Business Law

Chapter 11

Partnership

Course Content

Nature of Partnership Duties of Partner Liability of Partners Dissolution of Partnership

Nature of Partnership

Partnership is defined by s3(1) Partnership Act 1961 as ‘the relation which subsists between persons carrying on a business in common with a view of profit’

By virtue of s3 PA, co-operative societies and registered statutory and chartered companies are specifically excluded from the definition

Nature of Partnership

Persons in the s3(1) definition refers to: - Encompasses individuals as well as corporate

bodies such as limited company It is possible that one or more limited companies

to be partners s14(3) Companies Act 1965 and s47(2) PA –

consists of not more than 20 members. Professional partnerships are exempt from this.

Tan Teck Hee v Cheng Tian Peng (1915) Shim Fatt v Leila Bus Road Co (1957)

Formation of Partnership In an agreement to form a partnership, as in all

contracts, there must be free consent and consideration The partnership must also be for a lawful purpose The relations between partners usually arise through

partnership agreement They may be in the form of a partnership article under

seal or a simple agreement signed by the partners, or even an oral agreement

The more formal agreements usually provide for a wide range of matters such as the duration of the partnership, the rights and duties of partners and the amount of capital

Formation of Partnership

In Peninsular Malaysia, a partnership business must be registered under the Registration of Business Act 1956; 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 exist (Gulazam v Noorzaman and Sobath (1957))

Elements of a Partnership

3 Elements are: - The carrying on of a business The business must be carried on in common The business must be carried on with a view of

profit

Carrying on a Business

The Act defines ‘business’ as including ‘every trade, occupation or profession’ (s2 PA)

If non-commercial purposes – fall outside PA ‘Carrying on’ implies that a business is being

conducted in a regular and systematic manner and that there is some continuity or at least an intention of continuity

A single transaction is usually NOT an activity of partnership (Smith v Anderson (1880))

Carrying on a Business in Common The business of the firm must be carried on

in common This means that the business must be carried

on by or on behalf of all the partners It does not matter that only one or some of

the partners actually do the day-to-day business and that some are ‘sleeping partners’

With a View of Profit

The business in question must be carried on with the view of making profit

This requirement would exclude ‘not for profit’ organisations from the definition of ‘partnership’

Rules for Determining Existence of Partnership Co-ownership of property (s4(a))

Joint tenancy, tenancy in common, joint 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 PROFIT made by the use thereof

The sharing of gross returns (s4(b)) Profit before deducting any costs Sharing of gross profit does not create a partnership

(Lyons v Knowles)

Rules for Determining Existence of Partnership Sharing of profits (s4(c))

The sharing of profits is prima facie evidence of partnership but this presumption may be rebutted by showing that the purpose of sharing was for some other purpose

The following situations by themselves do not make a person a partner in the business: - Payment of a debt by installments out of profits Remuneration to a servant or agent of the business Payment of an annuity or a portion of the profits to a widow or

child of a deceased partner in the business Payment of interest which varies with the profits on a loan

advanced for use in the business under a written contract Payment of the seller of the goodwill of a business in the form

of a share of the profits of the business

s26, 31, 32 of PA 1961 – Rights and duties of partners in the absence of an agreement which incorporates the principle of ‘utmost good faith’ between partners i.e. fiduciary relationship

Rights and Duties of Partner

Rights and Duties of Partner

S26 PA states: - Partners share profit equally Partners who incur expenses that are reasonable and made in

the ordinary course of partnership business must be indemnified If a partner extends a loan to the firm, he is entitled to interest to

it All partners have the right to participate in the management of

the business New partners may only be taken in with the permission of the

existing ones Disputes that are ordinary may be settled by a majority vote but

fundamental issues must require a unanimous decision All books and records must be open for inspection to partners at

any time

Rights and Duties of Partner

S30 AP 1961 – Partners are bound to render true accounts and full information of all things affecting the partnership to any partner or his legal representatives

