Topic Law of

Partnership
10 (Part I)
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Define the meaning of partnership;
2. Explain the important characteristics of partnership;
3. Discuss the rules on formation of partnership;
4. Identify the relations of partners to outsiders; and
5. Describe the liabilities of partners to third parties.

INTRODUCTION
There are various types of business that are widely being carried out in Malaysia.
The most common types of business are:
Sole Proprietorship,
Partnership; and
Company.

In Malaysia, the law that governs partnership is the Partnership Act 1961. The
Act is similar to the English Partnership Act 1890 and under Section 47(1) of the
Partnership Act 1961, it provides for the application of the rules of equity and
common law in partnership so long as they are not inconsistent with the express
provisions of the Act.
 TOPIC 10 LAW OF PARTNERSHIP (PART I) ! 159

10.1 DEFINITION OF PARTNERSHIP AND ITS

CHARACTERISTICS
It is important to establish a partnership between parties since the formation of it
entails certain obligations and liabilities for the partners. Section 3(1) of the
Partnership Act 1961 defines partnership as "the relation which subsists between
persons carrying on a business in common with a view of profit." Partnership
however does not include clubs, societies, mutual benefit organisations and
building societies (Refers to Figure 10.1).

(a) The relation between parties

In order to form a partnership, there must be a minimum of two persons.
Therefore, there is usually an agreement to be made by the parties which
lay down certain terms and conditions relating to the partnership business,
and duties and responsibilities of the partners involved. This agreement
will be binding upon every partner and enforceable in law.

(b) The agreement is for business purpose

Section 2 of the Partnership Act 1961 defines 'business' as includes every
trade, occupation or profession. Thus, the persons must have an agreement
to have a business in common.

(c) The business is for purpose of gaining profit

This means the partners agree to carry on business for profit. Thus, if a
person is excluded from sharing any profit in a partnership, then he is not a
partner. Similarly, the relationship between persons to do voluntary or
welfare works is not a partnership.
160 TOPIC 10 LAW OF PARTNERSHIP (PART I)

Figure 10.1: Characteristic of Partnership

Section 3(2) of the Partnership Act 1961 therefore excludes the following list from
the definition of partnership:

The relation between members of a company or association which is

registered as a company under the Companies Act 1965 or a co-operative
society under any written law relating to co-operative societies; or

The relation between members of a company or association which is formed

or incorporated by or in pursuance of any other law having effect in Malaysia
or letters patent, Royal Charter or Act of Parliament of the UK.

Existence of partnership: Some considerations

 TOPIC 10 LAW OF PARTNERSHIP (PART I) ! 161

Where a partnership agreement does not exist, Section 4 of the Partnership Act
1961 provides a number of tests in determining the existence of a partnership, as
follows:

Section 4(a) Joint tenancy, tenancy in common, joint property, or part ownership
does not of itself form a partnership.

Section 4(b) The sharing of gross returns does not of itself establish a partnership,
whether the parties who share the returns have or do not have a joint
right or interest in the property from which or from the use of which
the returns are derived.

Section 4(c) Sharing of business profit by a person is prima facie evidence of

partnership. However, the presumption may be rebutted if the
sharing is for some other reasons:
Payment of a debt out of profits of the business to a creditor by
instalments does not make the creditor a partner in the business.
Remuneration to a servant or an agent of the business from the
profit of their employer's business.
Payment of an annuity or a portion of the profits to a widow or
child of a deceased partner in the business.
Payment of interest which varies with the profits on a loan
advanced for use in the business under a written contract.
Payment to a seller of the goodwill of a business in the form of a
share of the profits of the business.

Section 4(a)
Partnership does not exist between tenants regardless whether they share or not
the profit gained through the use of the land. In the case of jointly owned
property, it does not of itself form a partnership between the owners.
162 TOPIC 10 LAW OF PARTNERSHIP (PART I)

In Davis v. Davis (1894) 70 LT 265, a father gave his business and three
houses to be shared together by his two sons. Two of the houses were
rented out. The sons used part of the money earned from the rental of the
house to improve the business and shared the other remaining portion
equally.

