Law346 Chapter 1 & 2
Law346 Chapter 1 & 2
Law346 Chapter 1 & 2
The Sole Proprietorship business entity in Malaysia is owned solely by one individual,
as his/her liability is unlimited. Unlimited liability means, if a business fails or is
declared bankrupt, the creditors can sue the sole proprietor’s owner for all debts owed
and can obtain a court order to claim against his personal assets.
Partnership
Partnership is defined by section 3(1) of Partnership Act 1961 as “the relation which
subsists between persons carrying on a business in common with a view of
profit”.
It is an agreement of two or more persons associated together for the purpose of
conducting a business. In a partnership, there are at least two persons. There also will
have joint responsibility for partnership debts and liabilities.
Company
According to section 2 of the Companies Act 2016, ‘A company is incorporated
pursuant to Companies Act’.
Disadvantages of a company
PARTNERSHIP LAW
What is partnership?
1. Number of partners
The minimum number is 2 and the maximum number is 20 for non-professional
partnership and unlimited for professional partnership. Presently, this type of
business is known as the conventional partnership to distinguish with the limited
liability partnership governed by the Limited Liability Partnership Act 2012. In
Tan Teck Hee v Cheng Tien Peng (1915), the firm consisted of 25 members.
The Court held that the firm was void. Therefore, legal action cannot be taken.
3. ‘Business in common’ means the parties must intended to run the same nature
of business. In Chooi Siew Cheong vs Lucky Height Development Sdn Bhd
& Anor [1995] 1 MLJ 513, the Court held that no partnership from a joint
venture agreement between a landlord who agreed to contribute land and a
housing developer because there was different types business.
In Keith Spicer Ltd v Mansell [1970] 1 All ER 462, the defendant, Mansell
and his friend Bishop decided to open up a restaurant. The restaurant has not
yet operated. Bishop order goods from the plaintiff for the restaurant but did not
pay for the goods. The plaintiff sued for the unpaid goods. It was held that there
was no partnership because the business has not yet started. The plaintiff’s
claim failed.
5. The agreement between the persons to carry on the business for ‘profit’. If a
group of people raise funds to run a charitable organization, this is not a
partnership. It must not include club or charitable trusts that set up for welfare.
The definition of a partnership should be seen in two aspects. The definition of s.3(1)
is a general definition, and whether a partnership exists or not will depend on
whether s.3(1) has been fulfilled. This general definition is followed by s.4 which
specifically sets out rules to determine certain relationships that do not constitute a
partnership.
Section 4 of the PA 1961 lays down certain circumstances which are not ‘prima facie
‘partnerships .The rules for determining the existence of a partnership are set out
under s.4 which concerns three situations:
S.4(a) Joint tenancy and tenancy in common
S.4(b) Sharing of gross returns
S.4( c ) Receipt of share of profits
Section 4 of the 1961 Act gives a detailed guidance on the establishment of
partnership. Certain circumstances are not ‘prima facie’ partnership. Here, the term
‘prima facie’ means evidence based on first impression or at the first view before
further investigation.
2. Section 4(b) – the sharing of gross return also does not imply the existence
of partnership
3. S.4( c ) of the PA 1961: The general rule is that if a person receives a share
of the profits, he is prima facie deemed to be a partner of the firm. However,
the courts will look at the other circumstances surrounding the receipt of the profits
to decide whether or not there is a partnership. There are five circumstances
pointed out under s.4 ( c ) where the sharing of profits does not make the person
receiving a partner.Receipt of such a share of profits of a business, does not itself
make him a partner in the business.
• Section 4(c)(i) – payment of debts / payment by instalments
The relationship of employer and employee is inconsistent with partnership and that
of an independent agent is clearly distinguishable on the basis that there is no
involvement in the business.
Usually, in partnership agreement, the partner will make the provision that the
partner’s widow or children are to receive a specified proportion of the profits of the
business after his death. Such receipt is clearly no evidence of partnership.
Case: I.R.C v Lebus’s Trustees (1946)
A deceased partner, in his will, bequeathed his share of the profits in a firm to his wife.
The widow’s share of the profits was not paid by the continuing partners and was in
that year surtaxed by the Inland Revenue. It was held that the widow was not a partner
in the business and none of the assets of the firm is belonged to her. Therefore, her
share of profits should not have been surtaxed.
