by any partner.
e. When the business of the partnership can only be carried on at loss.
f. If in the opinion of court, it is just and equitable to dissolve the partnership.
For example, where there are only two partners and the partnership has
reached a deadlock although it may continue to make profits as in the case
of Re Yenidje Tobacco Co. Ltd.