Chapter 4 - Partnership

Business Law All Rights Reserved
© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch13: 1

CHAPTER 13
Partnership Law

OBJECTIVES
This chapter covers:

 the nature and characteristics of partnerships
 the rights and liabilities of a partner with respect to
the other partner or partners, and between partners
and third parties
 the rules governing the formation, duration, and
dissolution of partnerships

PREVIEW
 Introduction
 Definition and Nature of Partnership
 Formation and Duration of a Partnership
 Relations between Partners and Third Parties
 Liability of Partners
 Relations between Partners to One Another
 Partnership Property
 Shares in Partnership and Assignment
 Dissolution of Partnership
INTRODUCTION
 law of partnership governed by Partnership Act

1961 (Revised 1974)
 rules of equity and of common law applicable in
partnership will continue in force, except in so far as
they are inconsistent with the express provisions of
the Act – section 47(1)
 in Peninsular Malaysia, it is necessary that all
partnership businesses, as well as sole-
proprietorships must be registered with the CCM–
Registration of Businesses Act, 1956 (Revised
1978)
DEFINITION AND NATURE OF
PARTNERSHIP
 definition of partnership – partnership is the relation
which subsists between persons carrying on business
in common with a view of profit: section 3(1)
 co-operative societies and registered statutory and
chartered companies are specifically excluded from
the definition in section 3(2)
 partnership business must be registered:
1. In Peninsular Malaysia – under the Registration of Businesses
Act 1956; (now centrally administered by the Companies
Commission of Malaysia)
2. In Sarawak – under the Sarawak Cap. 64 (Business Names)
and Cap. 33 (Business, Professions and Trade Licensing)
3. In Sabah – under the Trade Licensing Ordinance No. 16 1948
PARTNERSHIP (cont.)
 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 – see
Gulazam v Noorzaman and Sobath
 although the word ‘partnership’ does not appear in
the agreement, a partnership may still exist if the
relationship between the individuals has the
business character of a partnership within the
scope of the Act – see Ratna Ammal & Anor v Tan
Chow Soo
PARTNERSHIP (cont.)
 a partnership need not have to be created by a
formal deed or written agreement – may be
created orally or in writing
 a partnership, however, is not a legal person by
itself – see Madan Lal & Anor v Ho Siew Bee
 as seen above from the definition of partnership
in section 3(1) of the Partnership Act 1961, for a
partnership to exist, two or more persons must
be ‘carrying on business in common’

PARTNERSHIP (cont.)
 the word ‘business’ has been defined in section 2 of
the Partnership Act 1961 as ‘including every trade,
occupation or profession’
 therefore if several people group together to raise
funds or to run a charitable or religious
organization, they cannot be said to have formed a
partnership. Similarly, clubs, societies and
cooperatives are not considered as partnerships –
see Chooi Siew Cheong v Lucky Height
Development Sdn Bhd & Anor, Sinnathamby a/l
Klondakoundan & Ors v Brijkishore a/l Shuparshad
PARTNERSHIP (cont.)
 the Court held that there is a distinction between a
joint venture and a partnership
 a joint venture may or may not be a partnership and
in deciding whether or not a partnership existed, the
court must have regard to the relevant rules in
section 4 of the Partnership Act 1961 and the
intention of the parties as appearing from the whole
facts of the case and the contract the joint venturers
had made – see Chooi Siew Cheong & Anor v
Lucky Height Development Sdn Bhd & Anor

PARTNERSHIP (cont.)
 whether the parties were to be regarded as parties
could only be determined if the joint venture between
them constituted a partnership ‘for a single adventure
or undertaking’ subsumable under section 34(1)(a) of
the Partnership Act 1961
 certain circumstances are not prima facie
partnerships – section 4 of the Partnership Act 1961:
– 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
PARTNERSHIP (cont.)
– 4(b) the sharing of gross returns does not of itself create a
partnership, whether the persons 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
– 4(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 of 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 – see Chooi
Siew Cheong v Lucky Height Development Sdn Bhd & Anor,
Buckingham v Port Jackson & Manly Steamship Co