The Court held that: The business was a partnership between the sons but
the joint ownership of the houses and equal share on the earnings did not
make them partners.

Section4(b)

In Cox v. Coulson (1916) 114 LT 599, the defendant, a manager of a theatre

entered into an agreement with Mill whereby Mill would prepare and pay for
the theatre show while the defendant would prepare and pay for the rent of
the stage and lighting services for the show. It was agreed that the defendant
would receive 60% from the gross returns and Mill would receive the
remaining 40%. The plaintiff suffered injury during the show and he sued the
defendant for liability as a partner of Mill.

The Court decided that: Even though the defendant and Mill shared the gross
returns from the business, it did not make the defendant and Mill as partners.
Both had separate responsibility and liability. The defendant was liable to pay
for the rent of the stage and lighting services from the 60% returns he
received. Mill, on the other hand, would settle the journey expenses, salaries
of the actors and the cost incurred during the show from the 40% returns he
received. This showed that no partnership being formed between the
defendant and Mill. Thus, the defendant was not liable to the plaintiff.

Section 4(c)(i)
Payment of a debt out of profits of the business to a creditor by instalments does
not make the creditor a partner in the business. For instance, A lends B a sum of
RM15,000 and A receives a sum RM1,000 per month from the business as
repayment of the loan. Though the payment of RM1,000 per month to A comes
from the profit of the business, A is not a partner to B in the business.
 TOPIC 10 LAW OF PARTNERSHIP (PART I) ! 163

In Badeley v. Consolidated Bank (1888) 38 ChD 238, X intended to build a

railway transportation and borrowed money from Y to finance the project. As
a security for the loan, X charged his machineries and agreed to pay an
interest of 10% of the loan amount and 10% from the profit of the project to Y.

The Court held that: The advance given by Y to X creates a lender-borrower

relationship. Y is not a partner to X though he received the payment from the
profit of the business.

Section 4(c)(ii)
Remuneration to a servant or an agent of the business from the profit of their
employer's business. Any form of payment to a servant or an agent which comes
from the employers business profit constitute salary or wages. Therefore, a
servant or an agent is not a partner in the employers business and has no
partnership liability.

In Abdul Gaffoor v. Mohamed Kassim & Ors [1931-32] FMSLR 19, the plaintiff
was a despatch clerk in the defendants firm. He was then appointed as a
manager in one of the firms branch office. One of the firms documents stated
that the profit from the firm would be divided into 79.4 parts and would be
shared between the plaintiff, the defendant and others partners. The plaintiff
contended that he was a partner but the defendant argued that the
relationship was a mere employer-employee relationship.

The Court held that: The receipt of salary from the profit did not make the
plaintiff a partner of the firm.

Section 4(c)(iii)
Payment of an annuity or a portion of the profits to a widow or child of a
deceased partner in the business. Some partnership agreements provide a term
on payment of annuity to the dependants of a deceased partner. The annuity
comes from the profit of the partnership. In this situation, although the widow or
the child receive payment from the profit of the partnership, it did not make
them partners in the business.
164 TOPIC 10 LAW OF PARTNERSHIP (PART I)

In Commissioners of Inland Revenue v. Lebuss Trustees [1964] 1 All ER 475,

A, a partner in a firm bequeathed that his right to profit would be given to his
wife upon his death. However, the partner did not perform the bequest and
thereafter, the Inland Revenue imposed certain tax for the amount which the
widow was supposed to receive.

The Court held that: As widow is not a partner of the firm. Therefore, her
portion of money must not be taxable.

Section 4(c)(iv)
Payment of interest which varies with the profits on a loan advanced for use in
the business under a written contract. A person who gives advance payment by
way of a loan and receives a payment of interest which varies according to the
profit of the business is not a partner in the business.

In the case of Re Young Ex p Jones (1896) 75 LT 278, Y and J entered into an

agreement whereby J advanced 500 to Y and in consideration, J would
receive 1 a week out of the profit gained from Ys business. J also helped in
the management of the business and was given certain power to manage.

The Court held that: The receipt of the payment from the profit in Ys business
does not make J a partner although J was authorised to deal with the business.