• Section 4(c)(iv) –Loan given with a rate of interest varying with profits.
FORMATION OF PARTNERSHIP
Number of partners
Where one or more parties to a partnership contract lack of such capacity, the contract
may be invalid.
(a) Minor
The age of majority in Malaysia is 18 as provided in the Age of Majority Act 1971. Until
that age, he is referred as a minor. A minor is a person who has not reached the age
of majority. In Malaysia, the provision of section 11 of the Contracts Act 1950, states
that a minor has no capacity to enter into a contract and this includes a partnership
agreement.
Case: William Jacks & Co (Malaya) Ltd v Chan & Yong Trading Co
Plaintiff claimed RM12,000 for goods sold and delivered to the defendants who were
partners. Yong, a minor at the time the goods were purchased, took no steps to defend
the action, but Chan denied Plaintiff’s claim alleging that the goods bought were for
Yong’s personal use and therefore the partners were not liable.
HELD: The fact that Yong made use of the goods did not mean that the firm and
consequently the partners were not liable. Further, as Yong had not taken any steps
to repudiate the partnership after attaining the age of majority, he was also liable as a
partner of the firm.
Thus, whenever a minor has attained the age of majority, he must make a decision
either to continue or discontinue his existence in the partnership. If he chooses to
remain , he will be regarded as a major/adult partner and thus accountable for the
partnership’s accounts and liabilities.
Illegality
A partnership agreement, like any other contract may be void ab initio because its
either commercial purpose is illegal or because it is proposed to carry on an otherwise
lawful business in an illegal manner. In addition, a partnership may be void for illegality
because the law prohibits partnerships between certain persons. If a partnership is
illegal, the parties will have no rights as against each other or against anyone else.
A partnership agreement also illegal if the intention of the parties is to conduct illegal
business. Eg: a partnership created for the export or import of drugs as it was
prohibited by law.
Types of partners
1. General partner – this is the normal type of partner who contributed his capital
for the business and manages the business.
2. Active partner – This partner did not contribute capital but managed the
business.
3. A dormant (sleeping) partner – This partner only contribute his capital into the
business but did not involve in the managing the business.
4. A quasi partner – This partner did not legally register his name as a partner but
his involvement in management of the business and his existence make third
party believe that he is legally the partner of the business. (Partner through
holding out or estoppels).
Every partner is an agent of the firm and his other partner. His action binds the firm
(other partners) if it is done:
1. In the usual way of business or in the usual manner
2. Third party knows that the person contracting is a partner or an agent to the
partnership
3. Third party believes that the partner has authority. The authority could be actual
or apparent.
But, the firm would not be liable for personal debt of partner if it is not done in the usual
way of business or not for business purpose.
Partners are bound by act of any person (not necessarily a partner) on behalf of firm
if it is done in the usual way of business and the person is authorized. The contract
made by employee or agent to the firm may bind the partners.
When a partner deals with third parties (an outsider), he is considered as an agent for
the firm and the other partners. Therefore, whatever contracts that he has entered into
with third parties will bind the firm and the other partners as well provided that he does
so within the authority given to him.
i. Actual authority
Simply means that an agent may bind his principal to any act which is expressly /
clearly authorized by his principal to do so.
Where one partner pledges the credit of the firm for the purpose apparently not
connected with the firm’s ordinary courses of business, the firm is not bound unless
he is in fact specially authorized by the other partners but this section does not affect
any personal liability incurred by an individual partner.
Thus, to summarize that for a third party to hold the partnership firm and the rest of
the partners liable, the following condition must be satisfied;
1. the act must be done for the purpose of the business of the partnership
2. The act must be done in the firm’s ordinary course of business
3. The act must be done by the partner as a partner of the firm and not in his own
personal capacity.
Case: Mercantile Credit Co v Garrod (1962)
Mr Garrod and Mr Parkin formed a partnership carried on a garage business. Their
partnership agreement stated that their usual scope of business would exclude the
buying and selling of car. Parkin, without Garrod's knowledge, sold a car to which he
had no title, to Mercantile Credit Co Ltd for $700. The company brought an action
against Garrod to claim back $700.
It was held that Garrod was liable, because the sale of the car was the doing of "an
act for carrying on in the usual way business of a kind carried on by the firm" within
the scope of the Partnership Act.
