Topic 1: Business

Organisations
1. Sole proprietorship
2. Partnership
3. Limited companies
Partnership

• 2 types
• i) general partnership
• ii) limited liability partnership

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 General partnership

• The law of partnership is governed by the Partnership

Act 1961.
• S. 3 (1) of the Act defines a partnership as:
‘the relation which subsists between persons carrying
on a business in common with a view of profit’.
• S. 3(2) excludes from the definition registered
companies, statutory and chartered companies, co-
operative societies, clubs and societies.

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• There must be more than one person to constitute a
partnership. According to Arjunan, persons include
individuals and corporate bodies.
• The number of partners cannot exceed 20 - s. 47 (2)
PA 1961.
• Professional partnership firms are not subject to the
limit of 20 members. e.g. legal firms.
• A ‘business’ under s. 2 includes every trade,
occupation or profession.
• There must be an agreement between the persons to
carry on the business for a profit.
• There must be a carrying on of business in common.

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• Profit – business must be carried out with a profit
motive
• Business in common – signifies involvement of
partners in the business; that they are in the same
venture together for a common purpose. This does
not mean that all partners must participate in the
conduct of the business, as some partners may be
inactive.

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Partnership (firm) formed is not a legal entity by
itself and has no legal existence distinct from its
members.
Madan Lal & Anor. v Ho Siew Bee [1985] 2 MLJ
103
Re Sawers, Ex parte Blain [1897] Ch D 552

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 FORMATION OF
PARTNERSHIP
• A partnership agreement is no different from any
other contracts.
• It may be created orally or in writing
• There must be free consent, consideration and
intention.
• It must be for a lawful purpose.
• The parties must be competent to contract. A person of
unsound mind will be incompetent to enter into a
partnership agreement.

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 Partners & Outsiders

Concerned with the effect of the partnership on the

partners vis-à-vis their individual and collective
liability to those who are outside the relationship. They
are known as ‘outsiders or third parties’.
• Each partner is an agent of the firm and the other
partners. His acts are binding on them who are his
principals; s.7
• Each partner is also a principal who is bound by the
acts of the other partners; s. 7

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• S.7 also provides that 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 is binding
on the firm UNLESS:
• (a) the partner so acting has no authority AND
• (b) the person with whom he is dealing either:
• (i) knows that he has no authority OR
• (ii) does not believe him to be a partner.

• In the usual way – eg exorbitant rate of interest

charged by the lender on the loan, then the loan is
not created in the usual way.

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• The question whether a given act can or cannot be
said to be done in carrying on a business in the way
in which it is usually carried on must evidently be
determined by the nature of the business and by the
practice of persons engaged in it.

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 Partners bound by acts on
behalf of the firm
• S.8 PA 1961 – an act or instrument relating to the
business of the firm and done or executed in the
firm’s name or in any 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.

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 Partners using credit of firm
for private purposes
• S.9 PA 1961 – where 1 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 specially authorised by the
other partners.

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 Effect of notice that firm will
not be bound by acts of
partners
• S.10 PA 1961 - 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.

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 RELATION OF PARTNERS TO EACH OTHER
There are 2 important principles governing the
relationship of partners with each other; (1) freedom to
contract, (2) fiduciary relationship of partners with
each other.
S.21 PA 1961 – mutual rights and duties of partners,
whether ascertained by agreement or defined by this
Act, may be varied by the consent of all the partners
and such consent may be either express or inferred.

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The relationship between partners comes into existence
by an agreement between them. The usual terms
provided for in a partnership agreement are:-

the conduct and management of the business,

the capital to be contributed by each partner,
the proportion in which each partner will share the
profits, and
the rights and duties of the partners.

The Partnership Act will apply in the absence of

specific provisions in the agreement.

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 RIGHTS AND DUTIES OF PARTNERS IN
THE ABSENCE OF AN AGREEMENT - s. 26

• All partners to share equally in the capital and

profits and must contribute equally to losses.

• The firm must indemnify every partner for

personal liabilities incurred by him in the ordinary
conduct of the business.