PARTNERSHIP (cont.)
 there are particular instances listed under
subsection 4(c) whereby the receipt of a share of
profits does not qualify a person to be a partner:
– 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 of itself make him a partner
in the business or liable as such – see Cox v Hickman
– 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 of itself make the servant or agent
a partner in the business or liable as such – see Walker v
Hirsch

PARTNERSHIP (cont.)
– 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 – see I.R.C. v Lebus’s Trustees, Wong Peng
Yuen v Senanayake
– 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 –
see Re Young
PARTNERSHIP (cont.)
– 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 – see Pratt v Strick
 there is no ceiling on the number of members who
can join professional partnerships – section
14(3)(a), Partnership Act 1961

FORMATION AND DURATION OF
A PARTNERSHIP
 a partnership is easier to form than a company. The general
rule is that everyone sui juris is capable of entering into a
partnership agreement
 there can be a partnership between a minor and an adult.
The principle that a minor could be in a partnership for any
duration of time until he wanted to disaffirm it was
established in Goode v Harrison
 however, a minor cannot incur or be responsible for any
contractual liability for the firm’s debts. On reaching the age
of majority, a minor can, if he wishes, discharge himself from
all future debts of the firm by terminating the partnership.
Failure to repudiate the agreement will make him liable for
the partnership debts – see William Jacks & Co (Malaya) Ltd
v Chan & Yong Trading Co
RELATIONS BETWEEN
PARTNERS AND THIRD PARTIES
 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 – section 7,
Partnership Act 1961. See Chan King Yue v Lee &
Wong
 partners are bound by acts on behalf of firm – see
section 8, Partnership Act 1961. See Restoran
Rizqin v Asia Commercial Finance (M) Bhd

RELATIONS BETWEEN
(cont.)
 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 – section 10
 partner using credit of firm for private purposes –
section 9, Partnership Act 1961

RELATIONS BETWEEN
(cont.)
 for a third party to hold the partnership firm and the
rest of the partners liable, the following conditions
must be satisfied:
1. The act must be done for the purpose of the business of
the partnership – sections 7 and 9
2. The act must be done in the firm’s ordinary course of
business – see Bank of Australasia v Breillat, Beckham v
Drake, Porter v Taylor, Court v Berlin, Mercantile Credit Co
v Garrod
3. The act must be done by the partner as a partner of the
firm and not in his own personal capacity

LIABILITY OF PARTNERS
1. Ordinary Torts
 liability of firm for wrongs – see 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 co-
partners – e.g. 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
 similarly, a firm of lawyers would be liable for the
negligence of one of the partners – see Bkyth v Fladyate

LIABILITY OF PARTNERS (cont.)
2. Misapplication
 misapplication of money or property received for or in
custody of firm – see section 13 of the Partnership Act
1961
 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 above-mentioned – section
14, Partnership Act 1961. This means that if the
partnership firm is liable for wrongs under section 12 of
the Partnership Act 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
3. Misappropriation
 improper employment of trust property for partnership
purposes – see section 15 of the Partnership Act 1961
 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

4. Contractual Liability
 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 – section 11, Partnership Act 1961
 joint liability means that if a judgment is obtained against a partner
in the partnership for a debt owing by the partnership and the
judgment remains unsatisfied because of the partner’s bankruptcy
or otherwise, any other partner or partners who has or have not
been sued cannot be sued in a subsequent new proceeding or
proceedings – 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. See Guinness Anchor Marketing Sdn Bhd v Chellam Joe
Vetha Thya Singh
 third parties may sue all the partners individually or

the firm – see Krishnan v Abdul Razak & Anor, M.
K. Varma & Anor v K. M. Oli Mohamed
5. Criminal Liability
 although partners are jointly liable in civil cases,
they are not jointly liable in criminal cases – see
Chung Shin Kian & Anor v Public Prosecutor
6. Duration of Liability
 a new partner who has just been admitted into a
firm is not liable for the debts incurred prior to his
admission

