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BAC 3108

Legal Forms of Business
Business Organisation & Partnership


Describe the different forms of

business entities and its registration
characteristics of sole trader and
Explain the rights and liabilities of a
partner with respect to the other
partner or partners, and between
partners and third parties
Explain the rules governing the

Types of Business Organization

in Malaysia
All types of business by law must be
registered. The Acts that govern
business are:
The Business Registration Act 1956
(Amendment 1978).
Procedures of Business Registration
Act 1957
Partnership Act 1961 (Revised 1974)
Companies Act 1965
Limited Liability Partnerships Act

Choice of forming a business
entity basically depend on:
a.the nature of the business;
b.the amount of capital to be
c. the extent of risk acceptable

Factors influencing this decision are:

Number owners the business is going
to have
Tax position of the business
The owner take the risk of unlimited
The owner want all the business profits
Complete privacy in the affairs of the
business for the owner
Illness or death of owner what will
happen to the business

Companies Commission of
In 2002, the CCM assumes the responsibilities of

the former Registry of Companies and Registry of

The Chief Executive Officer (CEO) of the CCM is the
Registrar of Companies (ROC) as well as the
Registrar of Businesses (ROB).
Any persons who intend to carry on business
operations in Malaysia must register either a
business firm with ROB or a company with the ROC.
A person may choose to set up business as a sole
trader, which is a business run by one person. The
life of the business extends to the life of the owner
and there is no separate identity and no limit to the
liability of that individual.

Types of business entities

There are three main forms of business
organizations in Malaysia: sole proprietorships,
partnerships and companies.
1. A Sole Proprietorship or Sole Trader is
one person in business for himself.
2. A Partnership is an organization of two or
more persons associated together for the
purpose of conducting a business.
These 2 types of business organisations are
referred to as unincorporated associations.
They have no separate legal existence apart
from the person/s who conducts the business.


Sole Proprietorship

A sole proprietorship is one person in

business for himself and is a business wholly
owned by one.
It does not has a separate legal existence
apart from the persons who conduct the
The business and the sole trader are
considered as one entity.
A sole proprietor owns the business by himself
and that his personal properties are
considered as the businesss assets.
A sole proprietor is ultimately responsible for
all the debts of the firm.


Sole trader is a person who owns and

operates their own business. He/she may
or may not employ other people.
Sole trader is usually a relatively small
business with little capital available for
expansion and the capital that has been
invested comes from one source and that
is the owner.
E.g. hairdresser, hawkers, provision shop,
tailor, Beauty Saloon, restaurants,
launderettes (dobi), mini market etc.

Sole Proprietorship (Cont.)

If the sole proprietorship
assets are
insufficient to discharge the firms liabilities,
the sole proprietor must contribute towards
those assets until the liabilities are
The liability of the sole proprietor to pay the
firms debts is unlimited.
As a sole proprietorship has no legal entity,
any legal proceedings in which the sole
proprietorship firm may be involved are
brought or defended in the name of the sole
proprietor of the firm, not in the name of the
firm itself.

Advantages of Sole Trader

Profits - The owner enjoy all the profits. There are no
other shareholders so the profits don't have to be split.
Easy to manage & run easiest to form and run of
Easy to establish - hardly any complicated forms or
procedures. Less legal formalities.
Total control - the owner is in charge of the business.
He/she does not need to discuss their decisions with any
other owners. They have total control of the business.
Privacy - As there are no shareholders in the business
you only need to inform Inland Revenue and Customs
and Excise in order for them to see how well the sole
proprietor is doing
Flexibility - very flexible working hours as sole trader is
its own boss e.g. Rather than working on Friday he/she
decides to work on Sunday instead.

Advantages (cont.)
Low start up capital, no heavy
Easy to form and dissolve
with minimum formalities.
Less legal compliances Subject to less government rules
and regulation.
Income Tax Sole Trader has to
pay income tax based on total
profit earned to LHDN ( Inland

Disadvantages of Sole Trader

Illness or death - ill/death of owner the business might
be forced to shut down stopping the income and profits
Unlimited liability Sole Trader will be liable to settle
all debts outstanding. If the things dont work out as
planned the sole proprietor could lose all its investment.
All assets will be ceased by court order to be sold, and
cash generated will used to pay all outstanding creditors.
Lack of continuity - the owner is the business there is
no guarantee that the business will carry on running once
the owner decided to stop.
Long hours - long hours may be required of the owner
to keep the business afloat.
Difficulty in raising capital - small businesses find it
hard to find a start up capital and usually the owner
might have to put his/her house as an insurance for
capital borrowed

Disadvantages (cont.)
Limited specialisation - as the owner
has to be a purchaser, lorry driver and
accountant there is no time for this person
to specialise in all fields
Limited economies of scale - e.g. a
small construction business would have to
hire a lorry to do the required task as this
would be cheaper but larger business
would buy its own as this would prove to
be cheaper due to the fact that lorry is in
continuous use.
Limited source of capital - Lack of
capital to expand the business further.

