BAC 3108 COMPANY LAW

Legal Forms of BusinessBusiness Organisation & Partnership

LEARNING OUTCOMES

• Describe the different forms of business entities and its registration procedures.

• Describe the nature and characteristics of sole trader and partnerships

• Explain the rights and liabilities of a partner with respect to the other partner or partners, and between partners and third parties

• Explain the rules governing the formation, duration, and dissolution of partnerships

Types of Business Organization in MalaysiaAll types of business by law must be registered. The Acts that govern business are:• The Business Registration Act 1956

(Amendment 1978).• Procedures of Business Registration Act 1957 • Partnership Act 1961 (Revised 1974)• Companies Act 1965• Limited Liability Partnerships Act 2012

INTRODUCTIONChoice of forming a business entity basically depend on: a. the nature of the business; b. the amount of capital to be

invested; c. the extent of risk acceptable to the

potential businessman.

Factors influencing this decision are:• Number owners the business is going to

have• Tax position of the business• The owner take the risk of unlimited ability• The owner want all the business profits• Complete privacy in the affairs of the

business for the owner• Illness or death of owner what will happen

to the business

Companies Commission of Malaysia• In 2002, the CCM assumes the responsibilities of the

former Registry of Companies and Registry of Businesses. • The Chief Executive Officer (CEO) of the CCM is the

Registrar of Companies (ROC) as well as the Registrar of Businesses (ROB).

• Any persons who intend to carry on business operations in Malaysia must register either a business firm with ROB or a company with the ROC.

• A person may choose to set up business as a sole trader, which is a business run by one person. The life of the business extends to the life of the owner and there is no separate identity and no limit to the liability of that individual.

Types of business entitiesThere are three main forms of business organizations in Malaysia: sole proprietorships, partnerships and companies. 1. A Sole Proprietorship or Sole Trader is one person in

business for himself. 2. A Partnership is an organization of two or more

persons associated together for the purpose of conducting a business.

These 2 types of business organisations are referred to as ‘unincorporated associations’. They have no separate legal existence apart from the person/s who conducts the business.

SOLE PROPRIETORSHIP

Sole Proprietorship• A sole proprietorship is one person in business for

himself and is a business wholly owned by one.• It does not has a separate legal existence apart from the

persons who conduct the business. • The business and the sole trader are considered as one

entity.• A sole proprietor owns the business by himself and that

his personal properties are considered as the business’s assets.

• A sole proprietor is ultimately responsible for all the debts of the firm.

(cont.)

• Sole trader is a person who owns and operates their own business. He/she may or may not employ other people.

• Sole trader is usually a relatively small business with little capital available for expansion and the capital that has been invested comes from one source and that is the owner.

• E.g. hairdresser, hawkers, provision shop, tailor, Beauty Saloon, restaurants, launderettes (dobi), mini market etc.

Sole Proprietorship (Cont.)• If the sole proprietorship assets are insufficient to

discharge the firm’s liabilities, the sole proprietor must contribute towards those assets until the liabilities are discharged.

• The liability of the sole proprietor to pay the firm’s debts is unlimited.

• As a sole proprietorship has no legal entity, any legal proceedings in which the sole proprietorship firm may be involved are brought or defended in the name of the sole proprietor of the firm, not in the name of the firm itself.

• If a sole proprietor dies or cease to carry on the business, the firm may be closed by notifying the ROB.

Advantages of Sole Trader • Profits - The owner enjoy all the profits. There are no other

shareholders so the profits don't have to be split.• Easy to manage & run – easiest to form and run of business.• Easy to establish - hardly any complicated forms or

procedures. Less legal formalities.• Total control - the owner is in charge of the business. He/she

does not need to discuss their decisions with any other owners. They have total control of the business.

• Privacy - As there are no shareholders in the business you only need to inform Inland Revenue and Customs and Excise in order for them to see how well the sole proprietor is doing

• Flexibility - very flexible working hours as sole trader is its own boss e.g. Rather than working on Friday he/she decides to work on Sunday instead.

Advantages (cont.)• Low start up capital, no heavy

investment.• Easy to form and dissolve with

minimum formalities.• Less legal compliances - Subject to less

government rules and regulation.• Income Tax – Sole Trader has to pay

income tax based on total profit earned to LHDN ( Inland Revenue Board, M’sia)

Disadvantages of Sole Trader• Illness or death - ill/death of owner the business might be

forced to shut down stopping the income and profits• Unlimited liability – Sole Trader will be liable to settle all debts

outstanding. If the things don’t work out as planned the sole proprietor could lose all its investment. All assets will be ceased by court order to be sold, and cash generated will used to pay all outstanding creditors.

• Lack of continuity - the owner is the business there is no guarantee that the business will carry on running once the owner decided to stop.

• Long hours - long hours may be required of the owner to keep the business afloat.

