Malaysian partnership Law

Chapter 13: Partnership Law

Definition of partnership

Partnership [1] is defined by Section 3(1) of the Partnership Act 1961 as ‘the relation, which subsists between persons carrying on a business in common with a view of profit’ [2]. No person may be a partner with himself. There must be at least two or more persons to form a partnership. Section 3(2) excludes from statutory definition of partnership.

( a) registered as a company under the Companies Act, 1965 or as a cooperative society under any written law relating to co-operative societies; or,

(b) Formed or incorporated by or in pursuance of:

(i) Any other law having effect in Malaysia or any part thereof; or

(ii) Any letters patent, Royal Charter or Act of the Parliament of the United Kingdom, is not a partnership within the meaning of this Act. In Peninsular Malaysia, a partnership business must be registered 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); and in Sabah, under the Trade Licensing Ordinance No. 16 1948. 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.

From the definition which mention above of partnership 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'. 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.

Types of Partners

Partners can be described as follows

a) A general partner – that is, he is a partner in the fullest sense.

b) An active partner – that is , he is a partner who actively participates in the management of the business and is known to the world as a partner.

c) A dormant partner – sometimes called as the sleeping partner, that is, a partner who takes no active part in the management but is nevertheless liable as a partner.

d) A quasi partner – that is, a person who, in fact, is not a partner but who is liable for debts of the partnership as a consequence of holding out, that is causing people to believe he is a partner.

e)A salaried partner – commonly found in professional firms, may receive a fixed remuneration irrespective of profits or fixed salary every month plus a small percentage of the profits. The firm is fully responsible for his acts

Relations of partners to outsiders

Every partner is an agent to the firm and his other partners for the purpose of the business of the partnership, and the acts of every partner who does any act for carrying on the usual was business of the kind carried on by the firm of which he is a member bind the firm and his partners, unless the partner so acting has in fact no authority to act for the firm in the particular matter, and the person with whom he is dealing either knows that he has no authority or does not know or believe him to be a partner.

British Homes Assurance Corporation v Peterson [1902] 2 Ch 404

The above mentioned section states that each partner in an agent to other partner. Each partner when contracting with outsiders are agents and principals at the same time.

There are four elements which must be satisfied for the act of the partner to bind the firm and other partners.

1. The act must be done in relation to the partnership business

2. Carrying on usual way of business

3. The act must be done in the capacity as a partner and not as an individual person.

4. The person with whom he is dealing either knows that he has no authority or does not know or believe him to be a partner.

An act or instruments relating to the business of the firm and done executed in the firm-name, or in any other 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.

Re Briggs & Co (1906)

Liability of Partners

Every partner is liable jointly with the other partners for all debts and obligations of the firm incurred while he was a partner. If a partner dies, his estate becomes severely liable for the debts and obligations in so far as they remain unsatisfied but subject to the prior payment of his separate debts.

If a partner who is not authorised to act on behalf of the firm for any transaction, and the third party knows about it, and if the third party goes on to contract with the unauthorized partner, the other partners cannot be held liable for his unauthorised act.

Incoming Partners

When a person is admitted as a partner into an existing firm he immediately assumes the liability of a partner but he will not be liable for anything done before he became a partner except by special agreement. Although the special agreement is enforceable by any of the parties to it, creditors of the old firm do not have any right under it against the incoming partner. Therefore any debts contracted before he joined the firm are to be shouldered by his co-partners alone. However the Partnership Act does not impose any restriction or prohibit ant incoming partner from concluding an agreement whereby he holds himself liable to the firm’s creditors for debt contr4acted while he was the partner of the firm

Retiring Partners

When a partner retires from the firm, he remains liable for the partnership debts incurred before his retirement. This is clearly stated in Section 19(2), which says that ‘a partner who retires from the firm, he remains liable for the partnership debts incurred or obligations incurred before retirement’.

However 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.

Where the debts incurred after a partner’s retirement, he is still liable to persons who deal with the firm after a change in its constitution unless he has given express notice to such persons that he is no longer a partner.

In Phillips Singapore Private ltd v Han Jong Kwang & Anor [1989] 2 MLJ 323, it was held that the mere fact of registration of retirement in the Registry of Business will not give notice to a third party of that party.

