Chapter 6

RANACO EDUCATION & TRAINING
INSTITUTE
CHAPTER 6
LAW OF PARTNERSHIP
6.1 Nature of partnership
6.2 Elements of partnership
6.3 Formation of partnership
6.4 Relationship between partners and outsider
6.5 Relationship between partners inter se
6.6 Duties of partners
6.7 Dissolution of partnership
LAW 243 COMMERCIAL LAW

INSTITUTE
LESSON OUTCOME
By the end of this chapter student will be able to:
Understand the rules governing the formation of
partnership
State the rights and liabilities of a partner with respect to
the other partner or partners
Know the rights and liabilities between partners and third
parties
Understand the rules governing the dissolution of
partnerships

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SUBTOPIC 1:
NATURE OF PARTNERSHIP

INSTITUTE
6.1
Nature of partnership
Definiton
S.3 Partnership Act 1961
the relation which subsists between persons carrying on
business in common with a view of profit.
Person
- must be more than one
- For partnership of occupation such as accountant, architect
and lawyers, there case is no ceiling on the numbers of
partners.
Carrying on
- must be in business at present, not in the future

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SUBTOPIC 2:
ELEMENTS OF PARTNERSHIP

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6.2
Elements of Partnership
1. Business
Section 2 PA
- Include every trade, occupation or profession.
- There must be some commercial venture a selling of goods
or services for a reward.
Chooi Siew Cheong V Lucky Height Development Sdn Bhd
There was no partnership resulted from a joint venture
agreement between a land owner and a housing developer
because each party of the agreement intended a wholly
separate business, there was no business in common with a
view of profit.

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2. Carried on in common
There must be an agreement between partners either express or
implied to have the same business. If there is no participation
in the business then it seems that even if there is an intention
to draw up a partnership agreement and some discussion
between the parties as to the consequences of it, the courts will
not declare a partnership.
Ratna Ammal & Anor V Tan Chow Soo

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SUBTOPIC 3:
FORMATION OF PARTNERSHIP

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6.3
Formation of Partnership
Capacity:
Where one or more parties to a partnership contract lack of
such capacity, the contract may be invalid.
a) Minor
Majority Act 1971, age of majority in Malaysia has been
18, so that on attaining that age an individual attains full
legal capacity. Until that age, he is no longer referred to as
an infant but minor. A minor is a person who has not
reached the age of majority.

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Goode v Harrison
A minor would be in a partnership for any duration of time
until he wanted to disaffirm it. However, minor cannot incur or
be responsible for any contractual liability for the firms debt.
b) Unsound mind
Unsound mind is not itself a bar from entering into a
partnership. There can still be legally binding agreement to
form a partnership between a person of unsound mind and
another person provided the person of unsound mind can
establish that partnership prior knowledge of his insanity at
the time of the agreement

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Illegality:
A partnership agreement, like another 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 partnership between
certain persons.
Partnership is illegal if it is formed for a purpose prohibited
by statute or at common law. In times of war it is illegal for a
person resident 1(one) country to form a partnership with a
person resident in a enemy country.

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A partnership agreement also illegal if it is the intention of the
parties that it should be attained in an illegal way. If a
partnership is illegal, the parties will have no right as against
each other or against anyone else. e.g. a partnership created
for the export or import of drugs as it was prohibited by law.

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Number of partners:
Section 4(3)(b) CA 1965
No partnership may be formed for the purpose of carrying on
any business if the membership exceed 20
Tan Teck Hee V Cheng Tien Peng
No partnership which has a membership exceeding 20 can
maintain an action and such a formation was forbidden by law
therefore parties were not entitled to enforce any claim.

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SUBTOPIC 4:
RELATIONSHIP BETWEEN PARTNERS AND
OUTSIDERS

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6.4
Relationship Between Partners and

Outsider
(1)Liability under contract

Section 7 PA
Every partner is an agent of the firm and his other partner. His
action binds the firm (other partners) if it is done:
i. In the usual way of business or in the usual manner.
ii. Third party knows that the person contracting is a partner
or an agent to the partnership
iii. Third party believes that the partner has authority. The
authority could be actual or apperent.

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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.
Goldberg V Jenkins & Law
The Court held that the borrowing of money by a partner
was held not to amount to the usual way due to the
exorbitant rate of interest of the loan.
Other case:
Chan King Yue V Lee & Wong
Sithambaram Chetty V Hong Hing & Ors

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Section 8 PA
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 a agent for the other partners. Therefore,
whatever contracts that he has entered into with the third
parties will bind the firm and the other partners as well
provided that he does within the authority given to him.

