LAW OF PARTNERSHIP

TOPIC 9
 INTRODUCTION

• The law of partnership is governed by the Partnership Act 1961 (Act 135).

• The rules of equity and of common law applicable in partnership shall continue
to be in force, except so far as they are inconsistent with the express provisions
of the Act – s. 47(1) PA

• S. 3(1) of the Act defines a partnership as:

• ‘the relation which subsists between persons carrying on business in common
with a view of profit’.
 REGISTRATION OF FIRM

• The partnership business must be registered under the relevant law depending
on its location.

• sole proprietorships and partnerships are registered with the Companies

Commission of Malaysia (CCM) under the Registration of Businesses Act 1956 –
Peninsular Malaysia.

• Sabah - Trades Licensing Ordinance 1948 (Cap. 144)

• Sarawak - Businesses, Professions and Trades Licensing Ordinance of Sarawak

(Cap. 33) or the Businesses Names Ordinance of Sarawak (Cap. 64).
 CONT.

• However, the mere failure to register the partnership still entitled the partner to
enforce their rights against each other if, on the facts, a partnership exists –
Gulazam v Noorzaman and Sobath [1957] 23 MLJ 45

• The term ‘partnership’ is not required as long as the characteristics exist – Ratna
Ammal v. Tan Chow Soo (1964) 30 MLJ 399.

• A partnership need not have to be created by a formal deed or written

agreement. It can be created orally or in writing.
 Gulazam v Noorzaman and Sobath
[1957] 23 MLJ 45

• The P and D had made arrangements to form a partnership but never

registered the business. The conditions was that the P was to provide the
capital and the D were to do everything, with the profits to be equally divided.
However, the D failed to render accounts, neither did he pay the share of
profits to the P.

• Held: On the facts, a partnership existed between the parties. The facts that
the business was not registered did not affect the rights of the partner in a firm.
 Ratna Ammal v Tan Chow Soo
[1964] 30 MLJ 399

• The parties entered into an agreement to form a ‘syndicate’ for the purpose of
selling condensed milk. The word ‘partnership’ was not used in the agreement.
Instead, the word ‘syndicate’ was used.

• Held: From the facts, the relation of the parties had the business character of a
partnership and therefore, the arrangement was in fact a partnership. They had
agreed to carry on the business ‘in common with a view of profit’.
 ELEMENTS OF PARTNERSHIP

• There must be more than one person.

• They must agree (express or implied) to carry on a business. A ‘business’

includes every trade, occupation or profession – s. 2

• The business must be carried on in common i.e. there must be a repetition of

acts.

• The business must be carried on with a view to profit and this exclude ‘not for
profit’ organizations.
 FORMATION OF PARTNERSHIP

• There must be a minimum of 2 partners in a firm and maximum of 20.

• Professional partnership firms are not subject to any maximum limit on the
number of members – s. 14(3)(a)

• Everyone is capable of entering into a partnership agreement, including minor.

• However, a minor is not responsible for any contractual liability for the firm’s
debt.
 William Jacks & Co (Malaya) Ltd v Chan & Yong
Trading Co [1964] 30 MLJ 105

• Chan and Yong met the P’s representative in a coffee shop at which Chan held
himself out to be a partner with Yong in a hardware business. On this
representation, business between the parties commenced and goods were
supplied to Yong. R sued for the price against Chan and Yong. Yong did not
take any steps to defend but Chan defended that no firm was ever existed and
he was not a partner.

• Held: Chan represented himself to be a partner in the firm was sufficient to fix
him with liability as partner of the firm.
 RELATIONSHIP BETWEEN PARTNERS
INTER SE

• The relations between partners to one another are determined by their

partnership agreement.

• The partnership agreement normally provides for the rights and duties of the
partners, the conduct and management of the firm, the capital and their profit
sharing arrangement.

• In the absence of any provisions under the partnership agreement, Partnership

Act 1961 would apply, unless the partners have orally agreed.
 RIGHTS AND DUTIES OF PARTNERS

• The interests and duties of partners in the absence of agreements to the contrary
are provided in s. 26.