Liability of partners

Every partner is liable jointly with the other partners for all debts and obligations of the firm incurred while he was a partner.

a) A partner’s liability in contract is governed by Part II of the Partnership Act 1961. According to that, a partner’s liability for debts and obligation if the firm incurred while he is a partner. This means that there is only one cause of action and if it is exhausted no further action against any member of the firm can be commenced. [20]

b) Liability in torts has been provide for in Section 12 of the Partnership Act 1961. It is to be noted here that by virtue of Section 14 a partner is jointly and severally liable for torts committed by co-partner while both are members of the firm.

c) Under section 13 (a) of the Partnership Act 1961, a partner is liable for his co-partner’s misapplication of money received by the co-partner in the course of his apparent authority

Rights and duties of partners in the Absence of Agreement

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

Every partner may take part in the management of the firm

No partner is entitled for any remuneration while acting as a partner

No person may introduce a partner with the consent of other partners

No partner is entitle to the interest on capital before the ascertainment of the profits

Dissolution of Partnership

Partners are at liberty to fix the duration of the partnership. Where no fixed term has been agreed upon for the duration of the partnership, any partner may terminate the partnership at any time on giving notice of his intention to do so to all the other partners – section 28(1)

By agreement

The partnership articles may fix the duration of partnership, and the partnership is terminated on the expiry of the period. The partners may mutually agree to dissolve the partnership at any time.

By operation of law

Expiration. If the partnership it entered into for a fixed term

(S.34 (1)(a)) or for a single adventure or undertaking (s.34 (1)(b) ), the partnership is dissolved on the expiration of the fixed term or termination of the adventure or undertaking.

Notice. If the partnership is entered into for an undefined time, any partner may determine the partnership at any time by notice to the partners (s.34 (1)(c)). Such a partnership is a partnership at will and may be determined at any time on notice. The partnership is dissolve as from the date mentioned in the notice as the date of dissolution. If no date is mentioned, it is dissolved from the date of the communication (s.34 (2)).

Death or bankruptcy

Every partnership is dissolved as regards all the partners by the death or bankruptcy of any partner.

By charging on shares

Where a partner suffers his share of the partnership property to be charged with payment of his personal debt, the other partners have the option of dissolving the partnership (s.35 (2)).

By supervening illegality

If an event occurs which makes it unlawful for the business of the firm to be carried on or for the members of the firm to carry on in partnership, the partnership is dissolved (s.36).

Dissolution by the Court

The courts by virtue of section 37 of the Partnership Act 1961 may dissolve a partnership on the application by the other partner.

a) Partner’s mental incapacity

The court may dissolve the firm when a partner becomes in sane by virtue of section 37 (a). The partner concerned must be unable to perform his duties, because of mental disorder, of managing his property and affairs. The insanity must be of permanent nature, otherwise there can be no grounds to dissolve the partnership.[21]

b) Partner’s physical incapacity

 According to section 37(b) Partnership Act 1961, The incapacity must be permanent. In Whitwell v Arthur (1865) 35 Beav 140, a partner was paralysed for some months. By the time the case reached the court the partner had recovered and the court did not grant the dissolution

c) Conduct Prejudicial to the business

 Section 37(c) Partnership Act 1961 provides that a partnership may be dissolved when a partner is found to be guilty of any misconduct. This situation will be considered by the courts an ‘affecting prejudicially the carrying on of the business. Moral misconduct is not enough unless, in the view of the court, it is likely to effect the business. In snow v Milford (1868) 18 LT 142, a partner’s massive adultery all over Exeter was not regarded by the court as sufficient grounds for dissolution under the section.

d) Breach of agreement

 The court may dissolve a partnership by section 37(d) partnership Act 1961 when one partner breaches the partnership agreement either willfully or persistently. Here the word wilful means a serious breach inflicting damage to the business or on the firm. However the court will not interfere if the breach was a minor one and has no impact on the business of the firm. Thus occasionally bad tempered or behaving rudely will not suffice.

Note: No partner can force dissolution by his own default.

e) Business carried on at a loss.

This is provided by section 37(e) Partnership Act 1961. if the business can only be carried on at a loss that it can be petitioned to the court to dissolve the partnership. As we know the essential of having a partnership is in order for two or more people to get together in the common view of making profit. If this purpose is defeated then it is proper for the courts to dissolve the partnership.

f) On Just and equitable ground.

According to section 37(f) Partnership Act 1961 the court may dissolve the partnership if it is just and equitable to do so. In re Yenidje Tobacco Co Ltd 2 Ch. 426, a company dissolution based upon the fact that the company was in reality a partnership, that deadlock between the partners is enough for dissolution, even though the business is prospering.