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FARIHANA BINTI ABDUL RAZAK (2014) 1 LAW 346 CHAPTER 2: PARTNERSHIP  The law of partnership is governed by the Partnership Act 1961 (Revised 1974).  In Peninsular Malaysia, a partnership business must be registered under the Registration of Business Act 1956.  In Sarawak, it must be registered und...

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FARIHANA BINTI ABDUL RAZAK (2014) 1 LAW 346 CHAPTER 2: PARTNERSHIP     

The law of partnership is governed by the Partnership Act 1961 (Revised 1974). In Peninsular Malaysia, a partnership business must be registered under the Registration of Business Act 1956. In Sarawak, it must be registered under the Sarawak Cap.64 (Business Names) and Cap.33 (Business, Professions and Trade Licensing). In Sabah, it must be registered 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.

 Section 3 (1) of the PA 1961 defines a partnership as ‘the relation which subsists between persons carrying on business in common with a view of profit’.  Section 3 (2) of the PA 1961 states that the co-operative societies and registered statutory and chartered companies are specifically excluded from the definition.

Nature of Partnership

 A partnership need not have to be created by a formal deed or written agreement. It may be created orally or in writing.

 Thus the definition of partnership in Section 3 (1) of the PA 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 PA 1961 as ‘including every trade, occupation or profession’.

FARIHANA BINTI ABDUL RAZAK (2014) 2 LAW 346  Section 4 of the PA 1961 lays down the circumstances in which there are NO prima facie partnerships.

a) Joint tenancy, tenancy in common, joint property, common property, or part ownership

b) The sharing of gross returns

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 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; and in particular:

i.

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 itself make him a partner in the business or liable as such;

COX v HICKMAN (1860) 8 H.L. Cas. 268 Facts: A, a trader, was unable to pay his creditors. A came to an agreement with the trustees of his creditors whereby he assigned his property to them as well as allowed the trustees to have influence over the running of the business. This was to enable the trustees to be paid out of the profits.

Held: This arrangement did not create a partnership. At best, the business was carried out on behalf of A.

ii.

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

FARIHANA BINTI ABDUL RAZAK (2014) 3 LAW 346 business does not of itself make the servant or agent a partner in the business or liable as such;

WALKER v HIRSCH (1884) 27 Ch.D 460 Facts: P lent money to H & Co which was controlled and owned by two persons. P signed an agreement with H & Co which provided that P would be paid a salary and one-eighth of the profits and losses and the agreement could be determined with four months’ notice. P, who was a clerk, continued as such in H & Co after the agreement.

Held: P was merely a servant and was not a partner.

iii.

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; I.R.C. v LEBUS’S TRUSTEES [1946] ALL ER 476 Facts: A deceased partner, in his will, bequeathed his share of the profits in a firm to his wife. The widow’s share of the profits was not paid by the continuing partners and was in that year surtaxed by the Inland Revenue.

Held: The widow was not a partner in the business and none of the assets of the firm belonged to her. Therefore, her share of profits should not have been surtaxed.

FARIHANA BINTI ABDUL RAZAK (2014) 4 LAW 346 iv.

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;

RE YOUNG [1896] 2 QB 484 Facts: A and B entered into a written contract whereby A lent money to B for his business and in return A would ‘… be entitled during the continuance of this agreement, to draw from the profits of the business the weekly sum of…’. There was also an option for A to become B’s partner but A never exercised this option.

Held: A was not B’s partner.

v.

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.

PRATT v STRICK (1932) 17 T.C. 459 Facts: A professional man sold his practice and goodwill to another. In the agreement, he would continue to generate goodwill for his purchaser for a period in return for a share of the profits.

Held:

FARIHANA BINTI ABDUL RAZAK (2014) 5 LAW 346 There

was

no

intention

that

a

partnership

was

to

be

established.

Formation of Partnership  A partnership can be formed with or without a written agreement.

 Section 3 (1) of the PA 1961, Minimum of 2 partners in a firm.

 Section 47 (2) of the PA 1961, maximum of twenty.

 Section 14 (3)(a) of the PA 1961, professional partnership firms are not subject to any maximum limit on the number of members.

General Rule = Everyone sui juris (of legal capacity) is capable of entering into a partnership agreement.  There can be a partnership between a minor and an adult.

