Partnership law - Lecture notes 2 PDF

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Partnership law - Lecture notes 2...

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Topic 

11

Law of Partnership (Part II)

LEARNING OUTCOMES

By the end of this topic, you should be able to: 1.

Explain the rights, duties and liabilities of partners;

2.

List the obligations of partners to one another;

3.

Discuss the rules on partnership property;

4.

Describe the grounds for dissolution of partnership; and

5.

Explain the consequences of dissolution of partnership.



INTRODUCTION

The previous topic discusses and explains the meaning of partnership, the important characteristics of partnership, the rules on formation of partnership, the relations of partners to outsiders and the liabilities of partners to third parties. As a continuation, this topic focuses on: 

the relation of partners to one another;



the mutual rights and duties of the partners;



the liabilities of incoming and outgoing partners;



the assignment of a partner's share in the partnership property; and



the dissolution of partnership.

TOPIC 11

11.1

LAW OF PARTNERSHIP (PART II)

 181

RELATIONSHIP BETWEEN PARTNERS

The relationship between partners may be regulated by a partnership agreement made by the partners which outlines the rights and duties and other terms relating to business management, division of capital and profits of each partner, etc. The provisions contained in Part IV (Sections 21 to 33) of the Partnership Act 1961 will only apply where partners did not provide the terms of partnership in their partnership agreement. Section 21 of the Partnership Act 1961 provides that the mutual rights and duties of partners, whether ascertained by agreement or defined by the Act, may be varied by the consent of all the partners and such consent may be either expressed or inferred from a course of dealing. Above all, the principle of utmost good faith towards each other is implicit in the partnership agreement. 11.1.1

Mutual Rights and Duties of Partners

In the absence of a specific partnership agreement between the partners, the following provisions relating to rights and duties of partners are found in Section 26 of the Partnership Act 1961, whereby: (a)

Every partner is entitled to equal share of capital and profits of the business, and must contribute equally to losses; and

(b)

Every partner who made any payment and incurred personal liabilities in the course of the firmÊs business is entitled to be indemnified by the firm. In the case of Kok Hok Leong & Anor v. Seow Kah Cheng & Anor (1950 (1950)) 16 MLJ 87 87, the appellant and respondent were partners in a firm which has been sued for breach of contract and ordered to pay for damages of RM4,246.50. The respondent engaged a solicitor and managed to reduce the payment of damages in the legal suit. When the partnership was dissolved, the court ordered the legal fees incurred by the respondent to be paid out of the partnership assets. The appellant refused to pay and went for appeal. The Court rejected the appeal on the ground that the respondentÊs action in the defence was an act to protect the firmÊs assets. Therefore, he was entitled to be indemnified from the firm's assets.

182

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LAW OF PARTNERSHIP (PART II)

(c)

Every partner who made any advance for the purpose of the firm's business, beyond the capital amount he subscribed, is entitled to 8% interest per annum from the date of the payment of the advance.

(d)

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

In Rishton v. Grissel Grisselll (1868) LR 5 Eq 326, the Court held that a principal in a business was not entitled to the interest on capital until the employees and the agentsÊ remuneration has been ascertained.

(e)

Every partner may participate in the management of the firm. (1907) 07) 5 CLR 1, K and T had entered into a In Kelly v. Tucker (19 partnership agreement verbally whereby they agreed to involve in the business of buying horses from Australia, to be sold in South Africa. By the said agreement, T would provide the capital while K was entrusted to manage the business. In this case, TÊs participation in the management of the partnership was denied by the agreement of both parties.

(f)

No partner is entitled to remuneration for acting in the partnership business. Reason being is the existence of the fiduciary relationship between partners. Thus, any partner who is assigned to manage the business is duty bound to exercise such duty for the interest of the partnership. The partners are not entitled to any salary or wages because they are performing their duties as partners in the course of the partnership business.

(g)

No partner may introduce another (new) partner without the consent of other existing partners.

TOPIC 11

LAW OF PARTNERSHIP (PART II)

 183

In Wong Peng Yuen v. Senanayak anayakee [1962] 1 MLJ 204, the defendant and Goh were partners in a share-brokerage firm. On 26 March 1959, they signed a partnership agreement whereby Goh transferred part of his interests in the partnership to his two children who were minors. On 3 April 1959, Tan joined the partnership as a new partner and on 30 April 1959 the plaintiff paid the defendant a sum of RM20,000 in consideration of the firm taking him as a partner. The plaintiff then acted as if he was a partner in the firm. Later, the firm suffered unexpected losses and when the firm was dissolved, the plaintiff claimed for the return of RM20,000 he had paid on the ground that he was not a partner because Tan and the children of Goh had never agreed to take him as a partner in the firm. The Court held that there was evidence to show that Tan's consent had been obtained and that consent from GohÊs children was not necessary. The agreement signed on 26 March 1959 was only a transfer of GohÊs interests in the partnership but not his right as a partner in the firm. Therefore, the plaintiff had no right to claim his money back. (h)

The majority partners may decide any differences as to ordinary matters connected with the firm's business but the changes in the nature of the firm's business must be made with consent of all the existing partners. In Highley v. Walker (1 (1910) 910) 26 TLR 685 685, there were three partners in a firm, carrying on business in worsted clothes. Two of the partners agreed to train one of the partner's son in the business. The plaintiff opposed to the agreement and applied to the court for an injunction to prevent the two partners from proceeding with their plan. The court dismissed the application on the ground that the dispute or disagreement between partners is usual in a partnership business. Thus, majority agreement is sufficient to resolve the dispute.