• The principle of utmost good faith between partners is implied in every partnership
agreement as it involve mutual trust and confidence.

a) All partners to share equally in the capital and profits of the business and
must contribute equally to losses.

b) The firm must indemnify every partner for personal liabilities incurred by him
in the ordinary conduct of the business of the firm.
 CONT.

c) A partner is entitled to 8% interest per annum for making actual payment or

advance beyond the amount of capital which he agreed to subscribe.

d) No partner is entitled to interest on capital before the ascertainment of profits.

e) Every partner may take part in the management of the business.

f) No partner is entitled to remuneration for acting in the partnership business.

g) No person may be introduced as a partner without the consent of all existing

partners.
 CONT.

h) Differences arising as to 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.

i) 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.
 FIDUCIARY DUTIES OF PARTNERS

• Partners are bound to render true accounts and full information of all things
affecting the partnership to any partner or his legal representative – s. 30

• If a partner derives a profit by the use of partnership property, name, or business

connection, he would have to account for the profit to the firm – s. 31(1)

• Duty of a partner not to compete with the firm. 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 – s. 32
 PARTNERSHIP PROPERTY

• S. 22(1) identifies partnership property as all property and rights and interests
in property:
• originally brought into the partnership stock or
• acquired, on account of the firm; or
• acquired for the purposes and in the course of the partnership business.

• The property must be used and applied by the partners exclusively for the
purposes of the partnership and in accordance with the partnership agreement.

• However, mere fact that property is used for the purpose of the partnership
does not mean that it is partnership property.
 CONT.

• To determine the property is partnership property or not, depends on the

intention of the partners, which has to be determined on each individual case.

• A property purchased with partnership money is deem to constitutes

partnership property, unless a contrary intention appears – s. 23
 Ponnukon v Jeyaratnam [1980] 1 MLJ 282

• The App had obtained an option to sell land for RM60,000. When he found it
difficult to get a buyer, he formed a partnership with the R to develop the land
into a housing estate. As they failed to obtain a bank loan to finance the
purchase of the land, the R bought the land with his own money. The App
brought an action to seek declaration that the land was held in trust for the
partnership.

• Held: There was no agreement at all between the parties that the land was to
be purchased or treated as partnership property. The land was paid by the R’s
fund, not the partnership fund. The land was the separate property of the R.
 LIABILITIES OF PARTNERS WITH THIRD
PARTIES
• As partners are agents of the firm, any act or omission committed by one
partner binds the rest of the partners, if it is carried out within the ordinary
scope of the firm’s business – s. 7

• Restoran Rizqin v. Asia Commercial Finance (M) Bhd. [2005] 4 MLJ 157
• A partner is an agent of the firm within the scope of his authority and a
partnership has no separate legal entity from its individual partners. As such, a
suit against a partnership was a suit against all the partners, as though the
partners were individually named in the suit.
• Every partner is treated as an agent of the firm and permitted to act on
behalf of it only for purposes of the partnership business.
• The common law views partnerships as a branch of the law of agency and
that every partner is both principal and agent to each other (Established
rule in Cox v Hickman).
• Any transaction entered into by the partners with the third party will bind
the firm as long as it is done within the ambit of the given authority.
• The basic agency principle is the basis for contractual liabilities of partners
if they had acted within their authority on behalf of the firm.
 Chan King Yue v Lee & Wong [1962] MLJ 379

• The P’s husband borrowed money from her as a loan from her to the firm in
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 utilized by the firm to
pay off debts. The P take action to recover the loan but the other partner
contended that the P’s husband was not authorised by the firm to borrow
money.

• Held: The fact that the loan had been utilized for the payment of the
partnership’s debts, entitle the P to claim the money as if the money had
originally been borrowed by the partner.
Contractual liability
• All partners in a firm are jointly liable for all contractual and other debts and
liabilities, which are incurred while being a partner – s. 11

• A joint liability means that where there is only one cause of action for the
recovery of debt and that cause of action having been exhausted, a second
cause of action or a new proceeding is no longer available against any partner
or partners whom the creditor failed to sue at the first instance.

