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COMPANY LAW I

LBA 4033

LECTURE NOTES (10 AUGUST 2009)

Liability of Incoming and Outgoing Partners

1. Reference to ss. 19(1) and (2) of PA.

Q: What happens when the contract is entered into before a partner’s retirement, but
liability arises only after he has retired?

This depends on the following:

(a) whether the contract is a single continuous contract, in which case the retiring
partner remains liable, and the new partner is exempted.

Case: Court v Berlin [1897] 2 QB 396

The firm, in which Berlin and two other persons were partners, engaged Court, a
solicitor, for the purpose of debt recovery. During the process, Berlin’s two other
partners retired. Later, Court sued the firm for his fees. The two partners
claimed that they were only liable for costs incurred up to the date of their
retirement.

The court held that they were, as the appointment of the firm as solicitors
consists of one entire contract to carry on the action until it was fully completed.
The solicitors did not need to come for fresh instructions at each step of the
action.

or;

(b) whether it is a series of individual contracts, or liabilities accrue on a day-to-day


basis; in which case the retiring partner will cease to be liable upon retirement.

Case: Bagel v Miller (1903) 88 LT 769

The firm entered into a contract to purchase various shipments of goods. One of
the partners died. The court held that the estate of the deceased was only liable
for the price of goods delivered before his death, and not after.

2. S. 19(3) of PA – a retiring partner may be discharged from any existing liabilities by an


agreement to that effect between:

(a) the retiring partner;


(b) all members of the newly constituted firm; and
(c) the creditors.

This is known as a novation agreement. It is a tripartite agreement, where the creditor


agrees that the “new firm” will take over the liability for the debt from the “old firm”.
When a partner retires or a new partner joins the existing partnership, the “old firm”
ceases to exist, and a “new” partnership comes into place.

Q: Why must it be a tripartite agreement?

Neither an agreement between the old firm and the creditor, nor an agreement
between the old partners and the new partner is sufficient to effect a novation, because
in both cases there is no privity of contract between the new partners and the creditor.

3. What amounts to novation is a question of fact, depending on the circumstances of each


case.

Case: Rolfe and Bank of Australasia v Flower Salting & Co

William, Rutledge & Co. owed the respondent company an amount of £8,000. The firm
later took in two additional partners, T & S. The newly constituted firm continued to
trade under the same name and kept books of account as the old firm. The respondent
continued to deal with the newly constituted firm. The debt owed to the respondent
was also regularly updated in the firm’s books of account, to which T & S had full access.

It was held that the facts pointed towards the existence of a novation based on the
following:

(a) the respondent company, by dealing with the newly constituted firm with
knowledge of the change in its membership, had impliedly agreed to accept the
new firm as debtors in place of the old firm; and

(b) T & S, by not objecting to the entries in the firm’s book of accounts, had
impliedly agreed to accept joint liability for the debts of the old firm.

Contrast this to:

Case: Chew Chee Mun v MBF Finance Bhd [2003] 3 CLJ 22

Appellant and Leong were partners of a firm and entered into an equipment lease
agreement with the respondent in 1996. When the partners defaulted, the respondent
sued both partners for the debt (RM72,436.80) in 1998. Leong later withdrew from the
partnership in 1997. In 2000, Leong paid RM36,300 to the respondent, who issued a
letter releasing Leong from any further liability. The respondent then withdrew the first
action and instituted a fresh suit solely against the appellant for RM40,619.47. No
mention was made as to the settlement by Leong or why the appellant was sued for
such an amount.
Held: The rationale behind the requirement of the remaining member(s) to sign as a
newly constituted firm is to show the creditor concerned that they will accept
liability or responsibility for the remaining balance of the debt.

Under S. 19(3), the existence of such an agreement can be inferred as a fact


from the course of dealing between the parties concerned. However, in the
present case, the letter issued to Leong was not copied to the appellant. Neither
did the respondent make any mention of the same in the statement of claim
against the appellant. To all intents and purposes, the appellant was left in the
dark as to the settlement between the respondent and Leong. Thus, there is no
way that the court can infer that the appellant was aware of and had acquiesced
in the agreement.

Rights of Outsiders against Apparent Members of a Firm

1. S. 38 of PA provides for the following rules:

(a) A creditor who has had previous dealings with a firm is entitled to treat all those
whom he knew to be a partner as still being partners until he has notice of the
change.

(b) A creditor who has had no previous dealings with the firm is entitled to treat all
those whom he knew to be partners as still being partners until a notice of the
change is advertised in the relevant Gazette.

(c) A creditor who has had no previous dealings with the firm and who has no
knowledge of the composition of the firm is not entitled to hold a retired
partner liable.

(d) The estate of a partner who dies or who becomes bankrupt is not liable for
partnership debts contracted after the date of his death or bankruptcy.

Elders Pastoral Ltd v Rutherfurd:

Two points must exist for liability to arise under s. 38:

(i) the outsider was known to the creditor before actual retirement to have been a
partner before actual retirement; and

(ii) the former partner must still be an “apparent” member i.e. a retired partner
who gives no notice may be an apparent partner if his name continues to be
used. That is something he can prevent or can counter by notice of retirement.
But he cannot be said to be an “apparent” partner merely because a former
partner says he is still a partner.

Case: Ang Lay Sim v Choo Lay Poh [2004] 8 CLJ 7


Tan Boon Cheo v Ho Hong Bank Ltd [1934] MLJ 80
PARTNERS’ RELATIONS WITH EACH OTHER

S. 21 of PA –a partnership is essentially a relationship based on contract, thus:

(a) The rights and duties of partners may be determined by an agreement between the
partners. These may be mutually varied.

(b) Even though s. 26 of PA provides for the rules to interests and duties of partners, they may
be varied by agreement between all the partners.

(c) The agreement to vary the mutual rights and duties of partners may be either express or
inferred from a course of dealing. However, this is best done in writing through a
supplementary agreement.