LAW OF PARTNERSHIP

2.1. MEANING, NATURE & FORMATION OF

PARTNERSHIP
 The main law governing partnership in Malaysia is the
Partnership Act 1961.

 Section 3(1) of the Partnership Act 1961:

“Partnership is the relation which subsists between
persons carrying on business in common with a view
of profit”.
 MEANING, NATURE & FORMATION
OF PARTNERSHIP
 Parties to the partnership must be more than one, and
shall not exceed 20.
Case : Tan Teck Hee v Cheng Tien Peng [1915] 2
FMSLR 161
HELD : No partnership which has a membership
exceeding 20 can maintain an action as such formation
was forbidden by law and therefore parties were not
entitled to enforce any claim.
 MEANING, NATURE & FORMATION
OF PARTNERSHIP
 The business must be carried on in common.
Case : Choi Siew Cheong v. Lucky Height
Development (1995)
Held : There is no partnership in this case because the
intention of the parties was that of separate businesses.
 MEANING, NATURE & FORMATION
OF PARTNERSHIP
 The partnership must be formed with a view of profit.
Case : Gulazam v. Noorzaman and Sobath, the
parties agreed among themselves to form a
partnership of buying and selling cattle and agreed to
share the profits.
HELD: All essential elements including ‘with a view of
profit’ were present to constitute a partnership.
 MEANING, NATURE & FORMATION
OF PARTNERSHIP
 Partnership can be formed with or without a written
agreement.

 General rule : Anyone with a ‘sui generis’, i.e. legal

capacity is able to enter into a partnership.
 EXISTENCE OF PARTNERSHIP

Section 4 of the Partnership Act 1961 :

Partnership may either exist or not.

 Section 4(a) :
Co-tenancy such as that of two persons hiring a shop in
common, or co-ownership such as owning a truck in
common does not in itself give rise to a partnership.
 DURATION OF PARTNERSHIP

 Where the duration of the partnership is fixed:

If the duration has expired but the partnership is
continued without any new agreement, the rights and
duties of the partners remain the same.

BUT,

 If there is no fixed duration of the partnership, the

partnership can be terminated at any time.
 TYPES OF PARTNERS

 General partner : A partner in the fullest sense.

 Active partner : A partner who actively participates in the
management of the business
 Dormant partner : A partner who does not actively
participate in management of the business and may not
be known to the outside world.
 Quasi-partner : A person who is liable for debts of the
partnership and not a partner but causing people to
believe he is a partner.
 RELATIONS OF PARTNERS TO
OUTSIDERS
Partners are agents of the partnership firm.

Therefore, 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 of the Partnership Act].
 RELATIONS OF PARTNERS TO
OUTSIDERS
Case: Chan King Yue v Lee & Wong [1962] MLJ 379
-The plaintiff’s husband borrowed RM35,000 from her as a loan from her to
the firm in which he was a partner. He gave her a receipt in the name of the
partnership.
-The money was paid into the partnership account and immediately there
after the firm utilized the money to pay off some of its debts. The plaintiff
then initiated a suit to recover the loan.
-The other partner of the firm contended that the plaintiff’s husband was not
authorized by the firm to borrow the money.
- Held : The borrowing was an ‘act necessary for the carrying on of the
business’ of the partnership and as such bound the co-partner. The fact
that the loan had been utilized for the payment of debts of the
partnership, meant that the lender was entitled in equity to stand in the
same position as if the money had originally been borrowed by the other
partner.
 RELATIONS OF PARTNERS TO
OUTSIDERS
 However, a partner who has no authority to act on
behalf of his co-partners will not bind the firm in the
following circumstances, i.e. where the outsider who
deals with him knows his lack of authority and where
the outsider does not believe the partner to be a
member of the firm.
INCOMING & RETIRING PARTNERS
Section 19(1) of the Partnership Act 1961 :
A new partner who has just been admitted into a firm
is not liable for the debts incurred prior to his
admission. 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) of the Partnership Act 1961:

A partner who has retired from a partnership is not
liable to any debts which are made after the date of
his retirement. This depends however on Section 16
and Section 38 of the Partnership Act.
INCOMING & RETIRING PARTNERS

Section 16 requires that the person who has retired

from a partnership must ensure that there is no other
representation made by words or conduct of himself
or other partners to the effect that he is still a partner
of the firm.