Section 4(c)(v)
Payment to a seller of the goodwill of a business in the form of a share of the
profits of the business. For example, A, a solicitor agreed to sell his firm to B and
agreed to introduce his clients to B. In consideration, B agreed to give A 10% out
of the profit of the business for the period of three years. In this case, although A
receives payment out of the profit of the business, it does not make him a partner
to B in the business.
 TOPIC 10 LAW OF PARTNERSHIP (PART I) ! 165

In Rawlinson v. Clarke (1860) 15 M&M 292, a doctor sold his business and
introduced his clients to the buyer. In consideration, he received certain
payment and shares from the profit made in the first year of the business.

The Court held that: He was not a partner to the buyer.

10.2 FORMATION OF PARTNERSHIP

In formation of a partnership, the elements of a valid contract including
consideration, competency, free consent, lawful purpose, must be present. Also
the relations between partners concerning rights and duties will usually be
contained in an agreement or defined by the Partnership Act 1961.

10.2.1 Partnership under the Law

Distinct from a company, a partnership firm has no separate legal entity from its
founder under the law. A partnership is the relationship between individuals
who intend to do a business in common together. It is not a legal persona but a
label used by a number of individuals trading under that particular name.
Section 6 of the Partnership Act 1961 allows persons to form a partnership to be
called a firm under the name in which the business is carried on. The name under
which a firm carries on business is the name applicable to the persons who are
partners of the firm. Thus, when an action is brought against the firms name, it is
in fact an action against all the partners. For example, Husain, Akbar and Chua
are partners, carrying on business under the name of HAS Enterprise. Hence, if
any person brings an action against HAS Enterprise, it is an action against
Husain, Akbar and Chua.

10.2.2 Lawful Purpose

A partnership must be formed for a lawful purpose. A partnership is said to be
illegal when it is formed with the intention to carry out business activities against
the law. Under Section 47(2) of the Partnership Act 1961, a partnership is also
considered as illegal if the number of partners exceeds twenty persons.
166 TOPIC 10 LAW OF PARTNERSHIP (PART I)

10.2.3 Capacity
The partners must have the capacity to enter into contract. A partner is
competent to contract if he is an adult, of sound mind and has not lost capacity to
enter into contracts under any laws. In partnership, a minor can become a
partner. However, a minor partner is not liable for all the firms debt and
contractual liabilities. When a minor partner reaches his age of majority, he can
exonerate himself from liability by withdrawing himself from the firm. But if he
remains in the firm, he will be liable with other partners.

In William Jacks & Co. (Malaya) Ltd v. Chan & Yong Trading Co (1964) MLJ
105, Jacks claimed a sum of RM12,734.91 being the payment of the goods sold
to the defendant who were partners in a firm. Yong who was a minor partner
at the time of the purchase of the goods did not defend his case but Chan
denied that the goods were for Yongs personal use. Therefore, other partners
were not liable for the claim.

The Court held that: Even though the goods were bought for Yongs personal
use, it did not mean that the firm and other partners were not liable and since
Yong did not take any action to terminate his partnership upon attaining
majority age, he was also liable as a partner.

10.2.4 Partnership Agreement

Partners agreement may be in the form of oral or written agreement. The
partners may have partnership agreements in writing, usually known as Articles
of Partnership which provides for particulars of the firm and the terms of the
partnership. In absence of a partnership agreement, the provisions of the
Partnership Act 1961 will be applicable to the partners. For mutual rights and
duties of partners, they may be varied by the partner's consent as provided under
Section 21 of the Partnership Act 1961.

10.2.5 Registration of Partnership

A partnership must be registered under the Registration of Businesses Act 1956
(in Peninsular Malaysia); Sarawak Cap.64 (Business Names) and Cap.33
(Business, Professions and Trade Licensing)(in Sarawak); Trades Licensing
Ordinance, No. 16, 1948 (in Sabah). Particulars as to the date of operation of
business, name of business, name of partners, registered address of business,
type and nature of the business, shall be submitted to the Registrar of Business
 TOPIC 10 LAW OF PARTNERSHIP (PART I) ! 167

for registration. Any changes to the above particulars is to be reported to the

Registry Department. In the event of a dissolution of partnership or death or
retirement of a partner, a report on the same shall be made to avoid liability to
third party after the occurrence of any of the above.

