Nature of a Partnership

Nature of a Partnership

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Partnership Act, 1961 (Revised 1974) This Act is based on the English Partnership Act, 1890.

Section 47(1) of the Act states that the English principles of law will continue to be used in Malaysia, except where they are not in agreement with the express provisions of the Act.

2DEFINITION OF PARTNERSHIPSection 3(1) defines partnership as: the relation which subsists between persons carrying on a business in common with view of profit.

Excluded under Section 3(2)Companies, co-operative societies, associations formed under any Malaysia Act of Parliament or other law, or Act of U.K Parliament or Charter, clubs, societies, and mutual benefits organizations or building societies -

3To understand the meaning of partnership, we need to examine the definition:Relation.Persons.Carrying on a business.In common.With a view of profit.

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RELATION A partnership is actually about relationships between two or more persons.

The words relation implies that there is some form of agreement or contract between these persons.

The agreement could be expressed (in the ptp agreement) or implied (from association of events, the conduct of the parties or certain circumstances surrounding the relationship). Wong Peng Yuen v Senanyake (1962)28 MLJ 20455

RELATION As the basis of the relationship of the partners is a contract, the Contract Act 1950 applies to partnership.

The partners must know or impliedly know that there is some relationship with the other person.(ibid)

The relationship (the FIRM) is not a LEGAL ENTITY (like a co.)as partners are liable both as Principals & Agents for each other. Keow Seng & Co. v Trustees of Leong San Tong Kho Kongsi(Penang)Registered [1983]2MLJ 1036

PERSONS Plural persons implies more than one member.

Maximum number of persons S. 14(3)(b) Companies Act, 1975, limits the number of partners in an ordinary partnership to twenty, but there is no limit for professional firms which cannot be incorporated under the Companies Act, 1965. S. 47(2) Partnership Act, 1961 also does not allow more than twenty members in a partnership.7

PERSONS If more than twenty, the entity will not be recognized as a partnership.

Tan Teck Hee v Cheng Tian Peng [1915]2 F.M.S.L.R.161 the court declared that a firm with 25 persons could not take a legal action in court as a partnership, as it was not recognised as a valid partnership.

Tan Ching Cheang v Estate Trust Agencies (1926) Ltd. [1932] F.M.S.L.R.129 the original membership of more than 20 was trimmed down before beginning a legal action. The court still did not recognize it as a partnership. The initial invalidity still remained.

Shim Fatt v Leila Bus Road Co. [1957] SCR 3 the court decided that the plaintiff could not claim their money back from a firm that had more than twenty members, because legal action could not be taken against a firm that was not at law considered as a valid partnership. 8

CARRYING ON A BUSINESS...A partnership is normally formed for commercial venture. The term business has been defined by s.2 as: includes every trade, occupational or profession.

Customs and Exercise Commissioner v Lord Fisher [1981]2 All.E.R 262 where the landlord invited several friends and relatives to a pheasant shoot for a small fee, the court decided the venture was not considered a business, although detailed preparations were made for the occasion.

Soh Hood Beng v Khoo Chye Neo (1897)4 S.S.L.R 115 the court held that the efforts several persons making individual contributions to establish a loan society with the purpose of lending money to its members in turns cannot be as considered as a business.9

...CARRYING ON A BUSINESSThe words carrying on a business denotes the present tense. If the persons concerned entered into transactions in the midst of preparing to carry on business as a company, no partnership can be construed as in:

Keith Spicer Ltd. v Mansell [1970]1 All ER 462M and a Mr. Bishop decided to go into business together and to form a limited company which was to carry on the business of the defendants restaurant. Mr. B ordered goods from the plaintiff to be used by the company after it had been formed (which it eventually was). The goods were not paid for, so the plaintiff sued for the price on the grounds that the defendant, M, was liable because a partnership existed between Mr. B. and M. The Court of Appeal held that the actions failed because there was no evidence that at the time Mr. Bishop ordered the goods, the defendant and Mr. Bishop were carrying on a business in common with view of profit within the meaning of the U.K S.1 (1) of the Partnership Act 1890. Evidence merely showed that they were preparing to carry on a business as a company as soon they could.

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IN COMMON by or on behalf of all the other partners - business is carried out for all the other partners benefit (or even detriment). Even where there is sharing of profits of a business, it is not a partnership unless the business involves participation of all the partners.