Joint liabilities means the creditor has only one cause of action. If he sues one partner
or some only and obtain judgment against him or them, he can no longer sue the
other partners who are jointly liable. This is because he can only constitute a single
action and not several actions against member of the firm.
After the death of a partner, his estate becomes severally liable for debts and
obligation incurred while he is a partner. However, the liability is subjected to prior
payment of his personal debts. If there is insufficient partnership property to settle
debt, 3rd party may bring separate action against the property of the deceased partner.
(3) Misapplication of money or property received from 3rd party for or in custody
of firm
The court held Ingram was not liable because he had not ‘knowingly’ suffered himself
to be represented as a partner.
HELD: The retired partner was liable even though he had inserted the notice of
retirement in the newspaper. This is because of his failure to give an actual notice to
the creditor. The advertisement in the newspaper considered to be insufficient.
QUESTION 1
Lina, Mila and Fieda are partners in a firm called “ The New You” which specializes in beauty
treatment.
Lina, without Mila’s and Fieda’s knowledge, borrowed RM50,000 from Sure Finance to pay
off some debts of the firm and to buy new treatment machine. Sure Finance demanded
repayment of the loan form Mila and Fieda when Lina defaulted a few monthly instalments.
SAMPLE ANSWER
a)Issue:
Whether Sure Finance can succeed in its action to sue “The New You “ for not paying the
debt sum ?
But, the firm would not be liable for personal debt of partner if it is not done in the usual way
of business or not for business purpose.
Case: Chan King Yue v Lee & Wong
The plaintiff’s husband borrowed from her $35,000 as a loan from her to the firm 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 thereafter utilized by the firm to pay off some of its debts.
The plaintiff initiated an action to recover the loan. The other partners 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-partners.
Third party may sue all the partners individually or the firm. It is because all the partners in the
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.
Kendall v Hamilton.
The creditor sued all the obvious members of a partnership and was awarded judgment
against them. He failed to recover the debt in full. He subsequently discovered a wealthy
dormant partner whom he sought to sue for the balance of the debt.
HELD: Since the debt was a joint one only, by suing the apparent partners the creditor elected
to sue only them and could not commence a fresh proceedings against the other partner.
After the death of a partner, his estate becomes severally liable for debts and obligation
incurred while he is a partner. However, the liability is subjected to prior payment of his
personal debts. If there is insufficient partnership property to settle debt, 3rd party may bring
separate action against the property of the deceased partner.
Application:
According to section 7 of the PA 1961, a partner’s action will make the other partners and firm
liable for the partners action ,if the 3 conditions are fulfilled.
By applying CKY v. L & W to this present case, , the borrowing power is regarded as an act
necessary for the carrying on off the business of the partnership.
Thus, whatever that has been made Lina as long as it is necessary for the ‘New You” firm ,
her action will make the other partners (Fieda and Mila) are accountable too. Furthermore,
Fieda and Miela are jointly liable with other partners for debts and contractual obligations
while he is a partner .Sure Finance may sue all the partners individually or the firm
Conclusion:
In conclusion, Sure Finance is likely to succeed in its action to sue the firm “New You” if all the
conditions stipulated under section 7 and 11 are been fulfilled.
QUESTION 2
Eza, Piekah and Amal are partners in a firm manufacturing “ikan masin”(salted fish).The
partnership was formed on 1st January 2016 under the name “Masin Enterprise”.
Discuss the legal position of the concerned parties in the following situation:-
i) On 1st May 2017, Eza retired from the firm. Piekah and Amal continued the business of the
firm without changing the name of the firm. The firm had borrowed a sum of money from Koko
Bank in March 2018. The firm had also borrowed RM10,000 from Semperit Bank in
September 2018.
Consider the liability of Eza towards Koko Bank and Semperit Bank.
SAMPLE ANSWER :
ISSUE:whether Koko Bank and Semperit Bank can sue Eza ?whether Eza is liable towards
the said Banks?
Section 38(1) provides that where a person deals with a firm after a change in its constitution,
he is entitled to treat all apparent members of the old firm as still being a member of the firm
until he has notice of the change.