 A minor could be in a partnership for any duration of time until he wanted to disaffirm it.

 However, a minor cannot incur or be responsible for any contractual liability for the firm’s debts.

WILLIAM JACKS & CO (MALAYA) LTD. v CHAN & YONG TRADING CO. [1964] 30 M.L.J. 105 Facts: The plaintiff claimed against the defendants the sum of $ 12 734.91 for goods sold and delivered by the plaintiff to the defendants. Chan and Yong were sued as partners of the defendant firm. Yong did not take any steps to defend but Chan raised the following defences:

1) That no firm by the name of Chan & Yong Trading Co. ever existed, and that, if such a company did exist, he was not a partner thereof; 2) That he had not in any way represented or held himself out as partner of the said firm;

FARIHANA BINTI ABDUL RAZAK (2014) 6 LAW 346 3) The goods bought from the plaintiff were for the personal use of Yong who was a minor and that the partners were therefore not liable.

Held: 1. Chan was a partner of Chan & Yong Trading. 2. Chan represented himself to be partner in the firm by approaching a salesman of the plaintiff to ask for credit facilities with the plaintiff company, by registering the partnership with the Registrar of Businesses, and by opening a banking account with his own money in the name of the partnership with the Bangkok Bank. Each mode of representation was sufficient to fix him with liability as a partner of the firm. 3. The fact that Yong made use of the goods bought from the plaintiff for his own purpose did not mean that the partnership and consequently the partners were not liable. 4. As Yong had not taken any steps after attaining the age of majority to repudiate the partnership he was also liable as a partner of the firm.

FARIHANA BINTI ABDUL RAZAK (2014) 7 LAW 346 Relationship between partners and outsiders  As partners are agents of the partnership firm, any act or omission committed by one parties binds the rest of the partners if it is carried out within the ordinary scope of the firm’s business.  Section 7 of the PA 1961 stated that 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.  The authority of each partner may be either actual (express or implied) or apparent (or ostensible).  Express authority may be given in writing (as in the partnership agreement) or orally.  Implied authority is inferred from the conduct of the parties.  Apparent or ostensible authority arises when the partner holds out to others that he has such authority section 8, PA 1961.  Section 10 of the PA 1961 provide 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.  For the 3rd party to hold the partnership firm and the rest of the partners liable, the following conditions must be satisfied: i.

The act must be done for the purpose of the business of the partnership (Section 7 & 9 of the PA 1961)

ii.

The act must be done in the firm’s ordinary course of business.

iii.

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

FARIHANA BINTI ABDUL RAZAK (2014) 8 LAW 346 Liability of Partners Ordinary torts Misapplication Misappropriation Criminal liability Contractual liability

Ordinary Torts

 Section 12 of the Partnership Act 1961

 Where, by any wrongful act or omission of any partner acting in the ordinary course of the business of the firm or with the authority of his co-partners, loss or injury is caused to any person not being a partner in the firm, or any penalty is incurred, the firm is liable thereafter to the same extent as the partner so acting or omitting to act.

 By virtue of 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 copartners.  For example, 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.

Misapplication

 Section 13 of the Partnership Act 1961

 Misapplication of money or property received for or in custody of firm in the following cases, namely:a) Where on partner, acting within the scope of his apparent authority, receives the money or property of a third person and misapplies it; and b) Where a firm in the course of its business receives the money or property of a third person, and the money or property so

FARIHANA BINTI ABDUL RAZAK (2014) 9 LAW 346 received is misapplied by one or more of the partners while it is in the custody of the firm, The firm is liable to make good the loss.  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.  This means that if the partnership firm is liable for wrongs under Sec 12 of the PA 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.

Misappropriation

 Section 15 of the PA 1961 provides to the effect that 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.

Criminal Liability

 CHUNG SHIN KIAN & ANOR v PUBLIC PROSECUTOR [1980] 2 MLJ 246 Facts: Officers from the Trade Description Department raided the accused’s tailor shop. At that time, there were 10 workers engaged in stitching materials into jeans and jackets. The premises were searched and officers discovered various types of ‘Texwood’ labels and tags, and ‘Texwood’ jeans and jackets both finished and unfinished. During the raid, only the first accused was present in the shop. The second accused, a partner, was not present.