• Difficulty in raising capital - small businesses find it hard to find a start up capital and usually the owner might have to put his/her house as an insurance for capital borrowed

Disadvantages (cont.)• Limited specialisation - as the owner has to be a

purchaser, lorry driver and accountant there is no time for this person to specialise in all fields

• Limited economies of scale - e.g. a small construction business would have to hire a lorry to do the required task as this would be cheaper but larger business would buy its own as this would prove to be cheaper due to the fact that lorry is in continuous use.

• Limited source of capital - Lack of capital to expand the business further.

Disadvantages (cont.)• The future development of the business is limited.

Lot depends on the managerial capability of the owner and physical health. The life span of the business depends upon the age of the owner and how efficiently he manages the business. He is of ill health or passes away the business continuation is disrupted. If he choose an heir (successor) to the business, then the business has to be reregistered.

Partnership

INTRODUCTION

• Law of partnership governed by Partnership Act 1961 (Revised 1974)

• rules of equity and of common law applicable in partnership will continue in force, except in so far as they are inconsistent with the express provisions of the Act – section 47(1)

• in Peninsular Malaysia, it is necessary that all partnership businesses, as well as sole-proprietorships must be registered with the CCM–Registration of Businesses Act, 1956 (Revised 1978)

DEFINITION AND NATURE OF PARTNERSHIP• definition of partnership –

partnership is the relation which subsists between persons carrying on business in common with a view of profit: section 3(1) .Relation between personsCarrying on business in commonView of profit

Relation• An agreement or a contract between parties to form a

partnershipV.C George J:

A partnership is a contractual relationship which subsists between persons carrying on business in common with a view of profit.

Tan Eng Choon v Foo Kai Yuen

Relation between persons

Wee Chong Jin J:Although this statutory definition does not state from what the relation arises it has been clearly established that an agreement whether express or implied is the source of the relation and it is therefore a relation resulting from a contract

Wong Peng Yuen v Senanayake

(cont.)

• co-operative societies and registered statutory and chartered companies are specifically excluded from the definition in section 3(2)

• partnership business must be registered:• In Peninsular Malaysia – under the Registration of

Businesses Act 1956; (now centrally administered by the Companies Commission of Malaysia)

• In Sarawak – under the Sarawak Cap. 64 (Business Names) and Cap. 33 (Business, Professions and Trade Licensing)

• In Sabah – under the Trade Licensing Ordinance No. 16 1948

(cont.)• however, the mere failure to register the

partnership under these statutes would not mean that the partners cannot enforce their rights against each other if on the facts, a partnership exists – see Gulazam v Noorzaman and Sobath

• although the word ‘partnership’ does not appear in the agreement, a partnership may still exist if the relationship between the individuals has the business character of a partnership within the scope of the Act – see Ratna Ammal & Anor v Tan Chow Soo

Dr Rajan Sinha v Dr P.C. HermanPartnership can be created either by oral or written

Peh SweeChin J:

I find that a partnership agreement in writing was not a condition precedent to the formation of the partnership, but having regard to all the circumstances, a mere form which all the parties had decided to adopt

The agreement – not necessarily in writing

Persons• Two < x < twenty.• Sec 47(2) of PA 1961 & Sec 14(3)(b) of CA 1965• Except for professional, Sec 14(3)(a) of CA• Natural or artificial(company), Sec 4 of Interpretation

Act 1967- persons includes a body of persons, corporate or unincorporated

(cont.)

• BusinessSec 2 of PA – includes every trade,occupation or

profession.

Commercial activities or ventures with the purpose of profit

Carrying on business in common

(cont.)

• a partnership need not have to be created by a formal deed or written agreement – may be created orally or in writing

• a partnership, however, is not a legal person by itself – see Madan Lal & Anor v Ho Siew Bee

• as seen above from the definition of partnership in section 3(1) of the Partnership Act 1961, for a partnership to exist, two or more persons must be ‘carrying on business in common’

A single act or undertaking could not amount to carrying on a business

Smith v AndersonBrett J: The expression of carrying on implies a repetition of acts…That

series of act is to be series of acts which constitutes a business. Compare with Windsor v Schroeder

Held: One commercial adventure undertaken by the parties would be considered as business and the parties were partners

1 Members of a group who buy shares and divide up whatever dividends they may receive cannot call their group a partnership unless they are actively involved in securities speculation with a view to real profits.

#2 From the circumstances giving loan is not a business. Because the transaction is not something which result in profit.

#3There was no partnership resulting from a joint venture agreement between a landowner and a housing developer because each party to the agreement intended a wholly separate business, there was no business in common with a view of profit.

• Carrying on -Means existingKeith Spicer Ltd v Mansell [1970] 1 All ER 462

Def and Mr. Bishop decided to start a restaurant business. Mr.B ordered goods from P, to be used for the future business, (which it eventually was.) The goods was delivered but not paid so the P sued D, because according to P there was a partnership between Mr.B and D.

Held: There is no Partnership. There was no evidence that def and Mr.B carried on

business within the meaning of the PA. Evidence merely showed that at the time the ordered was made, D and Mr B were preparing to carry on business as soon as they could.

