FORMATION OF

PARTNERSHIP
THE PARTNERSHIP AGREEMENT
• Parties to the Agreement
• Nature of Business and Place of Business
• Firm Name
• Duration of Partnership
• Provision of Capital
• Division of Capital and Profits
• Partnership Property
• Management of the Business
• Methods of Dissolving a Partnership
• Change on the Firm
• Expulsion of Members
• Restriction on Competing
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 PARTIES TO THE AGREEMENT

• It is important to clearly spell out who

are the parties regarded as partners to
establish their right and liabilities (s.
26), although there are circumstances
where a person who has not been
named as one could be made liable as
if he was a partner.

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 NATURE OF BUSINESS AND PLACE OF
BUSINESS
The nature of the partnership
business should be stated because it is
only that particular business which the
partners agree to carry on. It is with
regard to this business only where
each partner is regarded as an agent
of the firm and can bind the other
partners. The usual place of business
should also be clearly stated, and
according to S. 26(i) it is where the
partnership books should be kept. 4
 FIRM NAME
• S.6 provides:
‘Person who has entered into partnership with one another is,
for the purpose of this Act, called collectively a firm, and the
name under which their business is carried is called firm-
name.’
• Partners have a choice of trading either under a combination
of their own names or any trade name.
• If a trade name is chosen, then a registration fee of RM50.00
will have to be paid under the Registration of Businesses Act,
1956.
• Although the partners are collectively called a firm, it is
important to note that the law does not consider the firm a
legal personality of its own like other incorporated bodies or
associations. The firm is not a separate personality from the
individual members of the partnership as was appointed out in
Alagappa Chettiar v Coliseum Café [1962] MLJ 111 where the
Court of Appeal said that as partnership is not a separate legal
entity it cannot hold a tenancy.
• However the firm-name can be used in official
correspondence, legal documents and the court rules allow
the firm-name to be used in any legal actions.
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 DURATION OF PARTNERSHIP

A partnership established without a fixed term

is under S.28(1) considered as a partnership at
will. The disadvantages of a partnership at will
are that any partner may determine the
partnership at any time on giving notice of his
intention to do so to all the other partners. This
uncertainty could be avoided by agreeing upon
a fixed term. Clearly stating the date on which
the partnership is to commence and for its
duration. The partnership may, however, to be
continued after the expiration of the agreed
term.

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 PROVISION OF CAPITAL

The amount of partnership capital should be

clearly stated according to its financial
value, and this includes the proportion that
each partner contributes to the capital,
whether in cash or kind. Where the partners
have agreed to contribute equally to the
capital, but at the beginning one of the
partners has to contribute more to make up
for another partner’s inability to come up
with the agreed amount, that advance is to
be regarded as a loan to the partnership, for
which he is entitled to be paid interest. S.
26(c)
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 DIVISION OF CAPITAL AND PROFITS
• It is important to agree to the division
of capital and profits between the
partners, especially on or after
dissolution, because without any
contrary agreement, S. 26(a) allows for
an equal share to capital and profits to
all the partners irrespective of their
contribution.

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 PARTNERSHIP PROPERTY

To avoid problems which normally

occur in many partnerships on the
question of ownership of property, it is
in the best interest of all parties to
clearly establish rules to identify which
of the assets are to be regarded as
partnership property. See ss. 22, 23 &
24.

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 MANAGEMENT OF THE BUSINESS

• To ensure that only those with the

relevant skills and experience manage
the partnership business, there must
be a provision for it in the articles of
partnership. If there is no written
provision, every partner may take part
in the management of the partnership
business since it is allowed by S.26(e).
To lessen the problem in the
management of the business, it is also
useful to set out clearly the limit of
each partner’s powers, especially in
entering into contract, or giving credit.
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METHODS OF DISSOLVING A PARTNERSHIP
• It is desirable to provide for methods of
dissolving a partnership, as the absence
of such a provision would mean that the
partnership is subjected to the provision
of Part V of the Partnership Act 1961.
According to S.35(1), the death or
bankruptcy of any partner will cause a
partnership to be dissolved. As this
provision may have an adverse effect on
active and successful business, it is thus
advisable to provide for the continuation
of the firm by the other partners, in the
event of death or bankruptcy.

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 CHANGE IN THE FIRM
As the agreements of all partners are
required for the introduction of a new
member according to S.26(g), it is
necessary to make provision for a retiring
partner, or the agent of a deceased
partner to appoint another as a new
partner without this unanimous decision.

