Tuesday, July 6, 2010

Partnership (Law 346)

PARTNERSHIP

Meaning and Nature 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.

The relation between members of any company association which is:-
a) registered as a company under Companies Act, 1965 or as a co-operative 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) letters, patent, Royal Charter or Act of the Parliament of the United Kingdom.

Clubs and societies as well as mutual benefit organizations and building societies cannot be considered as partnership. It was held in Soh Hood Beng v Khoo Chye Neo (1897) 4 SSLR 115 that Chinese loan association does not fall under the ambit of partnership. By virtue of Section 47(2) of the Act there cannot be an association of more than twenty persons formed or carrying on business in partnership. As that contravenes Section 14 (3) of the Companies Act 1965, unless it is a partnership of professionals, eg doctors, solicitors or dentists.

To explore partnership in detail it is worthwhile exploring the characteristics as revealed by the definition..

1. The relationship, which subsists, is one contract. A partnership agreement is a contract. However, it is not enough just to agree to be partners; you must also be in a business, which has started. eg. if Airil and Juanpe decide that they will run a shop as partners, they are not partners in the eye of the law until the shop is actually operating. Preparation stage is not partnership contract. as we can see in the case of Spicer (Keith) Ltd v Mansell [1970] 1 All ER 462, M and B lost their jobs. They agreed to go into business together and for a limited company to run a restaurant. While they were forming the company and before it had received its certificate of incorporation from the registrar, B ordered some goods from Specier’s for the business. They also opened a bank account in the name of the company. The company was eventually formed but not bound by the contract which B had made because it was not in existence at the time.

B went bankrupt before Spicer’s had been paid. So rather than prove in a bankrupt, Spicer sued M on the basis that he was a partner of B. Held. B and M were not partners. They were not carrying business together in partnership. They were preparing to carry on a business as a company as soon as they could

2. A partnership is between persons, but a company, being a legal person can be a partner with human person. the members of the company may have limited liability while the human person has not. Two mote limited companies can be a partner.

3. Parties must be carrying on a business, and for this reason a group of people who run a social club would not be a partnership.

4. There must a view of making profit.

5. Sharing gross profit.

According to Sir Montague Smith in Mollowo, March & Co v Court of Wards (1872) LR 4 PC 419 at 436, “to constitute a partnership the parties must have agreed to carry on business, or to share profit in some way common.
[3]. Thus in a partnership, each partner is an agent whose acts are binding on the other partners who are his principals, and each partner is again a principal who in turn is bound by the acts of the other partners. Section 7 provides:-

“ Every partner is an agent of 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 in the usual way 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.”

Firm and Firm Name

Persons entering into partnership with one another are, for the purpose of Partnership Act, called collectively a firm, and the name under which their business is carried on is called the firm name. Contrary to popular believe, a partnership does not have to be created by a formal deed. For example, two individuals, who have started a business in retailing in pursuance to an agreement to become partners, will be considered by law to be partners until the conclusion of the partnership agreement.

A partnership business must be registered under the appropriate law, depending on the location of the business. In Peninsular Malaysia it is the Registration of Business Act 1956. A creditor is entitled under Section 6 of the Registration of Business Act5 1956 to rely on the particulars kept in the Business Registry to ascertain whether a person has remained a partner of a firm at the commencement of a suit
[4].

In both English and Malaysian law, a firm has no legal existence distinct from its members . It has no legal entity. In Alagappa Chettiar v Coliseum Café [1962] MLJ 111, The appellant is the owner of premises known as No 102 Batu Road and the respondent is a firm of partners carrying on business of a cafe and hotel in Nos 98, 100 and 102 Batu Road. The present appellant brought an action in the Sessions Court for recovery of possession of his premises No 102 and for mesne profits. The learned President was of the opinion that the defendant firm though registered as a business had not the power to become tenants as so constituted and he gave judgment for the appellant.

The respondent appealed to the High Court and Hashim J allowed the appeal. From this decision the appellant appealed to the Court of Appeal. A preliminary point was raised by counsel for the respondent that as “he amount or value of the subject matter at the trial is less than five hundred dollars” there was no right of appeal unless leave was obtained from the High Court or from the Court of Appeal.