• A partner making advances to the firm beyond the

amount of capital he had agreed to subscribe is
entitled to interest at the rate of 8% p.a. from the
date of the advance.
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• No partner is entitled to interest on capital before the
ascertainment of profits.

• Every partner may take part in the management of the

business.

• No partner is entitled to remuneration for acting in the

partnership business.

• No person may be introduced as a partner without the

consent of all existing partners.

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• Any differences arising on ordinary matters
connected with the partnership business may be
decided by a majority of the partners.

• No change may be made in the nature of the

partnership business without the consent of all the
existing partners.

• The partnership books must be kept at the place of

the partnership business or the principal place, if
more than one.

• Every partner may have access to and inspect and

copy any of them.
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 Expulsion of partners

• S.27 PA 1961 – no majority of the partners can

expel any partners unless power to do so has been
conferred by express agreement between the
partners.

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 Duties of a partner

• S.30 – Partners are bound to render true accounts

and full information of all things affecting the
partnership to any partner.
• S.31 – Every partner must account to the firm for
any benefit derived by him, without the consent of
the other partners, from any transaction concerning
the partnership or from any use by him of the
partnership property, name, or business connection.

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 Duties of a partner

• S.32 – if a partner, without the consent of the other

partners, carries on any business of the same nature
as and competing with that of the firm, he must
account for and pay over to the firm all profits made
by him in that business.

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 DURATION OF
PARTNERSHIP
• The Partnership Agreement may provide some method
for ending the partnership.
• It may be of a fixed duration or with no fixed
duration (known as partnership at will).
• If it is for a fixed term, it can only be ended in
accordance with the terms of the agreement or by the
express provisions of the Act, for e.g. by death or
bankruptcy of a partner – s. 35.
• If it is not for a fixed term, a partnership can be
dissolved by any partner giving notice of his intention
to do so to the other partners – s. 28(1).

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 LIABILITY OF PARTNERS

• Contractual liability - Every partner in a firm is

liable jointly with the other partners for all debts
and obligations of the firm incurred while he is a
partner - s. 11.
• Partners must be sued jointly in one course of
action. If not all partners are sued, then the plaintiff
cannot later sue the other partners in another cause
of action.

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• Partners are liable for tortious acts or wrongs
committed by a partner in the ordinary course of the
firm’s business or with the authority of his co-partners.
s. 12
• Where a partner misapplies money or property
received from a third party the firm is liable to make
good the loss - s 13
• S.14 – liability under s.12 & 13 is joint and several
liability. Where liability is joint and several each
partner can be sued in turn or all together until the full
amount is recovered.

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 LIABILITY OF INCOMING PARTNERS

• A person who is admitted as a partner into an existing

firm is not liable to the creditors of the firm for
anything done before he became a partner unless by
special agreement - s. 19 (1)

• The creditors of the old firm have no right under it

against the incoming partner – they are not privy to the
agreement.

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• The creditors will be able to sue the new firm if there
was a ‘novation contract’ entered into by the 3
parties i.e. the old firm, the new firm and the
creditors to the original contract.
• The agreement substitutes a new contract in place of
the existing contract – the new firm’s liability in
consideration of releasing the old firm.
• Rolfe and Bank of Australasia v Flower Salting
(1865) :
• (i) creditors dealing with a new firm with full
knowledge of the change in its membership have
impliedly agreed to accept the new firm as debtors in
the place of the old firm.

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• (ii) incoming partners who have full access to the
accounts of the firm and not disputing the debt stated
in the accounts have impliedly agreed to accept
liability with the partners of the old firm.

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 Liability of retiring partners
• A partner who retires from a firm remains liable for
the partnership debts and obligations incurred before
retirement; s.19(2)
• He may be discharged from his existing obligations by
a novation contract entered into between himself, the
new firm and the creditors - s. 19 (3)

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• A retiring partner (apparent partner) will remain
liable to persons who deal with the firm after his
retirement unless he has given express notice to
them of his retirement - s. 38 (1)
• Michael Sim Hang Chuang v Syarikat Sri
Puspa [2000] – words “I would be retiring from
the above partnership soon” does not constitute
equivocal notice for the purposes of s.38(1). In
addition, the court held that a verbal notice does
not constitute a sufficient notice where the creditor
is a company or financial institution.