SELF-CHECK 10.1

(a) What is the meaning of partnership?

(b) How to determine the existence of partnership in absence of a
partnership agreement?
(c) Does joint tenancy and tenancy in common create a partnership
between the tenants?
(d) Does sharing of gross returns in a business between two
persons establish a partnership?
(e) Sharing of business profit by a person is prima facie evidence of
partnership. Is the presumption rebuttable?
(f) Is partnership a legal persona?
(g) What is the effect of a partnership formed for unlawful
purposes?
(h) Can a minor become partner in a partnership business?
(i) What is the importance of a partnership agreement?
(j) Must a partnership be registered? Why?
168 TOPIC 10 LAW OF PARTNERSHIP (PART I)

ACTIVITY 10.1

Discuss the following questions:

(a) If the partnership business plans to engage Niza to manage the
business and one of the terms is that Niza will receive
remuneration from the profit of the business. Is Niza a partner?
Discuss.
(b) S lends a sum of RM5,000 to firm Y and receives repayment by 12
monthly instalments of RM500 per repayment from the profits of
the firm. Does that make S a partner of firm Y? Discuss.
(c) T and H has entered into an agreement whereby H would lend a
sum of RM1,000 to T and as a consideration, H would receive
RM50 a week from the profit of T's business. H would also assist
in the administration of the firm and was given certain authority
to manage the business of the firm. Is H a partner of T? Discuss.
(d) R and F are partners of a restaurant business. They intend to
expand their business and make a loan from G. G will receive
20% from the net profit of the business. Is G a partner of R and F?
Discuss.
 TOPIC 10 LAW OF PARTNERSHIP (PART I) ! 169

10.3 RELATIONSHIP OF PARTNERS AND

OUTSIDERS (THIRD PARTIES)
The agency principle is significant in the relationship of partners to outsiders
because a partner is an agent for the firm. When a partner carries out activities
within the ordinary course of the partnerships business, his act will bind the
other partners, so long as he has the authority to act and does not act beyond the
authority given.

10.3.1 Partner's Authority to Bind the Firm

A partner has an authority to bind the firm if he carries out the partnership
business within his scope of authority. Section 7 of the Partnership Act 1961
provides that every partner is an agent for the firm and other partners for the
purpose of the business of partnership. This means any act done by a partner in
the course of the partneship business binds the firm and other partners; unless
the partner has no authority or unauthorised to act for the firm; and the third
party knows that the partner has no authority or does not know or believe him to
be a partner.

Therefore, for a partner to bind the firm and other partners, his act must have
been carried out within his scope of authority and in the usual way of the
partnership business. Consequently, outsiders or third parties dealing with the
partner may assume that the partner has the authority to do such acts usually
done by partners in that particular kind of business. This is an implied authority
of a partner as an agent for the firm, as illustrated in the following cases:

In Mercantile Credit Ltd. v. Garrod [1962] 3 All ER 1103, P and G were

partners in a garage business. One of the terms of their partnership agreement
prohibited the partners from buying and selling cars. Without the knowledge
of G, P sold a car to Mercantile Credit for a sum of 700 and the money was
deposited into the firms account. When Mercantile Credit initiated a suit to
claim the money back, the Court held that G was liable to the plaintiff. Even
though P was prohibited by the partnership agreement to engage in buying
and selling cars, the act of P was usually done by those who engaged in a
garage business.
170 TOPIC 10 LAW OF PARTNERSHIP (PART I)

In another case, Chan King Yue v. Lee & Wong [1962] 28 MLJ 379, the plaintiff
lent RM35,000 to her husband who was a partner in a firm. The husband
issued a receipt under the firms name and used the money to pay the firms
debt. The plaintiff took an action to recover her money but other partners
refused to pay on the grounds that the plaintiffs husband had no authority to
borrow money.

The Court held that: The act of borrowing money by the plaintiffs husband
was important for the firms continuous business. Therefore, the firm was
liable.