#1 When two persons entered into a contract for a business which is to be formed

there is no partnership because there is no business yet. There must be a business activity before there can be a partnership.

#2 Generally the business should be carried on by all partners or by a partner on behalf of the others. A person can still be a partner even if he is not actively participating in the business.

• Chooi Siew Cheong v Lucky Height Development Sdn Bhd

Held: No partnership resulted from the joint venture agreement between a landowner and a housing developer as each party intended a wholly separate business.

In common- Means together

• sharing profit of the business• an important element in constituting a partnership.• Profit means net profit i.e. the balance after

expenditure/cost has been deducted- Sec 4(b)); Sharing of gross return prima facie not a partnership.

• Substantiate by Sec 4(b) that it is not gross profit, where it was held in Cox v Coulson : sharing of gross return did not create a partnership.

View of profit

R v RobsonLord Coleridge : … the participation in profits essential to the English idea of

partnership.Re Spanish Prospecting Co. Ltd

Fletcher Moulton LJ : Net profit means paying out of the receipts of a business, all the expenses incurred in obtaining those receipts.

Cases

• The word ‘partnership’ is not necessary - Ratna Ammal & Anor v Tan Chow Soo - Gulazam v Noorzaman and Sobath

- Aw Yong Wai Choo & Ors v Arief Trading Sdn Bhd & Anor

Peh Swee Chin J:In my view to find the existence of such relation, the Court must find the real intention of the parties involved. The real intention is not necessarily the expressed intention of the parties so that even if the parties express they are partners, the Court may decide to the contrary after the Court considers all relevant factors taken together, refer to the leading case of Cox v. Hickman [1860] 8 HCL 268.

Additional points

#1Ratna Ammal & Anor v Tan Chow Soo [1964] 30 MLJ 399• The parties agreed to conduct a business together but they

used the word syndicate instead of partnership. • Held: There is a partnership between the parties as the

relationship between the individuals had the business character of a partnership within the scope of Partnership Act.

#2 Gulazam v Noorzaman and Sobath [1957] 23 MLJ 45• Three parties agreed verbally among themselves to form a

business of buying and selling cattle. They agreed that each will contribute to partnership capital and share the profits. The business however was never registered as a partnership.

• Held: All the requirements of Sec 3 have been fulfilled. There is a partnership between the parties even though it is not registered.

(cont.)

• the word ‘business’ has been defined in section 2 of the Partnership Act 1961 as ‘including every trade, occupation or profession’

• therefore if several people group together to raise funds or to run a charitable or religious organization, they cannot be said to have formed a partnership. Similarly, clubs, societies and cooperatives are not considered as partnerships – see Chooi Siew Cheong v Lucky Height Development Sdn Bhd & Anor, Sinnathamby a/l Klondakoundan & Ors v Brijkishore a/l Shuparshad

(cont.)

• the Court held that there is a distinction between a joint venture and a partnership

• a joint venture may or may not be a partnership and in deciding whether or not a partnership existed, the court must have regard to the relevant rules in section 4 of the Partnership Act 1961 and the intention of the parties as appearing from the whole facts of the case and the contract the joint venturers had made – see Chooi Siew Cheong & Anor v Lucky Height Development Sdn Bhd & Anor

(cont.)

• whether the parties were to be regarded as parties could only be determined if the joint venture between them constituted a partnership ‘for a single adventure or undertaking’ subsumable under section 34(1)(a) of the Partnership Act 1961

• certain circumstances are not prima facie partnerships – section 4 of the Partnership Act 1961: – 4(a) joint tenancy, tenancy in common, joint property,

common property, or part ownership does not of itself create a partnership as to anything so held or owned, whether the tenants or owners do or do not share any profits made by the use thereof

Davis v Davis

• A father left his two sons his business and three freehold houses in equal shares as tenants in common. They let one of them and employed the other in enlarging the workshops attached to the two houses. They continued to carry on the business. They also shared the rent of the third house.

• Held: The brothers are partners in the business but not as to the freehold houses. The property belonged not to the partnerships but to them as tenants in common.

(cont.)

• 4(b) the sharing of gross returns does not of itself create a partnership, whether the persons sharing such returns have or have not a joint or common right or interest in any property from which or from the use of which the returns are derived

Sec 4(b) -Sharing of gross return

Cox v Coulson• Mr.Coulson was a theater manager who agreed with

Mr.Mill to provide his theater for one of Mill’s production. Under the agreement, Mr.C was to receive 60% of the gross takings whilst Mr.M was to receive the balance 40%. The plaintiff (an audience)was shot during performances of one of the scenes. She sought to make Mr.C liable on the basis that Mr.C and Mr.M are partners and therefore liable for the incident.

• Held: The claim is rejected because sharing of gross returns did not create a partnerships within the meaning of the PA.

• 4(c) the receipt by a person of a share of the profits of business is prima facie evidence that he is partner in the business, but the receipt of such a share, or of a payment contingent on or varying with the profits of a business does not of itself make him a partner in the business – see Chooi Siew Cheong v Lucky Height Development Sdn Bhd & Anor, Buckingham v Port Jackson & Manly Steamship Co

(cont.)