 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
partner – section 19(1), Partnership Act 1961
 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) of the said Act reads:
– A partner who retires from a firm does not thereby
cease to be liable for partnership debts or obligations
incurred before his retirement

– 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
7. Liability of Persons for Holding Out
 persons liable by ‘holding out’ – see section 16,
 the effects of this section is illustrated in the case of
William Jacks & Co (Malaya) Ltd v Chan &
Yong Trading Co
8. Liability of Retired Partners

 after retirement, a partner is still liable to persons
who deal with the firm after a change in its
constitution unless he has given notice to such
persons that he is no longer a partner – section
38(1), Partnership Act 1961
 see Re Siew Inn Steamship Co,Tan Sin Moh v
Lebel Ltd, Philips Singapore Pte. Ltd v Han Jong
Kwang & Anor, Mayban Finance (Singapore) Ltd v
Yap Thiam Sen & Anor

RELATIONS BETWEEN
PARTNERS TO ONE ANOTHER
 the relations between partners to one another are
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
 the Partnership Act 1961 applies in the absence of
provisions being made under the agreement. 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
RELATIONS BETWEEN PARTNERS
TO ONE ANOTHER (cont.)
 the interests and duties of partners in the absence of

agreements to the contrary – see section 26,
 the above rules 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, Partnership Act 1961 provides that partners are

bound to render true accounts. Thus, when a partner purchases
a share in the partnership business from another partner, it is
the duty of the partner purchasing the share, if he is aware of
the financial situation of the firm, to disclose all the material facts
to the partner who is selling the share – see Maddeford v
Austwick, Law v Law
 section 31, Partnership Act 1961 provides for the 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 the 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
– see Aas v Benham
 a partner must not make a profit from a sale of the firm’s

property without full disclosure to the other partners. In addition,
he cannot make a profit from a resale of any property owned by
him to the firm without full disclosure to the other partners – see
Bentley v Craven
 the principle behind these cases is that each partner must
disclose any secret profit he has made in dealing with the firm,
and account for the profit to the firm
 section 32 of the Partnership Act 1961 states that it is the duty
of each partner not to compete with the partnership firm
 where it is expressly agreed by the partners that a partner may
be dismissed for flagrant breach of specified provisions, the
other partners can exercise the authority to dismiss if they do so
in good faith – see Green v Howell
 in partnerships amongst professionals, a serious act

of professional misconduct gives the other partner the
right to dissolve the partnership – see Clifford v
Phillips, Clifford v Timms
 if there is a 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 fraud or culpable
negligence or wilful default – see Ong Keng Huat v
Hong Kong United Co Ltd & Anor

PARTNERSHIP PROPERTY
 defined in section 22(1) of the Partnership Act 1961—

what constitutes partnership property, its application and
devolution
 partnership property must be used and applied for the
purposes of the firm and in strict accordance with the
partnership agreement
 a common problem which emerges is whether the
property belongs to the firm of the partner or the partner,
individually. It was decided in Davis v Davis that the
mere fact that the firm’s business was conducted on
property insured by one partner did not make it part of
the partnership property

(cont.)
 however, even if property which was purchased out of
partnership assets was not used for carrying out the partnership
business, such property was partnership property – see Murtagh
v Costello
 section 23, Partnership Act 1961 provides that unless the
contrary intention appears, property bought with money
belonging to the firm is deemed to have been bought on account
of the firm – see Wray v Wray, Ponnukon v Jebaratnam
 section 24, Partnership Act 1961, speaks of conversion into
personal estate of land held as partnership property. The
underlying principle in section 24 is that prima facie, unless
there exists an agreement to the contrary, the property of the
partnership has to be sold on dissolution of partnership, though
in equity it is deemed to have already been converted
(cont.)
 since it is only a conversion in equity the legal estate or interest
devolves according to the nature and tenure of the land and
also the general rules applicable thereto but in trust so far as
necessary for the persons beneficially interested thereof – see
Mat Shah bin Mohamed & Anor v Foo Say Meng & Ors
 both sections 22(1) and 24 specifically deal with partnership
property and therefore what is of paramount importance to
attract the application of these two sections is whether the
lands can be construed and classified as ‘partnership property’
 whether or not a property is partnership property or a property
deemed to be partnership property depends on the intention of
the partners which has to be determined on each individual
case