Section 7 also provides that the partner who has no authority or unauthorised to
act for the firm will not bind the firm if the third party knows that the partner has
no authority or does not know or believe him to be a partner. For example, A has
been informed about B's limited authority and B was unauthorised to order
goods exceeding RM15,000. A made a contract with B for the supply of electrical
goods worth of RM17,000 to the firm. The firm was not bound by the contract.

According to Section 8 of the Partnership Act 1961, an act or instrument relating

to the business of the firm and done or executed in the firm-name, or in any other
manner showing an intention to bind the firm, by any person thereto authorised,
whether a partner or not, is binding on the firm and all the partners.

In the case of Hock Hin Chan v. Ng Kee Woo [1966] 1 MLJ 223, H gave a loan
to one of the partners in a firm. As a security, a bill of sale has been issued
bearing the signature and seal by Ng Teng Tuan, a partner to Wan Lee
Chan, for and on behalf of Wan Lee Chan. The issue arose was whether
the bill of sale issued by the firm was valid and binding on the firm.

The Court held that: A partner in a firm had an implied authority to issue a
bill of sale on behalf of other partners. Therefore, the bill of sale was valid
and binding on the firm.

According to Section 9 of the Partnership Act 1961, where one partner pledges
the credit of the firm for a purpose apparently not connected with the firm's
ordinary course of business, the firm is not bound, unless he is in fact specially
authorised by the other partners. However, this section does not affect any
personal liability incurred by an individual partner.
 TOPIC 10 LAW OF PARTNERSHIP (PART I) ! 171

This means, a partner cannot misuse the trust given to him by the firm to make
debt which is not connected with the firm's business. The partner who misuse the
trust shall be personally liable unless he has been given the express authority to
do as such.

For instance, A and B are partners carrying on business of printing and selling
'batik'. A, without the knowledge of B bought a dishwasher under the firms
name. The supplier has requested payment from the firm. In this case, B may
deny liability under Section 9 and A would be personally liable. In other words,
A cannot bind the firm because his act was not carried out within the usual
course of the partnership business. Another example where a firm will not be
liable is where a partner issues the firm's cheque for the purpose of settling
personal debt.

10.3.2 Liability of Partners

As far as liability of partners is concerned, under the Partnership Act 1961, there
are several types of liabilities (Refer to Figure 10.2) namely contractual liability,
tortious liability, liability for improper use of trust property and for holding out,
criminal liability and liability of incoming and retiring partners.

Figure 10.2: Types of partnership liabilities

(a) Contractual Liability

According to Section 11 of the Partnership Act 1961, every partner in a
firm is liable jointly with the other partners for all debts and obligations of
172 TOPIC 10 LAW OF PARTNERSHIP (PART I)

the firm incurred while he is a partner; and after his death his estate is also
severally liable in a due course of administration for such debts and
obligations, so far as they remain unsatisfied but subject to the prior
payment of his separate debts.

Section 11 provides joint liability of partners in matters concerning

contracts entered into by the firm with third parties. The joint liability
under this section means that every partner is liable for all debts and
obligations of the firm. If A, B and C who are partners in a printing business
bought a printing machine worth of RM15,000 by credit, A, B and C shall be
jointly liable for the payment of the sum.

In the case of Osman b. Haji Mohamed Usop v. Chang Kang Swi (1924)
4 FMSLR 292, a partnership has been formed by six partners including
the appellant. Three of the partners borrowed RM10,000 from a third
party by effecting a promissory note. The loan was guaranteed by the
respondent (Chan Kang Swi). Later, the firm failed to pay the debt and
Chan was called to pay for the debt on his own account. He then
initiated action against the six partners for recovery of his money and
five partners accepted their liability, except the appellant.

The Court decided that: The debt was a firms debt and was obtained
for the purpose of partnership. The partners who signed the promissory
note had acted for the firm and they were authorised to do so.
Therefore, the firm or the six partners were liable.