• there are particular instances listed under subsection 4(c) whereby the receipt of a share of profits does not qualify a person to be a partner:– the receipt by a person of a debt or other

liquidated amount, by instalments or otherwise, out of the accruing profits of a business does not of itself make him a partner in the business or liable as such – see Cox v Hickman

– a contract for the remuneration of a servant or agent of a person engaged in a business by a share of the profits of the business does not of itself make the servant or agent a partner in the business or liable as such – see Walker v Hirsch

(cont.)– a person being the widow or child of a deceased

partner, and receiving by way of annuity a portion of the profits made in the business in which the deceased person was a partner, is not, by reason only of such receipt, a partner in the business or liable as such – see I.R.C. v Lebus’s Trustees, Wong Peng Yuen v Senanayake

– the advance of money, by way of a loan to a person engaged or about to engage in any business on a contract with that person that the lender shall receive a rate of interest varying with the profits, or shall receive a share of the profits, arising from carrying on the business, does not of itself make the lender a partner with the person or persons carrying on the business or liable as such; provided that the contract is in writing and signed by or on behalf of all the parties thereto – see Re Young

(cont.)

– a person receiving, by way of annuity or otherwise, a portion of the profits of a business in consideration of the sale by him of the goodwill of the business is not, by reason only of such receipt, a partner in the business or liable as such – see Pratt v Strick

• there is no ceiling on the number of members who can join professional partnerships – section 14(3)(a), Partnership Act 1961

Cox v Hickman

The partnerships business was in financial difficulties. The creditors appointed two trustees to manage their interests in the partnerships. The agreement was that upon full payment of the creditors’ debt, the trustees will be out of the firm and return full management to the original partners. Mr. Hickman sought to make the two trustees liable as partners of the firm.

Held: Sharing of the gross return of the business did not of itself make them partners. There was neither representation nor financial involvement which indicate a partnership.

Sec 4(c)(i)- Payment of debt by installment

Chua Ka Seng v Boonchai Sompolpong

The def was a partner in an architect firm, RSP of which the plf was an employee. The def later left the firm and set his own architect firm under the name CKS. The def requested the plf to resign from RSP and work with him at CKS. The plf alleged that in their agreement, he will be a partner who is entitle to 20% of the net profits. The def on the other hand claim that the plf was merely a salaried partner who was to receive 20 % of profit inclusive of salary and bonus.

Held: The plf was only a “salaried partner” remunerated by a 20% of net profits inclusive of salary and bonus.

Sec 4(c)(ii)- Remuneration of servant or agent by share of profit

• Annuity to widow or child out of the partnership’s profit.

IRC v Lebus’s TrusteesA partner of a firm involved in making furniture bequeathed(through his will) his share of the profits to his widow. In 1930, the widow’s share amounted to large sum but owing to a financial strategy, the firm was unable to pay her the money. However, the widow was assessed to income tax for that year. A question arise as to whether the assessment ought to include the sum representing her shares in the profits of the business. Held: The widow was not a partner in the business and none of the assets of the firm belonged to her.

Sec 4(c)(iii)

• Payment of a loan or interest of a loan out of profits• Such contract is in writing & signed by all parties –

lender is not a partnerRe Young

• L and Y entered into an agreement by which it is provided that L should lend 500 pound to Y in consideration for the payment to L of 3 pound per week out of the profits of the business. L was also to assist in the office and given some authority over the control of the firm’s money.

• Held: Despite the extensive power given to L , he is a mere creditor and not a partner.

Sec 4(c)(iv)

• Sale of goodwill in exchange for a share of profits Pratt v Strick

Held: The fact that the plf share some profits of the business from the sale of goodwill, does not make him a partner to the firm.

* Refer to Exception 1 of Section 28 of Contracts Act 1950

Sec 4 (c)(v)

• The word firm refers to partners – vice versa

Cases:Krishnan v Abdul Razak & Anor

Held: An action against the firm’s name is an action against all the partners collectively

Sec 6

Type of partners

CAPACITY AND LEGALITY

Minor partnerIllegal partnership

• Minor• Person of unsound mind• Generally a partner should be a

person who reached the age of majority i.e 18 according to the Majority Act 1971 and also person of sound mind.

CAPACITY

• A minor can be a partner when there are other partners who are major.

• Liability: only major partners will be liable• Upon attaining the age of majority can either affirm

or disaffirm his position as a partner. - if affirm; in M’sia, the partner will be liable for

contract entered during minority, however in England, he shall only be liable for contracts entered after the affirmation.

Minor

(cont.)• In Malaysia by virtue of the Majority Act 1971, the age of majority

is 18 years old. A person who is below that age is known as a minor. In forming a partnership, generally the parties are sui juris i.e. major.

• However a minor can entered into a partnership when other partners are major i.e. should not be among the minors.

• When the partnership entered into a contract, the minor is exempted from liability. The liability would go to other partners who are major.