(cont.)
 the fact that a property is used by all the partners for the
partnership purposes need not necessarily qualify it to be
termed partnership property even though the partnership
may be debited with the outgoings and expenses of the
property, unless there is evidence to show such an intention
– see Gian Singh v Devraj Nahar & Anor, Devraj Nahar &
Anor v Gian Singh, Ponnukon v Jebaratnam

SHARES IN PARTNERSHIP AND
ASSIGNMENT
 the share of a partner is defined as his proportional division
of the joint assets after their realization and conversion into
money and after payment and discharge of the joint debts
and liabilities – see Garbett v Veale
 whether a partner can dispose of his share to another person
depends on the construction of the partnership deed. Unless
there is express provision in the deed, a partner cannot
transfer his share to another person so as to entitle that
person to all the rights of a partner without the unanimous
consent of all the partners – see Byrne v Reid
 no person may be introduced as a partner without the
consent of all existing partners – section 26(g), Partnership
Act 1961
ASSIGNMENT (cont.)
 however, although a partner cannot transfer his share without
the consent of all other partners, the Partnership Act allows him
to assign his share in the assets and profits – section 33(1),
 the rights of an assignee are limited and he is not entitled to act
as a partner – an assignee cannot interfere in the management
of the business and he cannot object to payments made by the
firm to individual partners and employees for managing the
business – see Garwood’s Trust Paynter v Paynter
 an assignee is not entitled to require any accounts of
partnership transactions or to inspect partnership books. It is
only on dissolution of the partnership that an assignee is entitled
to receive his share of the partnership assets and to call for an
account as from the date of dissolution – see Watts v Driscoll
ASSIGNMENT (cont.)
 the rights of an assignee of share in a partnership are laid
down in section 33 of the Partnership Act 1961:
– during the continuance of the partnership, an assignee
has the right to receive the assignor’s share of the
profits, and the assignee must accept the account of
profits agreed to by the partners. However, during the
continuance of the partnership, the assignee does not
have the following rights:
1. To interfere in the management or administration of the
partnership business or affairs
2. To require any accounts of the partnership transactions
3. To inspect the partnership books
ASSIGNMENT (cont.)
 case in point – Ong Kian Loo v Hock Wah Trading Co & Ors
where it was held that in applying section 33 of the
Partnership Act 1961, an assignee was not entitled to
interfere in the management or administration of the
partnership business or affairs, or to require any accounts of
the partnership transactions, or to inspect the partnership
books during the continuance of the partnership
 when the partnership is being dissolved, the assignee has
the following rights:
1. To receive the assignor’s share of the partnership assets
2. To receive an account as from the date of the dissolution in
order to ascertain his share of the partnership assets

DISSOLUTION OF PARTNERSHIP
 a partnership ‘dies’ when it is dissolved

 may happen in various circumstances and its
consequences not only affect the partners themselves
but third parties (e.g. financial institutions and
merchants) dealing with them
1. Ways in which a Partnership is Dissolved
– By agreement
– By operation of law
– By death or bankruptcy
– By charging on shares
– By supervening illegality