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What is authority?
Authority is a mandate given to an agent by the principals to
perform a particular at or services of an act for them.
As a agent, a partner may have :
i. Actual authority
Simply means that an agent may binds his principal to any
act which is expressly / clearly authorized by his principal
to do so.
ii. Apparent / ostensible authority
An authority which is not expressly given to the partner in
that particular kind of business.

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Section 9
Where one partner pledges the credit of the firm for the
purpose apparently not connected with the firms 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.

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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:
a) The act must be done for the purpose of the business of
the partnership.
b) The act must be done in the firms ordinary course of
business.
c) The act must be done by the partner as a partner of the
firm and not in his own personal capacity.

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Section 11 PA
Each partner is jointly liable with other partner for debts and
contractual obligations while he is a partner.
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 member of a partnership and
was awarded judgment against them. He failed to recover the
debt in full. He subsequently discovered a wealthy dormnt
partner whom he sought to sue for the balance of the debt.

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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 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, third party may bring separated action against the
property of the deceased partner.
CONTINUE

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(2) Liability of firm for wrongs (liability under tort)

Section 12 PA
his liability arises when there is an act or omission of a partner, which
caused loss or injury third party. The wrongs must be committed in the
ordinary course of business and he acts with the authority of his co
partners.
Hamlyn V Houston & Co
Facts: A partner was engaged by the firm to obtain information by
legitimate means about the business contracts. He bribed the clerk of a
rival firm to get some confidential information about the firm. The bribe
was part of firms money and the information was for the purpose of the
partnership business and would have been legitimate if obtained by
proper means. Held: All partners were liable (jointly and several) for his
action.

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(3) Misapplication of money property receive from third party for or in
custody of firm
Section 13 PA
The firm is liable for the loss to third party if a partner, acting within
the scope of his authority, receives money or property and
misapplied it.
Rhoudes v Moules
Facts: The plaintiff sought to raise money by way of a mortgage on
his property. He used a solicitor in a firm who had told him that the
lenders wanted additional security and so he handed the solicitor
some share warrants to bearer. The solicitor misappropriated them
and the plaintiff sued the firm
Held: The firm was liable.

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(4) Liability for wrong joint and several
The liability under section 12 and 13 of the Act every partner
is liable jointly with his co-partners and also severally for
everything for which the firm becomes liable whilst he is a
partner. The distinction in the Act is between jointly liability
for contracts and joint and several liability for torts.

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CONTINUE
(5) Improper employment of trust property
Section 15
If a partner being a trustee, improperly employs trust property,
he will be liable personally. Other partners liable if they have
notice of the breach of trust and allow it to happen.
Blyth v Fladgate
Trust money may be recovered from the firm if it is still in
possession and under the control of the firm.

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Criminal liability
Although partners are jointly liable in civil cases, they are not
jointly liable in criminals cases. So, any criminal offence
committed by any partner, he is personal liable.
Chung Shin Kian & Anor v Public Prosecutor
Facts: Two men came on a tailoring business in partnership.
Offence applying a false trade description to jean and
jackets, committed by one partner but both were charges.
Held: The second accused conviction was quashed. He was
not present during the raid on the premise and there was no
evidence that he was involved.

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Persons liable by holding out
Section 16 PA
If a person is not a partner but represent s himself or allows
himself to be represented as a partner, he may be liable like a
partner for the debts of the firm.
There are three conditions in section 16 :
i. There must be representation made by a person or by
another person with that first persons knowledge, that is a
partner.
ii. Credit must have been given to that firm
iii. The representation

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CONTINUE
Marlyn v Gray
The representation need not have been made directly to the
persons who act upon it. It is sufficient, if it has come to his
knowledge through any source.
Means, the liability is limited to those persons who have, on
the faith of such representation, given credit to the firm.

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Duration of liability
Partners are liable without limit for all debts, obligations, torts,
crimes etc. Committed by the firm whilst they are partners.
However, partners may come and go. Thus it is necessary to
know when a retiring partner ceases to be liable for the debt
etc. of the firm and a new partner assume such liability.

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CONTINUE
A new partner
Section 19(1) PA Liability of new partner
Generally, anew partner is not liable to creditors for anything
done before he becomes a partner unless there is a special
agreement accept liability.
Section 19(2) PA Liability of retiring partner
Where a partner retires from the firm, he remains liable for
partnership debts incurred while he is a partnership debts
incurred while he is a partner unless there is an agreement to
release him.

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CONTINUE
What about debt incurred by the firm after partners
retirement?
He is still liable the person who deal with the firm and his
acts still bind the company unless the firm / he has given
express notice to such persons to inform that he is no
longer a partner.
Tan Sin Moh vLebel Ltd
Third party must specifically notified. There must be an
express notice or actual notice given them or advertised in
Federal Gazette. A mere notice to the Registrar of business
was insufficient.
Gazette : official journal with public notice. Notice in
newspaper may not be sufficient.