184

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LAW OF PARTNERSHIP (PART II)

Heng g However, in the case of Tham Kok Cheong & Ors v. Low Pui Hen [1966 2 MLJ 52 [1966]] 52, the Court held that the act of the first, second and third partners who sold the partnership business to a company without informing the fourth partner was invalid.

(i)

The partnership books are to be kept at the place of partnership business, or at the principal place if there is more than one place of business. [1939] 9] MLJ 286 286, the Court held that the In Gan Khuan v. Tan Jin Lua Luan n [193 right to examine and make copies of the partnership books is not limited to partners. The right can be exercised through an authorised agent appointed by the partners.

It is important to note that Section 26 of the Partnership Act 1961 is only applicable in the absence of the partnership agreement between the partners. In the existence of the partnership agreement, the above provisions are not applicable. 11.1.2

Obligations of Partners to Act in Utmost Good Faith

Every partner must act honestly because the relationship between partners is based on the principle of uberrimae fidei (utmost good faith). Further obligations of partners in a firm are provided in the following provisions: Section 30, 31 and 32 of the Partnership Act 1961. (a)

Under Section 30, every partner is obliged to render true accounts and full information on all things affecting the partnership.

Law w v. Law (190 In La (1904) 4) All ER 526 526, a partner transferred part of his shares to another partner for £21,000. The partner who bought the shares knew that the partnership assets comprised securities and charges but concealed the facts from the partner's knowledge. The Court held that the partner who had the information must disclose it; otherwise the sale of the shares may be set aside.

TOPIC 11

(b)

LAW OF PARTNERSHIP (PART II)

 185

According to Section 31, every partner who uses the partnership property, name or business connection, or involve in any transaction concerning the partnership, without the consent of other partners, must account to the firm for any secret profit or benefit derived by him. In Pathiran [1967]] 1 AC 233 233, a dispute arose Pathiranaa v. Ariya Pathiran a [1967 between two partners who were the marketing agents for Caltex Ceylon company. The defendant gave three monthsÊ notice to terminate the partnership. However, before the period of the notice ended, the defendant entered into a new agency contract with Caltex under his own name. The Court held that the profit gained by the defendant from the agency contract belonged to the firm because the defendant had used the firmÊs goodwill to obtain the new contract before the partnership was dissolved.

(c)

Section 32 covers the obligation of a partner not to compete with the firm in business of the same nature without consent of the other partners. Thus, if a partner opens a competing business without the consent of other partners, he must account for and render all profits made by him to the firm.

Benham m [1891] 2 Ch 244 244, a partner in a ship-brokerage firm In Ass v. Benha assisted in the incorporation of a ship building company using information he obtained from the firm's business. He was then appointed a director in the said company and received a salary in consideration for the services he rendered. Other partners claimed for the benefit to be given to the firm. The Court held that other partners had no right to claim for the benefit since the ship building business was of a different nature from the ship-brokerage business.

186

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11.2

TOPIC 11

LAW OF PARTNERSHIP (PART II)

INCOMING AND OUTGOING (RETIRING) PARTNERS

A partner takes up the liability as a partner upon joining an existing firm. However, he will not be liable before he became a partner, as provided under Section 19(1) of the Partnership Act 1961 whereby "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 a partner". The incoming partner will only be liable to the creditors of the firm under a contract of novation whereby the creditors agree to accept the liability of the incoming partners. On the other hand, a partner who retires from the firm continues to be liable for the partnership debt incurred before he retires, as provided under Section 19(2) of the Partnership Act 1961, whereby: "A partner who retires from a firm does not thereby cease to be liable for partnership debts or obligations incurred before his retirement." (Also refer to Topic 10, sub-topic 10.3.2). After a partner retires, he is still liable to any person who deals with the firm after a change in its constitution unless he has given express notice to the person that he is no longer a partner. According to Section 38(1) of the Partnership Act 1961, "where a person deals with a firm after a change in its constitution, he is entitled to treat all apparent members of the old firm as still being members of the firm until he has notice of the change". Further in Section 38(2), "an advertisement as to a firm in the Federal Gazette, Sabah Gazette or Sarawak Gazette shall be notice to persons who had no dealings with the firm before the date of dissolution or changed so advertised".

TOPIC 11

LAW OF PARTNERSHIP (PART II)

 187

In the case of Re Siew Inn Stea mship Co. [1934] MLJ 180, a retired partner had inserted a notice of his retirement in several issues of a newspaper to which certain old customers were proved to be regular subscribers. After his retirement, these old customers lent money to the firm on the security of promissory notes executed by the remaining partners. One of the lenders later sued the retired partner on these notes, denying having actually seen notice of his retirement in the papers. The Court held that the retired partner was liable on the notes, actual notice being necessary so far as old customers were concerned.