Disadvantages (cont.)
The future development of the business
is limited. Lot depends on the managerial
capability of the owner and physical
health. The life span of the business
depends upon the age of the owner and
how efficiently he manages the business.
He is of ill health or passes away the
business continuation is disrupted. If he
choose an heir (successor) to the
business, then the business has to be



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
registered with the CCMRegistration of
Businesses Act, 1956 (Revised 1978)


definition of partnership
partnership is the relation
persons carrying on business
in common with a view of
profit: section 3(1) .
Relation between persons
Carrying on business in
View of profit

Relation between persons

An agreement or a contract between
parties to form a partnership
V.C George J:
A partnership is a contractual relationship
which subsists between persons carrying
on business in common with a view of
Tan Eng Choon v Foo Kai Yuen

Wong Peng Yuen v Senanayake

Wee Chong Jin J:

Although this statutory definition does
not state from what the relation arises it
has been clearly established that an
agreement whether express or implied
is the source of the relation and it is
therefore a relation resulting from a


statutory and chartered companies are
specifically excluded from the definition in
section 3(2)
partnership business must be registered:
In Peninsular Malaysia under the
Registration of Businesses Act 1956; (now
centrally administered by the Companies
Commission of Malaysia)
In Sarawak under the Sarawak Cap. 64
(Business Names) and Cap. 33 (Business,
Professions and Trade Licensing)
In Sabah under the Trade Licensing

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

The agreement not necessarily in writing

Dr Rajan Sinha v Dr P.C. Herman
Partnership can be created either by oral or
Peh SweeChin J:

I find that a partnership agreement in writing was

not a condition precedent to the formation of the
partnership, but having regard to all the
circumstances, a mere form which all the parties
had decided to adopt


Two < x < twenty.
Sec 47(2) of PA 1961 & Sec 14(3)(b) of CA
Except for professional, Sec 14(3)(a) of CA
Natural or artificial(company), Sec 4 of
Interpretation Act 1967- persons includes a
body of persons, corporate or

Carrying on business in common

Sec 2 of PA includes every
trade,occupation or profession.
Commercial activities or ventures with the
purpose of profit


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 to exist, two or more

A single act or undertaking could not amount to

carrying on a business
Smith v Anderson
Brett J: The expression of carrying on implies a repetition
of actsThat series of act is to be series of acts which
constitutes a business.
Compare with Windsor v Schroeder
Held: One commercial adventure undertaken by the
parties would be considered as business and the parties
were partners
1 Members of a group who buy shares and divide up
whatever dividends they may receive cannot call their
group a partnership unless they are actively involved in
securities speculation with a view to real profits.
#2 From the circumstances giving loan is not a business.
Because the transaction is not something which result in
#3There was no partnership resulting from a joint venture
agreement between a landowner and a housing

Carrying on -Means existing

Keith Spicer Ltd v Mansell [1970] 1 All ER 462
Def and Mr. Bishop decided to start a restaurant business. Mr.B ordered
goods from P, to be used for the future business, (which it eventually
was.) The goods was delivered but not paid so the P sued D, because
according to P there was a partnership between Mr.B and D.

Held: There is no Partnership. There was no evidence that def and Mr.B
carried on business within the meaning of the PA. Evidence merely
showed that at the time the ordered was made, D and Mr B were
preparing to carry on business as soon as they could.

#1 When two persons entered into a contract for a business which is to

be formed there is no partnership because there is no business yet.
There must be a business activity before there can be a partnership.
#2 Generally the business should be carried on by all partners or by a
partner on behalf of the others. A person can still be a partner even if
he is not actively participating in the business.

In common- Means together

Chooi Siew Cheong v Lucky Height

Development Sdn Bhd
Held: No partnership resulted from the
joint venture agreement between a
landowner and a housing developer as
each party intended a wholly separate

View of profit

sharing profit of the business

an important element in constituting a
Profit means net profit i.e. the balance
after expenditure/cost has been deductedSec 4(b)); Sharing of gross return prima
facie not a partnership.
Substantiate by Sec 4(b) that it is not gross profit,
where it was held in Cox v Coulson : sharing of gross
return did not create a partnership.