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 An advertisement in the Federal Gazette, Sabah
Gazette and in the Sarawak Gazette by a firm whose
principal place of business is in these territories shall
be notice to persons who had no dealings with the
firm before the date of dissolution or advertisement
of the change – s. 38 (2).

• Actual notice is required in the case of old

customers & notice to customers of his retirement in
newspapers was insufficient to constitute
notification.

 In Re Siew Inn Steamship Co. [1934] MLJ 180, the

Court held that an advertisement published in three
local Chinese newspapers of the dissolution of the
partnership was not per se sufficient notice to those
who have had previous dealings with the firm and
had not actually seen it although they may be regular
subscribers to the newspapers.
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• To fix them with knowledge of the fact so as to prevent
them holding a retiring partner liable for debts incurred
after retirement, express notice must be given.

• The case of Re Siew Inn Steamship Co.[1934] Facts:

On the 31st of December, 1931, the plaintiff, Tan Boon
Cheo (P), retired from the partnership and notice of the
dissolution of partnership and his retirement from the
firm was duly given by the plaintiff to the defendant (D)
Co., Ho Hong Bank Ltd, through an advertisement
published in the three local Chinese newspapers, "Sin
Chew Jit Pau," the "Nanyang Siang Pau" and the "Min
Kuo Jih Pau" between the 12th and 16th of January,
1932, and also by verbal communication from P to D
company in or about the month of March, 1932.

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After his retirement these same 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 his retirement in the
papers.

The Court directed the following issue to be tried,

namely:- Whether P was or held himself out to Ho
Hong Bank Limited, to be a partner in the Siew Inn
Steamship Co. and, if so, at what date if any had P given
notice to D that he had ceased to be a partner of
the bankrupt firm.
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P and his witness Chow Guan Cheng stated that actual
notice was given verbally to Lim Bock Kee the then
manager of the Bank. Bock Kee denied ever having
had the conversation referred to by P.
When once it can be shown that liability has attached
to any partner, the onus of proving that such liability
has ceased is upon that partner. The court held that the
P had not discharged this onus. The notices in the
Chinese newspapers, even though they appeared 18
times, were not sufficient. Actual verbal or written
notice of his retirement should have been given by
Plaintiff. P was a partner in D and that he did not give
notice to D that he had ceased to be a partner. The
retired partner was liable on the notes. Actual notice
was necessary so far as old customers were concerned.
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• This requirement was reaffirmed by the Supreme
Court in Tan Sin Moh v. Lebel Ltd. [1988] where it
held that a person who had habitual dealings with the
partnership was entitled to be specifically notified of
the withdrawal of a partner
Tan Sin Moh v. Lebel Ltd. 1988] 2 MLJ 52 – notice to
Registrar of Business was insufficient.

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• The estate of a partner who dies or who becomes
bankrupt, or of a partner who, not having been
known to the person dealing with the firm to be a
partner, retires from the firm, is not liable for
partnership debts contracted after his death or
bankruptcy or retirement; s. 38 (3).

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 DISSOLUTION OF PARTNERSHIP

By Agreement

• Where the partnership agreement fix a duration for the

partnership, the partnership is terminated on the
expiration of the duration.

• The partners may mutually agree to dissolve the

partnership at any time.

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 By Operation of Law

by expiration of the fixed term if for a fixed duration,

by termination if formed for a single adventure or
undertaking, and
by notice if it is for an undefined time (partnership at
will).
s. 34 (1)(a)(b)(c)

Death or Bankruptcy

Subject to any agreement between the partners, the

partnership is dissolved by the death or bankruptcy of
any partner . s. 35 (1)

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 Charging of Partnership Share

• Where a partner suffers his share of the partnership to

be charged for his separate debts, the other partners
have the option of dissolving the partnership. s. 35 (2)

Supervening Illegality

• A partnership is dissolved by the happening of any

event which makes it unlawful for the business of the
firm or its members to carry on in partnership. s. 36

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 By the Court

S. 37 provides that on application by a partner, the

court may decree a dissolution in any of the following
cases:-

• Insanity of a partner. s. 37(a)

• Permanent incapacity of a partner to perform his part

of the duties under the partnership contract. s. 37 (b)

• When a partner has been found guilty of conduct that

is calculated to affect prejudicially the carrying on of
the business. s. 37 (c)
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• when a partner willfully or persistently commits a
breach of the partnership agreement or where his
conduct in matters relating to the partnership
business makes it reasonably impracticable to carry
on the business with him. s. 37 (d).