Even if the word partnership has not been used, as long as business is carried out in common, it is deemed a partnership Ratna Ammal & Anor v Tan Chow Soo [1964]MLJ 399. use of the word syndicate did not preclude a partnership11

WITH A VIEW OF PROFIT The business must be one carried on with a view of profit. Financial returns must be the motive.The word profit is not defined by statute. An acceptable meaning was given by Fletcher Moulton LJ. in Re Spanish Prospecting Co. Ltd. [1911]1 Ch 92 where he considered gross profit as profit. What is clear from the definition is that business must be carried out with the intention of making a profit. Where several persons carry on a business with a view of making profit, it fulfils the definition of S.3 (1) even if they do not make any profits. Soh Hood Beng v Khoo Chye Neo, one of the reasons why the court decided that is was not a partnership was because the intention to make profits did not exist in the activity that was carried out by the persons involved.

12DETERMINING THE EXISTENCE OF A PARTNERSHIP S. 4 specifically sets out rules to determine certain relationships that do not make up a partnership. But it is not complete.

In determining the issue as to whether a relationship is a partnership or not, the circumstances surrounding the relationship, including any written or verbal agreement and the conduct of the parties will have to be taken into consideration.

13DETERMINING THE EXISTENCE OF A PARTNERSHIP Aw Yong Wai Choo v Arief Trading Sdn. Bhd & Anor [1992]1 MLJ 166Plaintiff had entered into S&P agreement with Arief, a housing developer, who failed to complete the development project and then entered into a joint venture agreement with the Perak S.D.C. whereby the Corporation completed the project. Issue : whether Arief and the Corporation were partners.It was held by the High Court; on the evidence that a partnership existed between the defendants. To find the existence of the partnership, court must see what the real intention of the parties is, which is not necessarily the expressed intention of the parties.14 The rules for determining the existence of partnership as set out under section 4 concerns three situations:

Joint tenancy and tenancy in common.

Sharing of gross returns.

Receipts of share of profits.

15JOINT TENANCY AND TENANCY IN COMMONS. 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;

The words joint and common mean two or more persons involved in the holding of property.

It means that a partnership does not exist just because any property that is held or owned jointly or commonly is used, and out of the use of the property that is held regardless of whether such profit obtained is divided among the co-owner or tenant or not.

16JOINT TENANCY AND TENANCY IN COMMONDavis v Davis (1894)70 LT 265: 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 rent in enlarging the workshops attached the two houses. They continued to carry on the business. They each drew out from it a weekly sum, but no accounts were kept. They rent of the third houses was divided between them. The Chancery Division held that there was a partnership as to the business, but not as to the houses.

French v Styring (1875) N.S 375 the court decided that a partnership did not exist between several persons who jointly owned a race horse.

17SHARING OF GROSS RETURNSS. 4(b) the sharing of gross returns does not itself create a partnership, whether the person 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;

This rule means merely just because a person receives a part of gross returns, it does not make him a partner.

Gross returns, however, must be differentiated from net profit. Gross profit is whatever that a business gets, whereas, net profit is the income earned after all expenses have been deducted.

The origin of this rule was explained by C.D Drake in Law of Partnership. He said that this rule was a way of avoiding the principles that saw sharing of profits as creating a partnership.

18SHARING OF GROSS RETURNSCox v Coulson [1916]2 KB 177: The defendant was a manager of a theatre, and agreed with a Mr. Mill to provide the theatre, and pay for the lighting and the playbills. He was to receive 60% of the gross takings, whilst Mr. Mill was to provide and pay for a theatrical company and provide the scenery and receive the remaining 40%. The plaintiff was injured by a short fired by an actor during the performance of a play at the theatre. She sought inter alia to make the defendant liable on the ground that he was a partner of Mr. Mill.

It was held, by the Court of Appeal that the defendant could not be made liable on this ground because he was not a partner, for by s.2(2)of the UK Partnership Act 1890 the sharing of gross returns did not of itself create a partnership.

19RECEIPT OF SHARE OF PROFITSS. 4(c) the receipt of 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 payment contingent on or varying with the profits of a business ,does not of itself make him a partner in the business-

this rule points to the fact that under ordinary circumstances a person receiving a share of profits is considered as a partner. BUT, when some other facts are connected to the receipt of such profits, then it may not be a partnership.