• Upon attaining the age of majority, he can either affirm or disaffirm his position as partners. In Malaysia if he affirms he will be liable for the contract entered during his minority. The position in England is otherwise.

• If the minor disaffirm and he had made some contribution he cannot claim the contribution made if he had received any benefit from it.(Steinberg v Scala(Leeds) Ltd)

Held: A minor can be a partner of a partnership but can not be personally be sued for the firm’s debt incurred by the minor on behalf of the firm

Lovell and Christmas v Beauchamp

Goode v Harrison (1821) 5 B & Ald 147• Held: Minor can enter into partnership until he disaffirms it. If he fails to do so on

attaining majority he will still not liable for contract entered during minority. Lovell and Christmas v Beauchamp (1894) AC 607

• An action against a firm (whereby one of the partners was an infant) for supplied goods.

• Held: Judgment cannot be recovered against the firm simply but maybe recovered against the defendants other than the infant partner. So if an act of bankruptcy is committed a receiving order cannot be made against the firm simply but against the firm other than the infant.

William Jack & Co(Malaya) Ltd v Chan & Yong Trading Co [1964] MLJ 105

• One of the partners was a minor. Plaintiff sued all the partners for the goods that were sold and delivered. Chan (adult partner) claimed that the goods bought were for the personal used of the minor and therefore the partners were not liable.

• Held: The fact that the minor used the goods for his own purpose did not exempt the firm and the partners from liability. Since the minor did not take any steps after attaining majority to repudiate the partnership, he was also liable as a partner of the firm.

Yong Yit Chong was one of the partners in the def’s firm. He entered into the partnership when he was still a minor and ordered goods from the plaintiff company for the firm. When Yong attained the age of majority, he did not repudiate his position as a partner.

William Jack & Co (Malaya) Ltd v Chan & Yong Trading

• Per Gill J:“ I now come to deal with the question of Yong Yit

Chong's minority at the time of the formation of the partnership and the effect of his ordering the goods when he was still a minor… Under s. 200 of the Ordinance (Contracts), a person who is under the age of majority according to the law to which he is subject may be admitted to the benefits of partnership, but cannot be made personally liable for any obligation of the firm;…

… 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, is liable for the obligations of the firm, but he is not personally liable for such obligations…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.

• ..He (Yong) has since attained the age of majority and has not up to now repudiated the partnership. He is therefore now equally liable for the goods which were purchased during his minority.

• Can enter into partnership if other partners knew about his insanity

Imperial Loan Co. v Stone (18920 1 Q.B 599 There can still be a partnership between person of

unsound mind and another, provided that the person of unsound mind can establish that the other person has prior knowledge of his insanity at the time of the agreement.

Held: An insane person can enter into a contract provided that the other party knows about his insanity.

Person of unsound mind

Reasons for illegality:1. The contract was entered for Illegal purpose –

Refer to grounds for illegality –section 24 (a) –(e) CA 1950.

Foster v Driscoll (1929) 1 KB 470Partnership was created to export alcohol into US. Held: The partnership was illegal because it was

prohibited by the law. Biggs v Lawrence

Partnership for the sale of smuggle goods was illegal.

ILLEGAL PARTNERSHIP

2) Exceed number of partnersTan Teck Hee & Ors v Cheng Tien Peng (1915) 2 FMSLR 161

Firm consisted 25 persons. Held: A formation of a firm of more than 20 persons is forbidden by

the law and therefore the parties are not entitle to claim. The partnership being one which is forbidden by the law, is void and the parties are not entitled to enforce it.

Tan Chin Cheang v Estate & Trust Agencies Ltd (1931-32) FMSLR 129

“…even if the plaintiffs had succeeded in providing that the numbers of partners had been reduced by death to less than twenty, they would not have been entitled to relief unless they could have proved the formation of a new partnership free from any taint of illegality.”

Effect of illegal partnership

• Effect of illegal partnership: the partnership will become VOID. The court will not recognize the existence of the partnership and will not enforce any right of the partnership ( refer Higginson v Simpson (1877) 2 C.P.D. 76). However third party can still sue the partners.

• The third party can still sue the partners.• RE CHOP KWONG FOOK SENG & CHAN CHAN PHANG

ALIAS CHAN YING CHEONG A PARTNER THEREOF, EXPARTE THE NATIONAL, COMMERCIAL & SAVINGS BANK (S'PORE), LTD (IN VOLUNTARY LIQUIDATION)[1934] 1 MLJ 34

The Creditors issued a writ against Chop Kwong Fook Seng claiming monies due in respect of certain Contracts of Exchange; Chop Kwong Fook Seng subsequently turned out to be an illegal partnership as it consisted of more than twenty persons (prohibited and illegal under section 4 of Ordinance 155 (Companies). The question is, whether or not the judgment should in the circumstances have been entered against Chop Kwong Fook Seng.

Held: The illegality of the partnership affords no reason for refusing to make a Receiving Order against a partner.