Section 11 also provides the liability of a deceased partner. Under the

provision, the deceased partner is jointly liable for the firms debt incurred
during his term as a partner of the firm. This means if a creditor sues the
firm for the firms debt but fails to recover full satisfaction of his claim, he
can recover from the administrator of the estates of the deceased partner.
However, payment to the creditor is subject to the settlement of the
deceased partners personal debt, if any.

(b) Tortious Liability

Section 12 of the Partnership Act 1961 provides for liability of firm for
wrongs or tortious liability of partners:

Where, by any wrongful act or omission of any partner acting in the

ordinary course of the business of the firm or with the authority of his co-
partners, loss or injury is caused to any person not being a partner in the
 TOPIC 10 LAW OF PARTNERSHIP (PART I) ! 173

firm, or any penalty is incurred, the firm is liable therefore to the same
extent as the partner so acting or omitting to act.
Tort is a civil wrong. The examples of tortious acts are nuisance,
defamation, trespass and negligence. In partnership, tort may occur in the
following situation. For instance A, B and C are partners carrying out
business of repairing electrical equipment. C repaired a washing machine
for a customer but due to his negligence, the customer was electrocuted
when using the washing machine. In this case, C was negligent in
performing his work and therefore, the firm and other partners were liable
to the customer.

In Hamlyn v. Houston & Co [1903] 2 KB 82, H and S were partners in a

firm. H bribed a clerk of another firm to get secret information on
contracts and tenders of the said firm.

The Court held that: H, as the partner, had done illegitimately that
which was part of his business to do legitimately. Hence, the firm was
liable for his act.

In the above case, the firm was liable because the bribe was part of the
firms money and such information was for the purpose of the partnership
business and would have been legitimate if obtained by proper means.

(c) Liability for improper use of trust property

Liability for improper employment of trust property for partnership
purposes is provided under Section 15 of the Partnership Act 1961. It
provides that:

If a partner, being a trustee, improperly employs trust property in the

business or on the account of the partnership, no other partner is liable for
the trust property to the persons beneficially interested therein:

Provided as follows:
(i) this section shall not affect any liability incurred by any partner by
reason of his having notice of a breach of trust; and
(ii) nothing in this section shall prevent trust money from being followed
and recovered from the firm, if still in its possession or under its
control.

For example, A, B and C are partners of a firm. A who has been appointed
as a trustee, improperly uses the trust property in the business. Other
partners, B and C are not liable for the trust property. However, if B and C
174 TOPIC 10 LAW OF PARTNERSHIP (PART I)

have notice of a breach of trust, they cannot avoid liability and the trust
money may be recovered from the firm if it is still in possession and under
the control of the firm.

In Ex parte Heaton (1819) Buck 386, a father and sons were partners in a
firm. The sons used the trust property for the purpose of the firms
business. When the firm became bankrupt, the Court held that the
money which had been misappropriated could not be recovered from
the partnership property because the father had no knowledge of the
breach of trust committed by his sons.

(d) Liability for holding out

A person who is not a partner of a firm may become liable for the firms
debt if he represents himself or allow himself to be represented as a partner
in the firm. He will therefore be liable like a partner to the persons who give
credit to the firm. Section 16 of the Partnership Act 1961 provides:

Every one who by words spoken or written or by conduct represents

himself, or who knowingly suffers himself, to be represented, as a partner
in a particular firm is liable as a partner to any one who has on the faith of
any such representation given credit to the firm, whether the representation
has or has not been made or communicated to the person so giving credit
by or with the knowledge of the apparent partner making the
representation or suffering it to be made:

Provided that where, after a partner's death, the partnership business is

continued in the old firm-name, the continued use of that name or of the
deceased partner's name as part thereof shall not of itself make his
executor's or administrator's estate or effects liable for any partnership
debts contracted after his death.

The liability is based on the principle of estoppel. When a person makes a

representation that induces third party to believe and rely on such
representation that he is a partner, the person is estopped from denying or
contradicting the statement.