• When the business of the partnership can only be

carried on at a loss. s. 37 (e)

• Where circumstances have arisen which, in the

opinion of the court, it is just and equitable to
dissolve the partnership. S.37(f)
Re Yenidje Tobacco Co. Ltd [1916]

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 Limited liability partnership (LLP)

• Governs by Limited Liability Partnership Act 2012.

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• Special features and benefits of LLP:
• (a) limited liability status
• (b) partner’s binding authority
• (c) registration procedures
• (d) membership structure and eligibility
• (e) raising loans and creating security
• (f) creditors’ protection mechanism
• (g) financial reporting

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Fundamentals of a LLP; s.3
•Is a body corporate and have separate legal
personality from its partners
•Perpetual succession
•Any change in partners shall not affect the
existence, rights or liabilities of LLP
•Have unlimited capacity
•Capable of suing or being sued
•Acquiring, owning, developing or disposing
property
•Doing and be liable for acts that corporate
bodies are subject to

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Formation of LLP; s.6
•Any 2 or more persons (wholly or partly, individuals
or bodies corporate)
•Carrying on any lawful business with a view of profit

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• S.7 - If less than 2 partners -
• Can carry on for 6 months and can apply to
Registrar (under s.20A Companies Commission Act
2001) to 1 year.
• After the period, partner would be personally liable
for debts incurred after the period.

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LLP Agreement; s.9
•Rights and duties of partners are governed by LLP
agreement and Second Schedule (default rules)
•National or English language
•S.9(2) – there are certain particulars which are
mandatory

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Name of LLP; s13
•End with the words “Perkongsian Liabiliti Terhad” or
“PLT”

Registered office; s.18

•Have a registered office in Malaysia
•Registers and documents listed in s.19 must be kept
at the registered office.

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Management of LLP

• S.21 – partners enjoy limited liability

• S.22 - When LLP is insolvent, any partner or former
partner who receives a distribution from the LLP
where:
• (a) he knew or ought to have known that the LLP is
insolvent; or
• (b) the distribution results in the LLP becoming
insolvent and he knew or ought to have known of
this outcome

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would be personally liable for the amount of the
distribution if received within 2 years before the
commencement of winding-up of the LLP.

Distribution is defined in s.2 – distribution of

dividends, profits, returns or refunds of capital by
the LLP whether in cash or kind

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• S.23 – every partner is an agent of the LLP
• But LLP is not bound if the partner is acting without
authority and the person with whom he is dealing
knows that the partner has not authority or does
not know that he is a partner of the LLP.

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• A person who ceases to be a partner is still
considered to be a partner by those dealing with
the LLP unless the latter knows that the former is
no longer a partner or notice of this fact has been
lodged with the Registrar.

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Cessation of partnership interest; s.24
A partner may cease to be a partner on the
following situations:
•In accordance with LLP agreement
•In the absence of such agreement, a 30 days’
notice is given to the other partners of his
intention to resign
•Death or dissolution of the partner
•Professional LLP where partner is disqualified
from carrying out the professional practice

•S.25 – bankruptcy of partner does not affect his

ability to continue as a partner

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Compliance officer; s.27
•Must appoint at least 1 compliance officer (CO)
from its partners or company secretary.
•Citizen or permanent resident of Malaysia and
ordinarily resides in Malaysia.
•If no CO is appointed, all partners shall be deemed
as CO.
•CO is responsible for the matters under s.17, s.19
and s.20 and is personally liable to all penalties
imposed on LLP unless he satisfies the court that he
should not be so liable.
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