Per HUGGARD, CJ “It seems to me therefore that where two or more persons are carrying on business under a firm name,… be sued in the firm name whether or not the firm is legally and properly constituted. It is stated in Lindley on Partnership, 9th ed., at page 140, that "the illegality of a partnership affords no reason why it should not be sued," and I cannot find anything in the numerous authorities to which I have been referred which conflicts with this view…and in the circumstances I can see no sufficient ground for refusing to make a Receiving Order against Chan Chan Phang who was admittedly the managing partner

FORMATION AND DURATION OF A PARTNERSHIP• a partnership is easier to form than a company. The general

rule is that everyone sui juris is capable of entering into a partnership agreement

• 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 wanted to disaffirm it was established in Goode v Harrison

• however, a minor cannot incur or be responsible for any contractual liability for the firm’s debts. 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. Failure to repudiate the agreement will make him liable for the partnership debts – see William Jacks & Co (Malaya) Ltd v Chan & Yong Trading Co

RELATIONS BETWEEN PARTNERS AND THIRD PARTIES

• as partners are agents of the partnership 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 – section 7, Partnership Act 1961. See Chan King Yue v Lee & Wong

• partners are bound by acts on behalf of firm – see section 8, Partnership Act 1961. See Restoran Rizqin v Asia Commercial Finance (M) Bhd

(cont.)

• if the third party has notice of the agreement between the partners that there are some restrictions on the power of any one or more of them to bind the firm, the firm will not be bound in respect of any act done in contravention of the agreement – section 10

• partner using credit of firm for private purposes – section 9, Partnership Act 1961

(cont.)

• for a third party to hold the partnership firm and the rest of the partners liable, the following conditions must be satisfied:1.The act must be done for the purpose of the

business of the partnership – sections 7 and 92.The act must be done in the firm’s ordinary course

of business – see Bank of Australasia v Breillat, Beckham v Drake, Porter v Taylor, Court v Berlin, Mercantile Credit Co v Garrod

3.The act must be done by the partner as a partner of the firm and not in his own personal capacity

LIABILITY OF PARTNERS1. Ordinary Torts

liability of firm for wrongs – see section 12 of the Partnership Act 1961

in order to make a firm liable, the tortious act must be committed by a partner either in the ordinary course of the business of the firm or with the authority of his co-partners – e.g. all the partners of an accounting firm would be liable if any one of them has been negligent in the handling of accounts for their client

similarly, a firm of lawyers would be liable for the negligence of one of the partners – see Bkyth v Fladyate

(cont.)2. Misapplication

misapplication of money or property received for or in custody of firm – see section 13 of the Partnership Act 1961

every partner is liable jointly and severally for everything for which the firm, while he is a partner therein, becomes liable under section 12 or 13 above-mentioned – section 14, Partnership Act 1961. This means that if the partnership firm is liable for wrongs under section 12 of the Partnership Act 1961 or liable to make good the loss due to misapplication of money or property, the plaintiff can sue all the partners jointly or may even sue one or more of the partners concerned

(cont.)3. Misappropriation

improper employment of trust property for partnership purposes – see section 15 of the Partnership Act 1961

if a partner, acting in his individual capacity, improperly makes use of trust property in the business of the firm, 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

(cont.)4. Contractual Liability

all partners in a 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 – section 11, Partnership Act 1961

joint liability means that if a judgment is obtained against a partner in the partnership for a debt owing by the partnership and the judgment remains unsatisfied because of the partner’s bankruptcy or otherwise, any other partner or partners who has or have not been sued cannot be sued in a subsequent new proceeding or proceedings – 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. See Guinness Anchor Marketing Sdn Bhd v Chellam Joe Vetha Thya Singh

(cont.)third parties may sue all the partners individually

or the firm – see Krishnan v Abdul Razak & Anor, M. K. Varma & Anor v K. M. Oli Mohamed

5. Criminal Liabilityalthough partners are jointly liable in civil cases,

they are not jointly liable in criminal cases – see Chung Shin Kian & Anor v Public Prosecutor

6. Duration of Liabilitya new partner who has just been admitted into a

firm is not liable for the debts incurred prior to his admission

(cont.) a person who is admitted as a partner into an

existing firm does not thereby become liable to the creditors of the firm for anything done before he became partner – section 19(1), Partnership Act 1961

however, if the new partner agrees to be liable for the existing debts of the partnership at the time of his admission, he would be liable

section 19(2) and (3) of the said Act reads:– A partner who retires from a firm does not

thereby cease to be liable for partnership debts or obligations incurred before his retirement

(cont.)– A retiring partner may be discharged from any

existing liabilities by an agreement to that effect between himself and the members of the firm as newly constituted and the creditors, and this agreement may be either express or inferred as a fact from the course of dealing between the creditors and the firm as newly constituted