(cont.)
 the court may order the dissolution of the partnership, on
application by a partner, in any of the following cases:
a) insanity of a partner – section 37(a), Partnership Act 1961
b) permanent incapacity of any partner to perform his duties –
section 37(b), Partnership Act 1961
c) conduct calculated to prejudicially affect the carrying on of the
business – section 37(c), Partnership Act 1961
d) wilful and persistent breach of the partnership agreement (by
any partner other than the applicant) – e.g. if a partner
persistently refuses to keep proper accounts
e) when the business of the partnership can only be carried on at a
loss
f) where, in the opinion of the court, it is just and equitable to
dissolve the partnership – e.g. in Re Yenidje Tobacco Co Ltd
(cont.)
2. Notice of Dissolution
– unless notice of a dissolution is given, all customers
of the partnership are entitled to treat all the former
members as continuing to be members – see Tower
Cabinet Co Ltd v Ingram
– the dissolution of a partnership – see section 39 of
the Partnership Act 1961
– notice may be given by an advertisement in a local
press, gazette or by a circular letter
– for old customers and clients of the partnership,
express notice such as a circular letter must be
served – see Re Hodgson, Bechkett v Ramsdale,
Kam Hoy Trading v Hup Aik Tin Mining
(cont.)
3. Continuation of Authority of Partners
– after the dissolution of a partnership, the authority of partners
continues only so far as is necessary to wind up the affairs of
the partnership and to complete uncompleted transactions – see
section 40 of the Partnership Act 1961
– the authority of the partners continues only in so far as it is
necessary to wind up the partnership business and to complete
unfinished business – see Chartered Bank v Yong Chan
– section 44, Partnership Act 1961 envisages a situation where
prior to the settlement of account, i.e. before the winding up of
the partnership, in the event the surviving partner carries on with
that business using the same name, then that surviving partner
has to account to the estate of the late partner giving it the
option to a share of the profits or to pay an interest of 8 per cent
per annum on the amount of his share of the partnership assets
(cont.)
4. Settlement of Accounts after Dissolution

– upon dissolution of a partnership, every partner is entitled
to have the property of the partnership applied in payment
of the debts and liabilities of the firm, and to have the
surplus assets after payment of the debts distributed
among the partners – see section 41 of the Partnership Act
1961
– the rules for dissolution of partnership assets on final
settlement of accounts are laid down in section 46 of the
– a case on the distribution of assets and liabilities of a
partnership under sections 41 and 46 of the Partnership
Act 1961 – Ho Kam Fan v Fam Sin Nin
REVIEW
 Introduction
 Definition and Nature of Partnership
 Formation and Duration of a Partnership
 Relations between Partners and Third Parties
 Liability of Partners
 Relations between Partners to One Another
 Partnership Property
 Shares in Partnership and Assignment
 Dissolution of Partnership


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Business Law All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T) 2010 Ch13: 1

Business Law All Rights Reserved

This chapter covers:

Business Law All Rights Reserved

 law of partnership governed by Partnership Act

Business Law All Rights Reserved

Business Law All Rights Reserved

Business Law All Rights Reserved

Business Law All Rights Reserved

Business Law All Rights Reserved

Business Law All Rights Reserved

Business Law All Rights Reserved

Business Law All Rights Reserved

Business Law All Rights Reserved

Business Law All Rights Reserved

 third parties may sue all the partners individually or

Business Law All Rights Reserved

 a person who is admitted as a partner into an existing

Business Law All Rights Reserved

– A retiring partner may be discharged from any

8. Liability of Retired Partners

Business Law All Rights Reserved

 the interests and duties of partners in the absence of

Business Law All Rights Reserved

 section 30, Partnership Act 1961 provides that partners are

 a partner must not make a profit from a sale of the firm’s

 in partnerships amongst professionals, a serious act

Business Law All Rights Reserved

 defined in section 22(1) of the Partnership Act 1961—

Business Law All Rights Reserved

Business Law All Rights Reserved

Business Law All Rights Reserved

Business Law All Rights Reserved

 a partnership ‘dies’ when it is dissolved

Business Law All Rights Reserved

4. Settlement of Accounts after Dissolution

Business Law All Rights Reserved

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