The only other point raised was that it was suggested that since a partnership firm is not a legal entity in law, the firm cannot hold a tenancy. – rejecting the opinion of the trial court that the partnership known as Coliseum Café, although registered as a business, had no power to become tenants as so constituted, his Lordship went on to say that ‘ a single individual can be a tenant, and equally can eight partners be joint tenant’. ‘ Coliseum Café or Hotel, as such is not a legal persona, but a label used by a number of individuals trading in partnership under one name.




Held:
(1) the profits claimed must be taken into account in determining whether the amount or value of the subject matter was more or less than $500;

(2) in this case the respondent had not made out the allegation on which his preliminary objection rested;

(3) the letting in this case created the relationship of landlord on the one hand and the partners on the other, and though there had been a change of partners over the years, members of each new partnership arising from each change by virtue of s 206(g) and (j) of the Contracts (Malay States) Ordinance, 1950, had continued de jure to assume obligations and enjoy benefits of the tenancy. This followed from the fact that when the tenancy agreement was made no reliance was placed upon the “personnel of the Partners


Consideration Affecting Existence of Partnership

(1) Joint Tenancy and Tenancy in Common
[5]

Joint Tenancy and Tenancy in Common refers to ownership of property by two or more persons. Such an ownership alone does not imply the existence of a partnership if it is not designated to share the net profit as a result of the relationship.

A joint tenancy arises where there exists (a) unity of possession (b) unity of title (c) unity of time (d) unity of interest. The most distinct element in such tenancy is survivorship, on the death of a joint tenant, the entire property vests in the survivor or survivors

A tenancy in common arises when two or more persons own distinct and undivided share in the property. The death of a tenant in common does not result in the acquisition of his shares by the surviving partners but passes to his next of kin or according to his will if he has left one.

A joint ownership of a land or any property by two or more parties does not necessarily make them partners, not even if the actually conducted their business activities on the property.

(2) Sharing of Gross Returns
[6]

A distinct must be made between a specific interest in the profits and a claim on the gross takings. This is best illustrated in the case of Sutton & Co v Grey
[7] in which the court held that the commission earned by one, for business introduced by his to a firm to stockbrokers, did not amount to a specific interest in the profit.

In Cox v Coulson
[8] the defendant, a theatre manager was sued as a partner, for an injury alleged to have been caused to the plaintiff by a person the plaintiff claimed to be the defendant’s partner. The only relationship between the defendant and that person was an agreement to share whatever might come from a theatrical group performance. The court held that there was no partnership in this situation.



Sharing of Profits
[9]

As general rule, a person who receives a share of the profits is prima facie deemed to be a partner of the firm but the receipt of such share, or of a payment contingent on or varying in the profit of a business, does not of itself make him a partner in the business. Here the court has to examine all the circumstances of the cases in order to ascertain the intention of the parties, without giving undue weight to any of such circumstances including the question of the sharing of profit.
[10] In Davis v Davis [1984] 1 Ch 393 two brothers held certain houses as tenants in common. They also had a business. They let one of the houses and employed the proceeds in enlarging the business. It was held that they were partners as to the business but not to the houses, and the property acquired for expanding the business was not partnership property.

If one advances a sum of money (RM 25,000) to a firm and receives payment by installments of RM 500 monthly, this does not qualify him as a partner. Payment can be in the form of a salary plus a commission of the share of the profits. This arrangement does not make the recipient to be considered as a partner. Sometimes this category is also known as salaried partner.

In Walker v Hirsh
[11] plaintiff advanced a monetary sum to H & Co, controlled and owned by two individuals. P signed an agreement with H & Co which included clauses, inter alia, that P would be paid salary plus one –eight (1/8) of the profits, and losses and the agreement could be determined with four moths notice. P was previously a clerk and continued to discharge clerical duties in H & Co after the agreement. The firm gave his notice as agreed, in which case he brought an a action claiming to be a partner and demanding the dissolution of the firm. The court held that he was only a servant of the firm and not as partner as what he claims to be.
Formation of Partnership

The agreement is not required by the partnership Act 1961 to take any special form, though it is usually written. Writing is preferred as it makes it easy to ascertain the right and duties of the partner. In an agreement to form a partnership, as in all contracts, there must be free consent and consideration.

Capacity to be a firm’s member

Persons who have capacity to contract, including those of a religion, women, limited companies, and aliens may enter into the partnership agreement but others also may do the same thing in certain instances.