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 EXPULSION OF MEMBERS

If there is no provision to the contrary,

S.27 provides that a partner may not
be expelled from the partnership, even
if a majority wants him to leave. To
avoid the effect of this provision, it is
necessary to expressly state the power
of expulsion, not only by the majority,
but also on other grounds.

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 RESTRICTION ON COMPETING

• According to S.32, a partner may not

enter into any business that competes
with that other firm. To enable a partner
to involve himself in business that may
compete with that other firm, provision
must then be made for that. As there is
nothing to prevent a retired partner from
entering into competing business, it may
be advisable to make certain conditions
relating to that. However, such restriction
is subjected to the same rules as to
restraint of trade.
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 ADVANTAGES OF A WRITTEN
AGREEMENT
Where there is no written agreement to the contrary,
the provisions contained in Part IV and V of the
Partnership Act is applicable to a partnership. Some
of the rules are not suitable for a partnership; e.g.
• The existence of a partnership at will – where any
of the partners can give notice to dissolve a
partnership, even if its business is thriving.
• The dissolution of a partnership upon the death or
the bankruptcy of a partner unless it had been
agreed between the partners, the death or
bankruptcy of any of the partners will bring the
partnership to an end, even where the
partnership is actively carrying on a successful
business.
• Rights and liabilities over partnership property –
may create a problem where partners do not
contribute to the shares equally. 15
Several terms used in the Act can only
be interpreted by looking at the
intentions between the partners or the
way the partnership business is run.

The intention of the partners or the way

the business is run can only be
construed if there is a written agreement
to refer to. If there is no written
agreement, it will make it difficult to
reveal what the parties had actually
agreed upon.

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 CAPACITY
• Generally any one can enter into a partnership.
• However, as a partnership is subjected to the general principles of
ordinary contract, a person who becomes a partner should have
the capacity to contract -S.11 of the Contracts Act, 1950.
• A minor is not prevented from entering into a partnership. This
means that there can be a partnership between a minor and an
adult. The principle that a minor could be in a partnership for any
duration of time until he wants to get out of it was established in
Goodie v Harrison (1821) 5 B & Ald, 157. On reaching the age of
majority, a minor can, if he wishes, discharge himself from all
future debts of the firm by terminating the partnership. If he fails to
repudiate the agreement, he will be liable for the partnership debts.
• A partnership with a minor is risky for the other adult partners, as
minors cannot incur or be responsible for any contractual liability
for the firm’s debts. They can only be made liable for debts which
are legally enforceable against them, which would be for their
necessaries.

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• S.7 Partnership Act 1961 states:
“Every partner is an agent for the firm and his other partners for
the purposes of the business of the partnership…”

Thus, the principles in law of agency are applicable.

See PART X Contracts Act 1950 (Revised 1974)
Who may employ agent
• 136. Any person who is of the age of majority according to the
law to which he is subject, and who is of sound mind, may
employ an agent.
Who may be an agent
• 137. As between the principal and third persons, any person may
become an agent; but no person who is not of the age of majority
and of sound mind can become an agent, so as to be responsible
to his principal according to the provisions in that behalf herein
contained.
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William Jacks & Co. (Malaya) Ltd. V Chan and Yong
Trading Co. [1964] 30 MLJ 105;
Gill J explained that
“ a minor can be a partner in the limited sense that he can
be admitted to the benefits of partnership. His share in the
property of the firm, to the benefits of which he is admitted,
ia liable for the obligations of the firm, but he is not
personally liable for such obligations. He can order goods
as agent of the partnership, which in effect means an agent
of the other partner or partners of the firm so as to bind the
firm or the partners with liability, without incurring personal
liability. If on attaining the age of majority he does not
repudiate the partnership within a reasonable time, he
becomes liable for all obligations incurred by the
partnership from the time he was admitted to the benefits of
the partnership.”

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 REGISTRATION
• When a firm is established, it is required to be
registered under the Registration of Businesses
Act 1956. However, a firm is not affected by its
failure to register. It would still be valid as a firm.
Sivagami Achi v P.R.M Ramanathan Chettiar & Ors
[1959] 25 MLJ;
• The registration of a person’s name as partner is
prima facie evidence that he is a partner. This
however does not prevent the other partners from
proving that he is really not a partner.
Gulazam v Noorzaman & Sobath [1957] 23 MLJ 45
• The failure to register a business which was
supposed to be partnership was held by the court
as not affecting the right of a partner to legal
action against the other partners.
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THANK YOU

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