INSTITUTE
SUBTOPIC 5:
RELATIONSHIP BETWEEN PARTNERS
INTER SE

INSTITUTE
6.5
Relationship Between Partners Inter Se
Section 21 PA
Right and duties under the act or agreement may be varied by
consent of all partners and not majority.
Section 26 PA
Interest and duties of partners are subjected to the agreement
made between all partners. If there no agreement, all the
provision in section 26 are applied.
Section 26 Partnership Act consist :
a) Profits and losses are be shared equally
b) The firm must indemnify every partner in respect of
payment made and personal liabilities incurred by him :

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(i) In the ordinary and proper conduct of the business of
the
firm ;or
(ii) In or about anything necessarily done for the
preservation of the business or property of the firm.
C) Loan or advances by partner to the firm are to bear interest
at rate of 8% per annum.
d) No interest payable on the partner capital.
e) Every partner is entitled to participate in management of
the business.
f) No partner entitle to a salary for participating in a partnership
business

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g) Introduction of new partner must be by unanimous consent of
all existing partners.
h) Ordinary matters may be decided by majority of the partners,
but no changes may be made of the nature of business without
the consent of all existing partners.
i) Partnership book must be kept at the principal place of business
and report to all partner. They must also be allowed to have a
copy of the accounts.

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CONTINUE
Section 27 PA
Every partner cannot expel any partner unless that power was
conferred by prior express agreement between the partners.
An expulsion may or may not involve a dissolution. If A and B
expel C, the partnership continues. But if A expels his sole
partner B, that is in effect a dissolution.

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SUBTOPIC 6:
DUTIES OF PARTNERS

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6.6
i)
Duties of Partners
They must act in utmost good faith or bona fide toward 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.
Green v Howell
Facts: The partnership agreement provided that if either
partner committed any breach of the articles or breach his
duties as a partner as a partner, the other partner might, by
notice, terminate the partnership. One of the partners
committed such a breach and the other partner serve him a
notice of dissolution.
Held : The notice is valid.

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(ii) Section 30 Duty to render proper account
The partners are bound to render true accounts and full
information of all things affecting the partnership to any
partner or his legal representatives.
Law v Law
Facts: W and J were partners in woolen manufacturers
business. W lived in London and took little part in the
running of business. J brought Ws share for $ 21,000. Later
W discovered that the business was worth considerably more
and that various asset unknown to him had not been
disclosed.
Held: W can set aside the contract.

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iii) 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 ,
name or business connection.
Thomsons trustee in bankruptcy V Heaton & Ors
Facts: Benefit was gained from selling farm, belonging
originally to the partnership.
Held: Heaton has to account for the profit derived from the
transaction.

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(iv) Section 32 Duty not to complete with the firm
A partner cannot carry on any business of the same nature as
and completing with that of the firm. If this duty is breached,
the remedy has to pay to the firm and all profits made in the
competing business.
Ass v Benham
A partner cannot use information use information obtained by
him in the course of partnership business to compete with the
partnership itself.

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SUBTOPIC 7:
DISSOLUTION OF PARTNERSHIP

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6.7
Dissolution of Partnership
a) By agreement
When the fixed duration agreed in the articles of
partnership expired.
Partners agreed to dissolve at any time or mutually agree to
dissolve the partnership.
b) By operation of law Section 34 (1)
If the partnership was entered for a fixed term and the term
expires.
If the partnership was entered into for a single adventure or
undertaking, and that adventure or undertaking terminates.

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CONTINUE
If there is no fixed time or provision regarding dissolution, a
partner may terminate the partnership at any time by giving a
notice to other partners. If the partnership was originally
constituted by written document, notice in writing is required.
J.MM Levis v W.E Balasingham
A notice of dissolution would be ineffective as there was in
existence an agreement which had provided for a means of
terminating a partnership. If the partners have agreed as to the
method by which the partnership can be dissolved. No other
way is to be used.

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CONTINUE
c) By death / bankrupt section 35 (1)
Death or bankruptcy of any partner may dissolve a partnership
unless there is an agreement to provide otherwise. Therefore
partners may agree that any bankruptcy or death or any partner
may not dissolve the partnership.
Lee Choo Yam Holding Sdn Bhd v Khoo Yoke Wah
Facts: The plaintiffs applied for a declaration that the
partnership was dissolved by the death of any partner.
Held: On the death of any partner, a partner ship therefore
stands dissolved unless there is evidence that the partners had
agreed otherwise.