In relation to dismissal under Section 27, the majority partners cannot expel any partner unless the power to do so has been conferred by express agreement between the partners.

11.3

ASSIGNMENT OF SHARE

Under Section 33(1) of the Partnership Act, 1961, a partner may assign his share if there is no agreement among the partners prohibiting the assignment. However, the assignee is not entitled to interfere in the management of the partnership business or to require any accounts of the partnership transactions or to inspect the partnership books. The assignee is only entitled to receive the share of profits to which the assigning partner would be entitled.

Loo o v. Hock Wah Trading Co. & Ors [1990 [1990]] 1 MLJ 315, Ong In Ong Kian Lo contended that he was a partner in the defendant's firm after taking over all his mother's shares in the partnership. Thus, he had the right to interfere in the administration of the partnershipÊs business. The defendant denied it on the ground that Ong was only an assignee of his motherÊs shares and he had no locus standi to contend as such. The Court decided that Section 33(1) of the Partnership Act 1961 was applicable in this case. Ong was only an assignee to the share of his mother in the firm. Therefore, he had no right to interfere in the administration of the partnership including the right to inspect the partnership books.

188

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TOPIC 11

LAW OF PARTNERSHIP (PART II)

SELF-CHECK 11.1

1.

What is the important underlying principle inherent in all partnership agreements?

2.

What is the distribution of share of each partner in the capital, profits and losses in the business?

3.

Is a partner entitled to be indemnified by the firm for his personal liabilities?

4.

What is the right of a partner who gives advance to the firm for its business?

5.

Can a partner participate in the management of the business and receive wages or salary?

6.

What is the consequence of a partner who uses the partnership property, name or business connection to make secret profit for himself?

7.

What is the liability of a partner who competes with the firm in business of the same nature without the consent of other partners?

8.

Can a partner assign his share to other persons?

TOPIC 11

LAW OF PARTNERSHIP (PART II)

 189

ACTIVITY 11.1

Discuss the following problem by applying the principle of law on partnership: Car Universal Partners (CUP) was registered in 2004 to carry out the business of the trading of national cars. The partners of the firm are Mark, Cathy and Sarah. The firm managed to acquire a handsome profit due to the national campaign which encouraged people to buy national cars. In the year 2006, the firm agreed to sell their branch at Beruntung since the business was not doing well. Sarah offered to purchase the business in Beruntung as she has knowledge that the state government intended to develop the place as a mass housing project and there was the opportunity to have a good market for cartrading. Sarah purchased the branch and withdrew from being the partner of CUP. The fact that Sarah has been very successful in Beruntung and with the development in Beruntung itself, has come to the knowledge of all other partners in CUP. The partners claimed that Sarah has not disclosed the information to the firm with the intention to get the sole profit for herself. Advise Mark and Cathy.

11.4

PARTNERSHIP PROPERTY

It is important to determine whether the property used in the course of the firm's business is the property of partnership or the individual partnerÊs property. Section 22 and 23 of the Partnership Act, 1961 provide the rules on this issue. Section 22(1) states that, "all property and rights and interests in property originally brought into the partnership stock or acquired, whether by purchase or otherwise, on account of the firm or for the purposes and in the course of the partnership business, are called in this Act as partnership property and must be held and applied by the partners exclusively for the purposes of the partnership and in accordance with the partnership agreement....". According to Section 23, unless the contrary intention appears, property bought using firmÊs money is deemed to have been bought on account of the firm.

190

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LAW OF PARTNERSHIP (PART II)

From the statutory provisions and the decided case-laws, the following conclusions may be made: (a)

Whether the property brought into the firm is a partnership property or property of an individual partner depends on the partnership agreement between the partners. In Miles v. Clark [1953 [1953]] 1WLR 537 537, a photographer who carried out his own business brought in a new partner who had many business contacts. There was no clear agreement between the partners. Later, a dispute arose between them and the partnership was dissolved. The Court decided that since there was no clear agreement pertaining to the use of the assets in the partnership, the assets were not partnership properties but owned individually by the partners who brought them into the firm.

(b)

If there is no agreement provided for the partnership property, the partners must have the intention to regard the property as a partnership property. The property is intended to be a partnership property when it is purchased using the partnership money, even though it was purchased under a partnerÊs name. The property remains as a partnership property even though it is not used for the partnership business.

Murtagh agh v. Castell Castello o (1881) T LR Ir 428 428, it was held that a In the case of Murt property bought using partnership asset, although not used in the business, was regarded as a partnership property.

If the property is obtained using an individual partner's money, the property will remain the individual partner's property.

TOPIC 11

LAW OF PARTNERSHIP (PART II)

 191

[1980]] 1 MLJ 2283 83 83, the appellant had formed In Ponnukon v. Jebaratna m [1980 a partnership with the respondent to develop a land into a housing area. However, efforts to get the bank to purchase the land failed and the respondent decided to purchase the land using his money. The appellant applied for a court declaration that ...