APPLICATION:
In this case, Eza who is a retired partner is under a duty to inform her old cutomers or clients
that she has now retired from Masin Enterprise. Otherwise, she is accountable to their old and
new customers. By applying section 19(2) of the PA 1961 Eka, a partner who retires from the
firm, will remain liable for partnership debts incurred while he is a partner unless there is an
agreement to release her.Besides that, under section 38(1) of the PA 1961, Koko and
Semperit Bank are entitled to treat all apparent members of the old firm including Eka as still
being a member of the firm until the has notice of the change.
CONCLUSION:In a nutshell, Koko and Semperit Bank can succeed in their actions to sue
Eka since Eka has not informed her retirement to the old clients.
Section 21 - Right and duties under the acts or agreement may be varied by consent
of all parties and not majority.
Section 26 - Interest and duties of partners are subjected to the agreement made
between all partners. If there is no agreement, all the provisions in section 26 are
applied.
Section 27 - Every partner cannot expel any partner unless that power was conferred
by prior express agreement between the partners.
DUTIES OF PARTNERS
(i) They must act in utmost good faith or bona fide towards every other member. They
cannot gain benefit at the expense of the firm. This is because the relationship
between partners is based on mutual trust and confidence.
PARTNERSHIP PROPERTY
Section 22
“All property and rights and interests in property originally brought in 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;
Provided that the legal estate or interest in any land which belong to the partnership
shall devolve according to the nature and tenure thereof and the general rules of law
applicable thereto but in trust, so far as necessary, for the persons beneficially
interested in the land under this section.”
The meaning rather wide as it includes not only property but also rights and interests
in property.
2. Where the property is obtained through a purchase or through any other way
for the firm. Where the property is brought with the partnership money, the
property is deemed bought for the firm.
Case : Ex parte Hinds
A few partners traded as merchants in Liverpool and Barbados. The partner in
Liverpool had purchased shares in a railway with money that belonged to the
firm without the knowledge of the others. His intention was to buy it on behalf
and for the firm. Held; the shares were partnership property.
3. The property is obtained through any lawful means where the property is
obtained for the purpose and in the course of the partnership business.
However not all property used in the course of partnership business is
partnership property.
Ida, Ima and Hana are partners of a beauty saloon. Their saloon is located in section 9, Shah
Alam. Without the knowledge of the other two, Ida set up her own beauty saloon in Jalan
Telawi 3 Bangsar. Two months later, Ima and Hana came to know about Ida’s saloon and
demanded that Ida hand over all profits made by her saloon as she has breached her duty as
a partner under the Partnership Act 1961.
Identify the duty in question and the section which provides for it. Decide
whether Ida is, in fact, in breach of that duty.
(20 marks )
a)Issue:
whether Ima and Hana can sue Ida for the keeping of profits to herself ?
whether Ida has breached any duties as a partner i.e. for setting up her own beauty
salon without the knowledge of the other partners ?
General Rules:
(1) Section 31 - Account to the firm for any secret profit / benefit
A partner cannot make secret profit. If there is any, he has to account it to the firm
regarding to any transaction concerning the partnership or from any use by him of the
partnership property, name or business connection.
Case: Bentley v Cravan (1853)
A partner must not make a profit from a sale of the firm’s property without full disclosure
to the other partners.
Application:
By virtue of section 31, Ida’s action has shown to us that she has breached the duties
as a partner. Thus, she is accountable to render the private profit to the partnership
consisting Ima and Hana.This is in line with the decision in Bentley v Cravan where
a partner must not make a profit without the full disclosure to the other partners.
In accordance to s.32, Ida’s action of setting up a beauty saloon on her own and
without the knowledge of the other partners clearly depicts that it is of the same nature
and competing with the firm’s business.
This is further supported by Aas v. Benham case whereby a partner cannot use
information obtained by him in the course of partnership business to compete with the
partnership itself.
By applying. s31 and s.32 and Benham’s case to Ida’s case, we can summarise that
as a partner, Ida has done something which is contrary to the duties as a partner.
Thus, she is accountable on what he has done to the partnership bisness.
Conclusion: In conclusion, Ima and Hana can sue Ida for breach of duties as a partner
and Ida has to account for the profit derived from the partnership.
DISSOLUTION / TERMINATION OF PARTNERSHIP
Part V of the Partnership Act deals with dissolution of partnership in the following ways:
1. By agreement
a. Terminated on the expiry of the period fixed by the partnership agreement.
b. The partner may mutually agree to dissolve the partnership at any time.