R v Robson
Lord Coleridge :
the participation in profits essential to the English
idea of partnership.
Re Spanish Prospecting Co. Ltd
Fletcher Moulton LJ :
Net profit means paying out of the receipts of a
business, all the expenses incurred in obtaining those

Additional points

The word partnership is not necessary

- Ratna Ammal & Anor v Tan Chow Soo
- Gulazam v Noorzaman and Sobath
- Aw Yong Wai Choo & Ors v Arief Trading
Sdn Bhd & Anor
Peh Swee Chin J:In my view to find the
existence of such relation, the Court must find the
real intention of the parties involved. The real
intention is not necessarily the expressed
intention of the parties so that even if the parties
express they are partners, the Court may decide
to the contrary after the Court considers all
relevant factors taken together, refer to the
leading case of Cox v. Hickman [1860] 8 HCL 268.

#1Ratna Ammal & Anor v Tan Chow Soo [1964] 30 MLJ

The parties agreed to conduct a business together but they
used the word syndicate instead of partnership.
Held: There is a partnership between the parties as the
relationship between the individuals had the business
character of a partnership within the scope of Partnership Act.
#2 Gulazam v Noorzaman and Sobath [1957] 23 MLJ 45
Three parties agreed verbally among themselves to form a
business of buying and selling cattle. They agreed that each
will contribute to partnership capital and share the profits. The
business however was never registered as a partnership.
Held: All the requirements of Sec 3 have been fulfilled. There
is a partnership between the parties even though it is not


the word business has been defined in

section 2 of the Partnership Act 1961 as
including every trade, occupation or
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,
considered as partnerships see Chooi Siew
Cheong v Lucky Height Development Sdn
Bhd & Anor, Sinnathamby a/l Klondakoundan
& Ors v Brijkishore a/l Shuparshad


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


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
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

Davis v Davis

A father left his two sons his business and

three freehold houses in equal shares as
tenants in common. They let one of them
and employed the other in enlarging the
workshops attached to the two houses. They
continued to carry on the business. They
also shared the rent of the third house.
Held: The brothers are partners in the
business but not as to the freehold houses.
The property belonged not to the
partnerships but to them as tenants in


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

Sec 4(b) -Sharing of gross return

Cox v Coulson
Mr.Coulson was a theater manager who agreed
with Mr.Mill to provide his theater for one of
Mills production. Under the agreement, Mr.C
was to receive 60% of the gross takings whilst
Mr.M was to receive the balance 40%. The
performances of one of the scenes. She sought
to make Mr.C liable on the basis that Mr.C and
Mr.M are partners and therefore liable for the
Held: The claim is rejected because sharing of
gross returns did not create a partnerships
within the meaning of the PA.

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


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


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 Lebuss 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


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

Partnership Act 1961

Sec 4(c)(i)- Payment of debt by installment

Cox v Hickman
The partnerships business was in financial
difficulties. The creditors appointed two trustees
to manage their interests in the partnerships. The
agreement was that upon full payment of the
creditors debt, the trustees will be out of the firm
and return full management to the original
partners. Mr. Hickman sought to make the two
trustees liable as partners of the firm.
Held: Sharing of the gross return of the business
did not of itself make them partners. There was
neither representation nor financial involvement
which indicate a partnership.

Sec 4(c)(ii)- Remuneration of servant or agent by share of profit

Chua Ka Seng v Boonchai Sompolpong

The def was a partner in an architect firm, RSP of
which the plf was an employee. The def later left
the firm and set his own architect firm under the
name CKS. The def requested the plf to resign
from RSP and work with him at CKS. The plf
alleged that in their agreement, he will be a
partner who is entitle to 20% of the net profits.
The def on the other hand claim that the plf was
merely a salaried partner who was to receive 20
% of profit inclusive of salary and bonus.
Held: The plf was only a salaried partner
remunerated by a 20% of net profits inclusive of
salary and bonus.

Sec 4(c)(iii)

Annuity to widow or child out of the

partnerships profit.
IRC v Lebuss Trustees
A partner of a firm involved in making furniture
bequeathed(through his will) his share of the profits
to his widow. In 1930, the widows share amounted
to large sum but owing to a financial strategy, the
firm was unable to pay her the money. However,
the widow was assessed to income tax for that
year. A question arise as to whether the
assessment ought to include the sum representing
her shares in the profits of the business. Held: The
widow was not a partner in the business and none
of the assets of the firm belonged to her.