According to the age of Majority Act 1971, a minor is a person under the age of 18. In William Jacks and Co (Malaya) Ltd v Chan and Yong Trading Co
[12], The plaintiffs claimed against the defendants the sum of $12,734.91 for goods sold and delivered by the plaintiffs to the defendants. The writ was served on Chan and Yong the partners of the defendant firm. Yong did not take any steps to defend but Chan denied the plaintiffs’ claim on the following grounds namely that (a) 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 (b) he had not in any way represented or held himself out as partner of the said firm (c) the goods bought from the plaintiffs were for the personal use of Yong who was a minor and that therefore the partners were not liable.

Held:
(1) Chan was a partner of “Chan & Yong Trading” and “Chan & Yong Construction” and on the evidence “Chan & Yong Trading Co” and “Chan & Yong Trading” were one and the same firm because there was no evidence that there were two separate firms by these two separate names;

(2) Chan 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 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 plaintiffs for his own purpose did not mean that the partnership and consequently the partners were not liable. Further 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.

However in Goode v Harrison [1984] AC 607 a debt contracted during minority would not bind the contractor of he did not repudiate the partnership agreement on attaining the age of majority. It was further held that to avoid incurring liability on the firms future debts the minor who became of age should repudiate the partnership agreement before such debts were incurred.

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
[13]. –. – 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
[14].

Re Briggs & Co (1906)

A father and son were partners in a firm. The firm was in financial difficulties. They were being pressed by the creditors and they have no money to pay back the creditors. The assigned book debts to the creditors. The son deal with this without informing the other partner i.e the father. Later they firm was declared bankrupt and the trustee sought to set a side the agreement stating that it was executed by the individual. Court held that the agreement was bonding because it was an instrument relating to the business of the firm and there was some intention to bind the firm.

When one partner pledges the credit of the firm for a purpose apparently not connected with the firm’s ordinary course of business, the firm is not bound, unless he is in fact specially authorised by the other partners; but this section does not affect any personal liability incurred by an individual partner.
[15]

This section explain that if a partner uses the fund of the firm for his personal purposes which is not connected with the ordinary course of business, than the other partners will not be liable for his act, but if it was authorised by the other partners therefore all the partners can be made liable.

If it has been agreed between the partners that any restriction shall be placed on the power of any one or more of them to bind the firm, no act done in contravention of the agreement is binding on the firm with respect to persons having notice of the agreement.
[16]




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.
[17] 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.

Illustration.
Linda has supplied furniture worth RM50,000/- to the firm of Azizul, Samdan and Najib Enterprise. Linda has not been paid her 50,000/-.

Linda may sue Azizul, Samdan and Najib Enterprise. But if there is insufficient common partnership property to satisfy the debt, she can levy execution against the private property of the partners – Azizul, Samdan and Najib.. On the other hand, Linda may choose to sue only one partner.


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
[18]. 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.
[19]

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 anytime.

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).

6. 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 a s ‘ 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 willful 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.




[1] The partnership comes into existence when two or more individuals pool their skills, labour, capital and other resources together to form a business concern jointly – The law of partnership in Singapore and Malaysia 2nd Edt Peter Knh Soon Kwang
[2] Mollwo, March & Co v The Court of Wards (1872) L.R 4 PC 419
[3] Yeow Chesn v Teo Guan Chiang [1948] MLJ 154..
[4] Hup Aik Ting Mining Co v Kam Hoy Trading [1969] 1 MLJ 93
[5] Section 4(a)
[6] Section 4(b)
[7] [1894] 1 QB 285 at 291.
[8] [1961] 114 L.T 599
[9] Section 4(c)
[10] Davis v Davis
[11] (1884) 278 Ch D 460
[12] [1964] MLJ 105
[13] Section 7 of the Partnership Act 1961 -
[14] Section 8 of the Partnership Act 1961
[15] Section 9 of the Partnership Act 1961
[16] Section 10 of the Partnership Act 1961
[17] Section 11 – Osman v Chang Kang Swi (1924) 4 FFMSLR 292
[18] Section 19(1)
[19] Section19(3)
[20] In England this situation has been changed by s. 3 of the Civil Liability (Contribution) Act 1978.
[21] Jones v Noy (1833) My & K 125

1 comment:

  1. Dear Sir/Madam,

    thank you for the aforesaid Law Notes. i shall be grateful if you could kindly enlighten me as to whether or not there is a distinction between dissolution of partnership vs dissolution of a partnership firm? Thank you.

    ReplyDelete