• Third party may sue all the partners individually or the firm and vice versa.
Ordinary torts
• In order to make a firm liable, the tortious act must be committed by a partner
either in the ordinary course of the firm’s business or with the authority of his
co-partners – s. 12

Misapplication
• Where a partner misapplies money or property received from a third party the
firm is liable to make good the loss – s. 13

• Every partner is liable jointly and severally with the other co partners for the
above liabilities (tort and misapplication). The plaintiff can sue all the partners
jointly or may even sue one or more of the partners – s. 14
Misappropriation – s.15 PA 1961
• If a partner, acting in his individual capacity, improperly makes use of trust
property in the firm’s business, as a general rule, his other partners are not
liable to the beneficiaries.

• However, if the trust money is still in the firm’s possession or under its control,
the beneficiaries can recover the same from the firm.
• Examples –
• Transferring the assets on trust to himself such as property or money from a
bank account and refuse to hand it over to a rightful beneficiary.
• Failure to declare the assets on trust and claimed them for the partner himself.

Criminal liability
• Partners are not jointly liable in criminal cases. Individual liability.
 Chung Shin Kian & Anor v Public Prosecutor
[1980] 2 MLJ 246
• The accused tailor’s shop had been raided when the workers engaged in
stitching materials into jeans and jackets. The premises were searched and
discovered various types of false description of ‘Texwood’ labels and tags.
During raid, only the accused was present in the shop while his partner was
not present. The accused and his partner were convicted and sentenced. Both
appealed.

• Held: There was no evidence showing that the partner was implicated in the
offence except that he was a partner. Partners are not jointly liable for
criminal liability and thus, the partner’s conviction was quashed.
Holding out
• Where a person who is not a partner (expressly or by conduct) represents
himself or knowingly allows himself to be represented as a partner in a
particular firm, he would be liable as a partner for the debts of the firm – s. 16

• He is liable to those persons who have on the faith of such representation

given credit to the firm.

• They must have believed that the representation was true and had acted upon
it.
New partner
• A new partner who has just been admitted into a firm is not liable for the debts
incurred prior to his admission – s.19(1)

• However, if the new partner agrees to be liable for the firm’s existing debts at the
time of his admission, he would be liable - s.19(1)
Retired partner
• A partner who retires from a firm remains liable for the partnership debts and
obligations incurred before his retirement – s. 19(2)

• The retiring partner may be discharged from any existing liabilities by an agreement
to that effect between himself and the members of the newly constituted firm and the
creditors. This contract acts as a replacement for the contracts where earlier debts
are incurred. The agreement may either be express or inferred from the course of
dealings between the creditors and the newly constituted firm - s. 19 (3).
 • Malayan Banking Berhad v Lim Chee Leng [1985] 1 MLJ 214

• The Respondents (R) were partners of a firm called Berjasa Corporation. The
Appellant (A) sued the R under a trust receipt which matured and payable on
June 1975. 2 of the respondents resigned from the firm on August 1976.

• Held: The respondents incurred debt on the trust receipt before their
resignations or retirement and they could not escape the liability.
 CONT.

• A retiring partner will remain liable to persons who continue to deal with the firm
after his retirement unless he has given notice to them of his retirement – s.
38(1).

• 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).
 CONT

• What type of notice shall be given to those who have previous dealing
with the firm?
• Actual notice must be given to old customers in order to fix them with
knowledge of his retirement to prevent them from holding a retiring partner to
be liable for debts incurred after retirement.

• Notice to old customers of a partner’s retirement in newspapers is insufficient

to constitute notification but would be sufficient to persons who has no dealings
with the firm before the partner’s retirement.
 Re Siew Inn Steamship Co [1934] MLJ 180

• A retired partner had inserted a notice of his retirement in newspaper to which

certain old customers were the regular subscribers. After his retirement, these
same old customers lent money to the firm on the security of promissory notes
executed by remaining partners. One of the lenders sued the retired partner on
these notes, denying having seen notice of his retirement in the papers.

• Held: The retired partner was liable. Actual notice was necessary as far as old
customers were concerned.
 CONT.