7. Liability of Persons for Holding Out persons liable by ‘holding out’ – see section 16,

Partnership Act 1961 the effects of this section is illustrated in the case

of William Jacks & Co (Malaya) Ltd v Chan & Yong Trading Co

(cont.)8. Liability of Retired Partners

after retirement, a partner is still liable to persons who deal with the firm after a change in its constitution unless he has given notice to such persons that he is no longer a partner – section 38(1), Partnership Act 1961

see Re Siew Inn Steamship Co,Tan Sin Moh v Lebel Ltd, Philips Singapore Pte. Ltd v Han Jong Kwang & Anor, Mayban Finance (Singapore) Ltd v Yap Thiam Sen & Anor

RELATIONS BETWEEN PARTNERS TO ONE ANOTHER

• 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

• the Partnership Act 1961 applies in the absence of provisions being made under the agreement. In Malaysia, it is common for there to be no written partnership agreement and provisions in the Partnership Act 1961 would therefore apply unless the partners have orally agreed on those provisions

(cont.)• the interests and duties of partners in the

absence of agreements to the contrary – see section 26, Partnership Act 1961

• the above rules apply in the absence of an agreement to the contrary. The principle of utmost good faith between partners is implicit in every partnership agreement and is a prime requisite in relations between partners. This is because the relationship between partners is based on mutual trust and confidence

(cont.)• section 30, Partnership Act 1961 provides that partners are

bound to render true accounts. Thus, when a partner purchases a share in the partnership business from another partner, it is the duty of the partner purchasing the share, if he is aware of the financial situation of the firm, to disclose all the material facts to the partner who is selling the share – see Maddeford v Austwick, Law v Law

• section 31, Partnership Act 1961 provides for the accountability of partners for private profits. However, a partner is not prevented from keeping any profits made from transactions that are entirely outside the scope of the partnership. A partner must not make a profit or commission for himself by making use of his position or any information acquired in the partnership business – see Aas v Benham

(cont.)• a partner must not make a profit from a sale of the firm’s

property without full disclosure to the other partners. In addition, he cannot make a profit from a resale of any property owned by him to the firm without full disclosure to the other partners – see Bentley v Craven

• the principle behind these cases is that each partner must disclose any secret profit he has made in dealing with the firm, and account for the profit to the firm

• section 32 of the Partnership Act 1961 states that it is the duty of each partner not to compete with the partnership firm

• where it is expressly agreed by the partners that a partner may be dismissed for flagrant breach of specified provisions, the other partners can exercise the authority to dismiss if they do so in good faith – see Green v Howell

(cont.)

• in partnerships amongst professionals, a serious act of professional misconduct gives the other partner the right to dissolve the partnership – see Clifford v Phillips, Clifford v Timms

• if there is a breach of duty committed by a partner, he is only liable to make good the loss suffered by the partnership if he is guilty of fraud or culpable negligence or wilful default – see Ong Keng Huat v Hong Kong United Co Ltd & Anor

PARTNERSHIP PROPERTY

• defined in section 22(1) of the Partnership Act 1961—what constitutes partnership property, its application and devolution

• partnership property must be used and applied for the purposes of the firm and in strict accordance with the partnership agreement

• a common problem which emerges is whether the property belongs to the firm of the partner or the partner, individually. It was decided in Davis v Davis that the mere fact that the firm’s business was conducted on property insured by one partner did not make it part of the partnership property

(cont.)• however, even if property which was purchased out of

partnership assets was not used for carrying out the partnership business, such property was partnership property – see Murtagh v Costello

• section 23, Partnership Act 1961 provides that unless the contrary intention appears, property bought with money belonging to the firm is deemed to have been bought on account of the firm – see Wray v Wray, Ponnukon v Jebaratnam

• section 24, Partnership Act 1961, speaks of conversion into personal estate of land held as partnership property. The underlying principle in section 24 is that prima facie, unless there exists an agreement to the contrary, the property of the partnership has to be sold on dissolution of partnership, though in equity it is deemed to have already been converted

(cont.)

• since it is only a conversion in equity the legal estate or interest devolves according to the nature and tenure of the land and also the general rules applicable thereto but in trust so far as necessary for the persons beneficially interested thereof – see Mat Shah bin Mohamed & Anor v Foo Say Meng & Ors

• both sections 22(1) and 24 specifically deal with partnership property and therefore what is of paramount importance to attract the application of these two sections is whether the lands can be construed and classified as ‘partnership property’

• whether or not a property is partnership property or a property deemed to be partnership property depends on the intention of the partners which has to be determined on each individual case

(cont.)

• the fact that a property is used by all the partners for the partnership purposes need not necessarily qualify it to be termed partnership property even though the partnership may be debited with the outgoings and expenses of the property, unless there is evidence to show such an intention – see Gian Singh v Devraj Nahar & Anor, Devraj Nahar & Anor v Gian Singh, Ponnukon v Jebaratnam

SHARES IN PARTNERSHIP AND ASSIGNMENT• the share of a partner is defined as his proportional division

of the joint assets after their realization and conversion into money and after payment and discharge of the joint debts and liabilities – see Garbett v Veale

• whether a partner can dispose of his share to another person depends on the construction of the partnership deed. Unless there is express provision in the deed, a partner cannot transfer his share to another person so as to entitle that person to all the rights of a partner without the unanimous consent of all the partners – see Byrne v Reid