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d) By charging on shares Section 35 (2)
If any partner charges his shares of partnership property for his
own personal debt, the partnership would be dissolved.
e) By supervening illegality section 36
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, so, the partnership would be dissolved.
This section cannot be varied or modified by the partners. This
could happen when, for instance, there is change in
circumstances or status in law.

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CONTINUE
Hudgell Yeates & Co V Watson
Facts: One of three solicitors in a firm forgot to renew his
practicing certificate without which he was forbidden to
practice under solicitors Act 1974.
Held: The partnership was automatically ended.

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CONTINUE
F) By courts order section 37
Any partner may apply to the court for dissolution under any
of these circumstances;
Insanity of a partner
Permanent incapacity of any partner
Conduct of any partner prejudicial to the partnership
There is a willful and persistent breach of partnership
agreement by any partner
Partnership suffer loss several years
When there is just and equitable ground

INSTITUTE
QUIZ
1. If the business fails or declared bankrupt, the creditors cannot
sue the owner for all debt incurred (True/False)
2. They also can obtain a court order claim against his personal
assets (True/False)

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CONTINUE
3.Sole proprietorship
(True/False )
is
an
unincorporated
corporation
4. Advantages of sole proprietorship

A. There are fewer formalities in terms of its formation and
registration
B. involve less paperwork.
C. All above

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CONTINUE
5. Majority Act 1981, age of majority in Malaysia has been 18,
so that on attaining that age an individual attains full legal
capacity (True/False)
6. A partnership agreement, like another 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 (True/False )

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CONTINUE
7. Authority is a mandate given to an agent by the principals to
perform a particular at or services of an act for them
(True/False)
8. The liability under section 14 and 15 of the Act every partner
is liable jointly with his co-partners and also severally for
everything for which the firm becomes liable whilst he is a
partner (True/False)

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CONTINUE
9. Section 21 PA
Interest and duties of partners are subjected to the agreement
made between all partners (True/False)
10. Section 26 PA
Right and duties under the act or agreement may be varied by
consent of all partners and not majority (True/False)

INSTITUTE
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RANACO EDUCATION & TRAINING

LAW 243 COMMERCIAL LAW

RANACO EDUCATION & TRAINING

LAW 243 COMMERCIAL LAW

RANACO EDUCATION & TRAINING

LAW 243 COMMERCIAL LAW

RANACO EDUCATION & TRAINING

RANACO EDUCATION & TRAINING

LAW 243 COMMERCIAL LAW

RANACO EDUCATION & TRAINING

RANACO EDUCATION & TRAINING

LAW 243 COMMERCIAL LAW

RANACO EDUCATION & TRAINING

LAW 243 COMMERCIAL LAW

RANACO EDUCATION & TRAINING

LAW 243 COMMERCIAL LAW

RANACO EDUCATION & TRAINING

RANACO EDUCATION & TRAINING

LAW 243 COMMERCIAL LAW

RANACO EDUCATION & TRAINING

LAW 243 COMMERCIAL LAW

RANACO EDUCATION & TRAINING

RANACO EDUCATION & TRAINING

LAW 243 COMMERCIAL LAW

RANACO EDUCATION & TRAINING

Relationship Between Partners and

(1)Liability under contract

LAW 243 COMMERCIAL LAW

RANACO EDUCATION & TRAINING

LAW 243 COMMERCIAL LAW

RANACO EDUCATION & TRAINING

LAW 243 COMMERCIAL LAW

RANACO EDUCATION & TRAINING

RANACO EDUCATION & TRAINING

LAW 243 COMMERCIAL LAW

RANACO EDUCATION & TRAINING

LAW 243 COMMERCIAL LAW

RANACO EDUCATION & TRAINING

RANACO EDUCATION & TRAINING

LAW 243 COMMERCIAL LAW

RANACO EDUCATION & TRAINING

(2) Liability of firm for wrongs (liability under tort)

RANACO EDUCATION & TRAINING

RANACO EDUCATION & TRAINING

LAW 243 COMMERCIAL LAW

RANACO EDUCATION & TRAINING

LAW 243 COMMERCIAL LAW

RANACO EDUCATION & TRAINING

RANACO EDUCATION & TRAINING

RANACO EDUCATION & TRAINING

LAW 243 COMMERCIAL LAW

RANACO EDUCATION & TRAINING

LAW 243 COMMERCIAL LAW

RANACO EDUCATION & TRAINING

LAW 243 COMMERCIAL LAW

RANACO EDUCATION & TRAINING

RANACO EDUCATION & TRAINING

LAW 243 COMMERCIAL LAW

RANACO EDUCATION & TRAINING

Relationship Between Partners Inter Se

RANACO EDUCATION & TRAINING

RANACO EDUCATION & TRAINING