Section 38(1) provides that 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.
 INCOMING & RETIRING PARTNERS

 Case: Re Siew Inn Steamship Co (1934)

A retired partner had inserted notice of his retirement in
several issues of newspapers to which certain old
customers were proved to be regular subscribers. After
his retirement, these same old customers lent money to
the firm. One of the lenders later sued the retired partner,
denying having actually seen notice of his retirement in
the papers. It was held that the retired partner was liable.
Actual notice was necessary as far as the old customers
were concerned.

 PARTNERSHIP PROPERTY

Section 22(1) of the Partnership Act 1961:

“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,
… and must be held and applied by the partners
exclusively for the purposes of the partnership and in
accordance with the partnership agreement.”
 PARTNERSHIP PROPERTY
 A common problem arises as to whether the
property belongs to the firm or the individual
partners.
Case: Davis v. Davis [1894] 1 Ch 393
It was held 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.
 But, if the property is purchased out of the partnership
assets, the said property is deemed to constitute part of
the partnership property, unless the contrary intention is
established (Section 23 of the Partnership Act 1961).
 RELATION OF PARTNERS TO ONE
ANOTHER
 The partnership agreement determines the
relations of partners to one another.
 What does the partnership agreement normally
provide?
○ rights & duties of the partners.
○ the partnership’s capital
○ the conduct & management of the firm
○ the profit-sharing arrangement of the partnership.

 If the relations between the partners is not provided or

mentioned in the partnership agreement, Section 26 of the
Partnership Act shall apply in this case.
 DISSOLUTION OF PARTNERSHIP
 A partnership may be dissolved through several ways:

1. By notice or expiration:
i. If the duration of the partnership has been specified in
the partnership agreement, the partnership is terminated
on the expiry of that period;

ii. If the partnership was entered into for an undefined

time, by any partner giving notice to the other partners of
his intention to end the partnership- Sect. 34(1)(c).


 DISSOLUTION OF PARTNERSHIP
2. By death or bankruptcy (unless otherwise agreed by
the partners) : Sect. 35(1) of the Partnership Act 1961.

3. By court order –Sect. 37 of the Partnership Act, i.e. in

the following cases:
i. insanity of a partner – Sect. 37(a)
ii.permanent incapacity of any partner to perform his
duties – Sect.37(b)
iii.conduct calculated to prejudicially affect the carrying
on of the business- Sect.37(c)
 DISSOLUTION OF PARTNERSHIP
 By charging on shares – Sect.35(2)
A partnership may, at the option of other partners, be
dissolved if any partners suffers his share of the
partnership property to be charged for his separate debt.
 By supervening illegality – Section 36

Section 36 of the Partnership Act provides that:

“A partnership is in every case dissolved by the
happening of any event which makes it unlawful for the
business of the firm to be carried on or for the members
of the firm to carry it on in partnership.”

 NOTICE OF DISSOLUTION
 Once a partnership is dissolved, notice of dissolution
must be given to all customers of the partnership.
 In the absence of the notice of dissolution, the customers
are entitled to treat the partnership as still existing.
 For old customers and clients of the partnership, a
preferable mode is by a circular letter. This was held in
the case of Barfoot v. Goodall (1811) # Camp.
 However, for a recent customer of the partnership, one
advertisement in a gazette is not per se sufficient. This
was held in the case of Re Hodgson, Bechkett v
Ramsdale (1885) 31 Ch.
 CONTINUATION OF AUTHORITY OF
PARTNER

 Section 40 of the Partnership Act 1961 states that:

“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, and after his death his estate is also
severally liable in a due course of administration for such
debts and obligations so far as they remain unsatisfied,
….”
 2.11. CONTINUATION OF AUTHORITY
OF PARTNER
 The authority and rights of the partners continue for the
purpose of completing the winding-up process.
BUT,
 Where the dissolution is either by death or bankruptcy of
a member, such authority and rights in winding-up the
business fall upon the surviving or the solvent partners
alone (Section 16 of the Partnership Act 1961).
 SETTLEMENT OF ACCOUNT AFTER
DISSOLUTION
 Section 41 of the Partnership Act :
Once a partnership is dissolved, every partner is entitled
to have the property of the partnership applied in
payment of the debts and liabilities of the firm, and also
to have surplus assets to be distributed among the
partners after payment of the debts.