• no person may be introduced as a partner without the consent of all existing partners – section 26(g), Partnership Act 1961

(cont.)• however, although a partner cannot transfer his share without

the consent of all other partners, the Partnership Act allows him to assign his share in the assets and profits – section 33(1), Partnership Act 1961

• the rights of an assignee are limited and he is not entitled to act as a partner – an assignee cannot interfere in the management of the business and he cannot object to payments made by the firm to individual partners and employees for managing the business – see Garwood’s Trust Paynter v Paynter

• an assignee is not entitled to require any accounts of partnership transactions or to inspect partnership books. It is only on dissolution of the partnership that an assignee is entitled to receive his share of the partnership assets and to call for an account as from the date of dissolution – see Watts v Driscoll

(cont.) the rights of an assignee of share in a partnership are laid

down in section 33 of the Partnership Act 1961:– during the continuance of the partnership, an assignee

has the right to receive the assignor’s share of the profits, and the assignee must accept the account of profits agreed to by the partners. However, during the continuance of the partnership, the assignee does not have the following rights:1. To interfere in the management or administration of

the partnership business or affairs2. To require any accounts of the partnership

transactions3. To inspect the partnership books

(cont.)• case in point – Ong Kian Loo v Hock Wah Trading Co

& Ors where it was held that in applying section 33 of the Partnership Act 1961, an assignee was not entitled to interfere in the management or administration of the partnership business or affairs, or to require any accounts of the partnership transactions, or to inspect the partnership books during the continuance of the partnership

• when the partnership is being dissolved, the assignee has the following rights:1. To receive the assignor’s share of the partnership assets2. To receive an account as from the date of the dissolution

in order to ascertain his share of the partnership assets

DISSOLUTION OF PARTNERSHIP

• a partnership ‘dies’ when it is dissolved• may happen in various circumstances and its

consequences not only affect the partners themselves but third parties (e.g. financial institutions and merchants) dealing with them1. Ways in which a Partnership is Dissolved

–By agreement–By operation of law–By death or bankruptcy–By charging on shares–By supervening illegality

(cont.)• the court may order the dissolution of the partnership, on

application by a partner, in any of the following cases:a) insanity of a partner – section 37(a), Partnership Act 1961b) permanent incapacity of any partner to perform his duties –

section 37(b), Partnership Act 1961c) conduct calculated to prejudicially affect the carrying on of

the business – section 37(c), Partnership Act 1961d) wilful and persistent breach of the partnership agreement

(by any partner other than the applicant) – e.g. if a partner persistently refuses to keep proper accounts

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

f) where, in the opinion of the court, it is just and equitable to dissolve the partnership – e.g. in Re Yenidje Tobacco Co Ltd

(cont.)2. Notice of Dissolution

– unless notice of a dissolution is given, all customers of the partnership are entitled to treat all the former members as continuing to be members – see Tower Cabinet Co Ltd v Ingram

– the dissolution of a partnership – see section 39 of the Partnership Act 1961

– notice may be given by an advertisement in a local press, gazette or by a circular letter

– for old customers and clients of the partnership, express notice such as a circular letter must be served – see Re Hodgson, Bechkett v Ramsdale, Kam Hoy Trading v Hup Aik Tin Mining

(cont.)3. Continuation of Authority of Partners

– after the dissolution of a partnership, the authority of partners continues only so far as is necessary to wind up the affairs of the partnership and to complete uncompleted transactions – see section 40 of the Partnership Act 1961

– the authority of the partners continues only in so far as it is necessary to wind up the partnership business and to complete unfinished business – see Chartered Bank v Yong Chan

– section 44, Partnership Act 1961 envisages a situation where prior to the settlement of account, i.e. before the winding up of the partnership, in the event the surviving partner carries on with that business using the same name, then that surviving partner has to account to the estate of the late partner giving it the option to a share of the profits or to pay an interest of 8 per cent per annum on the amount of his share of the partnership assets

(cont.)4. Settlement of Accounts after Dissolution

– upon dissolution of a partnership, every partner is entitled to have the property of the partnership applied in payment of the debts and liabilities of the firm, and to have the surplus assets after payment of the debts distributed among the partners – see section 41 of the Partnership Act 1961

– the rules for dissolution of partnership assets on final settlement of accounts are laid down in section 46 of the Partnership Act 1961

– a case on the distribution of assets and liabilities of a partnership under sections 41 and 46 of the Partnership Act 1961 – Ho Kam Fan v Fam Sin Nin

ENDQ&A

Tutorial 1

1. Explain the essential characteristics of a partnership as defined in the Partnership Act 1961. (10 marks)

2. Under what circumstances may a partner make an application to the court for the dissolution of a partnership? State the relevant statutory provisions in your answer. (5 marks)

3. Discuss the liability of a retiring partner for the debts of the partnership incurred both before, and after, his retirement from the partnership; and (4 marks)

4. Explain the steps that a retiring partner may take to protect himself from liability for future debts of the partnership. (4 marks)