S31 AP 1961- every partner must account to the firm for any benefit derived by him, without the consent of the other partners, from any transaction concerning the partnership or from any use by him of the partnership property, name or business connection

S32 PA provides – if a partner, without the consent of the other, carries on any business of the same nature as and competing with that of the form, he must account for it and pay over to the firm all profits made by him in that business

Liability of Partners

Every partner in a firm is liable jointly with the other partners for all debts and obligations of the firm incurred while he is a partner (s11)

If a partner dies, his estate becomes severally liable for such debts and obligations in so far as they remain unsatisfied but subject to the prior payment of his separate debts

With regard to tortious acts or wrongs, the partners are jointly and severally liable for such wrongs committed by one of the partners in the ordinary course of business of the firm or with the authority of his co-partners

Where one partner, acting within the scope of his apparent authority receives money or the property of a third person and misapplies it, or where a firm in the course of its business receives money or the property of a third party and the money or property so received is misapplied, the firm is liable to make good the loss

Liability of Partners

As regard trust property, if a partner being a trustee, improperly employs trust property in the business or on account of the partnership, no other partner is liable for the trust property to the persons beneficially interested therein

But if any partner has notice of a breach of trust, his liability cannot be avoided and trust money may be followed and recovered from the firm if still in the possession and under the control of the firm (s15)

Liability of Persons for ‘Holding Out’ It may happen that a person is not a partner of a firm, but he may

by words spoken or written, represent himself or knowingly allow himself to be represented as a partner in the firm

In such a case, he may be liable like a partner for the debts of the firm

His liability is only to those persons who have on the faith of such representation given credit to the firm (Bevan v National Bank Ltd (1906)

When a partner dies and the partnership business is continued in the old firm name, the continued use of that name or of the deceased’s partner’s name as part of it, does not itself make his estate liable for any partnership debts contracted after his death (s16(2))

Liability of Retiring Partners For debts incurred by the partnership before the

partner’s retirement When a partner retires from the firm, he remains liable for

the partnership debts incurred before his retirement (s19(2) PA)

However, a retiring member may be discharged from existing liability by an agreement between himself, the new firm and the creditors. This agreement (the ‘contract of novation’) may either be express or inferred from the course of dealings. It is essential to securer the creditors’ consent to the agreement, otherwise the agreement is not binding on the creditors

Liability of Retiring Partners For debts incurred by the partnership after the

partner’s retirement Debts incurred after a partner’s retirement, the retiring

partner 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 (s38(1) PA)

Any advertisement in the Federal Gazette, Sabah Gazette or Sarawak Gazette as to a firm whose principal place of business is in the respective territories ‘shall be notice as to persons who had no dealings with the firm before the date of dissolution or change so advertised’ (s38(2) PA)

In the case of Re Siew Inn Steamship Co, the court held that actual notice was necessary so far as old customers were concerned

Dissolution of Partnership

Circumstances of dissolution of partnership: - Dissolution by expiration or notice (s34 PA) & McLeod v Dowling

(1927) Dissolution by death, bankruptcy or charge (s36 PA) Dissolution under express clause. Carmichael v Evans (1904) Dissolution by order of court (s37 PA)

Mental disorder Permanent incapacity Conduct prejudicial to the business Persistent breaches of partnership agreement and destruction of

mutual confidence e.g. Physical assault – Greenaway v Greenaway (1940) Groundless accusation of fraud – Re Venidge Tobacco Co Ltd (1916) Use of partnership property for private purpose – Smith v Jeyes (1841)

Partnership being carried on at loss – Jennings v Braddeley (1856) The dissolution being just and equitable

Consequences of Dissolution Right to notify

S39 – on the dissolution of a partnership, or retirement of a partner, any partner may publicly notify the same, and may require the other partner or partners to concur for that purpose in all necessary or proper acts, if any, which cannot be done without his or their concurrence

S38(2) – a notification in the Gazette is sufficient notice to persons who have had no dealings with the firm prior to the retirement or dissolution

Q & A