• Tan Sim Moh v Lebel Ltd [1988] 2 MLJ 51

• Held: A person who had habitual dealings with a partnership is entitled to be

specifically notified of the withdrawal of the partners, a mere notice to the
Registrar of Business is insufficient.
 DISSOLUTION OF PARTNERSHIP

• Dissolution of partnership may happen in various circumstances and its

consequences not only affect the partners but also the third parties dealing with
them.

• A partnership may be terminated as follows:

1. By agreement
2. By operation of law
3. By death or bankruptcy
4. By charging on shares
5. By supervening illegality
6. By court order
1. 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.

2. By operation of law – S.34 (1)

• If the partnership was entered into for a fixed term and the term expires.

• If the partnership was entered into for a single adventure or undertaking and
the adventure or undertaking terminates.

• If the partnership was entered into for an undefined time, by any partner giving
notice to the other partner(s) of his intention to determine the partnership.
 CONT

• Sukhinderjit Singh Muker v Arumugam Deva Rajah [1998] 2 MLJ 117,

• the plaintiff and the defendant were partners in a legal firm called “Loveland and
Hasting”. Due to an argument occurred between them, the plaintiff decided to terminate the
partnership by giving notice via a letter to convey his intention for the dissolution of the partnership.
It is stated in the letter that “…I hereby give notice of dissolution of the partnership as from
31 July1997…”.
• The court held the partnership had been effectively dissolved since there was no agreement to the
contrary.
3. By Death or Bankruptcy – s. 35(1)

• The partnership is dissolved by the death or bankruptcy of any partner (subject

to any agreement between the partners).

• Lee Choo Yam Holdings Sdn Bhd & Ors v Khoo Yoke Wah [1990] 2 MLJ 431
• The P applied for a declaration that the partnership was dissolved by the death
of any partner.

• Held: On the death of any partner, a partnership therefore dissolved unless

there is evidence that the partners had agreed otherwise.
4. By charging on shares – s. 35(2)
• 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.
5. By supervening illegality – s. 36
• A partnership is dissolved by the happening of any event which makes it unlawful for the
business of the firm or for its members to carry it on in partnership.

• R v Kupfer [1915] 2 KB 321

• the defendant and his two brothers were partners in a firm. The firm business was conducted in
Frankfurt and London. An order was made by the Frankfurt branch with a Dutch company in
Holland and the defendant was to pay for the order from the London office. However, a war
erupted on 4 August 1914. The defendant made the due payment to the Dutch company but he
was later found guilty with the offence of conducting trade with the enemy which was inconsistent
with the Trading with the Enemy Act 1914. This gave rise to an issue of whether the partnership
had been dissolved by the eruption of the war.
• The court held that the partnership had been dissolved once the declaration of war was made.
6. By court order – s. 37

• On application by a partner, the court may decree a dissolution in any of the

following cases:

a) Insanity of a partner
 CONT

(b) Permanent incapacity of a partner to perform his part of the duties under the partnership
contract
Whitwell v Arthur [1865] 35 Beav 140
a partner in a pharmaceutical firm became paralyzed due to the attack of a stroke. Thus, his
co-partners made application for a court order to dissolve the partnership on the reason
that the afflicted partner did not have the capability to perform his responsibilities in the
partnership business.
The application was held off as there were some proofs which showed that the paralyzed
partner’s condition had been improving. However, the co-partners were still free to apply for
the court order to dissolve the partnership if the health of the afflicted partner worsened.
 CONT.

(c) When a partner has been found guilty of conduct that is calculated to affect
prejudicially the carrying on of the business.
Carmicheal v Evans (1904) 1 CH 486
One partner was convicted for travelling on the railway without a ticket and with
intend to defraud.
Held: As the conviction was for dishonesty it was calculated to be detrimental to
the partnership business.
 CONT.

d) 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
(i.e. persistently refuse to keep proper account)

e) When the business of the partnership can only be carried on at a loss.

 CONT

(f) Where circumstances have arisen which, in the opinion of the court, it is
just and equitable to dissolve the partnership.

• Re Yenidje Tobacco Co Ltd – there were 2 partners and the firm reached
a deadlock. The partnership was dissolved.