Sec 4(c)(iv)

Payment of a loan or interest of a loan

out of profits
Such contract is in writing & signed by all
parties lender is not a partner
Re Young
L and Y entered into an agreement by which it
is provided that L should lend 500 pound to Y
in consideration for the payment to L of 3
pound per week out of the profits of the
business. L was also to assist in the office and
given some authority over the control of the
firms money.
Held: Despite the extensive power given to L ,
he is a mere creditor and not a partner.

Sec 4 (c)(v)

Sale of goodwill in exchange for a

share of profits
Pratt v Strick
Held: The fact that the plf share some
profits of the business from the sale of
goodwill, does not make him a partner
to the firm.
* Refer to Exception 1 of Section 28 of
Contracts Act 1950

Sec 6

The word firm refers to partners

vice versa
Krishnan v Abdul Razak & Anor
Held: An action against the firms name
is an action against all the partners

Type of partners


Minor partner
Illegal partnership


Person of unsound mind
Generally a partner should be
a person who reached the
age of majority i.e 18
according to the Majority Act
1971 and also person of
sound mind.


A minor can be a partner when there are

other partners who are major.
Liability: only major partners will be liable
Upon attaining the age of majority can
either affirm or disaffirm his position as a
- if affirm; in Msia, the partner will be
liable for contract entered during
minority, however in England, he shall
only be liable for contracts entered after
the affirmation.

In Malaysia by virtue of the Majority Act 1971, the age of
majority is 18 years old. A person who is below that age is
known as a minor. In forming a partnership, generally the
parties are sui juris i.e. major.
However a minor can entered into a partnership when
other partners are major i.e. should not be among the
When the partnership entered into a contract, the minor
is exempted from liability. The liability would go to other
partners who are major.
Upon attaining the age of majority, he can either affirm or
disaffirm his position as partners. In Malaysia if he affirms
he will be liable for the contract entered during his
minority. The position in England is otherwise.
If the minor disaffirm and he had made some contribution
he cannot claim the contribution made if he had received
any benefit from it.(Steinberg v Scala(Leeds) Ltd)

Lovell and Christmas v Beauchamp

Held: A minor can be a partner of

a partnership but can not be
personally be sued for the firms
debt incurred by the minor on
behalf of the firm

Goode v Harrison (1821) 5 B & Ald 147

Held: Minor can enter into partnership until he disaffirms it. If he fails to do so
on attaining majority he will still not liable for contract entered during
Lovell and Christmas v Beauchamp (1894) AC 607
An action against a firm (whereby one of the partners was an infant) for
supplied goods.
Held: Judgment cannot be recovered against the firm simply but maybe
recovered against the defendants other than the infant partner. So if an act of
bankruptcy is committed a receiving order cannot be made against the firm
simply but against the firm other than the infant.

William Jack & Co(Malaya) Ltd v Chan & Yong Trading Co [1964] MLJ
One of the partners was a minor. Plaintiff sued all the partners for the goods
that were sold and delivered. Chan (adult partner) claimed that the goods
bought were for the personal used of the minor and therefore the partners
were not liable.
Held: The fact that the minor used the goods for his own purpose did not
exempt the firm and the partners from liability. Since the minor did not take
any steps after attaining majority to repudiate the partnership, he was also
liable as a partner of the firm.

William Jack & Co (Malaya) Ltd v Chan & Yong Trading

Yong Yit Chong was one of the partners

in the defs firm. He entered into the
partnership when he was still a minor
and ordered goods from the plaintiff
company for the firm. When Yong
attained the age of majority, he did not
repudiate his position as a partner.

Per Gill J:
I now come to deal with the question of
Yong Yit Chong's minority at the time of
the formation of the partnership and the
effect of his ordering the goods when he
was still a minor Under s. 200 of the
Ordinance (Contracts), a person who is
under the age of majority according to the
law to which he is subject may be
admitted to the benefits of partnership,
but cannot be made personally liable for
any obligation of the firm;

A minor can be a partner in the limited sense

that he can be admitted to the benefits of
partnership. His share in the property of the firm, to
the benefits of which he is admitted, is liable for the
obligations of the firm, but he is not personally
liable for such obligationsIf on attaining the age of
majority he does not repudiate the partnership
within a reasonable time, he becomes liable for all
obligations incurred by the partnership from the
time he was admitted to the benefits of the

..He (Yong) has since attained the age of

majority and has not up to now
repudiated the partnership. He is
therefore now equally liable for the
goods which were purchased during his

Person of unsound mind

Can enter into partnership if other partners

knew about his insanity
Imperial Loan Co. v Stone (18920 1 Q.B
There can still be a partnership between
person of unsound mind and another,
provided that the person of unsound mind
can establish that the other person has
prior knowledge of his insanity at the time
of the agreement.
Held: An insane person can enter into a
contract provided that the other party
knows about his insanity.