The courts will look at the circumstances surrounding the receipt of the profit to decide whether or not there is a partnership.

There are five circumstances pointed out under section 4(c) where the sharing of profit does not make the person receiving a partner. They are:

20The receipt by a person of a debt or other liquidated amount, by installment or otherwise, out of the accruing profits of a business does not itself make him a partner in the business or liable as such.

This rule means that if a person lends money to a partnership, and the debt is repaid to him by instalments over a certain period of time out of the profits of the business, this does not mean that he is a partner, and could be made a liable as such:

Badeley v Consolidated Bank (1888)38 Ch.D 238 Plaintiff advanced to C a sum of money for the purpose of constructing rail transport. C assigned his right to the machinery and apparatus as security to the plaintiff, and agreed to pay an interest of 10% on the sum advanced to him from the net profit which he obtains from the business. It was held that on looking at the circumstances as a whole, the advance the plaintiff paid C is considered a secured loan, and although the plaintiff receives a share of the profits from the business, he is not considered as partner of C.

RECEIPT OF SHARE OF PROFITS21ii. 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 make the servant or agent a partner in the business or liable such as;This rule allows servants or agent to take part in any project where they have a share of the profits, but they are not liable as partners.

Walker v Hirsch (1884)27 Ch.D. 460The plaintiff, a former clerk of the firm, agreed to advance 1,500 to the firm and that the loan shall be repaid by payment of a salary 180 and one-eight from the net profits. The court decided that that in itself did not make him a partner, thus he had no rights as a partner.

RECEIPT OF SHARE OF PROFITS22Abdul Gaffor v Mohamad Kassim [1931-32]FMSLR 19The plaintiff was a servant of the defendant. He had signed an agreement where he was allocated shares that had been apportioned between him and the defendant and others. He claimed that this document proved that he was a partner of the business, and as such is entitled to a certain share of the profits. The defendant denied that there was a partnership and said that the relationship between them and the plaintiff was that of employer and employee.It was held by the courts that on true construction of the facts, there was no partnership. The relationship between them was that as employer-employee.

RECEIPT OF SHARE OF PROFITS23(iii) A person being a 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 are liable as such.

Commissioners of Inland Revenue v Lebuss Trustees [1946] 1 All ER 476;The widow of a partner who inherited one quarter of the share of the profits was held by the court as not to be a partner in the business and none of the assets of the partnership belonged to her.

RECEIPT OF SHARE OF PROFITS24(iv)The advance of money by way of loan to a person engaged or about to engage in any business in a contract with the person that the lender shall receive a rate of interest varying on the business, does not itself make the lender a partner with the person or persons carrying in the business on the business or liable as such.

This rule is about where a person has advanced money as loan towards a business. He then enters into a contract either agreeing that the rate of interest he shall receive will vary as according to the profit the business receives, or that he will receive a share of the firms profits. The receipt of the profits in such a case does not make him a partner of the business. The rule here is qualified by the fact that the contract must be in writing and signed by or on behalf of all the parties.

RECEIPT OF SHARE OF PROFITS25Re Young, ex p Jones (1896) LT 278Jones and Young entered into an agreement by which it was provided that Jones should lend 500 to Young in consideration for the payment to Jones of 3 per week out of the profits of the business. Jones was also to assist in the office, to have control of the money advanced and to be empowered to draw bills of exchange. He also had the right to enter into a partnership within a period of seven months. A question arose as to whether Jones was a partner.

It was held that he was not a partner.

RECEIPT OF SHARE OF PROFITS26(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.Where there had been a sale of a business and its goodwill. It is followed by an agreement that the consideration for the sale of the goodwill will be paid out of a portion of the profits that the business may make. The payment may be in the form of annuity or something else. The recipient of such payment is thus not liable as a partner.

Pratt v Strick [1932] 17 T.C 459 A doctor sold his practice to a buyer. They agreed that he will continue on living at the place of business (a house) for another three months and introduce all his former patients to the buyer. All the income received and expenses paid for those three months will be shared out equally between them.It was held that the doctor who had sold the practice was not a partner of the purchaser.RECEIPT OF SHARE OF PROFITS27