FARIHANA BINTI ABDUL RAZAK (2014) 10 LAW 346 The charge made against both the accused was that in the course of their business, they applied a false trade description name ‘Texwood’ to 10 pieces of jackets and fifty-seven pairs of jeans. Both accused were convicted and sentenced for an offence under Section 5(1)(a) of the Trade Description Act 1972. They appealed.

Held: 1) The first accused’s appeal was dismissed. 2) The second accused’s appeal was allowed. There was no evidence showing that the second accused was implicated in the offence except that he was a partner of the shop.  Although partners are jointly liable in civil cases, they are not jointly liable in criminal cases.

Contractual Liability

 Section 11 of the Partnership Act 1961 states to the effect of this section is that 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.

 GUINNESS ANCHOR MARKETING SDN BHD v CHELLAM JOE [1999]7 CLJ 392



A joint liability basically 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.

FARIHANA BINTI ABDUL RAZAK (2014) 11 LAW 346 Duration of liability Section 19 (1) PA 1961 A new partner who has just been admitted into a firm is not liable for the debts incurred prior to his admission. 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) PA 1961 (2) A partner who retires from a firm does not thereby cease to be liable for partnership debts or obligations incurred before his retirement.

(3) 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.

SUBRAMANIAM CHETTIAR v KADEN MASTAN & CO [1934] MLJ 74 It was decided that mere abandonment and inactivity by a partner who has given up all hope of recovering his share does not affect his liability for the partnership debts.

Liability of Persons for Holding Out Section 16 of the PA 1961 provides that persons may be liable by ‘holding out’.

The effects of this section is illustrated in the case of WILLIAM JACKS & CO. (MALAYA) LTD. v CHAN & YONG TRADING CO [1964] 30 MLJ 105: 

One of the defences raised by the defendant Chan was that he had not in any way represented or held himself out as partner of the partnership firm.

FARIHANA BINTI ABDUL RAZAK (2014) 12 LAW 346 

The court held that Chan had represented himself to be a partner in the firm by approaching a salesman of the plaintiffs to ask for credit facilities with the plaintiff company, by registering the partnership with the Registrar of Businesses, and by opening a banking account with the Bangkok Bank, using his own money in the name of



Partnership. Each mode of representation was sufficient to fix him with liability as a partner of the firm.

Liability of Retires Partners Section 38 (1) of the PA 1961:After retirement, a partner is still liable to persons who deal with the firm after a change I its constitution unless he has given notice to such persons that he is no longer a partner.

MALAYAN BANKING BERHAD v LIM CHEE LENG & ANOR [1985] 1 MLJ 214 Facts: The respondents were partners of a firm called Berjasa Corporation. The appellants sued the respondents under a trust receipt which matured and became payable on 14 June 1975. 2 of the respondents resigned from the firm on 16 August 1976.

Held: The respondents incurred the debt on the trust receipt before

their

resignations or retirement and they could not escape liability by merely pleading resignation or retirement.

FARIHANA BINTI ABDUL RAZAK (2014) 13 LAW 346 Relationship between partners inter se  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 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.  The interests and duties of partners in the absence of agreements to the contrary are provided for in Section 26 of the PA 1961. 



The rules in this section 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.

 Section 30 of the PA 1961 = Partners are bound to render true accounts and full information of all things affecting the partnership to any partner or his legal representatives.

LAW v LAW [1905] 1 Ch. 140 Facts: A partner sold his share in the partnership to another partner for £21,000. Subsequently he discovered that, unknown to him; the partnership assets included mortgages and other securities. The other partner, who knew about them, never told him of this fact. The partner who sold his share sought a court order for the sale and purchase agreement to be set aside.

FARIHANA BINTI ABDUL RAZAK (2014) 14 LAW 346

Held: An order setting aside the transaction would have been made but for the fact that in this case, a settlement of the claim had been made and the partner had agreed to be bound by it. Therefore, on the facts, the transaction could not be set aside.  Section 31 of the PA 1961 = 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 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. A partner must not make a profit from a sale of the firm’s property without full disclosure to the other partners.

 Section 32 of the PA 1961 = duty of partner not to compete with firm.  If there is 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 ...