Reasons for illegality:

1. The contract was entered for Illegal
purpose Refer to grounds for illegality
section 24 (a) (e) CA 1950.
Foster v Driscoll (1929) 1 KB 470
Partnership was created to export alcohol
into US.
Held: The partnership was illegal because it
was prohibited by the law.
Biggs v Lawrence
Partnership for the sale of smuggle goods
was illegal.

2) Exceed number of partners

Tan Teck Hee & Ors v Cheng Tien Peng (1915) 2 FMSLR
Firm consisted 25 persons.
Held: A formation of a firm of more than 20 persons is
forbidden by the law and therefore the parties are not entitle
to claim. The partnership being one which is forbidden by the
law, is void and the parties are not entitled to enforce it.

Tan Chin Cheang v Estate & Trust Agencies Ltd (1931-32) FMSLR
even if the plaintiffs had succeeded in providing that the
numbers of partners had been reduced by death to less than
twenty, they would not have been entitled to relief unless they
could have proved the formation of a new partnership free
from any taint of illegality.

Effect of illegal partnership

Effect of illegal partnership: the partnership

will become VOID. The court will not recognize
the existence of the partnership and will not
enforce any right of the partnership ( refer
Higginson v Simpson (1877) 2 C.P.D. 76).
However third party can still sue the partners.
The third party can still sue the partners.
[1934] 1 MLJ 34

The Creditors issued a writ against Chop

Kwong Fook Seng claiming monies due in
respect of certain Contracts of Exchange;
Chop Kwong Fook Seng subsequently turned
out to be an illegal partnership as it
consisted of more than twenty persons
(prohibited and illegal under section 4 of
Ordinance 155 (Companies). The question is,
whether or not the judgment should in the
circumstances have been entered against
Chop Kwong Fook Seng.
Held: The illegality of the partnership affords
no reason for refusing to make a Receiving
Order against a partner.

It seems to me therefore that where two or more
persons are carrying on business under a firm name,
be sued in the firm name whether or not the firm is
legally and properly constituted. It is stated in Lindley
on Partnership, 9th ed., at page 140, that "the
illegality of a partnership affords no reason why it
should not be sued," and I cannot find anything in the
numerous authorities to which I have been referred
which conflicts with this viewand in the
circumstances I can see no sufficient ground for
refusing to make a Receiving Order against Chan Chan
Phang who was admittedly the managing partner


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 firms 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







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 firms
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


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


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
2. The act must be done in the firms 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


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

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
firms 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 partners 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


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
A partner who retires from a firm

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, Partnership Act 1961
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







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

the interests and duties of partners
in the absence of agreements to the
contrary see section 26, Partnership
Act 1961
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

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 firms
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,

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


defined in section 22(1) of the Partnership Act

1961what 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 firms
business was conducted on property insured
by one partner did not make it part of the
partnership property

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

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


the fact that a property is used by

all the partners for the partnership
purposes need not necessarily
qualify it to be termed partnership
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


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

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), Partnership
Act 1961
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 Garwoods Trust Paynter v
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


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 assignors
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
administration of the partnership business or
2. To require any accounts of the partnership
3. To inspect the partnership books

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 assignors share of the partnership
2. To receive an account as from the date of the
dissolution in order to ascertain his share of the
partnership assets


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
By agreement
By operation of law
By death or bankruptcy
By charging on shares
By supervening illegality

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

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
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

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


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 Partnership Act 1961
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


Tutorial 1

1. Explain the essential characteristics of a

partnership as defined in the Partnership Act
1961. (10 marks)
2. Under what circumstances may a partner make
an application to the court for the dissolution of
a partnership? State the relevant statutory
provisions in your answer. (5 marks)
3. Discuss the liability of a retiring partner for the
debts of the partnership incurred both before,
and after, his retirement from the partnership;
and (4 marks)
4. Explain the steps that a retiring partner may
take to protect himself from liability for future
debts of the partnership. (4 marks)