For instance, A and B are partners of a saloon business. A is entrusted to

look after the account of the firm while B is in charge of the administration
of the firm. During the course of the business, they employ C as the
customer relations officer. One day, D, a salesman, came to the saloon, and
introduced a slimming product. C, who was at the saloon introduced
 TOPIC 10 LAW OF PARTNERSHIP (PART I) ! 175

himself as a partner and expressed his interest in the product. Relying on

Cs representation, D agreed to sell the product on credit to C. In such
situation, C was a partner by holding out and is liable for the payment of
the product supplied to the firm.

Whether A and B are jointly liable with C depends on their knowledge of

the transaction. If the firm or the partners knew about Cs contract on behalf
of the firm and did not deny it in due course, then the firm or partners
would be jointly liable for the payment of the product to D. But if they have
no knowledge about the contract, then C would be personally liable as a
partner for holding out.

In the case of Re Buchanan & Co. (1876) 4 QSCR 202, if the holding out
or representation is made without the knowledge or consent from the
real partner, only the person holding out as a partner shall be liable to
the third party acting in reliance of the representation.

Section 16 of the Partnership Act 1961 further states that,

where, after a partner's death, the partnership business is continued in the
old firm-name, the continued use of that name or of the deceased partner's
name as part thereof shall not of itself make his executor's or
administrator's estate or effects liable for any partnership debts contracted
after his death.

This means the use of the deceased name for the partnership business does
not constitute holding out.

(e) Liability for criminal offences

Any partner who commits criminal offences shall be personally liable.
Other partners shall not be liable unless there is evidence to prove their
participation in the commission of the crime.

In the case of Chung Shin Kian & Anor v. Pendakwaraya [1980] 2 MLJ
246, two partners in a firm had used a trade name (Texwood)
belonged to another company on their products. There was no evidence
to prove that the second appellant was involved in the crime, except as
to become a partner in the business. Thus, the appeal of the second
appellant was allowed.
176 TOPIC 10 LAW OF PARTNERSHIP (PART I)

(f) Liability of incoming and outgoing (retiring) partners

A person who is admitted as a partner into a firm is not liable for liabilities
incurred before he became a partner. According to Section 19(1) of the
Partnership Act 1961, 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 a partner.

For a person retiring from the firm, he is not free from liabilities before his
retirement. He remains liable for the partnership debts incurred before his
retirement, as provided under Section 19(2) of the Act, a partner who
retires from a firm does not thereby cease to be liable for partnership debts
or obligations incurred before retirement. A retiring partner may only be
discharged from liabilities by a novation agreement between himself, the
new firm and the creditors.

In the case of Duke v. Brewer (1848) 2 Car. & Ker. 828, it was held that for
a new incoming partner, if the liability was for a continuous contract
(which was made before he became a partner and continue to exist after
he became a partner), then he shall be liable for the same.

SELF-CHECK 10.2

(a) How can a partner bind the firm for his act?
(b) What is the liability of a partner in contracts?
(c) Are partners jointly liable in tortious liability?
(d) What is the liability of a partner in the case of improper use of
trust property in a firm?
(e) What is the effect of holding out by a person who is not a
partner?
(f) What are the liabilities of incoming and outgoing partners?
(g) Will a partner be liable for the criminal offence committed by
other partners?
 TOPIC 10 LAW OF PARTNERSHIP (PART I) ! 177

ACTIVITY 10.2

Discuss the following problems:

(a) Chandra and Dewi are partners in a garage business. Chandra

provided the capital and only visits the garage twice a month
whereas Dewi works full time for the firm. The terms of the
partnership agreement provide that no partner shall incur any
debt exceeding RM10,000 without the consent of the other
partner; partners must purchase oil only from RushOil
Company; and partners must not involve in trading of second-
hand goods. In the course of running the firm, Dewi has bought
oil amounting to RM15,000 from RiverinOil Company and has
also bought a second-hand car on his own account but in the
name of the firm. Advise Chandra on his liability as a partner.

(b) Malik and Noor were partners in a firm, operating a Cyber Caf
business. Malik made a friendly loan amounting to RM8,000
from Aiman as a capital for the business. The said loan was
guaranteed by Azmin. The firm failed to pay the loan and Azmin
had to pay instead. Then, Azmin took a civil action against both
partners, Malik and Noor to recover his money back. However,
Noor did not admit the said liability and decided to walk away
from the partnership. After Noor withdrew from the partnership,
Malik invited Jefri as a new partner to replace Noor. In helping to
settle the debt, Jefri intended to get a bank loan for the firm. In
dealing with the bank, he brought along his brother, Mr Zuki, a
well-known businessman and introduced his brother as one of
the partners in the firm. Believing the representation made by
Jefri, the bank agreed to approve the loan amounting to
RM50,000. However, the firm failed to pay the loan. Discuss the
liabilities of all parties involved by referring to the Partnership
Act 1961 and the relevant case-laws.

Formation of partnership entails certain obligations and liabilities for the

partners.
A partnership is the relation which subsists between persons carrying on a
business in common with a view of profit.
178 TOPIC 10 LAW OF PARTNERSHIP (PART I)

Joint tenancy, tenancy in common, joint property, or part ownership does not
of itself form a partnership.
The sharing of gross returns from a business does not of itself establish a
partnership.
Payment of a debt out of profits of the business to a creditor by instalments
does not make the creditor a partner in the business.
Remuneration to a servant or an agent of the business from the profit of their
employer's business does not make the servant or the agent a partner.
Payment of an annuity to a widow or child of a deceased partner does not
make the widow or the child a partner in the business.
Payment to a seller of the goodwill of a business in the form of a share of the
profits of the business does not make the seller a partner.
A partnership is not a legal persona but a label used by a number of
individuals trading under that particular name.
A partnership must be formed for a lawful purpose.
A partner is competent to contract if he is an adult, of sound mind and has
not lost capacity to enter into contracts under any laws.
Partnership agreement may be in the form of oral or written agreement.
A partner has an authority to bind the firm if he carries out the partnership
business within his scope of authority.
Every partner in a firm is liable jointly with the other partners for all debts
and obligations of the firm incurred while he is a partner.
A person who is not a partner of a firm may become liable for the firms debt
if he represents himself or allow himself to be represented as a partner in the
firm.
Any partner who commits criminal offences shall be personally liable.
A person who is admitted as a partner into a firm is not liable for liabilities
incurred before he became a partner.
 TOPIC 10 LAW OF PARTNERSHIP (PART I) ! 179

Partnership Contractual liability

Business in common Tortious liability
Profit Misappropriation
Articles of partnership Criminal liability
Registration Incoming and outgoing partner

Text Books:
Harlina Mohamed On & Rozanah Ab. Rahman. (2007). Undang-Undang
Perniagaan Malaysia. Selangor: Kumpulan Usahawan Muslim Sdn. Bhd.
Wu M.A. & Vohrah, B. (2000). The Commercial Law of Malaysia (2nd ed.).
Selangor: Pearson and Longman.
Cases:
Abdul Gaffoor v. Mohamed Kassim & Ors [1931-32] FMSLR 19.
Badeley v. Consolidated Bank (1888) 38 ChD 238.
Chan King Yue v. Lee & Wong [1962] 28 MLJ 379.
Chung Shin Kian & Anor v. Pendakwaraya [1980] 2 MLJ 246.
Commissioners of Inland Revenue v. Lebuss Trustees [1964] 1 All ER 475.
Cox v. Coulson (1916) 114 LT 599.
Davis v. Davis (1894) 70 LT 265.
Duke v. Brewer (1848) 2 Car. & Ker. 828.
Ex parte Heaton (1819) Buck 386.
Hamlyn v. Houston & Co [1903] 2 KB 82.
Hock Hin Chan v. Ng Kee Woo [1966] 1 MLJ 223.
Mercantile Credit Ltd. v. Garrod [1962] 3 All ER 1103.
Osman b. Haji Mohamed Usop v. Chang Kang Swi (1924) 4 FMSLR 292.
Rawlinson v. Clarke (1860) 15 M&M 292.
180 TOPIC 10 LAW OF PARTNERSHIP (PART I)

Re Buchanan & Co. (1876) 4 QSCR 202.

Re Young Ex p Jones (1896) 75 LT 278.
William Jacks & Co. (Malaya) Ltd v. Chan & Yong Trading Co (1964) MLJ
105.